[Federal Register Volume 59, Number 103 (Tuesday, May 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13196]


[[Page Unknown]]

[Federal Register: May 31, 1994]


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Part III





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Community Planning and 
Development



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24 CFR Part 570




Community Development Block Grant Program; Economic Development 
Guidelines; Proposed Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Community Planning and 
Development

24 CFR Part 570

[Docket No. R-94-1729; FR-3474-P-01]
RIN 2506-AB53

 
Community Development Block Grant Program; Economic Development 
Guidelines

AGENCY: Office of the Assistant Secretary for Community Planning and 
Development, HUD.

ACTION: Proposed rule and guidelines.

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SUMMARY: This rule proposes guidelines to assist Community Development 
Block Grant (CDBG) recipients in evaluating and selecting economic 
development activities for assistance with CDBG funds. The proposed 
guidelines deal with project costs and financial requirements and with 
the public benefit provided by such activities. This rule also proposes 
certain other changes to facilitate the use of CDBG funds for economic 
development objectives.

DATES: Comments due date: June 30, 1994.

ADDRESSES: Interested persons are invited to submit comments regarding 
the proposed rule to the Rules Docket Clerk, Office of General Counsel, 
room 10276, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC 20410. Comments should refer to the above 
docket number and title. Copies of all written comments received will 
be available for public inspection and copying between 7:30 a.m. and 
5:30 p.m. weekdays in the Office of the Rules Docket Clerk, at the 
address listed above.

FOR FURTHER INFORMATION CONTACT: James R. Broughman, Director, 
Entitlement Communities Division, Office of Block Grant Assistance, 
room 7282, 451 Seventh Street, SW., Washington, DC 20410. Telephone: 
(202) 708-1577; TDD: (202) 708-2565. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION: One of the Department of Housing and Urban 
Development's (HUD's) expressed goals is to provide an economic lift 
for distressed cities. Toward this end, HUD has embarked on a course 
designed to make the Community Development Block Grant (CDBG) program a 
potentially major contributor to the provision of jobs, especially for 
low-income persons residing in our poorest areas. To accomplish this 
goal, the Department recognizes that it will need to change both the 
perception and the reality concerning the usefulness of CDBG for 
economic development objectives.
    Section 806 of the Housing and Community Development Act of 1992 
(the 1992 Act) requires the Secretary to establish, by regulation, 
guidelines to assist CDBG recipients to evaluate and select economic 
development activities for assistance with CDBG funds. The 1992 Act 
also made further changes in the CDBG program affecting the use of 
funds for economic development activities, particularly those carried 
out under the national objective of benefiting low- and moderate-income 
persons through the creation or retention of jobs. These changes 
necessitate revisions to the CDBG regulations. HUD has also determined 
that it is appropriate to take this opportunity to propose certain 
other changes to the regulations to facilitate the use of CDBG funds 
for economic development objectives. These changes are designed to 
reduce the administrative burden on grantees while, at the same time, 
focusing efforts on assisting the residents of low- and moderate-income 
neighborhoods.

Applicability of This Proposed Rule to the State CDBG Program

    Separate regulatory language for the Entitlement and State CDBG 
programs is contained in this proposed rule. This preamble discusses 
the proposed changes for the two programs together; differences between 
the proposals for the two programs are noted. In general, the 
differences have been kept to a minimum.
    The State CDBG program regulations do not contain an explanatory 
list of eligible activities, and relatively few terms are defined in 
regulation. The proposed changes to Secs. 570.201, 570.203, 570.204, 
570.500 and 570.506 (and the accompanying preamble discussions thereof) 
are thus not applicable to the State CDBG program, as there are no 
comparable sections in the State regulations. In interpreting the list 
of eligible activities found in section 105 of the Housing and 
Community Development act of 1974, as amended, states may use the 
Entitlement regulations as interpretive guidance.

Applicability of This Proposed Rule to the HUD-Administered Small 
Cities and Insular Areas CDBG Programs

    Portions of the Entitlement CDBG Program regulations are 
incorporated by reference into the regulations for the HUD-Administered 
Small Cities program and the Insular Areas CDBG program. The proposed 
changes to the Entitlement regulations would also apply to the HUD-
Administered Small Cities and Insular Areas programs. The Department 
welcomes comment on whether these proposed changes can be practicably 
applied as written to the HUD-Administered and Insular Areas programs, 
or whether separate approaches are needed for those two programs. 
Further clarification would be provided (such as through annual Notices 
of Funding Availability or other instructions) for those programs, 
particularly regarding applications proposing a limited number of 
activities subject to the public benefit guidelines. Public comment is 
particularly welcomed on the proposed rule's approach in applying the 
aggregate public benefit tests to the HUD-Administered Small Cities and 
Insular Areas Programs.

Applicability of This Proposed Rule to the Indian CDBG Program

    It has been determined by the Office of Native American Programs 
that this proposed regulation will not be applicable to the Indian 
Community Development Block Grant (ICDBG) program. The nature of the 
ICDBG program is so separate and distinct from the Entitlement or the 
State and Small Cities program that it is in the best interest of the 
ICDBG to address these issues separately. A specific rule will be 
proposed at a later date to address the needs of the Indian Tribes and 
Alaskan Native Villages served by the ICDBG program to comply with the 
requirements of the Housing and Community Development Act of 1992. 
Comments and suggestions are solicited on the possible modification of 
this proposed rule or the development of a method of implementing these 
requirements for the ICDBG program.

Assistance for Microenterprises

    Section 807(a)(4) of the Housing and Community Development Act of 
1992 added a new section 105(a)(23) to the Housing and Community 
Development Act of 1974, as amended, regarding the provision of CDBG 
assistance to facilitate economic development through assistance to 
microenterprises and persons developing microenterprises. A 
``microenterprise'' is defined by section 807(c)(2) of the 1992 Act as 
a ``commercial enterprise that has five or fewer employees, one or more 
of whom owns the enterprise.'' This new eligibility provision became 
effective upon the enactment of the 1992 Act (October 28, 1992). In 
policy guidance issued in January 1993, the Department indicated that 
it intended to publish rules for public comment in order to show how 
assistance provided under the new provision should be distinguished 
from that provided to and for microenterprises under other existing 
authority in the CDBG program.
    The proposed rule implements the new microenterprise eligibility 
category by adding a new paragraph Sec. 570.201(o) to the CDBG 
Entitlement regulations. The Department has determined that it is 
appropriate to add the new provision to Sec. 570.201, basic eligible 
activities, rather than Sec. 570.203, special economic development 
activities, to highlight the unique aspects of the new microenterprise 
eligibility category. The provision of direct assistance to 
microenterprises has long been, and continues to be, eligible as a 
special economic development activity under Sec. 570.203(b). Such 
activities are carried out under the authority of section 105(a)(17) of 
the Housing and Community Development Act of 1974, as amended; 
therefore, they are statutorily subject to an ``appropriateness'' 
determination and the economic development ``guidelines'' (included in 
this proposed rule as a new Sec. 570.209 of the Entitlement regulations 
and additions to Sec. 570.482 of the State regulations). As noted 
above, however, this new microenterprise eligibility category was added 
to the Act as a new section 105(a)(23). This new paragraph of the 
statute does not contain any requirement that assistance for such 
activities be determined to be ``appropriate.'' In addition, this new 
paragraph is not included among those eligibility categories listed as 
covered by the economic development ``guidelines'' to be established 
pursuant to the new section 105(e) of the statute, as added by section 
806(a) of the 1992 Act. The new microenterprise eligibility category at 
section 105(a)(23) also authorizes the provision of ``general support * 
* * to owners of microenterprises and persons developing 
microenterprises,'' over and above the technical assistance and 
business support services authorized by the provision for such persons. 
The ``general support'' aspect of the eligibility provision is 
discussed in further detail later in this preamble. Given the above 
unique characteristics of the new statutory provision, the Department 
has determined that it is most fitting to list the eligibility category 
as a separate activity under Sec. 570.201 instead of adding it as 
another special economic development activity under Sec. 570.203 of the 
Entitlement regulations.
    While the new eligibility category does provide significant 
flexibility, there is an important restriction that must be noted. The 
beneficiaries of CDBG assistance under this new provision are limited 
to ``owners of microenterprises and persons developing 
microenterprises'' by the statute. As noted above, a 
``microenterprise'' is defined by section 807(c)(2) of the 1992 Act as 
a ``commercial enterprise that has five or fewer employees, one or more 
of whom owns the enterprise.'' This definition has recently been 
incorporated into the CDBG Entitlement regulations at Sec. 570.3. 
Pursuant to this statutory restriction, CDBG assistance to any business 
that has more than five employees cannot qualify under this provision 
and must continue to comply with the requirements of Sec. 570.203(b) of 
the Entitlement regulations. It should also be noted that given that 
activities assisted under this new provision are to exclusively benefit 
microenterprises and persons developing microenterprises, a CDBG-
assisted economic development loan or grant program that is open to any 
for-profit business under the provisions of Sec. 570.203(b) (Section 
105(a)(17) of the Housing and Community Development Act of 1974, as 
amended) cannot exempt an individual activity from compliance with the 
economic development ``guidelines'' simply because that individual 
business happens to be a microenterprise. The ``guidelines'' as 
currently proposed to be implemented by a new Sec. 570.209 of the 
Entitlement regulations (and Sec. 570.482 of the State regulations) 
take into account the special needs and limitations arising from the 
size of such businesses assisted under Sec. 570.203(b) as required by 
the new section 105(g)(1) of the statute as added by section 807(c)(1) 
of the 1992 Act.
    The new section 105(a)(23) authorizes the ``provision of assistance 
to public and private organizations, agencies, and other entities 
(including nonprofit and for-profit entities) to enable such entities 
to facilitate economic development by'' providing assistance to 
microenterprises and persons developing microenterprises. The 
Department has determined that given the general language contained in 
the statute, the grantee itself could be considered an entity eligible 
to carry out microenterprise assistance activities under section 
105(a)(23). If the grantee provides CDBG funds to other intermediary 
organizations to carry out microenterprise assistance activities under 
the new eligibility category, the Department considers such entities to 
be subrecipients. (See further discussion on such subrecipients later 
in this preamble.)
    As noted earlier, the new microenterprise eligibility category at 
section 105(a)(23) authorizes the provision of ``general support (such 
as peer support programs and counseling) to owners of microenterprises 
and persons developing microenterprises.'' Such ``general support'' is 
over and above the technical assistance and business support services 
authorized by the provision for such persons. This provision represents 
a potentially significant broadening of CDBG eligibility. The language 
of the statute indicates that the two specific types of services cited 
are meant only to serve as examples of what may be considered eligible 
under this provision and not an exclusive listing. The Department 
believes that this paragraph may be interpreted very broadly to include 
a multitude of non-business services for microenterprise owners and 
persons in varying stages of developing microenterprises. Thus, for 
illustrative purposes in the proposed rule at Sec. 570.201(o)(3), the 
Department has added two additional examples of potentially eligible 
services--child care and transportation. The proposed rule also makes 
it clear that other similar services that can be shown to help a person 
become a microenterprise owner can be considered eligible under this 
paragraph. Examples of other such services that might qualify under 
this provision, depending on the design of the microenterprise 
assistance activity, include personal financial counseling, substance 
abuse counseling, job training, and other education programs. Such an 
interpretation of this provision may provide significant new 
flexibility for grant recipients because services qualifying under this 
paragraph are not considered to be subject to the 15 percent cap on 
general public service activities qualifying under Sec. 570.201(e) of 
the CDBG Entitlement regulations (as authorized by section 105(a)(8) of 
the statute). Comment on the Department's interpretation of this 
provision is welcome.
    A new Sec. 570.482(c) of the State regulations is proposed. This 
proposed paragraph would specify that recipients of state CDBG grants, 
as well as subrecipients, may provide microenterprise development 
assistance; the proposed Sec. 570.482(c) also specifies that provision 
of support services to owners or developers of microenterprises is not 
subject to the statutory restrictions on public services.

Modification to the Definition of Subrecipient Related to 
Microenterprise Assistance Activities

    As noted earlier in this preamble, the new Section 105(a)(23) 
eligibility provision (proposed herein to be implemented by a new 
Sec. 570.201(o) in the Entitlement regulations) authorizes ``the 
provision of assistance to public and private organizations, agencies, 
and other entities (including nonprofit and for-profit entities) to 
enable such entities to facilitate economic development by'' providing 
various forms of assistance to owners of microenterprises and persons 
developing microenterprises. The Department interprets this provision 
to mean that any such entities beyond the grantee itself are to serve 
as intermediaries in the grant assistance chain rather than being 
considered beneficiaries in and of themselves. Thus, the Department 
considers such organizations to be subrecipients under the CDBG 
program. The term ``subrecipient'' is currently defined at 
Sec. 570.500(c) of the CDBG Entitlement regulations as a ``public or 
private nonprofit agency, authority or organization, or an entity 
described in Sec. 570.204(c), receiving CDBG funds from the recipient 
to undertake activities eligible for such assistance under Subpart C.'' 
As noted above, however, the new statutory eligibility category 
specifically includes for-profit entities as organizations that may be 
provided CDBG assistance to carry out microenterprise assistance 
activities. Thus, in this proposed rule, the Department is revising 
Sec. 570.500(c) to add a reference to ``an entity described in 
Sec. 570.201(o)'' to include such for-profit entities in the definition 
of a subrecipient.
    There are no regulatory requirements governing how a grant 
recipient selects a subrecipient under the CDBG program. Thus, a 
grantee may designate any entity, including a for-profit entity, to act 
as a subrecipient to carry out a microenterprise assistance activity 
under the new eligibility category. However, the Entitlement recipient 
and the subrecipient must then enter into a written agreement that 
meets all the requirements of Sec. 570.503 of the CDBG Entitlement 
regulations. These requirements include compliance with the applicable 
uniform administrative requirements as described at Sec. 570.502 and 
the program income requirements as set forth in Sec. 570.504(c).

Ensuring that Economic Development Projects Minimize Displacement

    The proposed rule implements section 907(a) of the National 
Affordable Housing Act of 1990 by amending Sec. 570.203(b) of the CDBG 
Entitlement regulations to delete the words ``necessary or'' from the 
previously required ``necessary or appropriate determination'' and to 
add the requirement that economic development projects assisted under 
this provision must minimize, to the extent practicable, displacement 
of existing businesses and jobs in neighborhoods. The language being 
added to the regulation on displacement is identical to that contained 
in the statute. The Department welcomes comment on whether any further 
explanatory language should be added and how broadly this provision 
should be interpreted.

Additional Changes to Sec. 570.203, Special Economic Development 
Activities

    Section 570.203 of the Entitlement regulations is further revised 
in this proposed rule, as is Sec. 570.204, to reflect that these 
activities are subject to the guidelines for selecting activities as 
required by section 806(a) of the Housing and Community Development Act 
of 1992 (``1992 Act''). The guidelines themselves are set forth in this 
proposed rule in a proposed new Sec. 570.209 in the Entitlement 
regulations and additions to Sec. 570.482 in the State regulations. 
These proposed changes are discussed in further detail later in this 
preamble.
    Additionally, a new paragraph (c) is proposed to be added to 
Sec. 570.203 of the Entitlement regulations to specifically address 
items that may be considered activity delivery costs in conjunction 
with special economic development activities assisted under this 
section. The Department's principal purpose in proposing the addition 
of this paragraph is to permit certain job training and placement 
activities in direct conjunction with otherwise assisted CDBG special 
economic development activities to be considered part of the ``delivery 
cost'' of those special economic development activities. Under current 
regulations, all job training and placement activities are considered 
to be public service activities qualifying under Sec. 570.201(e) of the 
Entitlement regulations and, thus, subject to the 15 percent cap on 
such activities. The Department recognizes that there are significant 
differences between general skill-building training programs and those 
that are directly linked with assisting individuals, especially low- 
and moderate-income persons, to obtain specific job openings generated 
by a CDBG-assisted special economic development activity. HUD believes 
it would be beneficial to permit the latter type of program to be 
considered part of the ``delivery cost'' of the associated special 
economic development activity. Such placement and training costs would 
then be considered to be eligible under Sec. 570.203 (Sections 105(a) 
(14) and (17) of the Housing and Community Development Act of 1974, as 
amended) and, thus, not subject to the limitations imposed on general 
public service activities. The remaining types of activities delineated 
in the proposed Sec. 570.203(c) are already considered to be activity 
delivery costs eligible under Sec. 570.203 under current regulations. 
The proposed new paragraph only provides a more specific statement of 
this point.

National Objective Standards for Low- and Moderate-Income Area Benefit 
Activities

    This proposed rule includes a revision to Sec. 570.208(a)(1)(i) of 
the Entitlement regulations and Sec. 570.483(b)(1)(i) of the State 
regulations dealing with activities qualifying under the national 
objective of benefiting low- and moderate-income persons as area 
benefit activities. The proposed revision relates specifically to 
special economic development activities that may be carried out under 
Sec. 570.203 (Sections 105(a) (14) and (17) of the Housing and 
Community Development Act of 1974, as amended) by a community 
development financial institution.
    Supporting the development and growth of community development 
financial institutions is a major initiative of this Administration. 
Such existing institutions have demonstrated their ability to identify 
and respond to community needs for equity investments, loans, and 
development services. They can play a critical role in the 
comprehensive revitalization of distressed neighborhoods by addressing 
the financing needs of the area that are otherwise unmet. The proposed 
change to Sec. 570.208(a)(1)(i) and Sec. 570.483(b)(1)(i) would allow 
that if a community development financial institution's charter limits 
its overall investment area to a primarily residential area where at 
least 51 percent of the residents are low- and moderate-income persons, 
any economic development activity carried out under Sec. 570.203 
(Sections 105(a) (14) and (17) of the Housing and Community Development 
Act of 1974, as amended) by that institution would be presumed to 
benefit that investment area generally. Thus, any such activity would 
qualify as an area benefit activity. This would reduce record keeping 
burdens for such activities while still ensuring that low- and 
moderate-income persons are receiving benefits from the activities.

National Objective Compliance by Microenterprise Assistance 
Activities

    Just as there are unique aspects distinguishing the new 
microenterprise eligibility category at section 105(a)(23) of the 
statute from CDBG special economic development activities, there is 
also a key distinction between the two types of activities relating to 
national objective compliance. Special economic development activities 
carried out under Sec. 570.203 (a) and (b) of the Entitlement 
regulations (Sections 105(a) (14) and (17) of the statute, 
respectively) are subject to the restrictions imposed by section 
105(c)(1) of the Act. That section limits the manner in which CDBG 
special economic development activities may be considered to meet the 
national objective of benefiting low- and moderate-income persons. 
Pursuant to section 105(c)(1), special economic development activities 
carried out under Sec. 570.203 (a) and (b) (Sections 105(a) (14) and 
(17) of the Housing and Community Development Act of 1974, as amended) 
can only be considered to benefit low- and moderate-income persons 
either as an area benefit activity (Sec. 570.208(a)(1) of the 
Entitlement regulations and Sec. 570.483(b)(1) of the State 
regulations) or as a job creation or retention activity 
(Sec. 570.208(a)(4) of the Entitlement regulations and 
Sec. 570.483(b)(4) of the State regulations). As noted above, however, 
the new microenterprise eligibility category was added to the Act as a 
new section 105(a)(23), and this new paragraph is not statutorily 
subject to the restrictions imposed by section 105(c)(1). Thus, the 
low- and moderate-income limited clientele method of meeting a national 
objective becomes an option for activities carried out under the new 
microenterprise eligibility category.
    In this proposed rule, a new Sec. 570.208(a)(2)(iii) has been added 
to the Entitlement regulations, and a new Sec. 570.483(b)(2)(iv) has 
been added to the State regulations, to specifically provide the 
limited clientele national objective option for the new microenterprise 
assistance activities. The Department believes that the limited 
clientele option provides the greatest flexibility for recipients and 
their subrecipients actually carrying out microenterprise assistance 
activities under the new eligibility category to qualify these 
activities as benefiting low- and moderate-income persons. This 
national objective provision would allow such activities to serve a 
broad range of microenterprise owners and persons developing 
microenterprises without concern as to whether and how many jobs are 
actually being ``created'' or ``retained'' as those terms are used in 
the CDBG Entitlement regulations at Sec. 570.208(a)(4) 
[Sec. 570.483(b)(4) of the State regulations]. This may be particularly 
significant when CDBG funds are used under the new eligibility category 
for the ``stabilization'' of existing microenterprises or to assist 
persons who subsequently decide against ``developing 
microenterprises.'' Also, under this proposed national objective 
provision, only the income status of the assisted microenterprise 
owners and persons developing microenterprises would need to be 
assessed; the recipient or subrecipient carrying out the activity would 
not have to ascertain the income status of any employees who may be 
hired or retained as a result of the CDBG assistance.
    The proposed rule would also permit the aggregating of 
beneficiaries by program year. Under the limited clientele provision, 
the recipient and any subrecipient carrying out the activity would need 
to demonstrate that at least 51 percent of the beneficiaries of the 
activity during the program year are low- and moderate-income persons. 
(States would need to demonstrate 51 percent low- and moderate-income 
benefit for each annual grant. Recipients of grants from HUD under the 
Insular Areas and HUD-Administered Small Cities programs would need to 
demonstrate 51 percent low- and moderate-income benefit for each 
separate grant.) Many activities carried out under the new eligibility 
category will likely be designed to assist an individual as he/she is 
attempting to develop a microenterprise and then to continue to assist 
the individual once that person has actually become an owner of a 
microenterprise. It is possible that a low- or moderate-income person 
initially assisted under such an activity may no longer be considered 
to be of low or moderate income in a later program year after the 
microenterprise actually becomes operational. The Department believes 
that some continuity of service for such persons may still be 
desirable. Thus, the proposed rule states that for purposes of meeting 
this national objective requirement, any person determined to be of low 
or moderate income may be presumed to continue to qualify as such for 
up to a three-year period before that person would have to requalify.
    Comment on the proposed manner for permitting a microenterprise 
assistance activity to demonstrate that it is meeting the national 
objective of benefiting low- and moderate-income persons is welcome. As 
discussed above, the Department believes that the proposed limited 
clientele provision will provide the greatest flexibility to recipients 
and their subrecipients actually carrying out such activities. 
Demonstrating compliance as job creation or retention activities would 
still be an option for activities carried out under the new eligibility 
category, but the Department is not proposing to make any special 
provisions in Sec. 570.208(a)(4) of the Entitlement regulations and 
Sec. 570.483(b)(4) of the State regulations for such activities. While 
job creation and retention activities can use the new presumptions 
added by Section 806(e) of the 1992 Act for determining a person's 
status as a low- or moderate-income person, the Department believes 
that microenterprise assistance activities carried out under the new 
eligibility category could still more easily meet national objective 
requirements under the proposed limited clientele provision.

National Objective Standards for Benefiting Low- and Moderate-Income 
Persons Through the Creation or Retention of Jobs--Presumptions Added 
by 1992 Act

    The proposed rule implements Section 806(e) of the 1992 Act by 
amending Sec. 570.208(a)(4) [Sec. 570.483(b)(4) in the State 
regulations] regarding the national objective standard for benefiting 
low- and moderate-income persons through the creation or retention of 
jobs. Section 806(e) of the 1992 Act amended section 105(c) of the 
Housing and Community Development Act of 1974 by adding a new paragraph 
(4) which permits certain presumptions to be made regarding the low- or 
moderate-income status for employees benefiting under that national 
objective criterion. The presumption permitted by the new section 
105(c)(4)(B) was effective upon enactment of the 1992 Act and is now 
being codified into the regulations. That section permits a person to 
be presumed to be of low or moderate income under this national 
objective standard if he/she resides within a census tract where not 
less than 70 percent of the residents are low- and moderate-income 
persons.
    The presumption permitted by the new section 105(c)(4)(A) has not 
yet become effective because it refers to census tracts that meet 
Federal enterprise zone criteria and HUD determined that further 
rulemaking was necessary to identify the specific criteria that must be 
met. Section 834 of the 1992 Act makes references to and updates 
certain portions of the enterprise zone designation authorized by 
section 701 of the Housing and Community Development Act of 1987. 
However, at the time the 1992 Act was enacted (October 28, 1992), a new 
enterprise zone bill was also being considered in Congress. The Omnibus 
Budget Reconciliation Act of 1993 (``1993 Act'') was subsequently 
enacted on August 10, 1993. Title XIII, chapter I, subchapter C, part I 
of that Act outlines a new program providing for the Federal 
designation of Empowerment Zones and Enterprise Communities. This 
program has now replaced the more limited enterprise zone designation 
authority that was provided in the 1987 Act. Section 1392 of the 1993 
Act prescribes the eligibility criteria for Empowerment Zones and 
Enterprise Communities. While there are various size, population, and 
distress criteria applicable to the overall area proposed for 
designation, the only eligibility criterion that is applied to 
individual census tracts is a poverty level standard. Pursuant to the 
1993 Act, each census tract to be included in an Empowerment Zone or an 
Enterprise Community must have a poverty rate of at least 20 percent.

    (Note: HUD interprets all of the above-noted statutory 
references to ``census tracts'' as also including ``block numbering 
areas'' (``BNAs'') in areas where census tracts are not defined. As 
used hereafter in this preamble, ``census tracts'' includes BNAs.)

    The low- and moderate-income presumption authorized by the new 
section 105(c)(4)(A), as added by section 806(e) of the 1992 Act, 
states that under the national objective standard of benefiting low- 
and moderate-income persons through the creation or retention of jobs, 
a person may be presumed to be of low or moderate income if either the 
person resides in a census tract that meets Federal enterprise zone 
eligibility criteria or the assisted activity is located in such a 
census tract. The statute does not require actual Federal designation, 
but only that the census tract meet the eligibility criteria. As noted 
above, the only eligibility criterion applicable to individual census 
tracts under the new Empowerment Zone/Enterprise Community program is 
the poverty level standard. Thus, HUD proposes to further amend 
Sec. 570.208(a)(4) and Sec. 570.483(b)(4) in this rule to provide that 
for purposes of determining whether a job is held by or made available 
to a low- or moderate-income person, the person may be presumed to be 
of low or moderate income if either (1) he/she resides in a census 
tract where at least 20 percent of the residents are in poverty or (2) 
the assisted business is located in a census tract where at least 20 
percent of the residents are in poverty and the job under consideration 
is to be located within that census tract. Such a change in the 
regulations should significantly ease grantees' record keeping burdens 
for many economic development activities, as was the apparent 
Congressional intent behind the change in the statute. A conforming 
change to Sec. 570.506(b) of the Entitlement regulations (the addition 
of a new paragraph (7) with the subsequent paragraphs renumbered) 
regarding records that need to be maintained is also included in this 
proposed rule. Comment on HUD's interpretation of the subject statutory 
provision is welcome.
    The Department particularly seeks comment as to whether further 
standards should be established for census tracts that comprise or 
include any part of a community's central business district. In 
delineating the size requirements for an area to be nominated as an 
Empowerment Zone or an Enterprise Community, section 1392(a)(3)(D) of 
the 1993 Act states that the area must exclude any portion of a central 
business district unless the poverty rate for each census tract in such 
district is not less than 35 percent in the case of an Empowerment Zone 
or 30 percent in the case of an Enterprise Community. HUD is interested 
in obtaining comment regarding whether the presumption of low- and 
moderate-income status included in the proposed revision to 
Sec. 570.208(a)(4) and Sec. 570.483(b)(4) should be revised to require 
a higher than 20 percent poverty percentage for census tracts that are 
part of a community's central business district and if so, whether such 
a standard should be set at 30 or 35 percent.
    It is noted that the new low- and moderate-income presumption based 
on a census tract meeting the eligibility criteria for the Empowerment 
Zone/Enterprise Community program would become effective only when a 
final rule is published for effect in this regard. It should also be 
noted that both of the above presumptions of a person's low- or 
moderate-income status are only applicable to activities qualifying 
under the low- and moderate-income national objective provisions of 
Sec. 570.208(a)(4) and Sec. 570.483(b)(4), job creation or retention 
activities. They cannot be extended to activities that qualify as 
benefiting low- and moderate-income persons under any of the other 
criteria delineated in Sec. 570.208(a) (1) through (3) or 
Sec. 570.483(b) (1) through (3). This is because the new section 
105(c)(4) of the Act, as added by section 806(e) of the 1992 Act, 
specifically states that it is only ``for the purposes of subsection 
(c)(1)(C).'' Section 105(c)(1)(C) of the Act is that provision which 
states that one of the ways in which economic development activities 
can be considered to principally benefit low- and moderate-income 
persons is to ``involve employment of persons, a majority of whom are 
persons of low and moderate income.''

Other Revisions Regarding Income Documentation

    As noted above, a new paragraph (7) is proposed to be added to 
Sec. 570.506(b) of the Entitlement regulations to specifically address 
what records should be maintained to document compliance with the above 
presumptions of a person's low- or moderate-income status as added by 
the 1992 Act. HUD is also including in this proposed rule additional 
revisions to the introductory paragraph of Sec. 570.506(b) regarding 
information HUD will generally accept as documentation of income by 
family size. The proposed revisions are principally designed to clarify 
what is already the intent of the current rule. The proposed rule cites 
specific examples of programs having income qualification criteria at 
least as restrictive as CDBG and would also permit grantees to use 
evidence that a person is homeless as a substitute for specific 
information on income by family size.
    Section 570.490(a) of the State regulations states that HUD and the 
states shall jointly agree on the content of records to be maintained 
by states. HUD is presently in the midst of negotiations with states on 
recordkeeping, and will continue the consultation process when final 
regulations are published.

Job Creation or Retention by Public Infrastructure Improvements

    In this proposed rule, the Department is also including another 
amendment to Sec. 570.208(a)(4) of the CDBG Entitlement regulations and 
Sec. 570.483(b)(4) of the State CDBG program regulations that is not 
directly related to any specific statutory change. This change relates 
to grantee concerns that have been raised regarding the requirements 
for demonstrating national objective compliance for CDBG-assisted 
public infrastructure improvements, such as parking garages, streets, 
and water and sewer improvements, that are designed to support an 
economic development project and are claimed under the national 
objective of benefiting low- and moderate-income persons through the 
creation or retention of jobs. Inasmuch as such public infrastructure 
improvements qualify independently for eligibility as public 
facilities, they are not statutorily subject to the additional 
eligibility determinations required for ``special economic 
development'' activities. However, such infrastructure improvements may 
often have unique difficulties in demonstrating compliance with the 
national objective requirements for the creation or retention of jobs. 
Grantee concerns in this regard have been most notable in the State 
CDBG program, but Entitlement grantees, particularly urban counties, 
may also face the same issues.
    In the November 9, 1992, State CDBG Program Regulations, HUD 
included a new criterion by which public improvements undertaken for 
economic development purposes could demonstrate compliance with the 
low- and moderate-income benefit national objective. Prior to 1992, 
both the Entitlement and State CDBG programs had no specific criteria 
for public improvement projects meeting the national objective through 
job creation or retention. All recipients were required to track job 
creation or retention indefinitely for any and all businesses 
benefiting from the CDBG assistance for the public improvements. Such 
is still the case for Entitlement grant recipients.
    The present State program rule at Sec. 570.483(b)(4)(iv)(C) 
requires that a unit of general local government develop an assessment 
which identifies any businesses located or expected to locate in the 
area to be served by the public improvement. Under that provision, the 
jobs to be considered for purposes of meeting the national objective 
are all jobs created or retained as a result of the public improvement, 
both by businesses identified in the assessment and by any other 
businesses which locate in the area within three years after the 
completion of the public improvement. If the cost of the public 
improvement is less than $3,000 per job, however, the jobs to be 
considered may be limited to those created or retained by the 
businesses identified in the assessment.
    This criterion has been subject to considerable question and 
concern from states. Three particular areas of concern have been 
frequently cited:
    (1) The $3,000 per job threshold is too low;
    (2) Counting jobs from all businesses that locate in the area 
within a three-year period is unreasonable, as most projects are 
undertaken to serve one (or a small number of) specific, identified 
business(es);
    (3) Counting jobs from businesses which were not identified in the 
initial assessment is problematic, because local governments cannot 
predict or control the business expansion activities of all businesses 
in the service area of a public improvement. A project could fail to 
meet the low- and moderate-income benefit national objective if 
unanticipated, higher-income jobs created by such previously 
unidentified businesses reduce the aggregate percentage of low- and 
moderate-income jobs below 51%.
    The Department has considered the issues raised by states and their 
experiences in implementing this criterion over the past year. As HUD 
desires to make the CDBG program a more flexible resource for assisting 
economic development projects, the Department proposes to revise the 
current State program criterion and also add a comparable provision to 
the Entitlement program regulations.
    In this proposed rule, the $3,000 per job threshold is raised to 
$10,000. The Department recognizes that a public works project with an 
economic development purpose is usually undertaken with the primary 
goal of assisting one (or a small number of) identified business(es). 
Benefit might accrue from the CDBG-assisted public improvement to 
other, currently unidentifiable businesses in the service area, 
particularly if that area is relatively undeveloped; however, the 
project is not being undertaken for their benefit. Where the $10,000 
per job threshold can be met by the identified business(es) for whom 
the public improvement is being undertaken, job creation or retention 
by only that (those) specific business(es) must be tracked.
    Where the $10,000 per job threshold cannot be met by considering 
only those specific businesses, recipients will still be required to 
track all job creation or retention resulting from the CDBG-assisted 
public improvement. However, the time period for determining the 
universe of businesses for which job creation must be tracked is 
changed in this proposed rule. The time period would be changed from 3 
years after completion of the improvement to a period starting with the 
award of the grant by the state and ending one year after the 
completion of the public improvement. In the case if an Entitlement 
recipient, the period would start with the identification of the 
project in the grantee's final statement. For recipients of grants from 
HUD under the Insular Areas or HUD-Administered Small Cities programs, 
the period would start with HUD's award of the grant to the recipient. 
The proposed rule clarifies that the requirement applies to the time 
period during which businesses move into a service area or expand as a 
result of the assistance, not to the time period for which jobs must be 
tracked for any given business.
    The present State CDBG regulation requires that ``the assistance 
must be reasonable in relation to the number of jobs''; the Department 
chose not to define ``reasonableness'' in the existing regulations. The 
portion of this proposed rule establishing the required guidelines for 
evaluating the public benefit of special economic development 
activities, which is fully discussed later in this preamble, provide a 
gauge for defining the reasonableness of the CDBG cost per job. 
Therefore, while a public facilities activity would not normally be 
subject to the public benefit guidelines, HUD proposes to make such an 
activity subject to the new public benefit guidelines proposed herein 
at Sec. 570.209(b) and Sec. 570.482(e) in any case where the activity 
is undertaken to support an economic development project and it does 
not meet the $10,000 per job threshold that is proposed to be 
established in the job creation or retention national objective 
regulations. The Department will presume that public improvement 
activities that meet the proposed $10,000 per job threshold provide 
reasonable benefits relative to the amount of the assistance.
    Given the above proposed changes, Sec. 570.208(a)(4) is also being 
reformatted for clarity in this proposed rule. The only substantive 
changes in this section of the regulations are those regarding the 
presumptions added by the 1992 Act and job creation/retention by public 
infrastructure projects as discussed above. These changes can be found 
at the proposed new paragraphs Sec. 570.208(a)(4)(iv) and (v)(C), 
respectively.

Request for Comment on Certain Other Job Creation/Retention Issues Not 
Contained in the Proposed Rule

    In addition to the revisions included in this proposed rule, HUD is 
also deliberating certain other issues in an attempt to determine 
whether further changes should be proposed regarding the national 
objective standards for benefiting low- and moderate-income persons 
through the creation or retention of jobs.
    While the presumptions added by the 1992 Act regarding a person's 
low- or moderate-income status for job creation or retention activities 
should significantly ease grantees' record keeping burdens for many 
economic development activities, HUD is also considering whether any 
further presumptions could be made in this regard. Specifically, HUD is 
deliberating whether any reasonable, objective presumption of a 
person's low- or moderate-income status could be made on the basis of 
the type of job being assisted. Given the statutory requirements of 
Section 105(c)(1)(C) of the Act, it is recognized that the type of job 
being created or retained cannot be the sole determining factor in 
assessing whether an assisted activity actually benefits low- and 
moderate-income persons. However, there may be cases where grantee 
experience clearly demonstrates that in certain types of businesses or 
industries, the large majority of persons employed are low- and 
moderate-income persons. HUD is attempting to determine whether there 
may be any feasible method for providing a grantee with some relief of 
record keeping burdens in such cases. On the other hand, HUD does not 
want to provide any encouragement for grantees to assist only those 
businesses that produce what may be considered ``dead-end jobs.'' 
Comment on this issue is welcome.
    CDBG job retention requirements are also often the subject of 
debate. There is criticism by certain grantees and other entities that 
the requirement to document that jobs claimed as being retained would 
actually be lost without the CDBG assistance may result in assistance 
that is ``too little and too late.'' Such groups argue that a grantee 
should be able to provide CDBG assistance to businesses much earlier in 
the process in order to help the business remain competitive. However, 
it may often be the case that such efforts would actually result in the 
``down-sizing'' of a business' workforce. Given that a job retention 
national objective claim is based on providing employment 
opportunities, principally for low- and moderate-income persons, any 
such net reduction in a business' workforce is problematic. Relaxation 
of the current requirement to document that jobs would otherwise be 
lost may also provide opportunities for abuse of the CDBG program by 
permitting assistance to any business that threatens to move or to 
close without any objective evidence that supports such a statement. 
Comment on these issues, particularly specific proposals as to how they 
could be dealt with, is welcome.
    There is a second aspect of CDBG job retention requirements that is 
often criticized. That is the fact that, except for some allowance for 
jobs that may become available through turnover, the low- and moderate-
income standards are applied at the time the assistance is provided, 
which is while the employees still have the income from the jobs that 
they are subject to lose. There can be cases where the employees do not 
meet the low- and moderate-income limits at that point, but would 
likely do so if the jobs are actually lost. The presumptions of a 
person's low- and moderate-income status added by the 1992 Act should 
help resolve this concern in many such situations. HUD is also 
considering whether it may be appropriate to propose some further 
regulatory change in this regard, particularly for cases where the 
majority of persons holding the endangered jobs have limited education 
and no specialized skills and the labor market area does not provide 
opportunities for other employment at comparable rates of pay. Comment 
on this issue, particularly specific proposals as to how it could be 
dealt with, is welcome.

National Objective Standards for Addressing Slums or Blight on an Area 
Basis

    The proposed rule includes a revision to Sec. 570.208(b)(1)(ii) of 
the Entitlement regulations and Sec. 570.483(c)(1)(ii) of the State 
regulations to provide for a limited broadening of the requirements an 
area must meet in order to be designated as a blighted area under the 
CDBG program. Under current regulations, in addition to meeting a 
definition of a blighted or deteriorating area under State or local 
law, there must also either be a substantial number of deteriorated or 
deteriorating buildings throughout the area or the public improvements 
must be in a general state of deterioration. The proposed rule would 
add a third option as a qualifier for areas that are exclusively 
commercial or industrial in nature. Such an area could qualify as a 
blighted area under the CDBG program if it met an applicable definition 
under State or local law and exhibited pervasive economic 
disinvestment. According to the change included in the proposed rule, 
such economic disinvestment would be evidenced by a substantial number 
of vacancies in previously occupied commercial or industrial buildings 
in the area. This change would permit grantees to use CDBG funds to 
assist an area experiencing substantial economic disinvestment before a 
substantial number of buildings in the area actually reached the point 
of being deteriorating or deteriorated. Comment on this proposed change 
is welcome. The Department is particularly interested in receiving 
comment regarding whether there are any alternative objective and 
easily quantifiable measures of economic disinvestment in a commercial 
or industrial area.

Request for Comment on an Additional Slum/Blight Issue Not Included in 
the Proposed Rule

    Several communities have described to the Department situations in 
which the presence of environmentally contaminated sites negatively 
affects the surrounding community. The Department has, in the past, 
determined that cleanup of contaminated sites (as a clearance activity) 
can meet the national objective of eliminating slums or blight on a 
spot basis. Current regulations do not provide clear means for 
recipients to demonstrate that an area is blighted because of 
environmental contamination in and of itself.
    The presence of contamination could cause abandonment of buildings 
or long-term vacancies on or near contaminated sites, which may enable 
a commercial or industrial area to qualify as blighted under the 
revision to Sec. 570.208(b)(1)(ii) of the Entitlement regulations or 
Sec. 570.483(c)(1)(ii) of the State regulations included in the 
proposed rule. However, there may also be situations in which the link 
between environmental contamination and economic disinvestment may not 
be clear-cut.
    At question is whether the presence of one or more contaminated 
sites, in and of itself, should be considered as evidence of blighting 
conditions in an area otherwise meeting a State or local definition of 
blight or deterioration. Comments are invited on this issue. In 
particular, the Department seeks comments addressing the following 
questions:

--How severe must environmental contamination be to have a blighting 
influence on an area? Should site(s) be required to appear on a Federal 
``Superfund'' (or similar State) cleanup priority list in order to be 
considered blighting? If not, how would the serious effect of the 
contamination on the area be demonstrated?
--How pervasive must the contamination be in order to affect an entire 
area? Must there be multiple contaminated sites throughout the area, or 
can one or two contaminated sites be so significant as to cause a 
larger overall area to be considered blighted?
--How broad a definition of ``contamination'' is appropriate? The 
Department envisions that soil or groundwater pollution would generally 
be viewed as ``contamination.'' Presence of hazardous building 
materials (such as asbestos or lead-based paint) could also be viewed 
as ``contamination''; however, such conditions could already permit an 
area to qualify under the existing regulations by causing 
``deteriorated or deteriorating buildings.'' Should more widespread air 
or water pollution, which may affect not just one area but an entire 
city or region, also be viewed as a blighting condition?

Guidelines for Evaluating and Selecting Economic Development Activities 
for CDBG Assistance

    The proposed rule implements section 806(a) of the 1992 Act at a 
proposed new Sec. 570.209 in the Entitlement regulations and additions 
to Sec. 570.482 in the State regulations. This proposed section of the 
regulations is intended to provide guidelines for the purpose of 
enabling the recipient to evaluate certain activities proposed to be 
assisted with CDBG funds for economic development purposes. 
Specifically, these guidelines are to be applied to activities that are 
eligible under Sec. 570.203(a) or (b) and similar activities that may 
be undertaken by a subrecipient eligible under Sec. 570.204 [Sections 
105(a) (14), (17), and (15), respectively of the Housing and Community 
Development Act of 1974, as amended]. Section 570.209(a) and 
Sec. 570.482(d) discuss the guidelines and objectives for evaluating 
project costs and financial requirements, and Sec. 570.209(b) and 
Sec. 570.482(e) delineate the guidelines for evaluating public benefit.
    In defining the applicability of these guidelines, HUD carefully 
reviewed the language contained in section 806(a) of the 1992 Act. The 
title of the new subsection added by this provision is cited as 
``Guidelines for Evaluating and Selecting Economic Development 
Projects.'' The text of the provision then states the following:

    The Secretary shall establish, by regulation, guidelines to 
assist grant recipients under this title to evaluate and select 
activities described in section 105(a)(14), (15), and (17) for 
assistance with grant amounts.

    The correlation to sections 105(a) (14) and (17) of the Housing and 
Community Development Act of 1974, as amended, is clear inasmuch as 
those sections authorize the use of CDBG funds for special economic 
development activities that are codified in the current Entitlement 
regulations under Sec. 570.203 (a) and (b), respectively. Section 
105(a)(15) of the Act, however, authorizes the provision of CDBG 
assistance to certain eligible subrecipients to carry out a wide 
variety of activities as part of a neighborhood revitalization, 
community economic development, or energy conservation project. This 
provision is codified in the CDBG Entitlement regulations at 
Sec. 570.204 (revisions to which are included in this proposed rule). 
HUD does not believe that Congress intended to extend the applicability 
of the subject guidelines to all CDBG-assisted activities undertaken by 
subrecipients eligible under Sec. 570.204, but rather limit the 
coverage of the guidelines to economic development activities 
undertaken by such entities. The Department has heretofore not formally 
defined a ``community economic development project'' (see definition 
proposed at Sec. 570.204(a)(2) herein), but the term can be broadly 
considered to encompass any project that increases economic 
opportunities for community residents. Establishing reasonable 
evaluation measures relevant to the entire spectrum of activities 
potentially eligible under this criterion would be quite complicated, 
and the implementation of such standards could be unduly burdensome for 
grantees. Such an outcome does not appear to be consistent with 
Congressional intent in enacting the subject statutory provision. Thus, 
in this proposed rule, HUD has, for the Entitlement, HUD-Administered 
Small Cities, and Insular Areas Programs, limited the extent to which 
the guidelines are to be applied to activities that are carried out 
under Sec. 570.204 of the CDBG regulations. Activities implemented by 
subrecipients eligible under Sec. 570.204 would be subject to the 
guidelines only to the extent that if the eligible subrecipient were 
not involved, the activities would otherwise be considered eligible 
under Sec. 570.203. The State regulations note that the guidelines are 
applicable to activities eligible under section 105(a)(17) of the 
Housing and Community Development Act of 1974 (as amended), economic 
development activities eligible under section 105(a)(14) of the Act, 
and activities that are part of a community economic development 
project eligible under section 105(a)(15) of the Act. Comment on this 
interpretation is welcomed.
    As noted above, the new section 105(e)(1) of the Housing and 
Community Development Act of 1974, as added by section 806(a) of the 
1992 Act, requires HUD to ``establish'' the referenced guidelines ``by 
regulation.'' However, that section of the Act further specifically 
states that the Secretary may not base a determination of ineligibility 
of the use of CDBG funds for economic development activities solely on 
the basis that the recipient fails to achieve one or more of the 
objectives of that portion of the guidelines pertaining to project 
costs and financial requirements. Given this limited ability to enforce 
the financial guidelines, HUD considered a variety of approaches in 
drafting the Sec. 570.209(a) and Sec. 570.482(d) portion of the 
proposed rule. The first issue considered was whether the above 
referenced statutory provision was intended to make conducting any form 
of financial underwriting for CDBG-assisted economic development 
activities totally optional on the part of grant recipients. If some 
form of underwriting was to be required, the issue would then be 
whether the regulations should specify the exact system of underwriting 
that must be followed or whether the regulations should simply set 
forth a ``safe harbor'' approach and allow grantees to follow some 
other process as long as it aims at the same objectives. Also, given 
the limited enforceability noted above, there is a question as to what 
level of detail should be included in the regulations themselves.
    The proposed rule states that the use of the financial guidelines 
discussed under Sec. 570.209(a) and Sec. 570.482(d) is not mandatory. 
To further demonstrate this point, the specific elements of the 
financial guidelines are not included within the text of the proposed 
rule itself. Instead, they are proposed to be published in a concurrent 
but separate Federal Register Notice, which is subject to the same 
standards for public review and comment as those that govern the 
rulemaking process. It should be noted, however, that the proposed rule 
further states that grantees electing not to use these guidelines would 
be expected to conduct basic financial underwriting with respect to any 
CDBG financial assistance provided to a for-profit business. States 
would be expected to ensure that the state or units of general local 
government conduct basic financial underwriting prior to the provision 
of CDBG financial assistance to a for-profit business. Thus, compliance 
with the exact financial guidelines delineated in the proposed Federal 
Register Notice, which is also published herein, is optional on the 
part of grant recipients. Nonetheless, HUD believes that sound 
management practices dictate that some form of financial underwriting 
be performed for any economic development activity proposed for 
financial assistance under the CDBG program. Therefore, in cases where 
such an activity receiving CDBG financial assistance fails to meet 
other applicable program requirements, such as the public benefit 
standards described in Sec. 570.209(b) and Sec. 570.482(e) of this 
proposed rule or the national objective requirements, HUD will consider 
the extent to which the recipient conducted prudent underwriting in 
HUD's determination of the appropriate sanctions to be imposed on the 
recipient for such noncompliance. Comment on this approach is welcomed. 
Comment is also welcomed on the specific elements included in the 
proposed financial guidelines. HUD believes that the information 
included in the proposed Federal Register Notice provides reasonable 
guidance for financial underwriting aimed at the objectives set forth 
in the 1992 Act. The Department is interested in obtaining comment as 
to whether the guidance provided is seen by local practitioners as 
being sufficient or, on the other hand, overly prescriptive. Commenters 
are encouraged to submit any recommended alternatives in this regard.
    While the 1992 Act specifically limits HUD's enforcement of the 
guidelines for project costs and financial requirements in assessing 
the eligibility of the use of CDBG funds for economic development 
activities, no such limitation is imposed by the Act on the guidelines 
required to be established for evaluating the public benefit provided 
by CDBG-assisted economic development activities. The new section 
105(e)(3) of the Housing and Community Development Act of 1974, as 
added by Section 806(a) of the 1992 Act, states that the guidelines 
shall provide that the public benefit generated by such an activity is 
appropriate relative to the amount of CDBG assistance provided for the 
activity. The proposed rule implements this statutory provision at 
Sec. 570.209(b) and Sec. 570.482(e) and states that unlike the 
financial guidelines discussed in Sec. 570.209(a) and Sec. 570.482(d), 
adherence to the guidelines for public benefit is mandatory.
    Assessing the extent of public benefit expected to be derived from 
an economic development project receiving financial assistance under 
the CDBG program has long been required to be documented as part of the 
``appropriate'' determination required as a condition of eligibility 
for some of the activities covered by the guidelines. However, HUD has 
heretofore provided little specific guidance as to what such an 
assessment should entail. As discussed above, the changes made by the 
1992 Act significantly increase the importance of the public benefit 
review in determining the eligibility of certain CDBG-assisted economic 
development activities. Thus, it is important that the guidelines 
establish reasonable and clear standards for determining whether the 
level of public benefit provided by an economic development activity is 
appropriate given the amount of CDBG assistance provided to that 
activity.
    Establishing reasonable public benefit guidelines is a formidable 
task. There are a myriad of different factors that are commonly 
ascribed to the overall public benefit generated by an economic 
development activity. The relative importance of the various factors 
can vary significantly between communities, making it difficult to 
establish a single set of standards on a national level. Setting such 
standards is made even more difficult by the fact that many elements of 
the public benefit provided by an economic development project are 
highly qualitative and thus difficult to measure objectively.
    In developing this proposed rule, HUD considered whether to attempt 
to include in the regulatory guidelines a wide array of different 
elements of public benefit that could be rated for each economic 
development activity proposed for CDBG assistance. However, as noted 
above, such an approach would require ratings on each activity for many 
highly qualitative elements that can be difficult to measure 
objectively. HUD thus decided against using this approach. One of the 
common grantee complaints regarding the use of CDBG funds for economic 
development activities has been that HUD staff have unreasonably 
``second guessed'' the community's underwriting decisions in funding 
specific businesses. Congress responded to such complaints in the 1992 
Act by clearly stating that no ``but for'' test is to be applied to 
CDBG-assisted economic development activities and as discussed earlier 
in this preamble, by specifically prohibiting the Secretary from making 
determinations of ineligibility solely on the basis that such an 
activity fails to achieve the objectives of the financial guidelines. 
Given the increased importance of the public benefit evaluation in 
determining the eligibility of CDBG-assisted economic development 
activities pursuant to the 1992 Act, HUD does not believe that it would 
be beneficial to establish public benefit guidelines that could easily 
become susceptible to similar ``second guessing'' debates.
    In order to provide grantees with clear standards for assessing 
what level of CDBG assistance, if any, may be appropriate for proposed 
economic development activities, HUD believes it is best to delineate 
standards using elements of public benefit that are easily measured and 
commonly considered by grant recipients. One of the most widely used 
and easily calculated measures in various public economic development 
financing programs is a ``cost per job'' standard. HUD has determined 
that such a standard is also appropriate to serve as a principal factor 
for evaluating the level of public benefit provided by many CDBG-
assisted economic development activities, regardless of which national 
objective may be claimed for the activity. It is also recognized, 
however, that not all such activities are designed to create or retain 
jobs. Some economic development activities assisted with CDBG funds are 
designed to serve a certain geographic area, with no direct change in 
employment levels. An example of such an activity is the provision of a 
CDBG working capital loan to a neighborhood grocery store that may be 
experiencing financial difficulties and thus plans to move to a 
different location. HUD believes that a ``cost per low- and moderate-
income person served'' calculation is appropriate to serve as a 
principal factor for measuring the level of public benefit provided by 
such activities. However, HUD recognizes that using the above two 
factors as principal measures may unduly limit the scope of the types 
of public benefit that are to be generally considered in evaluating a 
proposed economic development project for CDBG assistance. Thus, the 
proposed rule also includes standards that focus on benefits that 
address what HUD believes are important national interests.
    The proposed rule at Sec. 570.209(b)(1) and Sec. 570.482(e)(2) 
delineates certain basic tests to be applied to each economic 
development activity receiving CDBG assistance. The ``CDBG cost per 
job'' and the ``CDBG cost per low- and moderate-income person served'' 
standards included in these tests are designed to establish absolute 
upper limits for what HUD would consider to be reasonable on an 
individual project basis. This portion of the proposed rule also 
delineates certain types of activities that HUD believes, in the 
context of the CDBG program, provide insufficient public benefit. Thus, 
HUD is proposing to deem these activities to be ineligible for 
assistance as part of activities governed by the public benefit 
standards. Comment on this proposed list of activities is welcome. 
Commenters are encouraged to submit justification for any recommended 
additions or deletions.
    Beyond the above threshold tests for individual activities, the 
proposed rule establishes criteria for measuring the public benefit of 
a grantee's CDBG economic development activities on an aggregate 
portfolio basis. Under the State CDBG program, these standards would be 
applied to the aggregate amount of all such activities carried out by 
all units of local government receiving funds from a state's annual 
grant. A state would aggregate each annual grant separately, for the 
entire time period that an annual grant remains open. Under the HUD-
Administered Small Cities and Insular Areas CDBG Programs, these 
standards would be applied to the aggregate amount of all such 
activities carried out by the grantee from a single year's grant. A 
grantee would aggregate each grant separately, for the entire time 
period that a grant remains open. Under the Entitlement program, these 
standards would be applied to the aggregate of all such activities for 
which the grantee obligated CDBG funds within a single program year 
without regard to the source year of the funds. Such aggregate tests 
are similar to those already used by other public economic development 
financing programs, such as the Small Business Administration's (SBA's) 
Section 504 program. They provide the grantee with more flexibility in 
selecting individual economic development activities for CDBG funding.
    The proposed rule at Sec. 570.209(b)(2) and Sec. 570.482(e)(3) 
describes two different criteria that may be used to measure public 
benefit in the aggregate. Only one of these criteria would have to be 
met to demonstrate compliance with the standards for activities in the 
aggregate. Each grantee would have the option of choosing which 
criterion it would meet. The first option in the proposed rule applies 
a $35,000 ``CDBG cost per job'' standard and a $350 ``CDBG cost per 
low- and moderate-income person served'' standard to a grantee's 
aggregate portfolio. Under the second option, a grantee would be 
considered to meet the public benefit standards if at least 75 percent 
of the aggregate amount of CDBG funds used by the grantee for economic 
development activities is used for activities that are principally 
designed to address at least one of a variety of specified goals that 
HUD believes represent important national interests.
    Public comment on the proposed rule's approach for evaluating the 
level of public benefit provided by a grantee's CDBG-assisted economic 
development activities, including the specific numerical standards 
established, is particularly welcome. In considering whether and how to 
comment on this section, there are certain factors that should be kept 
in mind. While it has been noted earlier in this preamble that the 
aggregate ``cost per job'' standard is similar to that already used by 
SBA's Section 504 program, the proposed CDBG standard is different in 
one significant fashion. While SBA's cost per job calculation is based 
only on the amount of the debentures guaranteed by SBA, the amount of 
CDBG funds to be used in the cost per job calculation under the 
proposed CDBG standard is the total amount of CDBG funds used by the 
grantee for economic development activities in the specified period. 
This amount would include all CDBG-funded activity delivery costs for 
economic development activities and all CDBG funds used for technical 
assistance to for-profit businesses. Secondly, in devising the proposed 
CDBG standards, consideration was given to the possibility of 
differentiating between loans and grants. When CDBG funds are provided 
to an economic development activity in the form of a loan, it is 
generally with the expectation that the funds will be repaid over some 
term. Any repayment of such funds reduces the activity's ultimate 
``cost'' to the CDBG program. However, the face amount of the loan 
still represents at least an ``opportunity cost'' to the grantee's CDBG 
program. Given that the majority of CDBG assistance to for-profit 
businesses is awarded in the form of loans, HUD has thus determined 
that adding any calculations to the public benefit standards to 
differentiate between loans and grants would unnecessarily complicate 
the process and would be unduly burdensome for grantees.
    Section 570.209(c) and Sec. 570.482(f) of the proposed rule address 
amendments to economic development activities after the ``appropriate'' 
review determinations have been completed. As an economic development 
activity is implemented, there are often changes in the financing 
structure and other various aspects of the project. The intent of this 
provision is to indicate that when such changes occur, the grantee 
should reevaluate the various terms and conditions of the CDBG 
assistance it has agreed to provide for the project. HUD considers each 
such reevaluation to be equivalent to a new ``appropriate'' 
determination in that it is subject to the same guidelines, 
particularly those relating to public benefit.
    Section 570.209(d) and Sec. 570.482(e)(5) of the proposed rule 
address the grantee's responsibility to maintain records that 
demonstrate the actual public benefit results, based on the standards 
contained in Sec. 570.209(b) and Sec. 570.482(e), achieved upon 
completion of the CDBG-assisted economic development activities. These 
records must also indicate how the actual results for each project 
compare to the level of benefit that was projected to be achieved by 
the project at the time the CDBG assistance was obligated. If actual 
results vary substantially from the grantee's initial projections, the 
grantee is expected to take all actions reasonably within its control 
to improve the accuracy of its projections in future cases. This 
paragraph is intended to address possible grantee concerns that it may 
be put in the position of having to guarantee job creation/retention 
results under the proposed public benefit standards. HUD generally 
judges compliance with program requirements on the basis of actual 
results rather than initial projections. Thus, with the proposed public 
benefit standards, HUD intends to track the aggregate of economic 
development activities funded by a grantee each year to assess whether 
the cost per job standards are actually met. Assessing compliance only 
on initial job projections would invite abuse through deliberate 
overstatements. As experience with the national objective standard for 
benefiting low- and moderate-income persons through the creation or 
retention of jobs has shown, the number of jobs actually created by a 
CDBG-assisted activity is often less than that which was originally 
projected by the grantee. The reasons for the decrease in the number of 
jobs created may vary from unexpected developments in the economy 
completely beyond the control of the grantee to the deliberate 
overstatement of job projections at the time the CDBG assistance was 
obligated. It is unreasonable to expect that the number of actual jobs 
created by CDBG-assisted economic development activities will always 
meet or exceed original projections. However, if actual results vary 
significantly from initial projections, the grantee is expected to 
review its systems for making such projections and/or reviewing those 
supplied by developers and take all actions reasonably within its 
control to improve the accuracy of the projections. The actions the 
grantee takes in this regard will be considered by HUD in determining 
the appropriate sanctions to be imposed on the recipient for any 
noncompliance with the public benefit standards.

History of Special Activities by Certain Subrecipients (Section 
105(a)(15) of the Act)

    This portion of the rule proposes changes to Sec. 570.204 of the 
Entitlement regulations, which implements section 105(a)(15) of the 
Act, authorizing the provision of ``assistance to neighborhood-based 
nonprofit organizations, local development corporations, or entities 
organized under 301(d) of the Small Business Investment Act of 1958 to 
carry out a neighborhood revitalization or community economic 
development or energy conservation project * * *.'' Activities assisted 
in accordance with the requirements of Sec. 570.204 are eligible in 
their own right, and may thus consist of activities that are ineligible 
to be carried out by the recipient, or by subrecipients which do not 
qualify under this section. Over the past several years, the Department 
has been aware of a considerable amount of confusion among grantees 
concerning various aspects of this provision. The main questions raised 
repeatedly have been: What kinds of organizations can qualify as 
special subrecipients; what limitations are there on the involvement of 
the grantee in establishing or operating the organization; and, what 
are the essential characteristics of the types of projects to which 
this provision is limited? It has become increasingly apparent that 
clarification of the provision would be useful. As noted above, one of 
the project types that this provision makes eligible is that of 
community economic development. Because HUD has embarked upon a course 
aimed at making the CDBG program more readily used for economic 
development, it has been decided to propose changes to this provision 
at this time.
    In order to minimize the confusion and misunderstanding concerning 
Sec. 570.204, this rule would provide specific criteria for the 
entities permitted to carry out such activities and assure that they 
are not controlled by the recipient (or other entities not qualified 
under this section) to indirectly carry out activities for which they 
are ineligible. The rule also establishes the requirement for 
meaningful involvement of the eligible subrecipient receiving 
assistance ``to carry out a * * * project,'' in order to preclude the 
use of the subrecipient as a mere conduit to launder CDBG funds for 
otherwise ineligible activities. In addition, the rule provides 
definitions for the three types of projects made eligible by section 
105(a)(15), particularly in regard to a neighborhood revitalization 
project (under which most of the activities are currently carried out 
for otherwise ineligible housing activities). The purpose of this is to 
give meaning to the statutory ``project'' language and to make clear 
that any single CDBG-assisted activity, such as an otherwise ineligible 
public service or residential construction, will not of itself 
necessarily qualify simply because it is carried out by a subrecipient 
qualified under this section. The changes in this rule would apply to 
metropolitan city and urban county entitlement recipients.
    The only legislative history on the meaning of ``local development 
corporation'' in section 105(a)(15) is the reference in the House 
Report, 95th Congress 1st Session (1977), to ``local development 
corporations organized under either Federal or State laws such as those 
under title VII of the Community Services Act of 1974.'' Both title VII 
and its successor legislation, the Community Economic Development Act 
of 1981, defined community development corporation as:

    a nonprofit organization responsible to residents of the area it 
serves and which is receiving assistance under part A and any 
organization more than 50 percent of which is owned by such an 
organization, or designated by such an organization for the purpose 
of this subchapter [Subchapter I]. [emphasis added.]

    The purpose of Subchapter I--Community Economic Development was:

    To encourage the development of special programs by which the 
residents of urban and rural low-income areas may, through self-help 
and mobilization of the community at large, with appropriate Federal 
assistance, improve the quality of their economic and social 
participation in community life in such a way as to contribute to 
the elimination of poverty and the establishment of permanent 
economic and social benefits.

    The purpose of part A was:

    To establish special programs of assistance to nonprofit private 
locally initiated community development corporations which (1) are 
directed to the solution of the critical problems existing in 
particular communities or neighborhoods (defined without regard to 
political or other subdivisions or boundaries) within those urban or 
rural areas having concentrations or substantial numbers of low-
income persons; (2) are of sufficient size, scope, and duration to 
have an appreciable impact in such communities, neighborhoods and 
rural areas in arresting tendencies toward dependency, chronic 
unemployment, and community deterioration; (3) hold forth the 
prospect of continuing to have such impact after the termination of 
financial assistance under this part; and (4) provide financial and 
other assistance to start, expand, or locate enterprises in or near 
the area to be served so as to provide employment and ownership 
opportunities for residents of such areas * * *

    Despite the emphasis on economic development in title VII and the 
Community Economic Development Act of 1981, the range of activities 
permitted for CDCs under these Acts included not only community 
business and commercial development programs, but also community 
physical development programs, including parks and housing activities 
that contribute to an improved environment, and a variety of public 
service programs that complement the community development program.

Special Subrecipient Local Development Corporations

    As can be seen, the term local development corporation (LDC) does 
not have a precise and uniform meaning, but rather encompasses a 
diverse range of organizations generally sharing certain basic 
characteristics. The existing regulation at Sec. 570.204 therefore 
recognizes LDCs qualified under sections 502 and 503 of the Small 
Business Investment Act, the CDCs under title VII and the Community 
Economic Development Act of 1981, and ``other entities incorporated 
under State or local law whose membership is representative of the area 
of operation of the entity (including nonresident owners of businesses 
in the area) and which are similar in purpose, function, and scope to 
the above listed organizations.'' Most LDCs have in common the 
characteristics of operating in a defined geographic area; being 
established and controlled by residents and businesses located in the 
defined area; carrying out community development activities, including 
economic development and housing assistance; being established for the 
purpose of meeting critical needs in the area, particularly of lower-
income persons, by improving the physical, economic, and social 
environment of the area; and being not-for-profit associations or 
corporations created under State or local law. While some LDCs may vary 
somewhat (e.g., the SBA LDCs provide assistance only for economic 
development, do not have a focus on lower-income areas or persons, and 
may be for-profit if earnings are only incidental to their operations), 
the proposed rule sets forth these more commonly shared characteristics 
(including a focus on lower-income residents of the area in view of the 
primary purpose of benefiting such persons under the CDBG program) as 
the criteria that must be met for all LDCs qualified in Sec. 570.204. 
Note that the statutory reference to entities organized under section 
301(d) of the Small Business Investment Act of 1958 is reflected in the 
proposed rule revisions although these for-profit entities make loans 
to businesses (or to other entities that make loans to businesses), and 
these activities were made eligible under other provisions of the CDBG 
program added in 1981 (Sec. 570.203(b) of the Entitlement regulations). 
Reference to the SBA 502 and 503 organizations would be continued in 
this rule, however, to avoid unnecessarily disqualifying currently 
qualified organizations.
    The Department anticipates that a few entities that recipients 
believe qualify under the current rule would not qualify under this 
rule, and plans to allow in the final rule for a one-year grace period 
during which any such organizations may reorganize or find other 
funding. Because this rule is based on the history of legislation, 
regulation, and policy currently in place, it should not affect the 
eligibility of many currently qualified organizations.

Two New Special Subrecipient Policies

    Two points on which this proposed rule varies from the current rule 
for CDBG entitlements deserve mention. First, this rule would reflect 
the policy in the State CDBG program that when the funded project 
activities carried out by the subrecipient under this subpart include, 
as activities integral to the project, otherwise ineligible income 
payments or other public service activities that are eligible under 
section 105(a)(8) of the statute, such activities are not subject to 
the limitations in that section. This change will be particularly 
important for special subrecipients who wish to provide services, such 
as day care and job training, as part of a Sec. 570.204 project. Such 
services would not be subject to the public service cap. Removal of 
this limit would provide more flexibility for community-based efforts 
by entitlement communities.
    The ``maintenance of effort'' requirements that apply to public 
service activities protect an important part of the goals of the CDBG 
program, and would be included in this proposed rule to cover both 
otherwise eligible and otherwise ineligible public services. The 
Department requests comment on inclusion of this clause.
    The second point of variation from the current rule is that the 
distinction between ``public'' and ``private'' nonprofits, now used to 
exclude public nonprofits that might potentially be controlled by the 
grantee from eligibility under this section, will no longer be made in 
determining the eligibility of entities under this section. A public 
nonprofit entity that meets the requirements to be an LDC may now 
qualify. The Department believes that these requirements are sufficient 
to ensure the independence of the LDC.

Special Subrecipients in Nonentitlement Areas

    Section 807(f) of the 1992 Act expanded the list of organizations 
eligible to carry out activities in nonentitlement areas under section 
105(a)(15) of the Housing and Community Development Act of 1974, as 
amended. ``Nonprofit organizations serving the development needs of the 
communities of nonentitlement areas'' may now qualify as special 
subrecipients under section 105(a)(15) of the Act. Since the State CDBG 
program regulations contain no listing of eligible activities, no 
regulatory language is needed to implement this change. Consistent with 
the above discussions of proposed changes to Sec. 570.204 of the 
Entitlement regulations, the Department interprets section 807(f) of 
the 1992 Act as clearly excluding units of general local government. 
However, a public nonprofit organization that meets Internal Revenue 
Service requirements for nonprofit status may qualify.

Description of Regulatory Changes

    Projects defined. The changes in the rule begin at Sec. 570.204(a) 
by clarifying that activities funded under this section may be 
considered either alone or in concert with other activities being 
carried out or for which funding has been committed (which other 
activities need not be funded with CDBG funds or carried out by the 
subrecipient) for purposes of determining whether an eligible 
Sec. 570.204 neighborhood revitalization, community economic 
development, or energy conservation project is being undertaken. The 
rule continues with definitions of the eligible projects under 
Sec. 570.204: Neighborhood revitalization, community economic 
development, and energy conservation projects. The definition of 
``carry out'' is included to clarify how the LDC is to control the 
project.
    Public services. The new policy on application of the funding 
limitation on public service activities and of the maintenance of 
effort clause is discussed above. The Department's interpretation of 
the existing rule is that when ineligible public services, such as 
income payments, are carried out under Sec. 570.204, the activity is 
considered to be a public service and the funds used for this purpose 
are subject to the 15 percent limitation at Sec. 570.201(e). Judging 
from the questions received by HUD on this matter, recipients do not 
believe that the existing rule is sufficiently clear on this matter. 
Thus, this proposed rule clarifies the policy.
    Ineligible activities. Paragraph (b) has been replaced with a new 
paragraph delineating the types of otherwise ineligible activities that 
are also not authorized under this section.
    Eligible subrecipients. Paragraph (c) has been rewritten to define 
eligible subrecipients. This proposed rule removes any further 
reference in the rule to neighborhood-based nonprofits (NBNs) since 
most, if not all, NBNs qualified under the current rule could meet the 
qualifying criteria for an LDC in the proposed rule. The sole purpose 
of this change is to simplify the regulation. The Department believes 
that NBNs can be very effective agents for neighborhood revitalization 
and community economic development, and has drafted this rule to 
continue the qualification of such organizations. The proposed rule 
refers to all qualifying entities as LDCs, regardless of the geographic 
area they serve.
    Community control. In general, the Department's history in 
implementing section 105(a)(15) reflects a belief that community 
control, and not mere community participation is crucial to the 
existence of an LDC. Therefore, at Sec. 570.204(c)(2), this rule would 
require that 51 percent of the governing body of a qualified LDC be 
low- and moderate-income persons residents of or business owners in the 
LDC's area of operation. This reflects current policy for most NBN 
organizations under Sec. 570.204(c)(1), LDC/CDC organizations under 
Sec. 570.204(c)(3)(i), and those organized like CDCs pursuant to the 
``similar to'' language at Sec. 570.204(c)(3)(iii). The 51 percent 
requirement possibly may disqualify some organizations that currently 
qualify as NBNs because their clients are residents of the 
neighborhood, even though no residents serve on the governing body of 
the organization. The Department believes that the definition of NBN in 
the existing rule at Sec. 570.204(c)(1) has allowed grantees to create 
``shell'' organizations that serve as conduits for grantees to carry 
out otherwise ineligible activities without benefit of any significant 
contribution to decision making from persons with a stake in the 
neighborhood.
    The reasons for the changes the rule proposes at Sec. 570.204(c) to 
the definition of LDC have been discussed above. Comment is 
specifically requested on whether these changes will disqualify any 
truly community-based and controlled organizations, and if so, 
specifically how the rule will have this effect.

Special Subrecipients and ``CHDOs''

    The new HOME Investment Partnerships program authorized under Title 
II of the National Affordable Housing Act of 1990 has a provision 
defining community housing development organizations, or ``CHDOs'', 
which are similar in many ways to LDCs. In developing this proposed 
rule, some care was taken when drafting the language describing common 
characteristics of LDCs to define the same characteristics of LDCs as 
the HOME regulations define for CHDOs. By establishing definitions 
around the same criteria (e.g. percentage of low- and moderate-income 
persons on the governing body, percentage of grantee or other entity 
representation on the governing body, primary purpose of the 
organization, geographic area served) the Department hopes to minimize 
confusion among organizations that may qualify both as an LDC for CDBG 
and as a CHDO under the HOME Program, and may want to receive funds 
under both. After further consideration of these criteria and the 
activities undertaken by Sec. 570.204 subrecipients and by CHDOs, the 
Department has decided to propose that any qualified CHDO that (1) is 
designated by the participating jurisdiction in accordance with the 
HOME program rules and (2) has a geographic area of operation that is 
no greater than one neighborhood, and (3) has or is expected to receive 
HOME funds for developing housing would qualify as an LDC. Note that 
two characteristics of CHDOs can vary from the common characteristics 
of LDCs in general: (1) CHDOs can serve a geographic area as large as a 
metropolitan area (LDCs may serve no more than one county); and (2) the 
minimum percentage of low- and moderate-income persons on the governing 
body of a CHDO is the same as the percentage of grantee or other entity 
appointments (i.e. 33 percent) (the minimum percentage of low- and 
moderate-income persons/representatives on the board of an LDC is 51 
percent).
    While it would be possible under this proposal for one organization 
to be designated both as an LDC for CDBG and as a CHDO for HOME, the 
CDBG and HOME program requirements for activities undertaken by the two 
types of organizations are NOT identical. For example, an LDC using 
CDBG funds under Sec. 570.204 must carry out a neighborhood 
revitalization, community economic development, or energy conservation 
project, and meet a national objective. A CHDO funded under the HOME 
program must develop, own or sponsor housing that meets income 
targeting and affordability requirements. To the extent feasible within 
the above constraints, the Department has developed this proposed rule 
to avoid an unnecessary burden on any organization that may qualify 
both as an LDC and as a CHDO. The Department requests comments on this 
aspect of the proposed rule.

Relationship to Section 3 Economic Opportunity Requirements

    Recipients of CDBG funds must also comply with the requirements of 
section 3 of the Housing and Urban Development Act of 1968 (Section 3), 
as amended by Section 915 of the 1992 Act. Section 3 requires that, to 
the greatest extent feasible, and consistent with existing Federal, 
State and local laws and regulations, employment and other economic 
opportunities arising in connection with the CDBG assistance to any 
Section 3 covered project are given to low- and very low-income persons 
residing within the metropolitan area (or nonmetropolitan county) in 
which the project is located. For the CDBG program, Section 3 covered 
projects include housing rehabilitation, housing construction, and 
other public construction. The Section 3 requirements apply to 
training, employment and contracting opportunities arising in 
connection with a covered project, as well as job (or other 
opportunities) which may be retained or created as a result of the 
project. The Department anticipates that regulations implementing the 
1992 amendments to Section 3 will be published this fiscal year.

Other Matters

Justification for 30-day Public Comment Period

    The Department has determined that it is contrary to the public 
interest to have the usual 60-day comment period and, therefore, 
believes it appropriate to shorten the comment period to 30 days in 
order to expedite the process for developing a final rule that may be 
published for effect. Current requirements governing the use of CDBG 
funds for economic development activities are unclear, and thus they 
tend to be inconsistently applied. This uncertainty has caused many 
communities to be apprehensive about undertaking economic development 
activities with CDBG funds. As a result, potentially valuable 
opportunities for economic empowerment may be lost. While some of the 
statutory changes made by the 1992 Act became effective upon enactment, 
certain provisions will not become effective until a final rule is 
published.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
proposed in this proposed rule would not have Federalism implications 
when implemented and, thus, are not subject to review under the Order. 
Nothing in the proposed rule implies any preemption of State or local 
law, nor does any provision of the proposed rule disturb the existing 
relationship between the Federal Government and State and local 
governments.

Executive Order 12606, the Family

    The General Counsel, as the designated Official under Executive 
Order 12606, has determined that this proposed rule would not have 
potential significant impact on family formation, maintenance, and 
general well-being, and, thus, is not subject to review under the 
Order.

Environmental Finding

    A Finding of No Significant Impact with regard to the environment 
has been made in accordance with HUD regulations in 24 CFR part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969, 42 U.S.C. 4321. The Finding of No Significant Impact is 
available for public inspection between 7:30 a.m. and 5:30 p.m. 
weekdays in the Office of the Rules Docket Clerk, room 10276, 451 
Seventh Street SW., Washington, DC 20410.

Regulatory Flexibility

    Under the Regulatory Flexibility Act (5 U.S.C. 605(b)), the 
Secretary by his approval of publication of this proposed rule hereby 
certifies that this proposed rule would not have a significant economic 
impact on a substantial number of small entities. The rule does not 
affect the amount of funds provided in the CDBG program, but rather 
modifies and updates program administration and procedural requirements 
to comport with recently enacted legislation.

Semiannual Agenda

    This proposed rule was listed as item 1638 in the Department's 
Semiannual Agenda of Regulations published on April 25, 1994 (59 FR 
20424, 20458) under Executive Order 12866 and the Regulatory 
Flexibility Act.

Catalog of Federal Domestic Assistance

    The Community Development Block Grant Program is listed in the 
Catalog of Federal Domestic Assistance under the following numbers: 
Entitlements--14.218, HUD-administered Small Cities--14.219, Indian--
14.223, Insular Areas--14.225, State's Program--14.228.

List of Subjects in 24 CFR Part 570

    Administrative practice and procedure, American Samoa, Community 
development block grants, Grant programs--education, Grant programs--
housing and community development, Guam, Indians, Lead poisoning, Loan 
programs--housing and community development, Low and moderate income 
housing, New communities, Northern Mariana Islands, Pacific Islands 
Trust Territory, Pockets of poverty, Puerto Rico, Reporting and 
recordkeeping requirements, Small cities, Student aid, Virgin Islands.

    Accordingly, 24 CFR part 570, subparts C, I, and J, are proposed to 
be amended as follows:

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

Subpart C--Eligible Activities

    1. The authority citation for 24 CFR part 570 would continue to 
read as follows:

    Authority: 42 U.S.C. 3535(d) and 5300-5320.

    2. In Sec. 570.200, paragraph (e) would be revised to read as 
follows:


Sec. 570.200  General policies.

* * * * *
    (e) Recipient determinations required as a condition of 
eligibility. In several instances under this subpart, the eligibility 
of an activity depends on a special local determination. Recipients 
shall maintain documentation of all such determinations. A written 
determination is required for any activity carried out under the 
authority of Secs. 570.201(f), 570.202(b)(3), 570.203(b), 570.204, 
570.206(f), and 570.209.
* * * * *
    3. In Sec. 570.201, paragraph (o) would be added to read as 
follows:


Sec. 570.201  Basic eligible activities.

* * * * *
    (o) (1) The provision of assistance either through the recipient 
directly or through public and private organizations, agencies, and 
other subrecipients (including nonprofit and for-profit subrecipients) 
to facilitate economic development by:
    (i) Providing credit, including, but not limited to, grants, loans, 
loan guarantees, and other forms of financial support, for the 
establishment, stabilization, and expansion of microenterprises;
    (ii) Providing technical assistance, advice, and business support 
services to owners of microenterprises and persons developing 
microenterprises; and
    (iii) Providing general support, including, but not limited to, 
peer support programs, counseling, child care, transportation, and 
other similar services, to owners of microenterprises and persons 
developing microenterprises.
    (2) Services provided under this paragraph (o) shall not be subject 
to the restrictions on public services contained in Sec. 570.201(e).
    4. Section 570.203 would be amended by revising the introductory 
text and paragraph (b); and by adding a new paragraph (c) to read as 
follows:


Sec. 570.203  Special economic development activities

    A recipient may use CDBG funds for special economic development 
activities in addition to other activities authorized in this subpart 
which may be carried out as part of an economic development project. 
Guidelines for selecting activities to assist under this paragraph are 
provided at Sec. 570.209. The recipient must ensure that the 
appropriate level of public benefit will be derived pursuant to those 
guidelines before obligating funds under this authority. Special 
activities authorized under this section do not include assistance for 
the construction of new housing. Special economic development 
activities include:
* * * * *
    (b) The provision of assistance to a private for-profit business, 
including, but not limited to, grants, loans, loan guarantees, interest 
supplements, technical assistance, and other forms of support, for any 
activity where the assistance is appropriate to carry out an economic 
development project, excluding those described as ineligible in 
Sec. 570.207(a). In selecting businesses to assist under this 
authority, the recipient shall minimize, to the extent practicable, 
displacement of existing businesses and jobs in neighborhoods.
    (c) Economic development services in connection with activities 
assisted under this section, including, but not limited to, outreach 
efforts to market available forms of assistance; screening of 
applicants; reviewing and underwriting applications for assistance; 
preparation of all necessary agreements; monitoring and management of 
assisted activities; and the screening, referral, and placement of 
applicants for employment opportunities generated by CDBG-assisted 
economic development activities, including the costs of providing 
necessary training for persons filling those positions.
    5. Section 570.204 would be revised to read as follows:


Sec. 570.204  Special activities by Local Development Corporations 
(LDCs).

    (a) Eligible activities. The recipient may provide CDBG funds as 
grants or loans to any LDC subrecipient qualified under this section to 
carry out a neighborhood revitalization, community economic 
development, or energy conservation project. The funded project 
activities may include those listed as eligible under this subpart, 
and, except as described in paragraph (b) of this section, activities 
not otherwise listed as eligible under this subpart. For purposes of 
qualifying as a project under paragraphs (a)(1), (a)(2), and (a)(3) of 
this section, the funded activity or activities may be considered 
either alone or in concert with other project activities either being 
carried out or for which funding has been committed. For purposes of 
this section:
    (1) Neighborhood revitalization project means an activity or 
activities of sufficient size and scope to have an impact on the 
decline of a geographic location within the jurisdiction of a unit of 
general local government (but not the entire jurisdiction) designated 
in comprehensive plans, ordinances, or other local documents as a 
neighborhood, village, or similar geographical designation; or the 
entire jurisdiction of a unit of general local government which is 
under 25,000 population;
    (2) Community economic development project means an activity or 
activities that increase economic opportunity for persons of low- and 
moderate-income or that stimulate or retain businesses or permanent 
jobs;
    (3) Energy conservation project means an activity or activities 
that address local energy conservation;
    (4) To carry out a project means that the LDC undertakes the funded 
activities directly or through contract with an entity other than the 
grantee, or through the provision of financial assistance for 
activities in which it retains a direct and controlling involvement and 
responsibilities; and
    (5) When the funded project activities carried out by the 
subrecipient under this subpart include income payments described as 
ineligible in Sec. 570.207(b)(4) or other public service activities 
generally eligible under Sec. 570.201(e), such activities shall not be 
subject to the limitations in Sec. 570.201(e); however, such an 
activity must be either a new service or a quantifiable increase in the 
level of an existing service above that which has been provided by or 
on behalf of the unit of general local government (through funds raised 
by the unit, or received by the unit from the State in which it is 
located) in the twelve calendar months before the submission of the 
statement. (An exception to this requirement may be made if HUD 
determines that any decrease in the level of service was the result of 
events not within the control of the unit of general local 
government.);
    (b) Ineligible activities. Notwithstanding that subrecipients may 
carry out activities that are not otherwise eligible under this 
subpart, this section does not authorize:
    (1) Carrying out an activity described as ineligible in 
Sec. 570.207(a);
    (2) Providing assistance to activities that would otherwise be 
eligible under Sec. 570.203 that do not meet the requirements of 
Sec. 570.209; or
    (3) Carrying out an activity that would otherwise be eligible under 
Sec. 570.205 or Sec. 570.206, but that would result in the recipient's 
exceeding the spending limitation in Sec. 570.200(g).
    (c) Eligible subrecipients. (1) An LDC qualifying under this 
section is an organization which has the following characteristics:
    (i) Is an association or corporation organized under State or local 
law to engage in community development activities (which may include 
housing and economic development activities) within an identified 
geographic area of operation not to exceed the jurisdiction of the 
recipient, or in the case of an urban county, the jurisdiction of the 
county; and
    (ii) Has as its primary purpose the improvement of the physical, 
economic or social environment of its geographic area of operation by 
addressing one or more critical problems of the area, with particular 
attention to the needs of persons of low and moderate income; and
    (iii) May be either non-profit or for-profit, provided any monetary 
profits to its shareholders or members must be only incidental to its 
operations; and
    (iv) Maintains at least 51 percent of its governing body's 
membership for low- and moderate-income residents of its geographic 
area of operation, owners of private establishments located in its 
geographic area of operation, or representatives of low- and moderate-
income neighborhood organizations located in its geographic area of 
operation; and
    (v) Is not an agency or instrumentality of the recipient and does 
not permit more than one-third of the membership of its governing body 
to be appointed by, or to consist of, elected or other public officials 
or employees or officials of an ineligible entity (even though such 
persons may be otherwise qualified under paragraph (c)(1)(iv) of this 
section); and
    (vi) Except as otherwise authorized in paragraph (c)(1)(v) of this 
section, requires the members of its governing body to be nominated and 
approved by the general membership of the organization, or by its 
permanent governing body; and
    (vii) Is not subject to requirements under which its assets revert 
to the recipient upon dissolution except as required for compliance 
with Sec. 570.503(b)(8); and
    (viii) Is free to contract for goods and services from vendors of 
its own choosing.
    (2) An LDC will also qualify as an eligible subrecipient under this 
section if it meets one of the following requirements:
    (i) Is an entity organized pursuant to section 301(d) of the Small 
Business Investment Act of 1958 (15 U.S.C. 681(d)), including those 
which are profit making, or
    (ii) Is an SBA approved Section 501 State Development Company or 
Section 502 Local Development Company, or and SBA Certified Section 503 
Company under the Small Business Investment Act of 1958, as amended; or
    (iii) Is a Community Housing Development Organization (CHDO) under 
24 CFR 92.2, designated as a CHDO by the HOME Investment Partnerships 
program participating jurisdiction, with a geographic area of operation 
of no more than one neighborhood, and has received HOME funds under 24 
CFR 92.300 or is expected to receive HOME funds as described in and 
documented in accordance with 24 CFR 92.300(e).
    6. Section 570.208 would be amended by revising the paragraph 
heading of paragraph (a) and by revising paragraph (a)(1)(i); by adding 
a new paragraph (a)(2)(iii); and by revising paragraphs (a)(4) and 
(b)(1)(ii), to read as follows:


Sec. 570.208  Criteria for national objectives.

* * * * *
    (a) Activities benefiting low- and moderate-income persons.
* * * * *
    (1) Area benefit activities. (i) An activity, the benefits of which 
are available to all the residents in a particular area, where at least 
51 percent of the residents are low and moderate income persons. Such 
an area need not be coterminous with census tracts or other officially 
recognized boundaries but must be the entire area served by the 
activity. An activity that serves an area that is not primarily 
residential in character shall not qualify under this criterion. 
Activities carried out under Sec. 570.203 by a community development 
financial institution shall be presumed by HUD to meet this criterion 
if the institution's charter limits its investment area to a primarily 
residential area consisting of at least 51 percent low- and moderate-
income persons.
* * * * *
    (2) * * *
    (iii) A microenterprise assistance activity carried out in 
accordance with the provisions of Sec. 570.201(o) if at least 51 
percent of all persons, including both owners of microenterprises and 
persons developing microenterprises, who are assisted under the 
activity during each program year are low- and moderate-income persons. 
For purposes of this paragraph, persons determined to be low and 
moderate income may be presumed to continue to qualify as such for up 
to a three-year period.
* * * * *
    (4) Job creation or retention activities. An activity designed to 
create or retain permanent jobs where at least 51 percent of the jobs, 
computed on a full time equivalent basis, involve the employment of 
low- and moderate-income persons. To qualify under this paragraph, the 
activity must meet the following criteria:
    (i) For an activity that creates jobs, the recipient must document 
that at least 51 percent of the jobs will be held by, or will be 
available to, low- and moderate-income persons.
    (ii) For an activity that retains jobs, the recipient must document 
that the jobs would actually be lost without the CDBG assistance and 
that either or both of the following conditions apply with respect to 
at least 51 percent of the jobs at the time the CDBG assistance is 
provided:
    (A) The job is known to be held by a low- or moderate-income 
person; or
    (B) The job can reasonably be expected to turn over within the 
following two years and that steps will be taken to ensure that it will 
be filled by, or made available to, a low- or moderate-income person 
upon turnover.
    (iii) Jobs that are not held or filled by a low- or moderate-income 
person may be considered to be available to low- and moderate-income 
persons for these purposes only if:
    (A) Special skills that can only be acquired with substantial 
training or work experience or education beyond high school are not a 
prerequisite to fill such jobs, or the business agrees to hire 
unqualified persons and provide training; and
    (B) The recipient and the assisted business take actions to ensure 
that low- and moderate-income persons receive first consideration for 
filling such jobs.
    (iv) For purposes of determining whether a job is held by or made 
available to a low- or moderate-income person, the person may be 
presumed to be a low- or moderate-income person if:
    (A) He/she resides within a census tract (or block numbering area) 
having either:
    (1) At least 20 percent of its residents who are in poverty; or
    (2) At least 70 percent of its residents who are low- and moderate-
income persons; or
    (B) The assisted business is located within a census tract (or 
block numbering area) having at least 20 percent of its residents who 
are in poverty and the job under consideration is to be located within 
that census tract.
    (v) As a general rule, each assisted business shall be considered 
to be a separate activity for purposes of determining whether the 
activity qualifies under this paragraph, except:
    (A) In certain cases such as where CDBG funds are used to acquire, 
develop or improve a real property (e.g., a business incubator or an 
industrial park) the requirement may be met by measuring jobs in the 
aggregate for all the businesses which locate on the property, provided 
such businesses are not otherwise assisted by CDBG funds.
    (B) Where CDBG funds are used to pay for the staff and overhead 
costs of a subrecipient making loans to businesses exclusively from 
non-CDBG funds, this requirement may be met by aggregating the jobs 
created by all of the businesses receiving loans during each program 
year.
    (C) In any case where the activity undertaken for the purpose of 
creating or retaining jobs is a public facility or improvement, the 
requirement shall be met as follows:
    (1) Prior to the obligation of CDBG assistance for the activity, 
the recipient shall develop an assessment which identifies the 
businesses located in or expected to locate in the service area of the 
public facility or improvement. For each identified business, the 
recipient shall project the number of jobs anticipated to be created or 
retained by the business as a result of the public facility or 
improvement and enter into written agreements with each such business, 
as applicable, concerning such jobs and identifying the number of such 
jobs that are to be provided or made available to low- and moderate-
income persons;
    (2) The recipient shall compare the number of jobs expected to be 
created or retained as a result of the public facility or improvement 
with the CDBG cost of the public facility or improvement to be 
undertaken:
    (i) If the number of jobs actually created or retained by the 
combination of the businesses with whom such agreements have been 
executed is not less than one full-time equivalent job per $10,000 of 
CDBG funds used for the activity, then only the jobs created or 
retained by those specific businesses need be considered for purposes 
of meeting the national objective requirement;
    (ii) If the number of jobs actually created or retained by the 
combination of those businesses is less than one full-time equivalent 
job per $10,000 of CDBG funds used for the activity, then all jobs 
created or retained as a result of the public facility or improvement 
shall be considered for purposes of meeting the national objective 
requirement. This includes jobs created or retained as a result of the 
assistance by businesses already located in the public facility or 
improvement's service area, whether identified in the assessment or 
not. This also includes jobs created or retained as a result of the 
assistance by businesses which locate in the public facility or 
improvement's service area during the period starting with the date the 
recipient identifies the activity in its final statement and ending one 
year after the physical completion of the public facility or 
improvement.
    (iii) If the public facility or improvement is subject to paragraph 
(a)(4)(v)(C)(2)(ii) of this section, then the activity must also comply 
with the guidelines concerning public benefit at Sec. 570.209(b).

    Note: * * *

    (b) Activities which aid in the prevention or elimination of slums 
or blight.
* * * * *
    (1) * * *
    (ii) Throughout the area there exists at least one of the following 
conditions:
    (A) A substantial number of deteriorated or deteriorating 
buildings;
    (B) The public improvements are in a general state of 
deterioration; or
    (C) For exclusively commercial or industrial areas only, pervasive 
economic disinvestment as evidenced by a substantial number of 
previously occupied buildings experiencing either long term vacancies 
or an unusually high rate of turnover in occupancy.
* * * * *
    7. A new Sec. 570.209 would be added to read as follows:


Sec. 570.209  Guidelines for evaluating and selecting economic 
development projects.

    The following guidelines are provided to assist the recipient to 
evaluate and select activities to be carried out for economic 
development purposes. Specifically, these guidelines are applicable for 
activities that are eligible for CDBG assistance under Sec. 570.203 and 
activities carried out under the authority of Sec. 570.204 that would 
otherwise be eligible under Sec. 570.203. These guidelines are composed 
of two components: guidelines for evaluating project costs and 
financial requirements; and standards for evaluating public benefit. 
The standards for evaluating public benefit are mandatory, but the 
guidelines for evaluating projects costs and financial requirements are 
not.
    (a) Guidelines and objectives for evaluating project costs and 
financial requirements. (1) HUD has developed guidelines that are 
designed to provide the recipient with a framework for financially 
underwriting and selecting CDBG assisted economic development projects 
that are financially viable and that will make the most effective use 
of the CDBG funds. These guidelines are published separately as a 
Federal Register Notice. The use of the financial underwriting 
guidelines published by HUD is not mandatory. However, grantees 
electing not to use these guidelines would be expected to conduct basic 
financial underwriting prior to the provision of CDBG financial 
assistance to a for-profit business.
    (2) Where appropriate, HUD's guidelines for financial underwriting 
recognize that different levels of review are appropriate to take into 
account differences in the size and scope of a proposed project, and in 
the case of a microenterprise or other small business take into account 
the differences in the capacity and level of sophistication among 
businesses of differing sizes. Recipients are encouraged, when they 
develop their own programs and underwriting criteria, to also take 
these factors into account.
    (3) The guidelines for financial underwriting are for the purpose 
of achieving the following objectives:
    (i) That project costs are reasonable;
    (ii) That all sources of project financing are committed;
    (iii) That to the extent practicable, CDBG funds are not 
substituted for non-Federal financial support;
    (iv) That the project is financially feasible;
    (v) That to the extent practicable, the return on the owner's 
equity investment will not be unreasonably high; and
    (vi) That to the extent practicable, CDBG funds are disbursed on a 
pro rata basis with other finances provided to the project.
    (b) Standards for evaluating public benefit. The grantee is 
responsible for making sure that at least a minimum level of public 
benefit is obtained from the expenditure of CDBG funds under the 
categories of eligibility governed by these guidelines. The standards 
set forth in this paragraph (b) identify the types of public benefit 
that must be used for this purpose and the minimum level of each that 
must be obtained for the amount of CDBG funds used. Unlike the 
guidelines for project costs and financial requirements covered under 
paragraph (a) of this section, the use of the standards for public 
benefit is mandatory.

    (1) Tests for individual activities. (i) With respect to each 
individual activity for which CDBG funds are expended under one of the 
authorities governed by these guidelines, one of the following two 
tests must be met:
    (A) The number of permanent jobs created or retained by an assisted 
business(es) as a direct result of the CDBG assisted activity shall not 
be less than one full-time equivalent job per $100,000 of CDBG funds 
used for the activity; or,
    (B) The number of low- and moderate-income persons residing in the 
area served by an assisted activity which directly results in providing 
essential goods or services shall not be less than one person per 
$1,000 used for the activity.
    (ii) The following activities provide insufficient public benefit 
in the context of the CDBG program and are thus deemed to be ineligible 
as part of activities governed by these guidelines:
    (A) General promotion of the community as a whole (as opposed to 
the promotion of specific areas and programs);
    (B) Assistance to professional sports teams;
    (C) Assistance to privately-owned recreational facilities that 
serve a predominantly higher-income clientele where the benefit to such 
clientele clearly outweighs employment or other benefits to low- and 
moderate-income persons;
    (D) Acquisition of land for which no specific proposed use has yet 
been identified; and
    (E) Additional assistance to a for-profit business while that 
business is the subject of unresolved findings of noncompliance 
relating to previous CDBG assistance provided by the recipient.
    (2) Tests for activities in the aggregate. With respect to the 
aggregate amount of CDBG funds from a single grant year that are 
expended on activities under the authorities governed by these 
guidelines, one of the following two criteria, selected at the option 
of the grantee, must be met:
    (i) In order to qualify under the first criterion, the following 
two tests must be met, as applicable:
    (A) For activities that are expected to result directly in the 
creation or retention of jobs, the number of permanent jobs created or 
retained by the assisted businesses shall not be less than one job 
(computed on a full-time equivalent basis) per $35,000 of CDBG funds 
used for the activities; and,
    (B) For activities that are expected to provide essential goods or 
services to an area as a direct result of the CDBG assistance, the 
number of low- and moderate-income persons residing in the areas served 
by the assisted businesses shall not be less than one person per $350 
of CDBG funds used for the activities.

    Note: With respect to activities that are expected both to 
create or retain jobs and to provide essential goods or services to 
an area, the grantee may elect to consider such activities under 
either the jobs test or the persons-served test, but not both.

    (ii) In order to qualify under the second criterion, at least 75 
percent of the CDBG funds used by the recipient for activities governed 
by these guidelines must be used for activities that are principally 
designed to address at least one of the following:
    (A) The provision of jobs for participants in any of the following 
programs: Jobs Training Partnership Act (JTPA), Jobs Opportunities for 
Basic Skills (JOBS), or Aid to Families with Dependent Children (AFDC);
    (B) The provision of jobs for participants in Unemployment 
Insurance programs;
    (C) The provision of jobs for residents of Public and Indian 
Housing units;
    (D) The provision of jobs for homeless persons;
    (E) The provision of jobs that provide clear opportunities for 
promotion, such as through the provision of training;
    (F) The provision of jobs for persons residing within a census 
tract (or block numbering area) that has at least 20 percent of its 
residents who are in poverty;
    (G) The establishment, stabilization, or expansion of 
microenterprises;
    (H) The stabilization or revitalization of a neighborhood that is 
predominantly low and moderate income;
    (I) The provision of assistance to a community development 
financial institution whose service area is predominantly low and 
moderate income;
    (J) The provision of assistance to a neighborhood-based nonprofit 
organization serving a neighborhood that is predominantly low and 
moderate income;
    (K) The provision of employment opportunities that are an integral 
component of a community's strategy to promote spatial deconcentration 
of low- and moderate-income and minority families;
    (L) The provision of assistance to business(es) that operate(s) 
within a census tract (or block numbering area) that has at least 20 
percent of its residents who are in poverty; or
    (M) With prior HUD approval, other innovative approaches that 
provide substantial benefit to low-income persons.
    (3) Applying the aggregate tests. With respect to the aggregate 
tests under paragraph (b)(2) of this section, a metropolitan city or an 
urban county shall apply the criteria to all applicable activities for 
which CDBG funds are obligated within each single CDBG program year 
without regard to the source year of the funds.
    (c) Amendments to economic development projects after review 
determinations. Once the recipient has completed its economic 
development analysis under these guidelines and has agreed to provide 
CDBG assistance to the for-profit business, any material change in the 
project that affects the underlying assumptions upon which the 
recipient relied to conduct its review should be reevaluated under 
these and the recipient's guidelines. A ``material change'' is defined 
for these purposes as a change in the size, scope, location or public 
benefit of the project or a change in the terms or the amount of the 
private funds (both lender's funds and equity capital) to be invested 
in the project or a change in the terms or the amount of the CDBG 
assistance to be made available to the project. If the recipient 
determines that a material change has occurred and a reevaluation of 
the project indicates that the financial elements and public benefit to 
be derived have also changed, then the recipient should make 
appropriate adjustments in the amount, the type of CDBG assistance and/
or the terms and conditions under which that assistance has been 
offered to reflect the impact of the material change. For example, if a 
material change in the project elements resulted in a reduction of the 
total project costs, it would be appropriate for the recipient to 
reduce the amount of total CDBG assistance.
    (d) Documentation. The grantee must maintain sufficient records to 
demonstrate the level of public benefit, based on the above standards, 
that is actually achieved upon completion of the CDBG-assisted economic 
development activity(ies) and how that compares to the level of such 
benefit that was projected to be achieved at the time the CDBG 
assistance was obligated. If actual results vary substantially from the 
grantee's initial projections, the grantee is expected to take all 
actions reasonably within its control to improve the accuracy of its 
projections. If the actual results demonstrate that the recipient has 
failed the public benefit standards, HUD may require the recipient to 
meet more stringent standards in future years as appropriate.

Subpart I--State's Program: State Administration of CDBG 
Nonentitlement Funds

    8. Section 570.482 would be amended by adding paragraphs (c), (d), 
(e), and (f) to read as follows:


Sec. 570.482  Eligible activities.

* * * * *
    (c) Provision of assistance for microenterprise development--(1) 
Eligible providers. Microenterprise development activities eligible 
under section 105(a)(23) of the Housing and Community Development Act 
of 1974, as amended, may be carried out either through the recipient 
directly or through public and private organizations, agencies, and 
other subrecipients (including nonprofit and for-profit subrecipients).
    (2) Provision of support services. Support services provided under 
Section 105(a)(23) of the Housing and Community Development Act of 
1974, as amended, shall not be subject to the restrictions on public 
services under section 105(a)(8) of the Housing and Community 
Development Act of 1974, as amended.
    (d) Guidelines and objectives for evaluating project costs and 
financial requirements.--(1) Applicability. The following guidelines 
are provided to assist the recipient to evaluate and select activities 
to be carried out for economic development purposes. Specifically, 
these guidelines are applicable for activities that are eligible for 
CDBG assistance under Sec. 105(a)(17) of the Act, economic development 
activities eligible under Sec. 105(a)(14) of the Act, and activities 
that are part of a community economic development project eligible 
under Sec. 105(a)(15) of the Act. The use of the financial underwriting 
guidelines published by HUD is not mandatory. However, states electing 
not to use these guidelines would be expected to ensure that the state 
or units of general local government conduct basic financial 
underwriting prior to the provision of CDBG financial assistance to a 
for-profit business.
    (2) Objectives. (i) The guidelines are designed to provide the 
recipient with a framework for financially underwriting and selecting 
CDBG assisted economic development projects that are financially viable 
and that will make the most effective use of the CDBG funds. Where 
appropriate, HUD's guidelines for financial underwriting recognize that 
different levels of review are appropriate to take into account 
differences in the size and scope of a proposed project, and in the 
case of a microenterprise or other small business take into account the 
differences in the capacity and level of sophistication among 
businesses of differing sizes. Recipients are encouraged, when they 
develop their own programs and underwriting criteria, to also take 
these factors into account.
    (ii) These guidelines are published separately as a Federal 
Register Notice. The guidelines for financial underwriting are for the 
purpose of achieving the following objectives:
    (A) That project costs are reasonable;
    (B) That all sources of project financing are committed;
    (C) That to the extent practicable, CDBG funds are not substituted 
for non-Federal financial support;
    (D) That the project is financially feasible;
    (E) That to the extent practicable, the return on the owner's 
equity investment will not be unreasonably high; and
    (F) That to the extent practicable, CDBG funds are disbursed on a 
pro rata basis with other finances provided to the project.
    (e) Standards for evaluating public benefit--(1) Purpose and 
applicability. The grantee is responsible for making sure that at least 
a minimum level of public benefit is obtained from the expenditure of 
CDBG funds under the categories of eligibility governed by these 
guidelines. The standards set forth in this paragraph (e) identify the 
types of public benefit that must be used for this purpose and the 
minimum level of each that must be obtained for the amount of CDBG 
funds used. These guidelines are applicable for activities that are 
eligible for CDBG assistance under Sec. 105(a)(17) of the Act, economic 
development activities eligible under Sec. 105(a)(14) of the Act, and 
activities that are part of a community economic development project 
eligible under Sec. 105(a)(15) of the Act. Certain projects eligible 
under Section 105(a)(2) of the Act and undertaken for economic 
development purposes are subject to these guidelines, as specified in 
Sec. 570.482(d)(4)(iv)(C)(3)(iii). Unlike the guidelines for project 
costs and financial requirements covered under paragraph (a) of this 
section, the use of the standards for public benefit is mandatory.
    (2) Tests for individual activities. (i) With respect to each 
individual activity for which CDBG funds are expended under one of the 
authorities governed by these guidelines, one of the following two 
tests must be met:
    (A) The number of permanent jobs created or retained by an assisted 
business(es) as a direct result of the CDBG assisted activity shall not 
be less than one full-time equivalent job per $100,000 of CDBG funds 
used for the activity; or,
    (B) The number of low- and moderate-income persons residing in the 
area served by an assisted activity which directly results in providing 
essential goods or services shall not be less than one person per 
$1,000 used for the activity.
    (ii) The following activities provide insufficient public benefit 
in the context of the CDBG program and are thus deemed to be ineligible 
as part of activities governed by these guidelines:
    (A) General promotion of the community as a whole (as opposed to 
the promotion of specific areas and programs);
    (B) Assistance to professional sports teams;
    (C) Assistance to privately-owned recreational facilities that 
serve a predominantly higher-income clientele where the benefit to such 
clientele clearly outweighs employment or other benefits to low- and 
moderate-income persons;
    (D) Acquisition of land for which no specific proposed use has yet 
been identified; and
    (E) Additional assistance to a for-profit business while that 
business is the subject of unresolved findings of noncompliance 
relating to previous CDBG assistance provided by the recipient.
    (3) Tests for activities in the aggregate. With respect to the 
aggregate amount of CDBG funds from a single grant year that are 
expended on activities under the authorities governed by these 
guidelines, one of the following two criteria, selected at the option 
of the grantee, must be met:
    (i) In order to qualify under the first criterion, the following 
two tests must be met, as applicable:
    (A) For activities that are expected to result directly in the 
creation or retention of jobs, the number of permanent jobs created or 
retained by the assisted businesses shall not be less than one job 
(computed on a full-time equivalent basis) per $35,000 of CDBG funds 
used for the activities; and,
    (B) For activities that are expected to provide essential goods or 
services to an area as a direct result of the CDBG assistance, the 
number of low- and moderate-income persons residing in the areas served 
by the assisted businesses shall not be less than one person per $350 
of CDBG funds used for the activities.
    (ii) In order to qualify under the second criterion, at least 75 
percent of the CDBG funds used by the grantee for activities governed 
by these guidelines must be used for activities that are principally 
designed to address at least one of the following:
    (A) The provision of jobs for participants in any of the following 
programs: Jobs Training Partnership Act (JTPA), Jobs Opportunities for 
Basic Skills (JOBS), or Aid to Families with Dependent Children (AFDC);
    (B) The provision of jobs for participants in Unemployment 
Insurance programs;
    (C) The provision of jobs for residents of Public and Indian 
Housing units;
    (D) The provision of jobs for homeless persons;
    (E) The provision of jobs that provide clear opportunities for 
promotion, such as through the provision of training;
    (F) The provision of jobs for persons residing within a census 
tract (or block numbering area) that has at least 20 percent of its 
residents who are in poverty;
    (G) The establishment, stabilization, or expansion of 
microenterprises;
    (H) The stabilization or revitalization of a neighborhood that is 
predominantly low and moderate income;
    (I) The provision of assistance to a community development 
financial institution whose service area is predominantly low and 
moderate income;
    (J) The provision of assistance to a neighborhood-based nonprofit 
organization serving a neighborhood that is predominantly low and 
moderate income;
    (K) The provision of employment opportunities that are an integral 
component of a community's strategy to promote spatial deconcentration 
of low- and moderate-income and minority families;
    (L) The provision of assistance to business(es) that operate(s) 
within a census tract (or block numbering area) that has at least 20 
percent of its residents who are in poverty; or
    (M) With prior HUD approval, other innovative approaches that 
provide substantial benefit to low-income persons.
    (4) Applying the aggregate tests. The following shall apply with 
respect to the aggregate tests under paragraph (e)(3) of this section:
    (i) With respect to activities that are expected both to create or 
retain jobs and to provide essential goods or services to an area, the 
grantee may elect to consider such activities under either the jobs 
test or the persons-served test, but not both.
    (ii) A state shall apply the criteria to all funds distributed for 
applicable activities from each annual grant. This includes the amount 
of the annual grant, any funds reallocated by HUD to the state, any 
program income distributed by the state and any guaranteed loan funds 
made under the provisions of subpart M of this part covered in the 
method of distribution in the final statement for a given annual grant 
year.
    (5) Documentation. The grantee must maintain sufficient records to 
demonstrate the level of public benefit, based on the above standards, 
that is actually achieved upon completion of the CDBG-assisted economic 
development activity(ies) and how that compares to the level of such 
benefit that was projected to be achieved at the time the CDBG 
assistance was obligated. If actual results vary substantially from the 
grantee's initial projections, the grantee is expected to take all 
actions reasonably within its control to improve the accuracy of its 
projections. If the actual results demonstrate that the grantee has 
failed the public benefit standards, HUD may require the grantee to 
meet more stringent standards in future years as appropriate.
    (f) Amendments to economic development projects after review 
determinations. Once the recipient has completed its economic 
development analysis under these guidelines and has agreed to provide 
CDBG assistance to the for-profit business, any material change in the 
project that affects the underlying assumptions upon which the 
recipient relied to conduct its review should be reevaluated under 
these and the recipient's guidelines. A ``material change'' is defined 
for these purposes as a change in the size, scope, location or public 
benefit of the project or a change in the terms or the amount of the 
private funds (both lender's funds and equity capital) to be invested 
in the project or a change in the terms or the amount of the CDBG 
assistance to be made available to the project. If the recipient 
determines that a material change has occurred and a reevaluation of 
the project indicates that the financial elements and public benefit to 
be derived have also changed, then the recipient should make 
appropriate adjustments in the amount, the type of CDBG assistance and/
or the terms and conditions under which that assistance has been 
offered to reflect the impact of the material change. For example, if a 
material change in the project elements resulted in a reduction of the 
total project costs, it would be appropriate for the recipient to 
reduce the amount of total CDBG assistance.
    9. Section 570.483 would be amended by:
    a. Revising the section heading;
    b. Revising the paragraph heading of paragraph (b) and by adding a 
sentence to the end of paragraph (b)(1)(i);
    c. Adding a new paragraph (b)(2)(iv);
    d. Redesignating paragraph (b)(4)(iv) as (b)(4)(v), and by adding a 
new paragraph (b)(4)(iv);
    e. Revising newly redesignated paragraph (b)(4)(v)(C); and
    f. Revising paragraph (c)(1)(ii), to read as follows:


Sec. 570.483  Criteria for national objectives.

* * * * *
    (b) Activities benefiting low- and moderate-income persons.
* * * * *
    (1) * * * (i) * * * Activities carried out under Sections 
105(a)(14) or 105(a)(17) of the Act by a community development 
financial institution shall be presumed by HUD to meet this criterion 
if the institution's charter limits its investment area to a primarily 
residential area consisting of at least 51 percent low- and moderate-
income persons.
* * * * *
    (2) * * *
    (iv) A microenterprise assistance activity carried out in 
accordance with the provisions of Section 105(a)(23) of the Act or 
Sec. 570.482(c) if at least 51 percent of all persons, including both 
owners of microenterprises and persons developing microenterprises, who 
are assisted under the activity from each annual grant are low- and 
moderate-income persons. For purposes of this paragraph, persons 
determined to be low and moderate income may be presumed to continue to 
qualify as such for up to a three-year period.
* * * * *
    (4) * * *
    (iv) For purposes of determining whether a job is held by or made 
available to a low- or moderate-income person, the person may be 
presumed to be a low- or moderate-income person if:
    (A) He/she resides within a census tract (or block numbering area) 
having either:
    (1) At least 20 percent of its residents who are in poverty; or
    (2) At least 70 percent of its residents who are low- and moderate-
income persons; or
    (B) The assisted business is located within a census tract (or 
block numbering area) having at least 20 percent of its residents who 
are in poverty and the job under consideration is to be located within 
that census tract.
    (v) * * *
    (C) Where CDBG funds are used for public improvements (e.g., water, 
sewer and roads) and the national objective is to be met by job 
creation or retention as a result of the public improvement, the 
requirement shall be met as follows:
    (1) Before CDBG assistance is obligated for such an activity, the 
unit of general local government shall develop an assessment which 
identifies the businesses located in or expected to locate in the 
service area of the public improvements. For each identified business, 
the unit of general local government shall project the number of jobs 
anticipated to be created or retained by each identified business as a 
result of the public improvement;
    (2) For any business which agrees to retain or create jobs as a 
result of the CDBG-assisted public improvements, the unit of local 
government shall have a written agreement with the business spelling 
out the business' obligation to create or retain jobs. The agreement 
should specify the total number of jobs to be created or retained, the 
number of jobs involving the employment of low- and moderate-income 
persons, and the time period during which the job creation or retention 
will occur. For purposes of meeting the national objective requirement, 
the unit of general local government shall count all jobs covered by 
such agreements until the local government determines that the business 
has fulfilled its job creation or retention obligation;
    (3) The unit of local government shall compare the number of jobs 
created or retained as a result of the pubic improvement with the CDBG 
cost of the public improvements to be undertaken:
    (i) If the number of jobs actually created or retained by any 
combination of businesses served by the public improvements is such 
that the cost (in CDBG funds) per job is less than $10,000, then the 
jobs created or retained by those specific businesses shall be 
considered for purposes of meeting the national objective requirement;
    (ii) If the number of jobs actually created or retained by any 
combination of businesses served by the public improvements is such 
that the cost (in CDBG funds) per job is $10,000 or more, then all jobs 
created or retained as a result of the public improvements shall be 
considered for purposes of meeting the national objective requirement. 
This includes jobs created or retained as a result of the assistance by 
businesses already located in the public improvements service area, 
whether identified in the assessment or not. This also includes jobs 
created or retained as a result of the assistance by businesses which 
locate in the public improvements service area during the period 
starting with the date the state awards the CDBG funds to the local 
government and ending one year after the physical completion of the 
public improvements.
    (iii) If the number of jobs actually created or retained by any 
combination of businesses served by the public improvements is such 
that the cost (in CDBG funds) per job is $10,000 or more, then the 
activity shall also be subject to the Guidelines for Evaluating Public 
Benefit at Sec. 570.482(e).
* * * * *
    (c) * * *
    (1) * * *
    (ii) Throughout the area there exists at least one of the following 
conditions:
    (A) A substantial number of deteriorated or deteriorating 
buildings;
    (B) The public improvements are in a general state of 
deterioration; or
    (C) For exclusively commercial or industrial areas only, pervasive 
economic disinvestment as evidenced by a substantial number of 
previously occupied buildings experiencing either long term vacancies 
or an unusually high rate of turnover in occupancy.

Subpart J--Grant Administration

    10. In Sec. 570.500, paragraph (c) would be revised to read as 
follows:


Sec. 570.500  Definitions.

* * * * *
    (c) Subrecipient means a public or private nonprofit agency, 
authority or organization, or an entity described in Sec. 570.201(o) or 
Sec. 570.204(c), receiving CDBG funds from the recipient to undertake 
activities eligible for such assistance under subpart C of this part. 
The term includes a public agency designated by a metropolitan city or 
urban county to receive a loan guarantee under subpart M of this part, 
but does not include contractors providing supplies, equipment, 
construction or services subject to the procurement requirements in 24 
CFR 85.36 or in Attachment O of OMB Circular A-110, as applicable.
    11. Section 570.506 would be amended by revising paragraph (b) 
introductory text; by redesignating paragraphs (b)(7) through (b)(11) 
as (b)(8) through (b)(12), respectively; by adding a new paragraph 
(b)(7); and by revising paragraph (c), to read as follows:


Sec. 570.506  Records to be maintained.

* * * * *
    (b) Records demonstrating that each activity undertaken meets one 
of the criteria set forth in Sec. 570.208. (Where information on income 
by family size is required, the recipient may substitute evidence 
establishing that the person assisted qualifies under another program 
having income qualification criteria at least as restrictive as that 
used in the definitions of ``low and moderate income person'' and ``low 
and moderate income household'' (as applicable) at Sec. 570.3, such as 
Job Training Partnership Act (JTPA) and welfare programs; or the 
recipient may substitute evidence that the assisted person is homeless; 
or the recipient may substitute a copy of a verifiable certification 
from the assisted person that his or her family income does not exceed 
the applicable income limit established in accordance with Sec. 570.3; 
or the recipient may substitute a notice that the assisted person is a 
referral from a state, county or local employment agency or other 
entity that agrees to refer individuals it determines to be low and 
moderate income persons based on HUD's criteria and agrees to maintain 
documentation supporting these determinations.) Such records shall 
include the following information:
* * * * *
    (7) For purposes of documenting, pursuant to paragraphs 
(b)(5)(i)(B), (b)(5)(ii)(C), (b)(6)(iii) or (b)(6)(v) of this section, 
that the person for whom a job was either filled by or made available 
to a low- or moderate-income person based upon the census tract where 
the person resides or in which the business is located, the recipient, 
in lieu of maintaining records showing the person's family size and 
income, may substitute records showing either the person's address at 
the time the determination of income status was made or the address of 
the business providing the job, as applicable, the census tract in 
which that address was located, the percent of persons residing in that 
tract who either are in poverty or who are low- and moderate-income, as 
applicable, and the data source used for determining the percentage.
* * * * *
    (c) Records which demonstrate that the recipient has made the 
determinations required as a condition of eligibility of certain 
activities, as prescribed in Secs. 570.201(f), 570.201(i), 
570.202(b)(3), 570.203(b), 570.204(a), 570.206(f), and 570.209.
* * * * *
    Dated: May 20, 1994.
Andrew Cuomo,
Assistant Secretary for Community Planning and Development.

Attachment--The Following Is Proposed To Be the Substance of What Will 
Be Published as a Separate Federal Register Notice Concurrent With the 
Final Rule

    Guidelines and Objectives for Evaluating Project Costs and 
Financial Requirements. HUD has developed the following guidelines that 
are designed to provide the recipient with a framework for financially 
underwriting and selecting CDBG assisted economic development projects 
that are financially viable and that will make the most effective use 
of the CDBG funds. The use of these financial underwriting guidelines 
as published by HUD is not mandatory. However, grantees electing not to 
use these guidelines would be expected to conduct basic financial 
underwriting prior to the provision of CDBG financial assistance to a 
for-profit business. States electing not to use these guidelines would 
be expected to ensure that the state or units of general local 
government conduct basic financial underwriting prior to the provision 
of CDBG financial assistance to a for-profit business.
    Where appropriate, HUD's guidelines for financial underwriting 
recognize that different levels of review are appropriate to take into 
account differences in the size and scope of a proposed project, and in 
the case of a microenterprise or other small business take into account 
the differences in the capacity and level of sophistication among 
businesses of differing sizes. Recipients are encouraged, when they 
develop their own programs and underwriting criteria, to also take 
these factors into account.
    The guidelines for financial underwriting are for the purpose of 
achieving the following objectives:
    (1) That project costs are reasonable;
    (2) That all sources of project financing are committed;
    (3) That to the extent practicable, CDBG funds are not substituted 
for non-Federal financial support;
    (4) That the project is financially feasible;
    (5) That to the extent practicable, the return on the owner's 
equity investment will not be unreasonably high; and
    (6) That to the extent practicable, CDBG funds are disbursed on a 
pro rata basis with other finances provided to the project.
    (1) Project costs are reasonable. Reviewing costs for 
reasonableness is important. It will help the recipient avoid providing 
either too much or too little CDBG assistance for the proposed project. 
Therefore, it is suggested that the grantee obtain a breakdown of all 
project costs and that each cost element making up the project be 
reviewed for reasonableness. The amount of time and resources the 
recipient expends evaluating the reasonableness of a cost element 
should be commensurate with its cost. For example, it would be 
appropriate for an experienced reviewer looking at a cost element of 
less than $10,000 to judge the reasonableness of that cost based upon 
his or her knowledge and common sense. For a cost element in excess of 
$10,000, it would be more appropriate for the reviewer to compare the 
cost element with a third-party, fair-market price quotation for that 
cost element. Third-party price quotations may also be used by a 
reviewer to help determine the reasonableness of cost elements below 
$10,000 when the reviewer evaluates projects infrequently or if the 
reviewer is less experienced in cost estimations. If a recipient does 
not use third-party price quotations to verify cost elements, then the 
recipient would need to conduct its own cost analysis using appropriate 
cost estimating manuals or services.
    The recipient should pay particular attention to any cost element 
of the project that will be carried out through a non-arms-length 
transaction. A non-arms-length transaction occurs when the entity 
implementing the CDBG assisted activity procures goods or services from 
itself or from another party with whom there is a financial interest or 
family relationship. If abused, non-arms-length transactions 
misrepresent the true cost of the project.
    (2) Commitment of all project sources of financing. The recipient 
should review all projected sources of financing necessary to carry out 
the economic development project. This is to ensure that time and 
effort is not wasted on assessing a proposal that is not able to 
proceed. To the extent practicable, prior to the commitment of CDBG 
funds to the project, the recipient should verify that: sufficient 
sources of funds have been identified to finance the project; all 
participating parties providing those funds have affirmed their 
intention to make the funds available; and the participating parties 
have the financial capacity to provide the funds.
    (3) Avoid substitution of CDBG funds for non-Federal financial 
support. The recipient should review the economic development project 
to ensure that, to the extent practicable, CDBG funds will not be used 
to substantially reduce the amount of non-Federal financial support for 
the activity. This will help the recipient to make the most efficient 
use of its CDBG funds for economic development. To reach this 
determination, the recipient's reviewer would conduct a financial 
underwriting analysis of the project, including reviews of appropriate 
projections of revenues, expenses, debt service and returns on equity 
investments in the project. The extent of this review should be 
appropriate for the size and complexity of the project and should use 
industry standards for similar projects, taking into account the unique 
factors of the project such as risk and location.
    Because of the high cost of underwriting and processing loans, many 
private financial lenders do not finance commercial projects that are 
less than $100,000. A recipient should familiarize itself with the 
lending practices of the financial institutions in its community. If 
the project's total cost is one that would normally fall within the 
range that financial institutions participate, then the recipient 
should normally determine the following:
    (i) Private debt financing--whether or not the participating 
private, for-profit business (or other entity having an equity 
interest) has applied for private debt financing from a commercial 
lending institution and whether that institution has completed all of 
its financial underwriting and loan approval actions resulting in 
either a firm commitment of its funds or a decision not to participate 
in the project; and
    (ii) Equity participation--whether or not the degree of equity 
participation is reasonable given general industry standards for rates 
of return on equity for similar projects with similar risks and given 
the financial capacity of the entrepreneur(s) to make additional 
financial investments.
    If the recipient is assisting a microenterprise owned by a low- or 
moderate-income person(s), in conducting its review under this 
paragraph, the recipient would generally only need to determine that 
non-Federal sources of financing are not available (at terms 
appropriate for such financing) in the community to serve the low- or 
moderate-income entrepreneur.
    (4) Financial feasibility of the project. The public benefit a 
grantee expects to derive from the CDBG assisted project (the subject 
of separate regulatory standards) will not materialize if the project 
is not financially feasible. To determine if there is a reasonable 
chance for the project's success, the recipient should evaluate the 
financial viability of the project. A project would be considered 
financially viable if all of the assumptions about the project's market 
share, sales levels, growth potential, projections of revenue, project 
expenses and debt service (including repayment of the CDBG assistance 
if appropriate) were determined to be realistic and met the project's 
break-even point (which is generally the point at which all revenues 
are equal to all expenses). Generally speaking, an economic development 
project that does not reach this break-even point over time is not 
financially feasible. The following should be noted in this regard:
    (i) Some projects make provisions for a negative cash flow in the 
early years of the project while space is being leased up or sales 
volume built up, but the project's projections should take these 
factors into account and provide sources of financing for such negative 
cash flow; and
    (ii) It is expected that a financially viable project will also 
project sufficient revenues to provide a reasonable return on equity 
investment. The recipient should carefully examine any project that is 
not economically able to provide a reasonable return on equity 
investment. Under such circumstances, a business may be overstating its 
real equity investment (actual costs of the project may be overstated 
as well), or it may be overstating some of the project's operating 
expenses in the expectation that the difference will be taken out as 
profits, or the business may be overly pessimistic in its market share 
and revenue projections and has downplayed its profits.
    In addition to the financial underwriting reviews carried out 
earlier, the recipient should evaluate the experience and capacity of 
the assisted business owners to manage an assisted business to achieve 
the projections. Based upon its analysis of these factors, the 
recipient should identify those elements, if any, that pose the 
greatest risks contributing to the project's lack of financial 
feasibility.
    (5) Return on equity investment. To the extent practicable, the 
CDBG assisted activity should provide not more than a reasonable return 
on investment to the owner of the assisted activity. This will help 
ensure that the grantee is able to maximize the use of its CDBG funds 
for its economic development objectives. However, care should also be 
taken to avoid the situation where the owner is likely to receive too 
small a return on his/her investment, so that his/her motivation 
remains high to pursue the business with vigor. The amount, type and 
terms of the CDBG assistance should be adjusted to allow the owner a 
reasonable return on his/her investment given industry rates of return 
for that investment, the local conditions and the risk of the project.
    (6) Disbursement of CDBG funds on a pro rata basis. To the extent 
practicable, CDBG funds used to finance economic development activities 
should be disbursed on a pro rata basis with other funding sources. 
This will help avoid the situation where it is learned that a problem 
has developed that will block the completion of the project, even 
though all or most of the CDBG funds going in to the project have 
already been expended. When this happens, a recipient may be put in a 
position of having to provide additional financing to complete the 
project or watch the potential loss of its funds if the project is not 
able to be completed. When the recipient determines that it is not 
practicable to disburse CDBG funds on a pro rata basis, the recipient 
should consider taking other steps to safeguard CDBG funds in the event 
of a default, such as insisting on securitizing assets of the project.

[FR Doc. 94-13196 Filed 5-26-94; 9:48 am]
BILLING CODE 4210-29-P