With the passage of the 21st Century ROAD to Housing Act (ROAD Act), HUD will be revising its guidance on Community Development Block Grant (CDBG) eligibility for housing construction. Existing HUD regulations at 24 CFR 570.207 and the October 2023 CPD Notice Using CDBG In Support of Housing are outdated to the extent they state that new construction of housing is generally ineligible.  

Section 204 of the Act establishes new construction of housing as an eligible CDBG activity under 42 U.S.C. §5305(a)(28). While HUD has not yet issued implementation guidance, consider how this new authority may support your construction strategies. Based on our experience with federal policy guidance and insights from CohnReznick’s affordable housing team, here’s what we think are a few key considerations for CDBG implementors.

Start planning before funding opportunities arise

If you are a CDBG grantee, is constructing new affordable housing consistent with your community needs and priorities, and is this reflected in your Consolidated Plan priorities? As with all CDBG activities, new construction of housing activities will be subject to the following:  

Consolidated Plan alignment: Determine whether new affordable housing development supports identified community needs and priorities and is reflected in Consolidated Plan objectives.

Action Plan inclusion: Make sure proposed activities are included in an accepted Annual Action Plan before funds are committed.

Program compliance readiness: Prepare for all applicable CDBG requirements, including environmental review, labor standards, financial management, Section 3 obligations, accessibility requirements, and Build America, Buy America (BABA) compliance.

Focus on filling financing gaps rather than fully funding projects

Key questions to consider as a grantee include:  

• • What are your project funding gaps now (e.g., affordable pre-development loans or construction financing)?  
  • Are funding gaps preventing new construction of affordable housing from going forward?  

Most CDBG grantees do not receive grant allocations large enough to fully finance a new affordable housing or mixed-use (housing/commercial) activity. Instead, consider how CDBG can be used to close specific gaps in your existing housing delivery systems, whether through affordable predevelopment financing, construction financing, or other targeted investments that help projects move forward.

Remember that CDBG affordable housing funding will be highly compatible with HOME projects and tax credit projects that can handle or are already subject to the cross-cutting requirements that come with CDBG and other federal funding, such as affordability thresholds, environmental review, labor standards, accessibility, financial management, Section 3 local hiring, and BABA domestic content requirements.  

Understanding the new statutory requirements 

Now let’s look at the specific statutory changes: Section 204 of the ROAD Act made new construction of housing eligible under the CDBG program statute (CDBG Act) at 42 USC 5305(a)(28), subject to the following conditions:

1. Applies only to future grant funds 

The new eligibility does not apply retroactively to existing CDBG grants. Rather, the authorization applies only to CDBG grants funded through appropriations made after the July 2026 enactment of the ROAD Act.

• • Prospective application: The new construction authority applies to future CDBG grant funds, not to grants awarded from prior appropriations.
  • Program income uncertainty: HUD has not yet stated whether the new eligibility extends to unprogrammed program income received before enactment.
  • Likely treatment of future program income: Based on HUD's implementation of previous CDBG eligibility changes, program income received after enactment would likely be eligible for use under the new authority, although formal guidance is still pending. 

2. There’s a 20% funding cap

No more than 20% of CDBG grant amounts may be used for new construction of housing. HUD has not stated whether this cap will also apply to CDBG program income.  However, if the cap does not apply to program income, this could enable the creation of new construction revolving funds and other financing mechanisms.

3. Affordability requirements are tied to HOME

Affordability for CDBG-assisted new construction of housing activities must follow the HOME program statutory requirements at 42 U.S.C. 12745.  

For rental housing, this requirement is implemented through 24 CFR 92.252. For homeownership activities, it is implemented through 24 CFR 92.254.

This change introduces several new considerations:

• • HOME affordability standards: Replaces CDBG's previous flexibility to establish local affordable rental standards
  • HOME resale and recapture provisions: Applies HOME homeownership affordability protections to assisted properties
  • Long-term compliance obligations: Requires affordability monitoring that extends well beyond the normal CDBG program’s initial occupancy requirement
  • Familiar implementation models: Builds on approaches many grantees have already encountered through NSP and CDBG-DR programs.

When the new cap does and does not apply

This new affordability provision and cap applies only to CDBG activities eligible as new construction of housing, not to all CDBG activities. If CDBG is used in a project solely for an eligible land acquisition/disposition activity under a different regulatory category, this cap is unlikely to apply. This could be a consideration in coordinating project sources and uses of funding.

Note that based on past new eligibility implementations for the CDBG entitlement program, HUD is likely to implement this new eligibility directly from the statute. Typically, HUD will issue some notification, a memorandum or CPD Notice, explaining the approach it will take and that grantees should take. Regardless, the entitlement CDBG regulation at 24 CFR 570.207, insofar as it states that new construction of housing is ineligible, will be supplanted by the new statutory provision. The entitlement CDBG regulations are only advisory for State CDBG grantees, who determine activity eligibility directly from the CDBG Act.  

Program income may create new opportunities  

Looking forward, one possible reading of the ROAD Act is that program income will not be subject to the 20% cap on grant amounts. If HUD makes this interpretation, a grantee may wish to use grant funds to provide construction financing for a new construction activity and then use proceeds (program income) to establish a revolving fund or loan loss reserves dedicated to use for CDBG new construction activities. We will be watching closely and providing more ideas for program designs as guidance firms up.

Compatibility with Section 108, tax credits, and other funding programs

Unless HUD   provides additional clarification, the statute appears to have only extended the new eligibility to CDBG grants (Section 106) and not to loan proceeds under the Section 108 Loan Guarantee program. This sidelines a potential financing tool that is highly compatible with mixed-use development, for now.  

In terms of pairing with other grant programs and tax credit programs, the CDBG Act has a specific statutory provision allowing CDBG funds to be contributed as match or cost share for other federal grant-in-aid programs as if the CDBG funds were local, non-federal funds. However, in capital stacks for the Low-Income Housing Tax Credit (LIHTC), New Markets Tax Credit (NMTC), Historic Tax Credit, and Opportunity Zones, federal non-grant programs, CDBG grants are not similarly advantaged.  

Despite this, CDBG-DR and NSP funds have been used extensively in tax credit “piggyback” financing structures for multi-family housing deals. CDBG allows a wide range of financing mechanisms, such as loans, loan loss reserves (when required by a lender), loan guarantees, and indirect assistance (such as funding needed for off-site infrastructure). As the new CDBG implementation path becomes clearer, so will the program’s usefulness in closing financing gaps in new construction projects.

Important note: HOME program regulations specifically block the use of CDBG to meet the HOME program’s match requirements. 24 CFR 92.220(b)(1).

Operational considerations for long-term success

Successful implementation will require establishing policies governing subsidy levels, compliance oversight, and project monitoring. Also consider:  

• • Right-sizing investments. As with CDBG housing rehabilitation programs, CDBG does not require underwriting or subsidy layering reviews or stipulate maximum per-unit subsidy amounts. CDBG grantees must, however, document that their assistance amounts are necessary and reasonable. Plus, CDBG allocations from HUD are not large, so grantees must be cost-conscious in determining assistance amounts and finding other financing and needed expertise to determine, document, and enforce investment choices.
  • Property inspections and monitoring. CDBG relies on state and local governments to ensure a CDBG-assisted activity delivers its claimed national objectives benefit for a reasonable duration. CDBG does not include housing quality or inspections requirements or standards. A grantee must consider how it will steward its CDBG projects; one approach would be to adopt the HOME or other established affordable housing program’s inspection approach and use that program’s available training, experts, and other resources.

Looking ahead 

CDBG-supported new construction of housing is still in its early stages. HUD guidance will ultimately determine how flexible the new authority becomes and how grantees can structure financing strategies around program income, affordability requirements, and related development activities.

While many implementation questions remain unanswered, grantees are not starting from scratch. Lessons learned from HOME, NSP, CDBG-DR, and other housing programs provide a strong foundation for designing effective affordable housing investments under this new authority.

To discuss how these changes may affect your programs, projects, or funding approach, contact the CohnReznick team.