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- Understanding Section 3

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Resources and Recognition

Downloadable Brochures
The Reverse Mortgage: Trading Equity for Cash

Property Tax Relief for the Elderly and Disabled

Understanding Section 3

What is Section 3?
Does Section 3 apply to my organization?
Section 3 reporting instructions (Form HUD-60002)
HUD's suggestion to comply with obligations
Definitions

What is Section 3?

Section 3 is a HUD requirement designed to ensure that the HUD funds invested in housing and community development activities also provide employment opportunities for low-income people.

HUD’s regulations state that “to the greatest extent feasible,” businesses and employers working on HUD-funded projects must make a good faith effort to train and employ low income individuals in the area (called “Section 3 residents”) and also to contract with other businesses that employ Section 3 residents.

In summary, the obligations of Section 3 are:

1. Provide outreach/training for Section 3 residents, and report on the outreach and training undertaken.
2. To the greatest extent feasible hire and train Section 3 residents, and report on employees and new hires.
3. To the greatest extent feasible contract with Section 3 businesses, and report on contracts and subcontracts.

All award recipients (see Definitions below) who receive more than $200,000 in HUD funding from NCHFA must fulfill these obligations.  Additionally, if an award recipient receives more than $200,000 in HUD funding from NCHFA, all businesses with which the recipient contracts (called “contractors”) must fulfill the same obligations if the contract is for more than $100,000.  And all the businesses with which those contractors contract (called “subcontractors”) must fulfill the same obligations if their contract is for more than $100,000.

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Does Section 3 apply to my organization?

HUD’s regulations on the Section 3 program can be found in the Code of Federal Regulations, at 24 CFR Part 135.  These regulations contain the obligations of each party working on the project. NCHFA has also designed a diagram to help award recipients understand those regulations. 

An organization’s obligations depend on:

• If it is an award recipient, contractor, subcontractor, or sub-subcontractor
• If the contract with which it was hired exceeds the dollar threshold ($200,000 for award recipients, and $100,000 for contractors and subcontractors)
• What the obligations were of the organization that hired it.  For example, the sub-subcontractor #3 above is not reported on because Subcontractor #3 was not awarded more than $100,000. 

If the chart above does not clarify for you which obligations apply to your organization please contact NCHFA; staff will be happy to figure this out with you.

Whether an organization is an award recipient, contractor, subcontractor, or sub-subcontractor depends on the number of contracts it is removed from the NCHFA award, as the diagram above illustrates. 

The diagram indicates which contracts must contain the Section 3 clause.  The Section 3 clause is specific contract language required by HUD.  If an organization (award recipient, contractor, or subcontractor) was hired with a contract containing the Section 3 clause (this will be a contract for more than $100,000 for contractors and subcontractors, and more than $200,000 for award recipients), the organization has reporting obligations, hiring obligations, and contracting obligations.  These obligations are discussed below.

Reporting Obligations
HUD requires NCHFA to report on specific award recipients, contractors, and subcontractors.  To do so it must collect information from the award recipient, who must collect information from contractors, who must (in turn) collect information from subcontractors. 

If an award recipient received an award of more than $200,000 in HOME funds from NCHFA, it must complete form HUD-60002 and submit it to NCHFA.  This form HUD-60002 must contain information (a) for the award recipient and (b) for all the contractors and subcontractors that received contracts of more than $100,000.  This will require the award recipient to collect information from contractors and subcontractors prior to submitting its HUD-60002 report to NCHFA. 

Not all organizations that work on the project must be reported on.  Whether or not an organization is reported on does not depend on the size of the contract with which it was hired.  Rather, it depends on if the organization that hired it has reporting obligations.  

Instructions for completing the required forms are found below, under “Section 3 Reporting Instructions (Form HUD-60002).”

Hiring Obligations
Section 3 requires that certain award recipients, contractors, and subcontractors fulfill the following obligations when the hire any new employees:

1. Do outreach to low-income people in the area whenever they intend to hire new employees
2. Train their new hires
3. Provide preferences in their hiring process.  If the project is assisted under the Stewart B. McKinney Homeless Assistance Act, homeless persons residing in the service area or neighborhood of the project get top priority, and these three populations get second priority.  If the project is not receiving McKinney funds, these three populations get top priority.
   • Section 3 residents living in the service area or neighborhood of the project. (This means any geography up to the area of the local government.)
   • Participants in HUD Youthbuild programs.
   • Other Section 3 residents.  (This means those outside the service area or neighborhood of the project.  A low-income individual can only be a Section 3 resident on a project if he or she resides in the MSA or nonmetro county of the project.  Low-income individuals outside the MSA or nonmetro county are not Section 3 residents for this project, although they may be for projects nearer to where they live.)
   • Meet HUD’s hiring requirement (the “minimum numerical target for training and employment”) that 10% of new hires be Section 3 individuals.

Minimum numerical targets for training and employment (per HUD):  At least 10% of the aggregate number of new hires each year must be Section 3 residents.  “New hires” refers to full-time employees for permanent, temporary or seasonal employment opportunities. If the business is not able meet this requirement, it has the burden of demonstrating why it was not feasible to meet the numerical goal.  Such justification may include impediments encountered despite action taken. 

It is important to note that if applicants are not qualified for a position, the business is under no obligation to hire them. 

Contracting Obligations
Section 3 requires that certain award recipients, contractors, and subcontractors fulfill the following obligations when they contract with other businesses to work on the project: 

1. “To greatest extent feasible” make contracts with Section 3 business concerns.
2. Give contracting priority to these 3 categories:
   • Section 3 businesses that provide “economic opportunities for Section 3 residents in the service area or neighborhood” of the project.
   • Applicants carrying out HUD Youthbuild programs.
   • Other Section 3 businesses.
3. Meet HUD’s contracting requirement (the “minimum numerical target for contracting”) that Section 3 businesses receive least 10% of the building trades contracts for the project, and at least 3% of the total amount for all non-building trade contracts.

Minimum numerical targets for contracting (per HUD):  10% of the dollar amount of contracts for building trades work must be with be Section 3 Business Concerns, and 3% of the dollar amount of contracts for other work (non building trades work) must be with Section 3 Business Concerns. If an organization has contracting obligations under Section 3 and is not able meet these requirements, it has the burden of demonstrating why it was not feasible to meet the numerical goals.  Such justification may include impediments encountered despite action taken.

These requirements concern (a) contracts for labor and (b) contracts for both labor and materials, but not (c) contracts just for materials.  These contracting obligations are for contracts of any dollar value, not just those contracts for more than $100,000.

It is important to note that recipients, contractors, and subcontractors don’t have to contract with businesses that are not qualified for the contract, even if only by doing so will the business meet HUD’s minimum numerical targets.

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Section 3 Reporting Instructions (Form HUD-60002)

This reporting requirement applies to any RPP or SHDP project receiving HOME funds from NCHFA in excess of $200,000, to contractors working on that project with contracts larger than $100,000, and to subcontractors hired by those contractors if the contract with which the subcontractor is hired is for more than $100,000.  The award recipient must submit to NCHFA one HUD-60002 report that contains both their own activities and the activities of the contractors with contracts for more than $100,000 and those contractors’ subcontractors with contracts for more than $100,000.

View a downloadable HUD-60002 form, including HUD’s instructions.  Recipients should email or fax in the completed forms to NCHFA.

IMPORTANT:
For NCHFA RPP projects, this report must be submitted prior to loan closing.

For NCHFA SHDP projects, this report must be submitted prior to loan closing.

For the heading of HUD-60002:

Fill out:

• Recipient Name and Address:  This should contain the name of the recipient of the NCHFA award, not the name of contractors and subcontractors.  The address field should be the address of the property being developed.
• Contact person: The person at the recipient organization whom NCHFA staff should contact with questions about this form.
• Dollar Amount of Award: The amount of the award you received from NCHFA.
• Phone: The telephone number of the contact person.
• Program Name: SHDP or RPP, and the name of the development for which you received the award from NCHFA.
• Date Report Submitted

Do not fill out:

• HUD Field Office
• Federal Identification Number
• Program Code
• Reporting Period

For Part I:
See instructions on the third page of the Section 3 report (Form HUD-60002).

All hours worked and Section 3 residents hired will be reported on Form HUD-60002.

See the Obligations diagram above.  If a business is to be “reported on” (yellow star) but does not have “reporting” obligations (red dot), then its activity does not need to be included in Part I.

For Part II:
See instructions on third page of Section 3 report (Form HUD-60002).

See the Obligations diagram above.  If a business is to be “reported on” (yellow star) then the contract should be represented in Part II.

For Part III:
See the Obligations diagram above.  If a business is to be “reported on” (yellow star) then Part III should contain the outreach activity done prior to the hiring of that business for the contract.

Resources for recruiting/outreach to Section 3 residents:
See Job Link Career Centers in your area
See List of PHAs in NC

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HUD’s Suggestions to Comply with Obligations

For recipients, contractors, and subcontractors with questions about what types of activities they can undertake to ensure they comply with Section 3, HUD has provided suggestions in an appendix to the regulations at 24 CFR part 135.   Below are links to sections from that appendix.

Examples of Efforts to Offer Training and Employment Opportunities to Section 3 Residents

Examples of Efforts to Award Contracts to Section 3 Business Concerns

Examples of Procurement Procedures That Provide for Preference for Section 3 Business Concerns

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Definitions

Award Recipient:  Participants in NCHFA programs that receive awards from the NCHFA board of directors are “award recipients”.  These award recipients have reporting obligations to NCHFA.

Contractor: Any entity which contracts to perform work in connection with a Section 3 covered project. 

Subcontractor: Any entity which has a contract with a contractor to undertake a portion of the contractor’s obligation for the performance of work on a Section 3 covered project. 

Section 3 covered contract: Any contract or subcontract (including contracts for professional services) awarded by a recipient or contractor for work generated by a Section 3-covered project.  These do not include contracts for the purchase of supplies and materials.  However, whenever a contract for materials includes the installation of the materials, the contract constitutes a Section 3 covered contract.

Section 3 Residents:  Low-income individuals (including public housing residents) living in the metro area (MSA) or nonmetro county in which the project is located. 

The Section 3 Resident Certification form will help you determine if an individual is a “Section 3 resident”.  Please reference the current income limits.

Section 3 Business: A business that meets one of the following conditions:

1. The business is 51 percent or more owned by Section 3 residents; or
2. The business’s permanent, full-time employees include persons, at least 30 percent of whom are currently Section 3 residents, or within three years of the date of first employment with the business concern were Section 3 residents; or
3. The business provides evidence of a commitment to subcontract in excess of 25 percent of the dollar award of all subcontracts to be awarded to business concerns that meet the qualifications set forth in paragraphs (1) or (2) in this definition of Section 3 business concern.
   (This language came from HUD’s regulations; please contact NCHFA staff if you need clarification.)

The Section 3 Business Certification form will help you determine if a business is a “Section 3 business concern”. Please reference the current income limits.

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