[Federal Register Volume 60, Number 3 (Thursday, January 5, 1995)]
[Rules and Regulations]
[Pages 1922-1954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32151]




[[Page 1921]]

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Part VII





Department of Housing and Urban Development





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24 CFR Part 570



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Community Development Block Grant Program Economic Development 
Guidelines; Final Rule

  Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules 
and Regulations   
[[Page 1922]]

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-F-02]
RIN 2506-AB53


Community Development Block Grant Program Economic Development 
Guidelines

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

ACTION: Final rule and guidelines.

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

EFFECTIVE DATE: February 6, 1995.

FOR FURTHER INFORMATION CONTACT: James R. Broughman, Director, Office 
of Block Grant Assistance, Room 7286, 451 Seventh Street, SW, 
Washington, DC 20410. Telephone: (202) 708-3587; 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 make 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.
    A proposed rule regarding these issues was published on May 31, 
1994, at 59 FR 28175. The rule gave the public 30 days in which to 
submit comments. Fifty-one comments were received, and many of the 
comments were extensive. The following types and numbers of commenters 
were represented: 14 local government agencies, 7 state agencies, 12 
national associations, 7 development organizations, 1 regional planning 
agency, 3 private citizens, and 7 HUD Field staff.

Applicability of This Rule to the State CDBG Program

    Separate regulatory language for the Entitlement and State CDBG 
programs is contained in this rule. This preamble generally discusses 
the changes for the two programs together, with differences between the 
requirements for the two programs noted. Overall, such 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 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 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. Thus, the 
changes to the Entitlement regulations also apply to the HUD-
Administered Small Cities and Insular Areas programs. Further 
clarification will 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.

Applicability of This Rule to the Indian CDBG Program

    It has been determined by the Office of Native American Programs 
that this 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.

Summary of Public Comments and HUD Responses

Assistance for Microenterprises

    Issue. Three commenters requested that the maximum number of 
employees permitted in order for a business to be considered a 
microenterprise be increased. (2 local government agencies and 1 state 
agency)
    Response. The term ``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.'' With this 
statutory limitation, the maximum number of employees cannot be 
increased.
    Issue. Four commenters requested further clarification of the 
definition of a microenterprise. Issues raised included: whether the 
limitation on the number of employees applies to actual persons or 
full-time-equivalent positions; the scope of the term ``commercial''; 
and the length of time a CDBG-assisted microenterprise must remain 
within the five-employee maximum. (2 national associations, 1 state 
agency, and 1 private citizen)
    Response. The Department interprets the statutory language 
regarding the size limitations for a microenterprise as referring to 
number of actual persons employed by the business, including the 
owner(s).
    As noted above, the statutory definition of a microenterprise 
describes [[Page 1923]] such a business as a ``commercial enterprise. . 
. .'' The Department does not believe that it was Congress' intent to 
construe the term ``commercial'' so narrowly in this instance that it 
would encompass only retail businesses. Rather, the HUD interprets this 
term broadly to mean any ``entity engaged in commerce,'' subject to the 
size limitations further imposed by the statutory definition of a 
microenterprise. Definitions of the terms ``microenterprise'' and 
``small business'' are being incorporated into the CDBG regulations at 
Sec. 570.3 in this final rule.
    In regard to the length of time a CDBG-assisted microenterprise 
must remain within these size limitations, the same general rule that 
applies to other CDBG activities would also apply to microenterprise 
assistance. That is, the size limitation applies only at the time the 
CDBG assistance is provided. There may often be the expectation that, 
in the future, the business will grow beyond five employees; that 
expectation should not block assistance to a currently qualified 
microenterprise. A grantee need not track the size of the business 
throughout the term of any CDBG loan received, as the commenters feared 
might be the case. However, it should be noted that when CDBG 
assistance is provided on an ongoing basis, as may often be the case 
for ``general support'' activities, such assistance ceases to qualify 
under the microenterprise eligibility category at the point when the 
business grows beyond the five-employee size limitation. Further 
assistance to the business after that time must qualify under other 
existing eligibility categories.
    Issue. Two commenters requested that HUD further define the term 
``persons developing microenterprises.'' (1 state agency and 1 private 
citizen)
    Response. HUD agrees that it is useful to include such a definition 
in the regulations. Thus, a new paragraph Sec. 570.201(o)(3) has been 
added to this final rule to provide such a definition. Generally, the 
term ``persons developing microenterprises'' is defined as persons who 
have expressed interest and who are, or after an initial screening 
process are expected to be, actively working toward developing 
businesses, each of which is expected to be a microenterprise at the 
time it is formed. It should be noted that HUD does not expect that all 
such persons will actually start a microenterprise; some ``fallout'' is 
expected. However, patterns of excessive ``fallout'' rates in a 
grantee's microenterprise activities may cause HUD to question whether 
such activities truly serve ``persons developing microenterprises.''
    Issue. Two commenters requested that HUD revise the regulations to 
permit ``general support'' services to also be provided, outside of the 
public service cap, to businesses larger than microenterprises. (1 
state agency and 1 national association)
    Response. The Department cannot accommodate the requested change. 
Flexibility to provide such services outside the public service 
category is only statutorily provided for microenterprise assistance 
carried out under Section 105(a)(23) of the Housing and Community 
Development Act of 1974, as amended, and, to a less direct extent, 
qualified activities carried out under Section 105(a)(15) of the Act 
(Sec. 570.204 of the Entitlement regulations). As noted above, the 
statute also imposes the five-employee size limitation on 
microenterprises.
    Issue. Seven commenters requested that HUD clarify various aspects 
of the ``general support'' portion of the microenterprise eligibility 
provision. Issues raised included: whether there were any circumstances 
in which such support activities would be considered public service 
activities; whether ``general support'' could be provided to employees 
of microenterprises who are not part-owners; whether ``general 
support'' included costs related to the delivery of microenterprise 
assistance; and whether the entities providing assistance under this 
category would be those most attuned to the special needs of 
microenterprises. (1 local government agency, 3 national associations, 
2 development organizations, and 1 private citizen)
    Response. As noted above, the statute limits the instances in which 
``general support'' services may be provided to businesses outside the 
public service eligibility category. In any circumstances which fall 
outside the specified instances, the provision of such support services 
would need to qualify as public service activities.
    Under the microenterprise eligibility provision, the statute limits 
the direct provision of ``general support'' to ``owners of 
microenterprises and persons developing microenterprises.'' Thus, 
``general support'' cannot be provided directly to employees of 
microenterprises who are not part-owners. However, there may often be 
other ways of structuring the activity to achieve essentially the same 
end result. For example, financial assistance may be provided to the 
microenterprise owner under Sec. 570.201(o)(1)(i) to permit the owner 
to provide certain benefits to his/her employees if that can be shown 
to assist in the ``development, stabilization, or expansion'' of the 
microenterprise. Alternatively, the extent of financial assistance 
provided to the microenterprise owner for the capital needs of the 
business could be sized taking into account the owner's cost of 
providing such benefits for his/her employees.
    The term ``general support'' as it is used in the statute and 
Sec. 570.201(o)(1)(iii) is not intended to specifically include the 
activity administrator's cost of delivering microenterprise assistance 
to owners of microenterprises and persons developing them. As with any 
CDBG activity, it is recognized that there are various necessary costs 
associated with carrying out a microenterprise assistance activity. As 
the commenters note, these may include the costs of outreach and 
screening, curriculum development, coordination with other agencies, 
formation and management of peer lending groups, and certain staff 
training and development. As with any other CDBG activity, such costs 
directly related to carrying out the microenterprise assistance 
activity are considered eligible as part of that activity, without 
being categorized as ``general support.'' Such ``activity delivery'' 
costs are not considered to be general administrative costs that would 
be subject to the 20 percent cap.
    In regard to the nature of the entities carrying out activities 
under this eligibility category and their familiarity with the needs of 
microenterprises, HUD has interpreted the statutory provision as 
broadly as possible in developing this rule. This should permit 
grantees significant flexibility in determining how, and by whom, 
microenterprise assistance activities should be carried out, based on 
local needs and priorities. The specific selection of service providers 
is a matter of local discretion.
    Issue. Four commenters recommended that some form of 
``appropriate'' test be required for microenterprise assistance carried 
out under the new eligibility category or that the rule include some 
language stating that such assistance must be reasonable and necessary. 
(2 local government agencies, 1 state agency, and 1 HUD Field staff 
person)
    Response. As noted in the preamble to the proposed rule, 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 [[Page 1924]] 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. HUD does not believe that adding any regulatory requirements 
to this eligibility category that are not required by statute is 
warranted. As with any other CDBG activity, however, grantees are free 
to develop more restrictive local policies as they feel are appropriate 
to meeting their local needs and objectives. Also, pursuant to 
Secs. 570.200(a)(5) and 570.502 of the CDBG regulations, all costs 
incurred for CDBG assisted activities must be in conformance with the 
applicable uniform administrative requirements. This includes the 
requirement that the costs be necessary and reasonable for the proper 
and efficient administration of the program. Thus, HUD does not believe 
it is necessary to include any special language in this regard in 
Sec. 570.201(o).
    Issue. A concern was raised over the fact that no revision to the 
Section 108 Loan Guarantee regulations at Sec. 570.703 was proposed to 
reflect the addition of microenterprise assistance as a separate 
eligibility category. (1 HUD Field staff person)
    Response. Activities eligible for assistance under the Section 108 
Loan Guarantee program are specifically delineated at Section 108(a) of 
the Act. While the 1992 Act added the separate microenterprise 
eligibility category as a new Section 105(a)(23) of the statute, no 
reference to this new paragraph was added to Section 108(a) of the 
statute. Thus, this eligibility category is not directly eligible for 
assistance using Section 108 Loan Guarantees. However, the provision of 
direct assistance to microenterprises has long been, and continues to 
be, eligible as a special economic development activity under Section 
105(a)(17) of the Act (Sec. 570.203(b) of the Entitlement regulations). 
Section 105(a)(17) is included at Section 108(a) among the list of 
activities eligible for Loan Guarantee assistance under that section. 
Therefore, grantees may use Section 108 Loan Guarantees to directly 
assist microenterprises, subject to the statutorily required 
``appropriateness'' determination and coverage under the economic 
development ``guidelines'' (established in this final rule as a new 
Sec. 570.209 of the Entitlement regulations and additions to 
Sec. 570.482 of the State regulations). These ``guidelines'' 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).
    Issue. One commenter asked whether (or how) certain assistance to 
in-home day care providers might be eligible under the proposed 
Sec. 570.201(o) or Sec. 570.203. The commenter noted that day care is 
often provided by people within their own homes. Improvements to the 
house may be necessary or beneficial to the provision of day care 
services. The existing regulations do not provide guidance as to 
whether improvements to a residence in this case should be classified 
as rehabilitation or as assistance to a business.
    Response. The Department agrees that this issue is not clear in the 
existing regulations; the addition of the microenterprise assistance 
eligibility section further muddies the issue, as many home day care 
providers might also qualify as a microenterprise. Situations in which 
businesses are operated from a residence are not limited to day care 
provision. To address this comment, the Department has revised 
Sec. 570.202 (eligible rehabilitation activities) of the Entitlement 
regulations. With this revision, certain situations in which physical 
improvements to a residence are undertaken to benefit a business 
operated therein may be classified as housing rehabilitation.

Ensuring That Economic Development Projects Minimize Displacement

    Issue. Section 907(a) of the National Affordable Housing Act of 
1990 amended Section 105(a)(17) of the statute to require, in part, 
that economic development projects assisted under this provision must 
minimize, to the extent practicable, displacement of existing 
businesses and jobs in neighborhoods. The proposed rule implemented 
this provision by amending Sec. 570.203 of the Entitlement regulations 
with language on displacement that was identical to that contained in 
the statute. Six commenters addressed this issue, and several of them 
recommended that further guidance be provided. However, few specific 
recommendations were received. (3 national associations, 1 local 
government agency, 1 private citizen, and 1 HUD Field staff person)
    Response. HUD has determined that it is most appropriate to leave 
the final rule provision as proposed on this issue. Within the 
parameters of the statutory language, grantees will have flexibility to 
demonstrate compliance with this requirement as appropriate for their 
circumstances. One possible way in which a grantee could demonstrate 
compliance with this requirement is by conducting an analysis for each 
covered economic development project to determine that any displacement 
of existing businesses and jobs that is likely to occur as a result of 
the economic development project, both in the neighborhood in which the 
project is located and in other surrounding neighborhoods, is 
justifiable given an examination of possible alternatives.

Additional Changes to Sec. 570.203, Special Economic Development 
Activities

    Issue. A total of eight commenters addressed the new paragraph (c) 
that was 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 was 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. All eight commenters supported 
this general concept, but five of them requested modification or 
clarification of the provision. The recommended modifications included: 
extending this provision to include construction jobs created as part 
of CDBG projects; extending it to include all ``CDBG-eligible'' 
economic development projects rather than just actual ``CDBG-assisted'' 
projects; limiting the job training and placement activities permitted 
under this provision to actual low- and moderate-income persons; and 
reclassifying the outreach and monitoring portions of this provision as 
general administrative costs subject to the 20 percent cap. 
Clarification was also requested as to whether there were any 
circumstances where the job training activities discussed would still 
be considered a public service. (3 local government agencies, 3 
national associations, and 2 development organizations)
    Response. HUD has determined that it is not appropriate to extend 
the coverage of this provision to include job training for construction 
jobs created as part of all CDBG projects in general. This new economic 
development services provision specifically applies only to activities 
qualifying as special economic development activities under the CDBG 
program. Costs for training and apprenticeship programs directly 
related to the construction for these activities can generally be 
considered to be covered under this provision. Costs of such programs 
for other types of [[Page 1925]] CDBG projects can often be considered 
as activity delivery costs of the respective projects to which they 
pertain.
    In regard to the comment that the proposed provision should be 
extended to include all ``CDBG-eligible'' economic development projects 
rather than just otherwise ``CDBG-assisted'' projects, the Department 
has determined that this recommendation has merit. Under the CDBG 
program, grant funds may be used to assist an activity ``in whole or in 
part,'' as noted at Sec. 570.200(a) of the Entitlement regulations. 
There are many cases in which ``activity delivery'' costs are the only 
portion of an activity's overall costs that are paid for with CDBG 
funds. Thus, Sec. 570.203(c) has been revised in this final rule to 
reflect the recommended change. In order to qualify under this 
provision, job training and placement activities must still constitute 
activity delivery costs for an economic development project that would 
otherwise be eligible for further assistance under Sec. 570.203. HUD 
considers this to permit such training activities only where the 
grantee has an agreement with a specific business(es) to actually 
employ the person(s) trained. This provision does not authorize 
programs that will merely create a ``pool'' of trained persons from 
which a business(es) may possibly hire. (Such activities must continue 
to qualify as public service activities under Sec. 570.201(e) of the 
Entitlement regulations unless they meet the requirements of the new 
Sec. 570.201(o) or Sec. 570.204.) It should also be noted that the use 
of CDBG funds for activity delivery costs qualifying under 
Sec. 570.203(c) constitutes CDBG assistance to the related economic 
development project, regardless of the funding sources for any other 
portion of the project. Thus, that project becomes subject to all 
applicable CDBG requirements, including national objective and public 
benefit requirements.
    In regard to the comment that the job training and placement 
activities permitted under this provision should be limited to actual 
low- and moderate-income persons, the Department has decided not to 
adopt this recommendation. Such a proposal confuses the distinction 
between eligibility and national objective requirements. As activity 
delivery costs, job training and placement activities carried out under 
Sec. 570.203(c) are considered part of the economic development project 
to which they relate. Thus, they are generally considered to qualify 
under the same national objective as that economic development project. 
Such CDBG special economic development activities can qualify under a 
variety of national objective provisions; they are not limited to 
creating or retaining jobs for low- and moderate-income persons.
    This comment has raised an issue, however, that HUD found to merit 
further consideration. Under existing regulations, with very few 
exceptions, the majority of persons benefiting from a CDBG-assisted 
activity must be low- and moderate-income persons. HUD is aware of 
various proposals under which certain entities have indicated a 
willingness to train low- and moderate-income persons for jobs and/or 
provide such persons with other employment opportunities, but these 
entities cannot agree that 51 percent of all assisted persons will be 
low or moderate income. HUD believes that such proposals can often 
provide valuable opportunities for employment of low- and moderate-
income persons and that a way should be found to permit CDBG funds to 
assist such efforts. Thus, HUD is amending the low- and moderate-income 
limited clientele national objective requirements in this final rule 
[with a new Sec. 570.208(a)(2)(iv) in the Entitlement regulations and a 
new Sec. 570.483(b)(2)(v) in the State regulations] to authorize the 
use of CDBG funds for such activities that provide training and/or 
other employment support services in limited circumstances. This 
provision is discussed more fully in detail in the national objective 
portion of this preamble.
    There also appears to be some general confusion regarding what can 
be considered as activity delivery costs and what must be classified as 
general administration subject to the 20 percent cap. Apart from the 
job training and placement activities discussed above, most of the 
remaining types of activities delineated in the proposed 
Sec. 570.203(c) are already considered to be activity delivery costs 
eligible under the currently-existing Sec. 570.203. The proposed new 
paragraph only provides a more specific statement of this point. One 
commenter specifically took issue with the outreach and monitoring 
portions of this provision, arguing that such activities should be 
considered part of general administration. HUD agrees that 
``monitoring'' should be considered a general administration activity, 
and thus, that term has been deleted from the new Sec. 570.203(c) in 
this final rule. However, reasonable outreach efforts by grantees to 
obtain applicants for available assistance and the direct management of 
resulting activities are routinely considered part of the delivery cost 
of such activities. The commenter compares the above type of outreach 
and marketing efforts to activities designed to help inform low-income 
residents about CDBG. If that reference is to activities that are 
designed to make residents generally aware of the CDBG program and how 
they may participate in determining what types of activities the 
community funds, such a comparison is imprecise. Rather, the type of 
outreach and marketing efforts included under the new Sec. 570.203(c) 
would be comparable to activities designed to make residents aware of 
how they could apply for assistance under specific activities, such as 
a housing rehabilitation program.

Special Activities by Community-Based Development Organizations 
(CBDOs)--Sec. 570.204  (Section 105(a)(15) of the Act)

    Issue. Six commenters addressed the eligible activities and project 
definition sections of the proposed rule changes at Sec. 570.204 (a) 
and (b). Most of these commenters requested clarification of the 
proposed definitions and discussion of eligible activities. (2 national 
associations, 1 local government agency, 1 private individual, and 2 
HUD Field staff persons)
    Response. HUD has not accepted the recommendation from one national 
association to add language to the beginning of Sec. 570.204(a) to 
specifically state that the recipient may provide CDBG funds to a 
subrecipient under this section ``if permitted by state or local law.'' 
Compliance with applicable state or local laws is a requirement for 
recipients in carrying out all CDBG activities; thus, there is no need 
to make a special statement here.
    In response to the various requests for clarification of the 
definitions for the projects made eligible by Section 105(a)(15) of the 
Act, HUD has made minor changes to those definitions included in 
Sec. 570.204(a) (1), (2), and (3) in this final rule. For the 
definition of a ``community economic development project,'' this 
includes a cross-reference to the Consolidated Plan rule at 24 CFR 
91.1(a)(1)(iii), which describes the types of activities HUD generally 
considers to aid in ``expanding economic opportunities,'' which is part 
of the primary objective of the CDBG program as delineated at Section 
101(c)(1) of the Act. The definition also notes the general conditions 
under which the construction or rehabilitation of housing may be 
included as part of a ``community economic development 
project.'' [[Page 1926]] 
    One commenter, a private citizen, raised a question as to whether a 
``project'' qualifying under Sec. 570.204 included only activities for 
which there is funding committed and which are occurring now or whether 
it could include proposed future activities for which no funding has 
yet been secured. HUD has determined that specific limits on the scope 
of a project cannot easily be prescribed in this regard. Thus, it has 
not been addressed in the text of this final rule. HUD expects 
recipients to use a plausible interpretation of the term ``project'' 
and only include activities that are to be carried out within a 
reasonable period of time. Such an interpretation should at least 
exclude activities which have not yet received necessary conceptual 
approvals from the local government.
    HUD has also revised the reference to permitted services under 
Sec. 570.204. Two commenters, a private citizen and a HUD Field staff 
person, requested clarification of this provision. Also, under a 
similar expansion of service activities as part of the new 
microenterprise eligibility category at Sec. 570.201(o), one of those 
same commenters raised a concern about potential abuse of the expanded 
flexibility if the requirements were not clearly defined. HUD has 
reconsidered the proposed provision and has determined that it is 
appropriate to limit the type of services that may be excluded from the 
public service cap by qualifying under this section to those (1) that 
are specifically designed to increase economic opportunities by 
supporting the development of permanent jobs, or (2) services of any 
type carried out under this section pursuant to a strategy approved by 
HUD under the provisions of Sec. 91.215(e). To reflect this change, the 
proposed paragraph Sec. 570.204(a)(5) has been deleted, the proposed 
paragraph Sec. 570.204(b)(2) has been renumbered to (b)(3), and a new 
paragraph Sec. 570.204(b)(2) has been added to this final rule. In the 
State program regulations, proposed Sec. 570.482(c)(2) has been 
deleted, and a new paragraph Sec. 570.482(d) has been added to discuss 
the eligibility of employment-related services and microenterprise 
support services.
    Issue. One commenter recommended that the Department consider the 
eligible project carried out by the qualified organization under 
Sec. 570.204 to be a single eligible activity instead of ``only a loose 
grouping of other eligible activities.'' The commenter recommends that 
this approach be reflected throughout the regulations, including 
national objective requirements, the economic development guidelines, 
and record keeping requirements. (1 HUD Field staff person)
    Response. In regard to eligibility requirements under Sec. 570.204, 
it already is the overall project that is assessed to determine if it 
qualifies as one of the three types of projects authorized by this 
section. Problems arise when trying to apply this approach for 
assessing compliance with national objective requirements, economic 
development guidelines, and other applicable requirements, however, 
because of statutory requirements that must be applied to specific 
types of activities that may be part of the qualified project. For 
example, Section 105(c)(3) of the Act limits the manner in which any 
housing activities may be considered to benefit low- and moderate-
income persons. Also, Section 105(e) of the Act, as added by Section 
806(a) of the 1992 Act, subjects economic development activities to 
compliance with the public benefit requirements. Beyond such statutory 
restrictions, the Department also believes that requiring detailed 
information on what the organization is actually doing with the CDBG 
funds helps ensure accountability to both the local citizens and HUD. 
However, HUD has determined that the commenter's recommendation does 
have a certain degree of merit. Thus, HUD has made certain changes to 
the CDBG regulations in this final rule to ease grantees' burden in 
tracking national objective compliance for certain activities that may 
qualify for eligibility under this category. These changes are 
discussed further in the respective national objective portions of this 
preamble.
    Issue. In regard to the types of entities that qualify under 
Sec. 570.204, one commenter noted that such entities are commonly 
referred to by practitioners as ``community-based development 
organizations (CBDOs)'' or ``community development corporations 
(CDCs).'' (1 national association)
    Response. HUD has determined that is appropriate, in adopting a 
single generic name for the entities that may qualify under 
Sec. 570.204, to use a name that is commonly understood by 
practitioners. It was also apparent from various comments that the 
proposed rule's use of the term ``local development corporations 
(LDCs)'' in this regard caused some confusion with some commenters 
thinking HUD was ``picking'' one of the entities in the current rule 
over the others. Use of the ``CDC'' term noted by the above commenter 
could create confusion with existing entities funded under other 
Federal programs. Therefore, to reduce confusion, the term ``community-
based development organization (CBDO)'' is now used in this final rule 
as the generic term to describe all entities that may qualify under 
Sec. 570.204.
    Issue. Five commenters addressed the proposed revision to the 
definition of the term ``subrecipient'' at Sec. 570.500(c). The 
proposed revision was intended only to expand that current provision to 
include for-profit entities that are now specifically authorized by 
statute to carry out microenterprise assistance activities under the 
new eligibility provision implemented in this final rule by a new 
Sec. 570.201(o) in the Entitlement regulations [Section 105(a)(23) of 
the Act]. Most of the commenters recommended that HUD not consider any 
entities carrying out activities under the new microenterprise category 
as ``subrecipients'' but rather as ``end beneficiaries.'' These 
commenters also requested a similar change in classification for 
entities receiving CDBG assistance under Sec. 570.204 of the 
Entitlement regulations [Section 105(a)(15) of the Act]. Other 
commenters asked only for a clarification of the proposed revision to 
Sec. 570.500(c). (1 local government agency, 1 development 
organization, and 3 HUD Field staff persons)
    Response. The comments regarding entities carrying out activities 
under the new microenterprise category will be discussed later in this 
preamble in further discussion of the revision to Sec. 570.500(c) in 
this final rule. This specific section will only respond to these 
comments as they relate to entities receiving CDBG assistance under 
Sec. 570.204 of the Entitlement regulations (Section 105(a)(15) of the 
Act). The Department has re-examined the status of these entities 
within the context of the statutory language at Section 105(a)(15). 
This section of the statute authorizes the provision of CDBG assistance 
to certain qualified entities to carry out specific types of projects. 
Upon review, HUD has determined that the comments questioning the 
status of these entities as subrecipients have merit. The Department 
has determined that, similar to for-profit businesses carrying out 
economic development projects, the entities carrying out qualified 
activities under Sec. 570.204 (Section 105(a)(15) of the Act) can be 
considered not to be an intermediary organization in the grant 
assistance chain acting for the grantee, but rather as being 
specifically eligible to receive CDBG assistance itself. While these 
entities are not true ``end beneficiaries'' as the commenters argue 
(that term applies to the persons served by the activities), they are 
not strictly intermediaries either. Thus, the Department has determined 
that such [[Page 1927]] eligible entities carrying out qualified 
activities under this section will no longer be considered as 
subrecipients under the CDBG program. In this final rule, 
Sec. 570.500(c) has been amended, in part, to reflect this change.
    Issue. Two commenters addressed the general jurisdictional 
limitations for organizations qualifying under this section as proposed 
at Sec. 570.204(c)(1)(i). One of these, a national association, 
recommended that these regulations mirror the Community Housing 
Development Organization (CHDO) requirements which permit an entity to 
operate in a rural ``multi-county area (but not a whole state).'' The 
other commenter, a local government agency, recommended that the 
proposed regulatory language be amended to read:
    ``. . . primarily within an identified geographic area of operation 
within the jurisdiction of the recipient. . . .'' The commenter argues 
that this would permit an organization with a successful track record 
to share its experience by consulting or entering into a joint venture 
to support a project in other areas. (1 national association and 1 
local government agency)
    Response. HUD has determined not to accept the ``multi-county'' 
recommendation because maintaining local community control of a 
organization qualifying under Sec. 570.204 is crucial. Also, it should 
be noted that truly rural organizations would not be subject to these 
regulatory restrictions anyway. This is because 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'' now qualify 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 that change.
    In regard to the second comment above regarding jurisdictional 
limitations, the Department agrees with the commenter's reasoning and 
has revised Sec. 570.204(c)(1)(i) to reflect the recommended language 
in this final rule. In this regard, however, HUD does note that it 
interprets the term ``primarily'' as it is used in this section to mean 
that most of the organization's projects are located, funds are used, 
and staff time is expended on a project or projects within the 
identified geographic area of operation and that outside projects are 
largely incidental to the organization's activities and purposes.
    Issue. One commenter recommended that HUD provide a definition for 
the term ``particular attention'' as it is used in the new 
Sec. 570.204(c)(1)(ii) regarding addressing the needs of low- and 
moderate-income persons. (1 national association)
    Response. The ``particular attention'' language as used in the 
above-noted section comes from those statutes that have been referenced 
for several years in the CDBG regulations at Sec. 570.204(c)(3) 
defining local development corporations. The Department is not aware of 
any significant problems with conflicting interpretations of this 
language, which is the commenter's stated concern. Thus, the rule has 
not been modified to include a formal definition of this term. In 
general, HUD would expect the charter, bylaws, etc., of the CBDO to 
reflect a commitment to meeting the needs of low- and moderate-income 
persons.
    Issue. In reference to the new Sec. 570.204(c)(1)(iii), another 
commenter expressed ``serious reservations'' about allowing for-profit 
organizations to qualify under this section of the regulations. (1 
development organization)
    Response. The statute at Section 105(a)(15) and the CDBG 
regulations at Sec. 570.204 have long permitted for-profit 
organizations under this section with the inclusion of Small Business 
Investment Companies. The rule now includes only a clearer statement of 
what already is permitted. The rule does provide a stipulation that any 
monetary profits to a CBDO's shareholders or members must be only 
incidental to its operations.
    Issue. Four commenters addressed the board structure requirements 
under Sec. 570.204(c)(1)(iv). Concerns raised included an objection to 
excluding organizations composed solely of institutional members from 
qualifying under this section and comments both for and against the 
inclusion of business owners in defining permitted board structures. 
One of the commenters also recommended that HUD permit the low- and 
moderate-income presumptions added by the 1992 Act to be used under 
this section in determining whether a sufficient percentage of board 
members are low- and moderate-income persons. (1 local government 
agency, 2 development organizations, and 1 national association)
    Response. HUD has determined that all of the comments regarding the 
inclusion of institutions and business owners on the boards of 
qualifying CBDOs have some merit. Thus, the Department has refined the 
requirements at Sec. 570.204(c)(1)(iv) in this final rule to permit 
consideration of both institutional board members and business owners, 
but only to the extent that the entities that they represent are both 
located in and serve the CBDO's geographic area of operation. In regard 
to the comment about permitting the presumption of low- and moderate-
income residents status under this section, it is noted that the 
presumptions at Section 105(c)(4) of the HCD Act, as added by Section 
806(e) of the 1992 Act, apply only to activities qualifying under the 
national objective of job creation or retention for low- and moderate-
income persons. Permitting them to be used in determining compliance 
with the board structure requirements of this section would include too 
broad of a spectrum of organizations to qualify under this provision. 
Thus, the Department has rejected this comment.
    Issue. Three commenters addressed the proposed Sec. 570.204(c)(2) 
that provided further ways in which an organization might qualify as an 
eligible CBDO under this section. These commenters requested 
clarification of when this paragraph would apply, and two of the 
commenters specifically requested that HUD expand the jurisdictional 
restrictions imposed on CHDOs, as designated by the HOME program, 
qualifying under this paragraph. (1 national association, 1 development 
organization, and 1 HUD Field staff person)
    Response. HUD's intent in the proposed Sec. 570.204(c)(2) was to 
give organizations that did not meet the general qualification 
requirements of (c)(1) certain additional ways of qualifying as a CBDO 
under this section of the CDBG regulations. It was not intended that 
qualifying organizations would have to meet both (c) (1) and (2); an 
entity can qualify under either standard. HUD has revised the 
introductory language to Sec. 570.204(c)(2) in this final rule to 
clarify that intent. An understanding of this approach is critical in 
assessing the requirements that a CHDO under the HOME program must meet 
in order to qualify under Sec. 570.204 of the CDBG Entitlement 
regulations. A CHDO qualifying under the HOME program may or may not 
meet the general qualification requirements for a CBDO under the CDBG 
Entitlement program, as delineated at Sec. 570.204(c)(1) of this final 
rule. If a CHDO meets those requirements, it may have an area of 
operation as large as the jurisdiction of the recipient, just as any 
other qualified CBDO. The more restrictive jurisdictional limits at 
Sec. 570.204(c)(2)(iii) are only applicable to [[Page 1928]] CHDOs that 
cannot meet the general CDBG Entitlement qualification requirements for 
CBDOs. An example of such an entity would be a CHDO that meets only the 
minimum HOME percentage requirement for low- and moderate-income 
persons on its board (33 percent) and cannot show that it has 
sufficient types of representatives on that board to meet the 51 
percent standard delineated in Sec. 570.204(c)(1)(iv).
    In assessing the comments on this issue, HUD has determined that it 
is appropriate to provide organizations with an additional alternative 
for qualifying as a CBDO under this section of the CDBG regulations. 
Thus, in this final rule, HUD has added a new Sec. 570.204(c)(3) under 
which an organization that does not qualify under either 
Sec. 570.204(c) (1) or (2) may also be determined to qualify as an 
eligible entity under this section if the grantee demonstrates to the 
satisfaction of HUD, through the provision of information regarding the 
organization's charter and by-laws, that the organization is 
sufficiently similar in purpose, function, and scope to those entities 
qualifying under the above-referenced paragraphs. The Department 
intends to have this determination made at the HUD Field Office level.
    Also in this regard, it should be noted that HUD expects that many 
Community Development Financial Institutions meeting the criteria in 
Title I, Subtitle A of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (P. L. 103-325, enacted September 23, 1994) 
will qualify as CBDOs under Sec. 570.204 of the CDBG Entitlement 
regulations. The above-referenced subtitle comprises the Community 
Development Banking and Financial Institutions Act. The purpose of this 
subtitle is to create a Community Development Financial Institutions 
Fund to promote economic revitalization and community development 
through investment in, and assistance to, CDFIs, including enhancing 
the liquidity of such institutions. The CDFI Fund is to be a wholly-
owned Government corporation that will not be affiliated with any other 
agency of the Federal Government. In this final rule, HUD is adding to 
the Entitlement regulations a definition of the term CDFI that 
references the above-noted new legislation. A CDFI is generally defined 
at Section 103 of that Act as an entity that (i) has a primary mission 
of promoting community development; (ii) serves an investment area or a 
targeted population; (iii) provides development services in conjunction 
with equity investments or loans, directly or through a subsidiary or 
affiliate; (iv) maintains accountability to residents of its investment 
area or targeted population; and (v) is not a government agency or 
instrumentality. An ``investment area'' is defined as an area that 
either (i) meets objective criteria of economic distress developed by 
the Fund and has significant unmet needs for loans or equity 
investments; or (ii) is located in a designated Empowerment Zone or 
Enterprise Community. These CDFI criteria are similar to those now set 
forth in Sec. 570.204(c).
    It should again be noted that the requirements of Sec. 570.204 only 
apply to the qualification of CBDOs serving Entitlement jurisdictions 
under the CDBG program. As discussed earlier in this preamble, 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 HCD Act. Any nonprofit organization serving the development 
needs of nonentitlement areas now qualifies under Section 105(a)(15) of 
the Act for the State CDBG program.
    Issue. One commenter also recommended that HUD allow a limited 
partnership in which the managing general partner is an eligible CBDO 
to qualify under Sec. 570.204. The commenter argues that the use of 
low-income tax credits (LITCs) necessitates a limited partnership 
structure and that adding the limited partnership itself as a 
qualifying entity would remove the necessity of having two levels of 
contracts--one between the grantee and the CBDO and one between that 
CBDO and the limited partnership. (1 local government agency)
    Response. Limited partnerships are single purpose entities which 
exist to syndicate and develop one project. It would be difficult to 
construe the definitions of the statutorily eligible entities to 
include limited partnerships. Thus, HUD has decided against expressly 
adding a provision to the regulations to include the type of limited 
partnership described by the commenter. However, in cases in which the 
activities of an LIHTC limited partnership are controlled by a 
Sec. 570.204 qualified entity, usually by that entity either serving as 
the general partner of the limited partnership or establishing such an 
entity as a subsidiary, the Department has accepted that CDBG 
assistance may be provided by the Sec. 570.204 qualified entity to the 
limited partnership for the purpose of carrying out all or part of the 
eligible project. The Department will continue to explore ways of 
removing unnecessary administrative burdens for such projects.
    Issue. Specifically in regard to qualified entities in 
nonentitlement areas, one commenter (a state agency) took issue with 
the discussion of such entities contained in the preamble to the 
proposed rule. The state agency disagreed with HUD's statutory 
interpretation that the term ``nonprofit organizations serving the 
development needs of communities in non-entitlement areas'' excludes 
units of general local government. This interpretation, according to 
the state, would restrict the use of CDBG funds by certain State-
sanctioned local entities.
    Response. The Department has chosen not to accept this comment. The 
preamble to the proposed rule noted that a public nonprofit 
organization which meets Internal Revenue Service requirements for 
nonprofit status may qualify under Section 105(a)(15) of the Act. The 
Department does not define a number of terms (``neighborhood 
revitalization project'', ``community economic development project'', 
``energy conservation project'', ``carrying out an activity'') which 
are significant to the discussion of CBDOs above, in order to give 
States maximum flexibility to implement Section 105(a)(15) within the 
context of their particular situations.

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

    Issue. A total of seven commenters addressed the proposed revisions 
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. This revision 
relates specifically to a proposed presumption of compliance for 
special economic development activities that may be carried out under 
Sec. 570.203 [Sections 105(a) (14) and (17) of the HCD Act] by a 
community development financial institution (CDFI) meeting certain 
criteria. Concerns raised by the commenters included statements both 
for and against the proposed presumption; requests for clarification of 
the types of entities that would qualify as CDFIs; and requests for 
revisions to the ``primarily residential'' and other aspects of the 
regulation. (1 local government agency, 1 state agency, 1 development 
organization, 1 national association, 1 private citizen, and 2 HUD 
Field staff persons)
    Response. Supporting the development and growth of CDFIs can be a 
critical component in the comprehensive revitalization of 
[[Page 1929]] distressed neighborhoods because they often address the 
financing needs of these areas that are otherwise unmet. Existing CDFIs 
have demonstrated their ability to identify and respond to community 
needs for equity investments, loans, and development services. Thus, 
HUD has decided to include a modified version of the proposed 
presumption in this final rule.
    First, it is important to define the types of entities that may 
qualify as CDFIs, as some of the commenters noted. As noted earlier in 
this preamble, HUD is herein adding to the CDBG regulations a 
definition of the term CDFI that references the Title I, Subtitle A of 
the Riegle Community Development and Regulatory Improvement Act of 1994 
(P. L. 103-325, enacted September 23, 1994). Secondly, HUD has 
determined that it is more appropriate to create separate paragraphs in 
Sec. 570.208 of the Entitlement regulations and Sec. 570.483 of the 
State regulations to reflect the options that may be used for 
activities carried out by certain CDFIs, rather than to simply include 
the proposed presumption in Sec. 570.208(a)(1)(i) and 
Sec. 570.483(b)(1). Thus, in this final rule, HUD has added new 
paragraphs under the ``additional criteria'' section of the national 
objective requirements at Sec. 570.208(d)(6) of the Entitlement 
regulations and Sec. 570.483(e)(4) of the State regulations to list the 
options that may be used for CDBG activities carried out by any CDFI 
whose charter limits its investment area to a primarily residential 
area consisting of at least 51 percent low- and moderate-income 
persons. The new paragraphs Sec. 507.208(d)(6)(i) and 
Sec. 570.483(e)(4)(i) cross reference with additional new paragraphs 
Sec. 570.208(a)(1)(v) and Sec. 570.483(b)(1)(iv) of the Entitlement and 
State regulations, respectively. Pursuant to these paragraphs, job 
creation or retention activities carried out by CDFIs meeting the above 
criteria may be presumed to meet the low- and moderate-income area 
benefit criteria. It should be noted that with the area benefit 
presumption applied in this manner, the ``exception criteria'' for 
Entitlement communities cannot be used in this regard. Thus, in order 
to take advantage of the area benefit presumption, the CDFI's 
investment area must be at least 51 percent low- and moderate-income 
regardless of the community's usual area benefit threshold requirement.
    HUD has determined that it is also appropriate to offer a similar 
benefit for job creation or retention activities carried out under 
certain other circumstances. Thus, in this final rule, HUD has also 
added Sec. 570.208(d)(5) in the Entitlement regulations, which is 
cross-referenced in Sec. 570.208(a)(1)(v). Under this provision, job 
creation or retention activities undertaken in an area pursuant to a 
HUD-approved economic revitalization strategy developed in accordance 
with the authority of Sec. 91.215(e) of the Consolidated Plan final 
rule may be presumed to meet the low- and moderate-income area benefit 
criteria. It should be noted that in order to reduce the potential for 
abuse of this provision, HUD is limiting this form of area benefit 
presumption to areas that are primarily residential and contain a 
percentage of low- and moderate-income residents that is no less than 
the percentage computed by HUD pursuant to Sec. 570.208(a)(1)(ii) but 
in no event less than 51 percent. This means that the required low- and 
moderate-income percentage for the area may be significantly higher 
than that which the community generally uses for its area benefit 
activities. For those communities that generally use the ``exception 
criteria,'' the required low- and moderate-income percentage for this 
area benefit presumption is 51 percent. For a community that generally 
is required to meet 51 percent for regular area benefit activities, the 
required low- and moderate-income percentage for this area benefit 
presumption is that percentage level of low- and moderate-income 
persons in the last census block group in the community's highest 
quartile of block groups ranked in order of proportion of low- and 
moderate-income persons, as computed by HUD pursuant to 
Sec. 570.208(a)(1)(ii).
    The Department will develop guidelines for determining when 
grantees should be authorized to take advantage of the benefits of this 
economic revitalization strategy area approach. These guidelines will 
be distributed to both grantees and HUD Field Office staff.
    In developing this approach for the Entitlement program, the 
Department became aware of significant issues concerning how the 
economic revitalization strategy provision might be applied to the 
State program. Therefore, the Department is not implementing comparable 
regulation language for the State program at this time. In order to 
gain public comment, the economic revitalization strategy area concept 
for states will be the subject of a future proposed rule. In the 
meantime, the Department welcomes any comments or suggestions on how 
the economic revitalization strategy area approach might be applied to 
the State CDBG program.
    Two commenters expressed concern about the requirement in 
Sec. 570.208(a)(1)(i) that limits the use of the low- and moderate-
income area benefit provision in general to only those activities that 
serve areas that are ``primarily residential.'' It should be noted this 
requirement is a long-standing provision of the CDBG regulations and 
has served the program well. Thus, HUD has decided not to make any 
changes to that requirement in this final rule. One of the commenters, 
a HUD Field staff person, recommended that a specific exception to the 
``primarily residential'' requirement be made for projects qualifying 
under Sec. 570.204 of the Entitlement regulations [Section 105(a)(15) 
of the HCD Act] because the types of projects made eligible under that 
section, including ``neighborhood revitalization'' and ``community 
economic development,'' appear to lend themselves to an area-wide 
benefit test. Such a change has not been incorporated into this final 
rule. The activities most often carried out under Sec. 570.204 [Section 
105(a)(15)] involve the provision of housing, and Section 105(c)(3) of 
the HCD Act specifically precludes the use of a low- and moderate-
income area benefit national objective claim for such activities. 
However, in recognition of the merit of the recommendation, HUD has 
made certain changes in this final rule to ease grantees' burden in 
tracking low- and moderate-income national objective compliance for 
housing activities in certain areas. These changes are more fully 
discussed later in this preamble.
    One commenter, a national association, expressed support for a 
supposed ``revision to permit area benefit . . . without requiring that 
the area be defined in terms of census tracts or other official 
boundaries.'' The commenter appears to misunderstand current 
requirements. While the CDBG regulations do require entitlement 
grantees to use, to the greatest extent feasible, the most recently 
available decennial census data to support the low- and moderate-income 
character of the area (and Sec. 570.208(a)(1)(iv) has been modified to 
incorporate a reference to the new Sec. 570.208(a)(1)(v) in this 
regard), there is no current requirement that the service area be 
defined along census tract or other official boundaries. The language 
included in this regard in Sec. 570.208(a)(1)(i) (for Entitlements) and 
Sec. 570.483(b)(1) (for States) in the proposed rule is unchanged from 
current requirements. [[Page 1930]] 

National Objective Compliance by Microenterprise Assistance Activities

    Issue. A total of 15 commenters addressed the proposed new 
Sec. 570.208(a)(2)(iii) to be added to the Entitlement regulations and 
the proposed new Sec. 570.483(b)(2)(iv) to be added to the State 
regulations to specifically provide the limited clientele national 
objective option for activities qualifying under the new 
microenterprise assistance eligibility category. Many of these 
commenters specifically supported the provision, and a few specifically 
opposed it. Various commenters requested revisions to or clarification 
of certain aspects of the provision, most of which related to the 
manner in which jobs created by such activities would be considered (2 
local government agencies, 3 state agencies, 4 national associations, 4 
development organizations, 1 private citizen, and 1 HUD Field staff 
person).
    Response. As discussed in the preamble to the proposed rule, 
activities carried out under the new microenterprise eligibility 
category are not statutorily subject to the same low- and moderate 
income national objective limitations as are generally applicable to 
special economic development activities carried out under Sec. 570.203 
[and Sections 105(a)(14) & (17) of the HCD Act]. 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. While many commenters 
specifically supported the subject proposed provision, a few commenters 
specifically opposed it, particularly the fact that only 51 percent of 
the owners of microenterprises and persons developing them would be 
required to be low- and moderate-income persons. Thus, there would be 
the potential to permit sizable numbers of non-low- and moderate-income 
persons to receive financial assistance to develop a for-profit 
business. HUD has found these arguments to be compelling. Thus, the 
Department has revised the subject limited clientele provision in this 
final rule to restrict its use to qualify only those assisted owners of 
microenterprises and persons developing microenterprises who are low- 
and moderate-income persons. This change should not be a significant 
issue for many of the microenterprise activities assisted under the 
CDBG program. Many such programs are designed to provide a means to 
help disadvantaged persons become more economically self-sufficient and 
are thus often targeted to persons who meet income qualification 
criteria at least as restrictive as the CDBG definition of low and 
moderate income. Also, to allow for some continuity of service to a 
low- or moderate-income person initially assisted under a 
microenterprise activity who later may no longer meet the income 
guidelines after the microenterprise actually becomes operational, the 
Department has retained the option that permits, for purposes of 
meeting this national objective requirement, any person determined to 
be of low or moderate income to be presumed to continue to qualify as 
such for up to a three-year period before that person would have to 
requalify. The language in this final rule also clarifies that under 
this new limited clientele provision, it is only owners of 
microenterprises and persons developing microenterprises that are 
considered for national objective purposes and not employees of such 
businesses who are not part-owners.
    While the new limited clientele provision has been restricted to 
only low- and moderate-income persons, activities qualifying under the 
new microenterprise eligibility category that may serve non-low- and 
moderate-income entrepreneurs may still be assisted under the criteria 
for creation and/or retention of jobs principally for low- and 
moderate-income persons. Under that national objective claim, all 
employees of a microenterprise, including the owner(s), are considered, 
and a grantee 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, as implemented in this final rule at Sec. 570.208(a)(4) 
of the Entitlement regulations and Sec. 570.483(b)(4) of the State 
regulations. These presumptions cannot be used under the new limited 
clientele provision because the 1992 Act added them as a new Section 
105(c)(4) of the HCD Act which refers only to activities qualifying 
under the national objective of job creation or retention for low- and 
moderate-income persons.
    One commenter asked that HUD specifically name examples of low- and 
moderate-income clientele. Certain such examples that apply to all 
activities benefiting low- and moderate-income persons are included in 
Sec. 570.506(b) of the Entitlement regulations.
    Two commenters requested clarification as to whether HUD's 
proposing the limited clientele provision for microenterprise 
assistance activities means that ``cost per job'' created will not be a 
primary consideration in the evaluation of a CDBG-funded 
microenterprise program. ``Cost per job'' is not a primary HUD 
consideration for any microenterprise assistance activities carried out 
under the new separate microenterprise eligibility category. Such a 
calculation only comes into play in the public benefit standards 
(established elsewhere in this final rule), which are not statutorily 
applicable to activities carried out under the new microenterprise 
eligibility category. As with any CDBG activity, however, grantees have 
the flexibility to add additional local criteria for activity 
evaluation. Also, given the general requirement that all costs charged 
to the CDBG program must be necessary and reasonable for the proper and 
efficient administration of the program, HUD expects grantees to 
consider cost in relation to results for all activities and to take 
steps to curb unusually high costs.

National Objective Compliance for Employment Support Activities

    As delineated earlier in this preamble under the discussion of the 
new Sec. 570.203(c) economic development services provision in the 
Entitlement regulations, HUD is aware of various proposals under which 
certain entities have indicated a willingness to train low- and 
moderate-income persons for jobs and/or provide such persons with other 
employment opportunities, but these entities cannot agree that 51 
percent of all assisted persons will be low- or moderate-income. HUD 
believes that such proposals can often provide valuable opportunities 
for employment of low- and moderate-income persons and that a way 
should be found to permit CDBG funds to assist such efforts. Thus, HUD 
is amending the low- and moderate-income limited clientele national 
objective requirements in this final rule [with a new 
Sec. 570.208(a)(2)(iv) in the Entitlement regulations and a new 
Sec. 570.483(b)(2)(v) in the State regulations] to authorize the use of 
CDBG funds for such activities that provide training and/or other 
employment support services in limited circumstances. In order to 
qualify under this provision, CDBG assistance for the project must be 
limited to the provision of such training and/or supportive services; 
the percentage of the total project cost borne by CDBG may not exceed 
the percentage of all persons assisted who are low or moderate income. 
HUD has included this provision under the limited clientele category 
rather than the job creation or retention national objective category 
because while such use of CDBG funds solely for job training and/or 
supportive services can often be considered to [[Page 1931]] ``involve 
employment'' of low- and moderate-income persons (reference Section 
105(c)(1) of the Act), they cannot generally be considered to directly 
``create'' or ``retain'' jobs as those terms are used in the CDBG 
regulations.

National Objective Standards for Low- and Moderate-Income Housing 
Activities

    As noted under the low- and moderate-income area benefit discussion 
earlier in this preamble, HUD has added in this final rule new 
paragraphs Sec. 570.208(d)(5) and (6) in the Entitlement regulations 
and Sec. 570.483(e)(4) in the State regulations. These paragraphs lay 
out various national objective options for activities undertaken in 
certain lower-income areas either by a CDFI or (in Entitlement 
communities) pursuant to a HUD-approved economic revitalization 
strategy. Paragraph (ii) of each of these new sections refers to 
housing activities carried out under these circumstances, and they are 
cross referenced in Sec. 570.208(a)(3) in the Entitlement regulations 
and Sec. 570.483(b)(3) in the State regulations in this final rule. As 
noted earlier, Section 105(c)(3) of the Act limits the manner in which 
housing activities may be considered to benefit low- and moderate-
income persons, and it precludes the use of an area benefit claim for 
such activities. As an alternative, the new provisions in this final 
rule permit all housing activities carried out under the delineated 
limited circumstances to be grouped together and considered as a single 
structure for purposes of complying with the low- and moderate-income 
housing national objective requirements. (For example, a grantee 
providing rehabilitation assistance to 10 single-family housing units 
in such an area could classify all 10 units as meeting the low- and 
moderate-income benefit national objective if at least six of the units 
were occupied by low- and moderate-income persons.) For the calculation 
of the overall low- and moderate-income benefit level of a grantee's 
CDBG program, such housing is still subject to the limitation on 
benefit to low- and moderate-income persons relative to activity costs, 
pursuant to Sec. 570.200(a)(3)(iv) of the Entitlement regulations and 
Sec. 570.484(b)(4) of the State regulations.

National Objective Standards for Benefiting Low- and Moderate-Income 
Persons Through the Creation or Retention of Jobs

Presumptions Added by 1992 Act

    Issue. A total of 19 commenters addressed the general manner in 
which HUD proposed to implement the presumptions for determining an 
employee's status as a low- and moderate-income person that were added 
to the HCD Act as a new Section 105(c)(4) by Section 806(e) of the 1992 
Act for job creation and retention activities. Of the total number of 
commenters, 11 clearly indicated their support for the proposed change, 
and five stated their opposition. Most of the support comments were 
based on the reduced burden and ``less intrusive'' means for 
determining the low- and moderate-income status of employees. Most of 
the comments opposing the proposed change referenced the fact that the 
proposed rule used only the minimum test for Empowerment Zone and 
Enterprise Community census tract. Concern was particularly expressed 
that there was no reference to the ``pervasive poverty, unemployment, 
and general distress'' requirement for Empowerment Zone and Enterprise 
Communities. (6 local government agencies, 6 national associations, 1 
state agency, 3 development organizations, 2 private citizens, and 1 
HUD Field staff person)
    Response. After a thorough review of all of the above comments and 
the applicable statutory references at Title XIII, Chapter I, 
Subchapter C, Part I of the Omnibus Budget Reconciliation Act of 1993 
regarding the eligibility criteria for Empowerment Zones and Enterprise 
Communities, HUD has determined that the presumptions added by the 1992 
Act should be implemented in a more stringent manner than was set forth 
in the proposed rule. The Department particularly agrees with those 
commenters who noted that the ``pervasive poverty, unemployment, and 
general distress'' eligibility requirement for Empowerment Zone and 
Enterprise Communities should be reflected in the implementation of the 
subject low- and moderate-income presumptions for job creation and 
retention activities under the CDBG program. Thus, a new paragraph 
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new 
paragraph Sec. 570.483(b)(4)(v) of the State regulations have been 
added to define the requirements a census tract (or block numbering 
area) must meet in order to qualify for the presumptions added by the 
1992 Act. Under these provisions, a census tract must, in part, 
demonstrate pervasive poverty and general distress by meeting at least 
one of three delineated standards. Two of these standards relate to the 
poverty levels in the various block groups comprising the census tract. 
The third standard provides a grantee with the option of requesting a 
determination from HUD that a census tract meets the ``pervasive'' test 
based on other objectively determinable signs of general distress. The 
Department intends to have the subject determinations made at the HUD 
Field Office level.
    A conforming change to the new Sec. 570.506(b)(7) of the 
Entitlement regulations regarding records that need to be maintained 
for the subject presumptions is also included in the final rule.
    Issue. A total of 10 commenters responded to HUD's specific request 
for comment as to whether tighter presumption standards should be 
established for census tracts that comprise or include any part of a 
community's central business district (CBD), as discussed in the 
Empowerment Zone and Enterprise Community legislation. Six of the 
commenters wanted no special standards for CBDs. Four of the commenters 
argued that there must be tighter standards for such areas given the 
statutory eligibility criteria for Empowerment Zones and Enterprise 
Communities (4 local government agencies, 3 national associations, 1 
development organization, and 2 private citizens).
    Response. After a thorough review of all of the above comments and 
the applicable statutory references, HUD has determined that tighter 
presumption standards must be established for CBDs. The statutory 
arguments are compelling. Thus, in the new paragraph 
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new 
paragraph Sec. 570.483(b)(4)(v) of the State regulations added by this 
final rule, HUD has included language similar to that which appears in 
the Empowerment Zone and Enterprise Community regulations regarding 
this issue, establishing a 30 percent poverty standard for any census 
tract that includes any portion of a CBD (as that term is used in the 
most recent Census of Retail Trade).
    Issue. Two commenters recommended that HUD revise the proposed rule 
language to include census tracts that qualify for Empowerment Zone or 
Enterprise Community eligibility under that program's special rules 
relating to the determination of poverty rates for census tracts with 
small populations, particularly those tracts that are more 
[[Page 1932]] than 75 percent zoned for commercial or industrial use (1 
local government agency and 1 development organization).
    Response. HUD has determined that it is not appropriate to revise 
the regulations implementing the CDBG presumptions to include such 
tracts in general. While the Empowerment Zone/Enterprise Community 
legislation does permit these tracts to be considered as passing the 
minimum poverty tests, this is done mainly in the context of qualifying 
the tract as part of an overall area to be designated. Because the CDBG 
presumptions apply only on an individual census tract basis, the 
Department has determined that including such tracts without limitation 
would unduly broaden the scope of the subject presumptions. However, it 
is recognized that many federally designated Empowerment Zones and 
Enterprise Communities could include such census tracts. Thus, the new 
paragraph Sec. 570.208(a)(4)(v) of the Entitlement regulations and a 
new paragraph Sec. 570.483(b)(4)(v) of the State regulations added in 
this final rule to implement the CDBG presumptions permit any census 
tract that is part of a federally designated Empowerment Zone or 
Enterprise Community to qualify for the CDBG presumption regardless of 
whether it meets the other general criteria delineated in the 
regulation.
    Issue. Several commenters raised other concerns that relate to the 
statutory bases for the subject presumptions of a person's low- and 
moderate-income status for CDBG activities carried out under the 
national objective of job creation or retention. Issues raised 
included: concerns regarding the use of census tract data instead of 
block group or ``neighborhood'' data; a recommendation to permit 
communities to use data obtained through a survey; questions as to why 
one of the presumptions only applied to the residence of the employee 
while the other applied to either the employee's residence or the 
location of the assisted business; and concerns about the 
interpretation of the terms ``assisted business'' and ``job under 
consideration'' as used in the proposed rule, as opposed to the term 
``assisted activity'' as used in the Act (4 national associations and 1 
private citizen).
    Response. Section 105(c)(4) of the Act, as added by Section 806(e) 
of the 1992 Act, which expressly authorizes the subject low- and 
moderate-income presumptions for job creation and retention activities, 
specifically refers to ``census tracts.'' Thus, overall tract data must 
be used in determining these presumptions. In regard to the presumption 
that is determined by the tract meeting what Section 105(c)(4) calls 
``Federal enterprise zone eligibility criteria,'' it is noted that the 
Empowerment Zone/Enterprise Community legislation requires poverty 
rates to be determined using the most recent decennial census data 
available. Thus, this requirement is carried over into a new paragraph 
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new 
paragraph Sec. 570.483(b)(4)(v) of the State regulations added in this 
final rule to implement the related CDBG presumption. The other CDBG 
presumption, which is based on the low- and moderate-income character 
of the census tract in which an employee resides, does not carry with 
it the specific requirement that the most recent decennial census data 
available must be used. Thus, while HUD expects grantees to follow the 
general CDBG rule of using such census data to the fullest extent 
feasible, it would be possible for a grantee to conduct a survey to 
support a census tract's qualification for that presumption. However, 
given the statutory ``census tract'' language noted above, the area for 
which such a survey would be undertaken must coincide with the census 
tract boundary. It is further noted that this latter presumption only 
applies to a census tract in which an employee resides and not to the 
location of the assisted economic development project because of the 
statutory language in Section 105(c)(4).
    In expressing concern over the possible interpretation of the terms 
``assisted business'' and ``job under consideration,'' as used in the 
regulations implementing the broader presumption, one commenter gave 
two examples. First, the commenter states that assistance to a ``branch 
office'' located in a qualified tract should be able to use the 
presumption resulting from ``Federal enterprise zone eligibility 
criteria'' even if the business' principal office is located elsewhere. 
This is entirely consistent with the language included in the new 
paragraph Sec. 570.208(a)(4)(iv) of the Entitlement regulations and the 
new paragraph Sec. 570.483(b)(4)(iv) of the State regulations. In using 
the term ``assisted business'' in those portions of the rule, HUD does 
not intend to imply that the business' main office or corporate 
headquarters must be located in a qualified tract in order to use the 
presumption. The regulatory language is designed to provide sufficient 
restrictions to prohibit businesses from establishing only a ``shell'' 
office to make use of the location presumption while the actual 
activity being assisted is in fact being carried out elsewhere. 
Assistance to legitimate ``branch offices'' is not restricted under the 
regulatory language. As a second example, the commenter states that a 
``job training center or small business assistance office'' should be 
able to use the presumption even though such a facility ``helps people 
who do not yet have businesses nor specific `jobs under 
consideration'.'' It is not clear how this second example would be able 
to use the presumption given the statutory language at Section 
105(c)(4). Based on that provision, the new presumptions can only be 
used for activities qualifying under the national objective of job 
creation or retention for low- and moderate-income persons. Job 
training centers or business assistance offices such as those which 
appear to be described in the commenter's second example generally 
would not qualify under that national objective and would thus not be 
able to use the presumption.
    Issue. Two commenters raised questions about how the subject 
presumptions would be implemented. The first question relates to 
whether the presumptions based on an employee's residence could be used 
together with the traditional way of documenting an employee as a low- 
or moderate-income person in order to meet the overall 51 percent low- 
and moderate-income requirement for jobs created or retained by a 
particular assisted business. One of the commenters also asked what 
documentation HUD will require to verify that jobs are created when the 
presumption on the basis of the location of the business is used. (1 
state agency and 1 private citizen)
    Response. In regard to the first question, it is entirely 
permissible for a grantee, in a single activity, to combine counting 
employees presumed to be low- and moderate-income persons on the basis 
of their residence with those employees documented as being such 
persons under more traditional means. Any concerns that this could 
possibly lead to the company and/or the grantee being accused of 
``singling out certain individuals'' for requests for income 
information (as one of the commenters states), is as unfounded as the 
``privacy'' concerns certain persons have raised for several years in 
discussions of this section of the CDBG regulations. In regard to the 
second question, a grantee qualifying a business based on its location 
must still obtain sufficient documentation to demonstrate that jobs are 
actually created or retained by the activity. This documentation would 
be [[Page 1933]] similar to that which the grantee currently receives 
for such activities, with the exception that any employee income 
information would be omitted.
    Issue. Two commenters recommended that the final rule contain 
language which would make it easy for low- and moderate-income people 
to challenge an ``unwarranted presumption.'' They recommend that HUD 
reiterate the regulatory ``substantial evidence to the contrary'' 
language in this section of the regulations and add wording that would 
encourage residents to submit challenges and direct HUD to quickly 
respond to such challenges. (1 national association and 1 development 
organization)
    Response. HUD cannot accommodate this recommendation. The subject 
presumptions of a person's low- and moderate-income status for job 
creation or retention activities is specifically authorized by statute. 
It does not matter if the presumption appears ``unwarranted'' in a 
specific case; if the activity meets the requirements delineated in 
Section 105(c)(4) of the Act, it is entitled to use the presumption. 
There is a distinct difference between these presumptions and those 
that are HUD has otherwise established only on a regulatory basis under 
the limited clientele standards.

Job Creation or Retention by Public Infrastructure Improvements

    The Department proposed another amendment to Sec. 570.208(a)(4) of 
the CDBG Entitlement regulations and Sec. 570.483(b)(4) of the State 
regulations concerning the requirements for demonstrating national 
objective compliance by CDBG-assisted infrastructure improvements. 
Eight entities commented on this proposed change: 4 states, 2 national 
associations, one HUD staff person and one citizen. Nearly all 
commenters supported HUD's efforts to provide more flexibility in this 
area. Several comments suggested specific revisions to HUD's proposal.
    Issue. Communities often over-design public facilities to 
accommodate future growth; this frequently makes sense for the 
community. However, CDBG funds should only be used to pay costs 
associated with the capacity needed by presently-identified businesses, 
or else the grantee should track future job creation for three years.
    Response. The Department has chosen not to accept this suggestion. 
As noted in the preamble to the proposed rule, the Department proposed 
shortening the three-year tracking period to one year because it has 
received numerous comments from states that the existing State CDBG 
regulations are unduly burdensome. The Department believes it would be 
cumbersome for HUD staff to attempt to identify and prorate 
construction costs associated with current vs. future capacity needs; 
this could place HUD staff in the role of second-guessing grantees' 
engineering reports.
    Issue. Two commenters requested that projected, rather than actual, 
job creation/retention be compared to the $10,000 CDBG cost-per-job 
threshold. Because grantees cannot be completely certain how many jobs 
will actually be created, there may be instances where the projected 
cost per job is less than $10,000, but the actual cost per job is over 
$10,000.
    Response. The Department concurs with these comments. The 
Department is concerned that grantees might intentionally overstate the 
projected number of jobs so as to take advantage of the less stringent 
requirements for projects whose per-job cost is less than $10,000. 
However, it is impossible for job creation or retention estimates to be 
100% accurate. As the proposed regulations are worded, a grantee could 
be retroactively held responsible for tracking a wider universe of 
businesses for job creation/retention if the actual cost per job was 
over $10,000, even though the projected cost per job was under $10,000. 
In the final regulations, references to actual vs. projected job 
creation/retention have been eliminated. Instead, the regulations refer 
to jobs ``to be created or retained.''
    In the regulations on public benefit documentation, the Department 
indicates that, where a grantee shows a pattern of substantial 
variation between projected and actual benefits received, a grantee 
will be expected to take actions to improve the accuracy of its 
projections. The Department has not included comparable language in 
this section. If, for purposes of this section, a grantee's projections 
show a pattern of substantial variation from actual job creation/
retention, the Department will expect grantees to take steps to improve 
the accuracy of their projections.
    Issue. One commenter recommended that, rather than requiring 
grantees to conduct an assessment of businesses in the service area of 
the public facility or improvement, the rule should require an 
``appropriate'' review for public improvement projects undertaken to 
create or retain jobs.
    Response. The Department does not accept this comment, for two 
reasons. This suggestion confuses requirements for meeting a national 
objective with requirements for demonstrating the eligibility of an 
activity. Equally significant is that the new statutory requirements 
regarding evaluating and selecting economic development projects 
effectively replace the ``appropriate'' determinations previously 
required. The Guidelines for Evaluating Project Costs and Financial 
Requirements are not applicable to public improvement projects; a 
grantee may choose to develop guidelines for evaluating public 
improvement projects if it wishes. The Department has chosen to apply 
the public Benefit standards only to those public improvement projects 
(undertaken to create or retain jobs) for which the projected cost per 
job is $10,000 or more.
    Issue. HUD should restrict the use of CDBG funds in situations 
where economic development infrastructure activities cross privately-
owned property. This would be construed as a potential windfall to the 
private property owner or company.
    Response. The Department has chosen not to accept this 
recommendation. HUD is unaware of any evidence that this is a 
significant problem in the CDBG program. As the commenter acknowledges, 
states and localities have legal mechanisms to govern hookup access to 
public utilities.
    Issue. One commenter noted that the proposed Entitlement and State 
regulation language differs regarding businesses with which agreements 
must be signed; the commenter prefers the language in the proposed 
State CDBG regulation.
    Response. The Department has revised the relevant sections [which 
are now Sec. 570.483(b)(4)(vi)(F) and Sec. 570.208(a)(4)(vi)(F) to 
provide greater consistency between the two paragraphs. In revamping 
this section of the regulations, the Department has eliminated 
references to agreements with businesses.
    Issue. Two states urged the Department to delete portions of the 
proposed regulations: the requirement for conducting an assessment of 
businesses in the service area of the public facility or improvement; 
the requirement that job creation should be tracked for each business 
until the business' job creation/retention obligation is fulfilled; 
and, where the cost per job is $10,000 or more, applying the time 
period for tracking businesses to just the business(es) with signed 
agreements for which the improvement is undertaken.
    Response. Based on relevant statutory language in the Housing and 
Community Development Act, the Department disagrees with the 
implication that documentation regarding national objectives should 
cease once the originally-projected [[Page 1934]] number of jobs has 
been created. Furthermore, these recommendations would eliminate the 
distinction in requirements between activities in which the cost per 
job is $10,000 or more and those in which the cost per job is under 
$10,000. Based on the data from the State CDBG program, the $10,000 per 
job created/retained threshold appears to be significantly above the 
median costs for public facility/improvement projects of this sort; few 
projects should thus be subject to the stricter requirements. The 
Department believes that stricter requirements are appropriate for 
projects costing $10,000 per job or more, because less public benefit 
is being obtained per CDBG dollar expended.
    However, the Department has taken seriously the underlying desire 
for simplicity, and as a result has worked to streamline this section 
of the regulations. Eliminated in the final regulations is the 
requirement that the recipient undertake an assessment of all 
businesses in the service area of the public facility/improvement to 
determine which businesses may create/retain jobs as a result of the 
public facility/improvement. Grantees are cautioned, however, that 
should the CDBG per-job cost of the project be $10,000 or more, the 
recipient must still aggregate jobs created/retained by all businesses 
which locate or expand in the service area of the public improvement/
facility. Grantees will thus need some mechanism for identifying such 
businesses.
    Issue. One state requested that the proposed public improvement-job 
creation requirements for the State program be made retroactively 
applicable to projects funded by states after December 9, 1992. That 
was the effective date of the current State CDBG regulations, in which 
the existing requirements concerning public improvement-job creation 
activities were first effected.
    Response. A recent U.S. Supreme Court decision casts uncertainty on 
the constitutionality of retroactive rulemaking. The Department feels 
an attempt to provide some retroactive flexibility through the rule-
making process could be legally problematic. States may, as always, 
request a waiver of the existing regulations for individual cases.
Other Job Creation/Retention Issues
    Issue. One commenter raised a concern regarding the provision at 
the new Sec. 570.208(a)(4)(vi)(B) of the Entitlement regulations which 
permits the aggregation of jobs for loan funds administered by a 
subrecipient where CDBG pays only for the staff and overhead and loans 
are made exclusively from non-CDBG funds. The commenter recommended 
that HUD change the phrase ``. . . jobs created by all the businesses 
receiving loans during each program year'' to ``. . . jobs projected by 
all the businesses receiving . . .'' This recommendation is based on 
the claim that during the early years of a program's operation, ``few 
jobs may actually have been created, even though many loans have been 
`committed.''' (1 private citizen)
    Response. The commenter appears to misunderstand the subject 
provision. The regulation does not measure the number of jobs actually 
created in each program year. Instead, it measures all the jobs created 
as a result of the CDBG assistance by all the businesses that receive 
loans in each program year, regardless of when the jobs are actually 
created.
    In developing this final rule, HUD has pursued additional job 
aggregation options in consideration of the many comments received in 
support of less burdensome job tracking. Also, in considering the 
comments on the public benefit standards, HUD has determined that it is 
appropriate to offer certain flexibility for activities that serve 
important national interests. Thus, in this final rule, HUD is 
delineating three additional instances under which jobs created or 
retained may be aggregated for purposes of determining compliance with 
national objective requirements. Aggregation of jobs is now also 
permitted for (1) activities providing technical assistance to for-
profit businesses; (2) activities meeting the criteria in the public 
benefit standards at Sec. 570.209(b)(2)(v) of the Entitlement 
regulations and Sec. 570.482(f)(3)(v) of the State regulations; and (3) 
for activities carried out by a CDFI. To reflect this, 
Sec. 570.208(a)(4)(vi) of the Entitlement regulations and 
Sec. 570.483(b)(4)(vi) of the State regulations have been amended. In 
this regard, it should also be noted new paragraphs Sec. 570.208(d)(7) 
and Sec. 570.483(e)(5), added to the Entitlement and State regulations 
respectively, require that for an activity that may meet the standards 
for more than one of these options, the grantee may elect only one 
option under which to qualify the activity. No ``double counting'' is 
permitted.
    Issue. One commenter raised a concern regarding the requirement 
regarding the criteria now at Sec. 570.208(a)(4)(iii) and 
Sec. 570.483(b)(4) making jobs ``available to'' low- and moderate-
income persons, particularly the ``no special skills'' requirement 
unless the business agrees to hire unqualified people and then provide 
training. The commenters argues that HUD should not ``presume'' that 
low- and moderate-income persons have no education because many such 
persons may have a community college or vocational technical education 
and still be underemployed or poorly paid because of various factors. 
The commenter also notes that in certain cases, the jobs to be created 
by an assisted activity will not actually be created for a year or 
more, which would provide time for necessary training before the 
business completes its hiring process. (1 national association)
    Response. The reference requirement is important to ensure that no 
special skill or education requirements form a barrier to low- and 
moderate-income persons being considered for the jobs under the 
``available to'' option under Sec. 570.208(a)(4). If a community knows 
that there is a pool of more skilled low- and moderate-income persons 
available, it can always choose to demonstrate compliance with the 
national objective requirement under the ``held by'' option where skill 
level is not considered. The new low- and moderate-income presumptions 
should also make it easier for grantees to use the ``held by'' option. 
In regard to the issue of the timing of the training versus hiring, the 
Department wants to ensure that any training claimed under the new 
``economic development services'' provision at Sec. 570.203(c) of the 
Entitlement regulations and Sec. 570.482(d) of the State regulations is 
limited to persons whom the respective business has actually agreed to 
employ and not to include training just to provide a general ``pool'' 
of persons from which a business may possibly hire. This is important 
in distinguishing ``economic development services'' that qualify as 
part of the ``delivery costs'' of a related economic development 
project from more generic public service activities that qualify under 
Sec. 570.201(e) of the Entitlement regulations. It is noted that under 
this final rule, activities qualifying under either of these 
eligibility categories can also take advantage of the new low- and 
moderate-income limited clientele option at Sec. 570.208(a)(2)(iv) of 
the Entitlement regulations and Sec. 570.483(b)(2)(v) of the State 
regulations in certain circumstances.
Request for Comment on Certain Other Job Creation/Retention Issues Not 
Contained in the Proposed Rule
    In addition to a discussion of specific regulatory revisions, the 
preamble to the May 31, 1994, proposed rule also contained a specific 
request for public comment on certain other issues which HUD is 
examining in an attempt to [[Page 1935]] 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. These issues included: (1) whether any further low- 
and moderate-income presumptions should be made for job creation or 
retention activities; (2) whether any modification should be made to 
the CDBG job retention requirement to document that jobs claimed as 
being retained would actually be lost without the CDBG assistance; and 
(3) whether any modification should be made to the requirement in job 
retention activities 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. (Please refer to the preamble to the proposed rule 
published in the Federal Register on May 31, 1994, for a more complete 
discussion of these issues.)
    A sizable amount of public comment in response to these issues was 
received. Many of the comments offered interesting suggestions, and HUD 
will be publishing an additional proposed rule in response to some of 
the recommendations provided. Such items must go through the proposed 
rulemaking process in order to provide the general public with an 
opportunity to comment on them before they would be published for 
effect. The public comments received on these issues based on the 
request contained in the preamble to the May 31, 1994, proposed rule 
will be discussed fully in the preamble to the new proposed rule.

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

    The proposed rule included a revision to Sec. 570.208(b)(1)(ii) of 
the Entitlement regulations and Sec. 570.483(c)(1)(ii) of the State 
regulations. This proposal would allow designated slum/blighted areas 
to qualify under the slum/blight national objective if the area 
exhibited pervasive economic disinvestment in the form of high turnover 
or vacancy rates in previously occupied commercial or industrial 
buildings.
    In addition, the Department sought comment on whether instances of 
environmental contamination should be considered as evidence of 
blighting conditions. No specific regulatory language was proposed in 
that area, however.
    The Department received valuable input on both topics relating to 
the slum/blight national objective. As a result, the Department has 
decided to propose additions to the slum/blight criteria to accommodate 
environmental contamination, and to revise its initially proposed 
criteria regarding pervasive economic disinvestment. The existing 
regulations would be significantly restructured to accommodate these 
changes.
    The Department has decided to publish a new set of proposed 
regulations dealing with the slum/blight national objectives. The 
comments received by the Department on slum/blight issues will be 
discussed in the preamble to those new proposed regulations.

Guidelines for Evaluating and Selecting Economic Development Activities 
for CDBG Assistance

    The proposed rule contained language implementing 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. The 
proposed regulations described guidelines for evaluating certain 
economic development activities assisted with CDBG funds. These 
guidelines consist of two parts: guidelines and objectives for 
evaluating project costs and financial requirements, the use of which 
are not mandatory, and public benefit standards, which are mandatory.
    Numerous comments were received on various aspects of this section 
of the proposed regulations. The comments can be categorized into 
groups of issues, and will be discussed by category of issue.

Underwriting Guidelines--General

    The proposed rule described HUD's Guidelines and Objectives for 
Evaluating Project Costs and Financial Requirements (the ``underwriting 
guidelines''); the proposed guidelines themselves were published as a 
separate Federal Register notice on the same day. Sixteen commenters 
commented on HUD's proposed Guidelines and Objectives for Evaluating 
Project Costs and Financial Requirements: 5 local governments, 4 
national associations, 2 States, 3 HUD Field Office staffs, one citizen 
and one business development entity. Four commenters expressed overall 
support for the approach proposed to be taken by the Department in 
implementing the requirements of the 1992 Act.
    Issue. Three commenters stated that the underwriting guidelines 
themselves should be included in the text of the regulations, rather 
than in a separate Federal Register notice. By not being part of the 
regulations themselves, commenters felt that the guidelines would be 
more easily overlooked or forgotten about in future years.
    Response. These issues were carefully considered by the Department 
in developing the proposed rule. The rule stated that the use of the 
underwriting guidelines proposed at Sec. 570.209(a) and Sec. 570.482(e) 
is not mandatory. To further demonstrate this point, the specific 
elements of the underwriting guidelines were not included within the 
text of the proposed rule itself. Instead, they were proposed to be 
published in a concurrent but separate Federal Register notice. 
Outweighing the conmmenters' concerns is the fact that, while Congress 
directed that the guidelines be published by regulation, the use of the 
underwriting guidelines is not mandatory. To publish non-binding 
guidance within a set of otherwise binding regulations would be 
contradictory and confusing. In disseminating information on the final 
regulations, the Department will take steps to include the guidelines 
along with the final regulations, to help ensure that the Federal 
Register notice does not get overlooked.
    Issue. Three widely divergent comments were received regarding the 
applicability of the underwriting guidelines to microenterprise and 
small business assistance programs. One commenter argued that 
``appropriate determinations'' should not be required on a loan-by-loan 
basis for microenterprise activities, but could be addressed by overall 
program design. Another argued that the underwriting guidelines should 
apply to microenterprise assistance activities, so that communities 
will have a stronger regulatory framework upon which to develop their 
own guidelines for evaluating microenterprise loans. A third commenter 
stated that small businesses which do not qualify as microenterprises 
should be given some relief from the underwriting criteria and 
financial documentation requirements.
    Response. The 1992 Act specifies that HUD is to develop guidelines 
for evaluating and selecting economic development activities funded 
under sections 105(a) (14), (15) and (17) of the Act. Microenterprise 
assistance activities were made separately eligible under the new 
Sec. 105(a)(23) of the 1992 Act, and thus were not subjected to the 
underwriting guidelines by Congress. The Department feels it is 
inappropriate to extend coverage of the underwriting guidelines to 
programs which provide assistance exclusively to microenterprises and 
which are eligible under Sec. 105(a)(23). Grantees may 
[[Page 1936]] develop their own underwriting guidelines for the 
evaluation of microenterprise assistance programs. However, if a 
grantee designs a program to provide assistance to both 
microenterprises and other small businesses, the public benefit 
standards and underwriting guidelines apply to the entire program, and 
grantees will be expected to evaluate each instance of assistance 
individually. Regarding the third comment, both the proposed and the 
final regulations state that different levels of review and financial 
documentation are appropriate for different sizes of projects and 
businesses; grantees are encouraged to develop guidelines which take 
into consideration the size of the business being assisted.
    From the first of these comments, as well as from several comments 
addressed elsewhere in this preamble, it is clear that the relationship 
between the financial guidelines, the public benefit standards and the 
``appropriate determination'' requirements (which the Department has 
heretofore relied on) is not understood. In the 1987 ``Stokvis Memo'' 
and in the 1992 ``Kondratas Memo'', the Department outlined its policy 
for implementing the statutory requirement that assistance to private 
for-profit entities must be ``appropriate to carry out an economic 
development project''. The Department believes that the new 
underwriting guidelines and public benefit standards, taken together, 
effectively comprise a methodology for determining that such assistance 
is appropriate, and supplant the previously-required ``appropriate 
determinations''.
    It is important to note that the financial and public benefit 
standards cover a wider range of activities than did the ``appropriate 
determinations'', including all economic development activities funded 
under sections 105(a) (14) and (15) of the Act. Grantees are encouraged 
to develop guidelines to cover the evaluation and selection of other 
types of economic development activities, beyond those statutorily 
required. However, HUD will not evaluate or enforce locally-developed 
guidelines covering economic development activities other than those 
described in the regulations.
    Issue. Three commenters expressed apprehension about a statement 
contained in the preamble to the proposed regulations. The Department 
noted that, in cases where an activity receiving CDBG financial 
assistance fails to meet other applicable program requirements, such as 
the public benefit standards or the national objective requirements, 
HUD will consider the extent to which the recipient conducted prudent 
underwriting in determining appropriate sanctions to be imposed on the 
recipient for such noncompliance. Commenters questioned the consistency 
of this statement with statutory language, felt this represented a 
``gotcha'' mentality by HUD, and opened the door to HUD ``second-
guessing'' grantees' underwriting decisions.
    Response. Commenters are correct in noting that the Department is 
prohibited from basing a determination of project ineligibility on the 
failure of a project to meet the objectives of the underwriting 
guidelines. The Department will not monitor grantees' projects for 
compliance with HUD's underwriting guidelines. The proposed 
underwriting guidelines also state, however, that the Department 
expects that grantees will engage in some form of underwriting of 
projects, regardless of whether or not a grantee adopts HUD's 
guidelines. The intent of the preamble statement was not to suggest 
that HUD would ``second-guess'' local underwriting guidelines or 
decisions about specific projects pursuant to them. When the Department 
discovers cases of noncompliance with other program requirements (such 
as national objectives or eligibility), it has flexibility to determine 
the appropriate action to resolve the noncompliance. In cases of 
noncompliance with other program requirements, the Department reserves 
the right to examine whether the grantee conducted any underwriting on 
the activity in question. If a grantee performed no underwriting 
whatsoever (or purely perfunctory underwriting) on a project that 
fails, the Department may look to see whether even rudimentary 
underwriting would have disclosed to the grantee that the project was 
likely to fall into noncompliance. Similarly, the Department will also 
consider whether a grantee's underwriting disclosed that a project was 
likely to fail, but the grantee chose to fund the project anyway for 
reasons unrelated to underwriting decisions.
    Issue. One HUD staff person inquired about the relationship between 
the public benefit standards and the underwriting guidelines. The 
commenter asked what HUD would do in a case where a grantee followed 
established underwriting guidelines, yet knowingly chose to fund a 
project which exceeded the public benefit standards (particularly the 
individual activity standards).
    Response. Having complied with a grantee's underwriting standards 
would not recuse this project from failure to meet the regulatory 
requirements for public benefit. In such a situation, the Department 
may still consider the extent to which underwriting was performed in 
assessing what corrective action is appropriate to resolve the 
noncompliance.
    Issue. One correspondent requested clarification or examples of 
what is meant by the statement that guidelines also apply to 
``activities carried out under the authority of Sec. 570.204 that would 
otherwise be eligible under Sec. 570.203.''
    Response. The Department's position is, and has been, that all 
activities involving assistance to a for-profit business are subject to 
the same requirements (including the underwriting guidelines, the 
public benefit standards, and the previously- required ``appropriate 
determinations''). Provision of CDBG assistance to a for-profit 
business through a non-profit subrecipient does not exempt such an 
activity from the underwriting guidelines or public benefit standards. 
In the final regulations, this principle is clarified and illustrated 
with an example.
    Issue. Three commenters raised questions about the treatment of 
non-financial or indirect assistance to businesses in the underwriting 
guidelines. Two commenters felt that by not specifically addressing the 
level of underwriting documentation needed for technical assistance 
activities, the proposed regulations imply that the same degree of 
analysis is required for technical assistance to a business as for 
direct financial assistance. Two commenters also urged the department 
to accept yearly aggregation of technical assistance activities for 
demonstrating compliance with national objectives.
    Response. The Department concurs with the comments regarding 
technical assistance activities. The underwriting guidelines published 
today specifically mention that different levels of underwriting 
documentation may be appropriate for technical assistance activities, 
given the nature and dollar value of assistance being provided to 
businesses. The Department has also added a provision to the national 
objectives requirements for low- and moderate-income benefit, to allow 
job creation/retention to be aggregated for technical assistance 
activities.
    Certain indirect forms of assistance to business, such as land 
acquisition or certain public improvement projects, are not statutorily 
subject to the underwriting guidelines. The Department believes that, 
while not mandatory, grantees should evaluate all forms of assistance 
to businesses, to ensure that the project represents an appropriate use 
of the grantee's funds. Grantees are encouraged to develop 
[[Page 1937]] underwriting guidelines which include other economic 
development activities beyond those subject to the regulations.
    Issue. Several comments were received on the wording of several of 
the objectives in the guidelines. These comments generally spring from 
the commenters' professional opinions on the desirable design features 
or outcomes of individual programs.
    Response. Because the underwriting guidelines are not mandatory, 
the Department has chosen not to adopt most of these suggestions. 
Commenters are encouraged to incorporate their ideas into their local 
guidelines.

Public Benefit Standards

    HUD heard from 20 different commenters on the public benefit 
standards (and how they would be applied) in the proposed regulations: 
3 local governments, 2 states, 8 national associations, 2 development 
organizations, one citizen and 4 HUD staff. Comments on public benefit 
fell into four categories of concern: the overall approach and 
terminology used; the individual activity standards; activities 
providing insufficient public benefit; and the aggregate standards. 
While numerous questions and concerns were raised, individual 
commenters also expressed general support for various aspects of the 
proposed approach to public benefit: the concept of aggregating public 
benefit; the flexibility provided by multiple approaches to measuring 
public benefit; and the concept of allowing certain categories of 
activities to be excluded from the aggregate dollar standards.
    It was also very clear that many commenters did not understand the 
relationship among the different public benefit standards. Confusion 
was also expressed about the meaning of various terms used in the 
proposed regulations, which apparently added to confusion over the 
relationships among the standards. To overcome this confusion, the 
Department has substantially rewritten and reorganized the final 
regulations sections on public benefit.

Overall Approach and Terminology

    Issue. Three different commenters asked for clarification of 
various terms such as ``tests'', ``criteria'', ``portfolio'' and 
``obligated''. One asked what constituted an ``activity'' for purposes 
of aggregation: an individual loan? All activity in one particular loan 
program run by a grantee? Would a grantee with 10 different programs 
subject to the public benefit standards develop 10 aggregate numbers, 
or one? Another asked for confirmation that the public benefit 
measurement period differs from the time period in which job creation/
retention is measured for national objectives documentation.
    Response. In the final regulation, the Department has attempted to 
use more precise wording. The term ``obligated'' here has the same 
meaning as it does elsewhere in the CDBG program--a formal commitment 
of funds to fund a specific activity, such as a signed contract with a 
business, or written notification of loan approval. The term ``test'' 
has been replaced with ``standard''; each numerical measure by which 
activities are judged (individually or in aggregate) is a standard. Use 
of the term ``portfolio'' has been avoided in discussing the aggregate 
standards. Use of the term ``criteria'' is limited to describing the 
``important national interests'' activities which may be excluded from 
the aggregate standards.
    The comment regarding the measurement period for public benefit vs. 
national objectives is correct. For most covered activities designed to 
create/retain jobs, each provision of assistance to a business is 
judged separately for whether it meets a national objective; each 
business is discretely tracked for job creation/retention until the 
business has fulfilled its jobs commitment. In contrast, public benefit 
for any given business is judged at the time assistance is first 
obligated to the business; the levels of public benefit determined at 
the time funds are obligated are then aggregated for all instances of 
assistance provided by a grantee through all covered activities. (The 
period of time over which activities are aggregated varies among the 
Entitlement, State, Insular and HUD-Administered CDBG programs.) Thus, 
for any given business, job creation/retention is primarily measured 
prospectively for public benefit and retrospectively for national 
objectives purposes. (However, this explanation does not apply 
universally; as the regulations note, certain types of activities may 
be aggregated differently. In addition, grantees are to keep 
comparative documentation on the projected vs. actual public benefit 
from projects.)
    Issue. A number of commenters voiced various objections to the 
overall approach to public benefit: the proposed standards are 
arbitrary and simplistic, and invite ``second-guessing'' of projects by 
HUD; more study is needed in this area before specific standards are 
proposed; the standards focus too much on the cost per job and assume 
that more jobs per CDBG dollar is a more important outcome than job 
quality; the standards ignore present or future values of assistance 
provided; the standards focus too much on individual activities, 
ignoring overall program outcomes; the standards focus too much on 
aggregate benefits, ignoring individual activities.
    Response. As discussed in the preamble to the proposed regulations, 
the Department considered all of these issues in developing the 
proposed public benefit standards. More sophisticated measurement 
systems involve greater complexity, and may increase the documentation 
burden on grantees and/or reduce flexibility. The Department strives to 
effect a system which is flexible enough to encompass the great variety 
of individual programs and individual activities which exist across the 
CDBG program, and yet ensures at least some modicum of public benefit 
will be obtained from any given activity. The Department has made 
revisions to the public benefit standards in response to comments, but 
has chosen not to radically change the overall approach.
    Issue. Two commenters (including one state) suggested that each 
community (or the state) be allowed to establish its own public benefit 
standards; HUD could then monitor communities or states for compliance 
with their standards.
    Response. The Department believes these suggestions are 
inconsistent with the statute. The 1992 Act specified that HUD is to 
develop, by regulation, guidelines to ensure that public benefit is 
appropriate relative to the amount of CDBG assistance provided. The 
commenters' approach could increase, not decrease, grantee complaints 
about HUD ``second guessing'' local decisions.

Individual Activity Standards

    Issue. Five commenters opined that the proposed $100,000-per-job 
individual activity standard is much too high to ensure reasonable 
public benefit for any given activity; various figures between $12,000 
and $50,000 were suggested as replacements. On the other hand, one 
commenter expressed concern that the $100,000 standard could preclude 
use of CDBG funds for massive real estate redevelopment projects or 
capital-intensive industrial projects; other public benefits from such 
projects may well justify the expenditure of CDBG funds even when the 
cost per job is high.
    Response. After weighing these arguments, the Department has 
decided to lower the individual activity per-job standard to $50,000. 
This should still provide flexibility to undertake vitally important 
projects with high capital costs per job created or retained; 
[[Page 1938]] grantees may request a waiver of regulations for projects 
which would exceed this level. The ``CDBG cost per job'' and the ``CDBG 
cost per low- and moderate-income person served'' standards are 
designed to establish absolute upper limits for what HUD would consider 
to be reasonable on an individual project basis. Grantees are free to 
set lower per-job maximums for their own projects, if they wish.
    Another example of high-cost projects which the Department has 
become aware of is the removal of environmental contaminants as part of 
a redevelopment project. The use of CDBG funds for such ``brownfields 
remediation'' activities is of growing interest among grantees. 
Projects of this nature can present high costs relative to the amount 
of public benefit as defined in these regulations. However, grantees 
may have additional flexibility in structuring the use of CDBG funds to 
treat environmental conditions. For example, publicly-owned land may be 
cleaned up before title is transferred to a private owner. In this way, 
the environmental remediation activity would not be subject to the 
public benefit standards.
    Issue. Two commenters opined that the proposed $1,000 per area-
resident standard is similarly too high to ensure reasonable public 
benefit; one recommended $50 instead.
    Response. The Department has decided to leave the per-area-resident 
standard as proposed. A lower figure could hinder economic development 
activities in small communities or sparsely-populated rural areas. 
Grantees are free to set lower per-area-resident maximums for their own 
projects, if they wish.

``Insufficient Public Benefit'' Activities

    The proposed regulations contained a list of activities for which 
HUD believes insufficient public benefit is derived; these activities 
would therefore not be eligible for CDBG assistance. Six comments were 
received on this list of activities (one each from a citizen, a local 
government, a national association and a HUD staff person, and two from 
states). Three commenters suggested additional activities to be added 
to the list of activities, two commenters objected to the inclusion of 
one activity on the list, and two commenters requested clarification of 
language.
    Issue. Use of grant funds for projects that will directly compete 
with existing businesses should be prohibited.
    Response. The Department believes this proposal would severely 
restrict grantees' use of CDBG funds for economic development and would 
handcuff the Department's efforts to make CDBG a more flexible funding 
resource. There is nothing which would prevent individual grantees from 
adopting such a policy, if they wish.
    Issue. Gaming facilities (whether on or off Indian Reservations) 
should also be made ineligible.
    Response. The Department has considered this issue in the past and 
has decided not to pursue it.
    Issue. Job Pirating (the use of CDBG funds to move a business from 
one community to another, with no net expansion of activity) is a waste 
of taxpayers' money and should be determined to be an ineligible 
activity.
    Response. The Department has studied the problem of job piracy a 
number of times in the past, but has not taken action to prohibit this 
activity. Determining whether a business is relocating principally 
because of the CDBG assistance, or because of other reasons, is a 
particularly intractable problem in attempting to define job piracy. 
Recently, Congress has shown interest in legislating on this issue. The 
Department has therefore decided to defer action on the issue of job 
piracy until it is clear what action might be taken in authorizing 
legislation.
    Issue. Three commenters opposed including the acquisition of land 
for which no specific use has been determined on the list of 
``insufficient public benefit'' activities. Commenters argued that this 
would eliminate future economic development activities, and that 
forcing grantees to prematurely identify the use of land drives up the 
development cost. One commenter suggested that HUD require land 
acquisition to meet a national objective within two years of the 
expenditure of funds.
    Response. The Department does not find the arguments for removing 
this activity from the list to be convincing. The Department is aware 
of a number of situations in which land has been purchased using CDBG 
funds with no specific use in mind, and in which the Department later 
determined that no national objective was ever met by the acquisition. 
In the Department's opinion, ``landbanking'' with CDBG funds does not 
provide any public benefit. It should be noted that the proposed 
regulation would not prohibit the construction of speculative buildings 
for which no tenant has been identified; nor does it mean that a 
specific occupant must be identified before land can be purchased. 
However, a grantee should at least be able to identify the intended use 
of the property (such as for a shopping center or office building). 
That does not mean, however, that grantees could satisfy the regulatory 
intent simply by identifying just any vaguely described proposed use. 
The language has been revised slightly in the final regulations to 
refer to ``acquisition of land for which the specific use has not been 
identified''.
    Issue. One commenter requested specific examples of types of 
privately-owned recreational facilities serving a predominantly-higher 
income clientele which might be determined ineligible under the 
proposed regulations. Concerning another activity on the list, this 
commenter also noted that the proposed language would not prevent the 
provision of assistance to a ``corporate shell'' or another corporate 
entity established by the same owner(s) of a business which is the 
subject of unresolved findings.
    Response. The Department has chosen not to try to develop such a 
list of recreational facilities, as that list might be misinterpreted 
as all-encompassing; furthermore, a comparison of the recreational 
benefits vs. other benefit to low- and moderate-income persons must of 
necessity be done on a case-by-case basis. The Department concurs with 
the second comment; the final regulations have been revised to include 
other businesses owned by the same owner(s). The final rule also makes 
minor clarifying revisions to several of the other ``insufficient 
public benefit'' activities.

Aggregate Activity Standards

    Issue. Three commenters argued that the aggregate standards are too 
complex, and so should be eliminated. Some commenters feared that 
grantees may focus only on the individual activity standards and 
overlook the aggregate standards; the human tendency will be to fund 
high-profile, high-cost-per-benefit projects first and ``make it up 
later'' with smaller projects. Another commenter expressed concern that 
for low-volume economic development programs, the individual and 
aggregate standards would effectively be the same; if a grantee does 
one loan early in a year with a per-job cost over $35,000 and then ends 
up making no other loans, the grantee automatically fails the aggregate 
standard.
    Response. To reinforce the significance of the aggregate public 
standards, the regulations concerning public benefit have been re-
ordered to discuss the aggregate standards first. It is not the 
Department's intent to unduly penalize low-volume economic development 
programs for noncompliance by one or two loans. However, in evaluating 
projects for possible funding, all grantees are well 
[[Page 1939]] advised to consider their historical levels of economic 
development activity to ensure that the aggregate standards will be 
met. It should be noted that HUD's decision to lower the individual 
activity standard for job creation/retention from $100,000 to $50,000 
should reduce the possibility that grantees will fail the aggregate 
standard because they funded very high cost-per-job projects early in 
the year.
    Issue. One commenter argued that the $35,000 per-job aggregate 
standard is too high to ensure reasonable public benefit; several 
alternative standards in the range of $5,000-$10,000 per job were 
recommended instead.
    Response. The Department has chosen not to accept this 
recommendation. This commenter also raised other objections to HUD's 
proposed method for assessing public benefit; taken together, their 
comments argue for a much more rigorous approach to economic 
development funding, which would reduce grantee flexibility.
    Issue. One commenter argued in favor of either eliminating the $350 
per low- and moderate-income area resident standard, or at least 
raising it to $500.
    Response. The Department has decided to retain the proposed $350 
figure.
    Issue. One HUD staff person questioned how public benefit would be 
measured in the aggregate under the HUD-Administered Small Cities CDBG 
program, given that many grantees have revolving loan funds funded with 
program income from previous grants.
    Response. The Department agrees that the proposed regulations do 
not adequately address this issue. In the final Entitlement 
regulations, Sec. 570.209(b)(2) has been revised to address aggregate 
public benefit in the HUD-Administered Small Cities and Insular Areas 
CDBG programs.
    Issue. Four comments were received on the list of ``important 
national interest'' activities. Two commenters felt that more than 75% 
of a grantee's funds should be used for such ``important national 
interest'' activities in order to meet the alternate aggregate 
standard. One commenter felt the criteria were so broadly written as to 
allow virtually all activities to qualify, and particularly objected to 
four of the proposed criteria [(E), (F), (H), (L)] as inappropriate. 
Another questioned why microenterprise assistance activities [(G)] were 
included on the list, when microenterprise assistance activities funded 
under Sec. 105(a)(23) of the Act are not subject to the public benefit 
standards. One commenter favored keeping the percentage of funds 
requirement at 75%.
    Response. In developing final regulations, the Department has 
substantially revised the concept that certain activities can be 
excluded from the $35,000 per-job or $350 per-area-resident aggregate 
standards. The 75% provision has been eliminated as an alternate to the 
aggregate dollar standards. Instead, grantees may, at their option, 
exclude individual ``important national interest'' activities from the 
aggregate standards. The list of ``important national interest'' 
activities which can be excluded from the aggregate standards has also 
been revised. Proposed criterion (G) has been eliminated, and proposed 
criteria (A) and (B) have been combined. Two new criteria [(L) and (M)] 
have been added to the Entitlement program final rule; these criteria 
provide additional flexibility in support of the new ``economic 
revitalization strategy area'' approach to demonstrating national 
objectives compliance. (This approach is discussed under ``Low and 
Moderate Income Area Benefit Activities'' above; as noted there, the 
approach is being implemented in the Entitlement program only at this 
time.) The remaining criteria are now more narrowly defined to better 
target assistance to certain population groups. One significant effect 
of these changes to the ``important national interest'' activities is 
worth noting. All activities which do not meet one of these ``important 
national interest'' criteria must be subject to the aggregate dollar 
standards.
    Issue. Two commenters expressed concern about the relationship of 
the aggregate standards to the Section 108 Loan Guarantee Program. 
Concern is expressed that the $35,000 per-job aggregate standard will 
hinder grantees' use of the Section 108 Loan Guarantee program; Section 
108 projects are often big projects which could overwhelm the aggregate 
average. If an expenditure of CDBG funds is required several years down 
the line to cover a default, the grantee's aggregate level of public 
benefit would suddenly become skewed too late for a grantee to make 
adjustments.
    Response. It is acknowledged that certain large Section 108 
projects might have a high cost per job; however, the Department 
believes Section 108 projects should be treated consistently with other 
CDBG-funded projects. The Department has revised the requirements 
applying to the ``important national interests'' activities listed in 
the final rule; grantees may now, at their option, exclude activities 
meeting these criteria from the aggregate standards. The Department 
believes many Section 108 projects could meet one or more of these 
criteria. Grantees may also request a waiver of the regulations for 
individual activities which may not meet the public benefit 
requirements. Concerning an unexpected skewing of aggregate benefit 
resulting from a default, grantees should consider the possibility of a 
default when deciding whether to fund proposed projects.
    Issue. One commenter suggested that economic development services 
activities funded under proposed Sec. 570.203(c) of the Entitlement 
regulations be excluded from the public benefit standards, either 
categorically or at the grantee's option.
    Response. The Department does not believe it possible to exempt 
this type of economic development activity from the public benefit 
standards, given the statutory language mandating the development of 
public benefit standards for activities qualifying under this 
authority.
    The Department has added language to the discussion of public 
benefit which clarifies how to apply the individual and aggregate 
standards to activities which provide job training, job placement and 
other employment support services. Except for microenterprise 
assistance activities eligible under Sec. 105(a)(23) of the Act, many 
such activities will be subject to the public benefit standards because 
they are undertaken pursuant to Sections 105(a)(14), (15) or (17) of 
the Act. For purposes of the individual and aggregate public benefit 
standards only, the jobs which such services involve are counted as 
jobs created or retained. (See also the preamble discussion of national 
objectives for further information on these activities.)

Public Benefit Standards--Documentation of Benefit

    Five commenters (two states and three national associations) 
offered comments on proposed paragraphs 570.209(d) and 570.482(e)(6). 
Comments fell into two groups: those concerned about what constitutes a 
substantial difference in actual versus projected benefits; and those 
concerned about what sanctions the Department might take where actual 
benefits were found to be substantially less than projected benefits. 
One of the comments expressed general support for the approach to allow 
adjustment to the projection process.
    Issue. One commenter felt that if a grantee re-evaluates an amended 
project, it should be held accountable to its amended projections, not 
to its initial projections. The commenter recommended that the 
regulations [[Page 1940]] should refer to ``initial or amended 
projections''.
    Response. The Department concurs with this point; the final 
regulations discuss benefits in terms of benefits ``anticipated when 
the CDBG assistance was obligated.'' This is intended to include 
situations in which projections are revised because of changes in a 
project which a grantee agrees to allow.
    Issue. One commenter recommended that grantees' records concerning 
the amount of public benefit derived from projects be made available to 
the public at no cost. This commenter also recommended that Entitlement 
grantees' Grantee Performance Reports should contain information on 
differences between projected and actual public benefits from projects.
    Response. Existing requirement concerning the availability of 
documents to the public (such as the CDBG citizen participation 
requirements) already cover the commenter's first concern. The 
Department will take under advisement the suggestion concerning 
reporting of benefits, at such time in the future that reporting 
requirements are revised.
    Issue. One commenter expressed the opinion that if a grantee shows 
a pattern of substantial differences between projected and actual 
benefits, over perhaps a two year period, HUD should impose a two-year 
moratorium on the offending activity for that grantee.
    Response. The Department does not accept this recommendation, as it 
is inconsistent with existing CDBG regulations concerning sanctions for 
noncompliance. The Department opposes the concept of developing 
different, prescribed sanctions for different categories of 
noncompliance.
    Issue. One commenter expressed concern over the proposal that the 
Department might hold a grantee to more stringent public benefit 
standards in the future when the Department found a grantee to have 
failed the public benefit standards. The commenter recommended that the 
Department not take such action unless a grantee failed the standards 
for two consecutive years, so as not to punish a grantee which might do 
only one project in a year and have that one project prove 
unsuccessful.
    Response. While the Department agrees that low-volume economic 
development programs should not be unduly penalized for the failure of 
one project, the Department considers it inappropriate to identify a 
specific time period over which to measure success or failure. The 
final regulations have been revised to discuss situations in which ``a 
pattern of substantial variation'' occurs.
    Issue. Two states expressed concern about proposed language 
requiring a state to ``take all actions reasonably within its control'' 
to improve a unit of local government's public benefit projections, 
when actual results vary substantially from initial projections. This 
language was seen as imprecise, and calls into question just what 
actions are within a state's (versus the local government's) control to 
rectify the problem. One state expressed concern that HUD might 
sanction a state even after the state took all actions available to it 
to correct a problem. The other state, while recognizing HUD's 
oversight role, felt it inappropriate for HUD to second-guess a state's 
actions, as only the state can impose on itself those actions necessary 
to resolve the problem at the local level.
    Response. These comments, as well as those discussed previously, 
clearly indicate concern by grantees over what sanctions the Department 
might take against a grantee, and over what local-level actions are 
``enough'' to address a problem. The Department concurs up to a point 
with the states' comments. The intended meaning of this paragraph was 
that if local governments' results disclose a pattern of inaccurately 
projecting pubic benefits, then the state should take actions to insure 
that localities improve projection accuracy; if a state were to do 
little or nothing to correct the problems, then HUD could impose 
stricter standards upon a state. Similarly, if an Entitlement grantee 
demonstrates that its projection process is inaccurate, it should take 
steps to improve the accuracy of its projections; if local efforts to 
resolve the problem were ineffective or nonexistent, then HUD could 
impose stricter public benefit standards upon the grantee. HUD does not 
intend that problems by one state recipient should be cause for 
sanctions against an entire state's program.
    HUD does not consider it useful to attempt to define what actions 
are ``reasonably within the grantee's control'', as every situation 
would involve a judgement call as to what could or should be done. The 
concept of deferring entirely to a state's judgement about what actions 
could or should be taken (against a state grant recipient) is 
impractical, given HUD's statutory mandate to determine grantees' 
compliance.
    The paragraphs on documentation have been revised to respond to all 
the above comments, and to provide greater clarity of meaning. In 
addition, Sec. 570.482(f)(6) of the final State regulations clarifies 
HUD's expectations upon states concerning local governments' 
performance.

Amendments to Projects After Determinations

    Four commenters (three local governments and one national 
association) commented on the paragraphs concerning amendments to 
projects after a funding decision has been reached.
    Issue. Three commenters questioned as imprecise HUD's use of the 
term ``material change'' in referring to situations in which a grantee 
should reevaluate a project (after committing funding to it) because of 
changes in the project. One commenter felt the proposed wording implied 
that reanalysis would be required for any change, which would in their 
opinion be overkill. Another commenter suggested use of the term 
``substantial change'', which is used in the existing Entitlement 
regulations to describe situations in which the Final Statement must be 
amended.
    Response. It is not the Department's intent that any change in a 
project should necessitate its complete reevaluation. Minor changes, 
such as the shifting of small dollar amounts among budget categories, 
or a one-month extension to the construction period, probably would not 
affect the underlying assumptions upon which a grantee decided to 
assist the project. However, if the project changes to the extent that 
the revised project would be very different in its scope, public 
benefit, total cost or CDBG cost (compared to the project as initially 
approved by the grantee), the Department believes that the project 
should be reexamined under the public benefit and underwriting 
guidelines. A grantee should confirm whether it still wishes to 
participate in the project, whether the costs and benefits of the 
project are still reasonable, and whether the amount of public benefit 
is still reasonable given the amount of assistance being provided.
    In the final regulations, these paragraphs have been rewritten to 
state that a project should be reevaluated if the project changes to 
the extent that ``a significant amendment to the contract (with the 
business) is appropriate.'' The use of the term ``substantial'' was 
avoided, as some might attempt to apply the same concept of 
``substantial'' as used concerning Final Statement amendments--a 
borrowing of concepts which the Department feels is not appropriate or 
relevant. The Department has chosen not to define what constitutes a 
``significant amendment'', nor to define the types of changes which 
[[Page 1941]] would call for reevaluation. Grantees are strongly 
encouraged, in developing their guidelines, to define what they will 
consider to be ``significant changes'', and to identify how they will 
reevaluate projects.
    Issue. One commenter objected to the example provided at the end of 
the paragraph concerning a situation in which total project costs 
change. In this example, the Department suggested that if total project 
costs decreased, it would be appropriate to reduce the amount of CDBG 
assistance to the project. The commenter felt that this implies that 
any reduction in total project cost should automatically result in a 
comparable reduction in the amount of CDBG assistance, which may not be 
practical. The commenter recommended eliminating the example.
    Response. The Department concurs with the basic point that it may 
not always be appropriate to reduce the amount of CDBG assistance in 
such cases. The example has been retained in the final rule, but has 
been modified to state that ``it may be appropriate'' to reduce the 
amount of CDBG assistance. The final regulation also notes that when a 
project is amended to receive additional CDBG assistance, the project 
as amended must still comply with the public benefit standards.

Modification to the Definition of Subrecipient Related to 
Microenterprise Assistance Activities

    Issue. As noted earlier under the CBDO discussion regarding 
Sec. 570.204 of the Entitlement regulations (Section 105(a)(15) of the 
Act), five commenters addressed the proposed revision to the definition 
of the term ``subrecipient'' at Sec. 570.500(c) to expand that 
provision to include for-profit entities that are now specifically 
authorized by statute to carry out microenterprise assistance 
activities under the new eligibility provision implemented in this 
final rule by a new Sec. 570.201(o) in the Entitlement regulations 
[Section 105(a)(23) of the Act]. Most of the commenters recommended 
that HUD not consider any entities carrying out activities under the 
new microenterprise category as ``subrecipients'' but rather as ``end 
beneficiaries.'' These commenters also requested a similar change in 
classification for entities receiving CDBG assistance under 
Sec. 570.204 of the Entitlement regulations [Section 105(a)(15) of the 
Act]. Other commenters asked only for a clarification of the proposed 
revision to Sec. 570.500(c). (1 local government agency, 1 development 
organization, and 3 HUD Field staff persons)
    Response. The new Section 105(a)(23) of the Act 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 existing definition of the term ``subrecipient'' at 
Sec. 570.500(c) of the CDBG Entitlement regulations is being revised in 
this final rule only to include a specific reference to the for-profit 
entities now authorized to carry out microenterprise assistance 
activities. (Nonprofit entities carrying out such activities are 
already covered by the existing definition of a ``subrecipient.'') The 
language in the proposed change to Sec. 570.500(c) has been revised, 
however, to clarify the Department's intent.

Other Issues Regarding Income Documentation

    Issue. One commenter recommended that HUD take this opportunity to 
clarify what is meant by a ``verifiable certification'' as the term is 
used in Sec. 570.506(b). The commenter asks whether this term implies 
that a sample of the certifications should be verified. (1 private 
citizen)
    Response. HUD does not believe that this issue need be further 
specified in the text of the regulation itself. However, as guidance 
for grantees, it should be noted that, over time, HUD does expect that 
some sample of such certifications would be verified by the grantee or 
subrecipient, as applicable. This verification is important to 
maintaining program accountability and integrity.
    Issue. One commenter raised concerns about the burden of keeping 
family size and income data for job creation or retention activities. 
As another option, the commenter recommended that HUD only look at the 
wages of the individual employee and compare that figure against the 
income limits for one-person households. (1 development organization)
    Response. HUD cannot accept this recommendation. First, the 
proposal is not consistent with the general statutory definition of a 
low- and moderate-income person as being a member of a low- and 
moderate-income family. Secondly, the proposal's use of the wages of a 
created job as the basis for determining a person's income status runs 
counter to CDBG program requirements. To be counted toward compliance 
with low- and moderate-income national objective compliance, a person 
need only be low- and moderate-income at the time the CDBG assistance 
is provided, i.e., for a created job, at the time he or she is hired. 
The CDBG program does not and should not impose any requirement that 
the person would have to stay low- and moderate-income based on the 
wages of the created job. Finally, it should be noted that presumptions 
added by the 1992 Act for determining whether a person is considered 
low- and moderate-income for job creation or retention activities, as 
implemented in this final rule, should significantly reduce the burden 
described by the commenter.
    Issue. One commenter stated that, in regard to the State CDBG 
program, it is good that HUD is consulting and negotiating with States 
on record keeping issue, but the commenter complained that the number 
of States being consulted was too small. The commenter argued that HUD 
should negotiate record keeping requirements with each and every State 
because since they represent such broad and varied regions. (1 state 
agency)
    Response. It is not logistically possible for HUD to negotiate with 
each and every State before issuing record keeping regulations for the 
State CDBG program. HUD is still negotiating with a sample of States 
and is hoping to devise certain minimum record keeping standards for 
States that will be accepted on a consensus basis.

Other Issues Not Specifically Addressed in the Proposed Rule

    A number of comments were received on issues not specifically 
addressed in the proposed regulations, but which were seen (by 
commenters) as having significant bearing on the use of CDBG funds for 
economic development activity.
    Issue. Two commenters (both local governments) requested that the 
Department address the issue of using CDBG funds for economic 
development activities on military bases which are being closed.
    Response. The Department does not see the reuse or redevelopment of 
closed military bases as an activity per se, but rather a goal which 
CDBG funds can be used to address. The Department believes the current 
regulations concerning eligibility and national objectives, along with 
these revised [[Page 1942]] regulations, give communities considerable 
flexibility to carry out a broad range of economic development 
activities, including those on former military bases.
    Issue. Six commenters (3 national associations, 2 states and one 
local government) identified other Federal requirements as major 
inhibitors to the use of CDBG for economic development (particularly 
for microenterprise assistance), and asked the Department to examine 
ways to streamline these other requirements. Specifically identified 
were environmental review procedures, program income requirements, and 
the Davis-Bacon Wage Rate Act.
    Response. HUD acknowledges that these areas are the source of 
frequent complaints. However, as some commenters noted, the underlying 
bases for many of the regulatory requirements in these areas are 
statutory, and thus lie beyond HUD's span of control. HUD is willing to 
explore ways in which regulations governing these other federal 
requirements might be made more amenable to the use of CDBG funds for 
economic development.
    In particular, the Department realizes that CDBG regulations 
governing the use of CDBG program income must be revised to include 
1992 changes to the Act. Issues concerning program income will be dealt 
with more comprehensively in separate future rule-making. In the 
meantime, and in response to these comments, the Department has 
identified three incremental changes which can be made regarding 
program income, and has included them in this final rule.
    1. The 1992 State CDBG program regulations included a provision 
excluding from the definition of program income an amount of up to 
$10,000 per year per state grant recipient. This provision was 
consistent with 1992 amendments to the Act, which permitted the 
Secretary to exclude from program requirements amounts of program 
income that are determined to be so small that compliance with 
requirements would place an unreasonable administrative burden on units 
of local government. During the past two years, a number of states have 
commented to HUD that many of their grant recipients regularly receive 
over $10,000 per year in program income; thus, at its present level, 
this exclusion provision is of little or no benefit to state grant 
recipients. Since state grant award amounts are typically smaller than 
the average yearly entitlement grant amount, state grant recipients 
typically receive less program per year than entitlement grantees. The 
problem noted by states is likely to be equally or more problematic for 
entitlement grantees.
    The Department has determined that $25,000 is a more appropriate 
level at which to set the yearly exclusion amount. These final 
regulations also extend the exclusion provision to the Entitlement 
program for the first time. In a separate rulemaking, the Department is 
also adding the exclusion provision to the HUD-Administered Small 
Cities program regulations.
    2. The existing definition of program income includes revenue 
generated by activities carried out with the proceeds from loans 
guaranteed under Section 108. Such revenue is now treated as program 
income even if the guaranteed loan is repaid with non-CDBG funds. Such 
revenue is treated as program income notwithstanding that it is 
required to be pledged to the repayment of the Section 108 loan. The 
final rule excludes from the definition of program income certain 
amounts generated by activities financed by Section 108 loans, to the 
extent that non-CDBG funds are used to repay the loan. Activities which 
can qualify for this exclusion are those meeting the criteria at 
Sec. 570.209(b)(2)(v) or Sec. 570.482(f)(3)(v) (the ``important 
national interest'' activities), and those carried out in conjunction 
with an Economic Development Initiative grant in an area determined by 
the Department to meet the eligibility requirements for Urban 
Empowerment Zone designation.
    Any revenue generated by activities financed with Section 108 loan 
guarantees which is not defined as program income would be 
miscellaneous revenue. In addition, any amounts in debt service 
accounts that were funded with non-CDBG funds (e.g. Section 108 funds 
and monies provided by the assisted business) that remain after full 
and final repayment of the guaranteed loan would also be considered 
miscellaneous revenue.
    3. As discussed earlier under the heading of Community-Based 
Development Organizations, the Department has substantially revised the 
requirements governing activities funded under Sec. 105(a)(15) of the 
Act (and Sec. 570.204 of the Entitlement regulations). As a result of 
those changes, the department has determined that amounts generated by 
such activities can also be excluded from the requirements governing 
the use of program income.
    Because Sec. 105(a)(15) of the Act differentiates between the types 
of eligible entities in entitlement jurisdictions and nonentitled 
areas, this change has been effected by different means for the 
Entitlement and State CDBG programs. Section 570.500(c) of the 
Entitlement regulations, which defines the term ``subrecipient'', has 
been revised; entities described in Sec. 570.204(c) [which implements 
Sec. 105(a)(15) of the Act], are no longer defined as subrecipients. As 
noted previously, the term ``subrecipient'' is not defined in the State 
CDBG program. Section 570.489(e) of the State rule (which comprises 
program income requirements) has been revised to exclude from the 
definition of program income amounts generated by Sec. 105(a)(15) 
activities. States are expected to ensure that any such activities are 
indeed carried out by an entity pursuant to Sec. 105(a)(15).
    It should be noted that this exclusion does not cover situations in 
which a grantee provides CDBG assistance to one of these entities in 
the form of a loan. Any repayments of principal or interest from the 
entity to the grantee for such a loan would be considered to be CDBG 
program income, regardless of the source of the funds used for 
repayment.
    Issue. Numerous commenters noted that HUD needs to provide 
additional training for grantees and HUD Field Office staff to ensure 
uniform understanding, interpretation and implementation of the revised 
regulations. HUD should also go beyond formal training to provide other 
mechanisms (such as national conferences, development of model 
programs, resource guidebooks and computer bulletin boards) for sharing 
information on economic development activities. Areas in which certain 
commenters were particularly interested in seeing greater information-
sharing included: related federal initiatives such as welfare reform 
and Empowerment Zones/Enterprise Communities; sharing of model 
programs; microenterprise assistance programs; use of ``first source'' 
agreements for job creation activities; and combining CDBG with other 
federal economic development resources.
    Response. The Department acknowledges the importance of training on 
new regulations, and is planning to provide training to both grantees 
and HUD Field Office staff once these regulations are effective. HUD is 
also developing a CDBG economic development reference manual which will 
include model programs. The Department's Consolidated Technical 
Assistance initiative, which is already being implemented, should also 
result in additional training opportunities on economic development 
issues.
    The Department plans to develop guidelines by which those 
communities [[Page 1943]] demonstrating the best performance in the 
area of economic development may be identified. These guidelines will 
be distributed to both grantees and HUD Field Office staff. The 
Department will also identify administrative mechanisms through which 
additional relief may be provided to communities with the best economic 
development performance records.

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 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. An interim rule implementing the 1992 amendments to Section 3 
was published by the Department in the Federal Register on June 30, 
1994, and it became effective August 1, 1994.

Other Matters

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 
in this rule do not have Federalism implications when implemented and, 
thus, are not subject to review under the Order. Nothing in the rule 
implies any preemption of State or local law, nor does any provision of 
the 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 rule does 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 rule hereby certifies 
that this rule does 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 rule was listed as item 1848 in the Department's Semiannual 
Agenda of Regulations published on November 14, 1994 (59 FR 57632, 
57664) 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 A, C, I, and J, are amended 
as follows:

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

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

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

Subpart A--General Provisions

    2. In Sec. 570.3, definitions for ``Community Development Financial 
Institution'', ``Microenterprise'', and ``Small business'', are added 
in alphabetical order to read as follows:


Sec. 570.3  Definitions.

* * * * *
    Community Development Financial Institution has the same meaning as 
used in the Community Development Banking and Financial Institutions 
Act of 1994 (12 U.S.C. 4701 note).
* * * * *
    Microenterprise means a business that has five or fewer employees, 
one or more of whom owns the enterprise.
* * * * *
    Small business means a business that meets the criteria set forth 
in section 3(a) of the Small Business Act (15 U.S.C. 631, 636, 637).
* * * * *

Subpart C--Eligible Activities

    3. In Sec. 570.200, paragraph (e) is 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), 570.204, 570.206(f), and 
570.209.
* * * * *
    4. In Sec. 570.201, paragraph (o) is 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, [[Page 1944]] 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 this paragraph (o) shall not be subject to 
the restrictions on public services contained in paragraph (e) of this 
section.
    (3) For purposes of this paragraph (o), ``persons developing 
microenterprises'' means such persons who have expressed interest and 
who are, or after an initial screening process are expected to be, 
actively working toward developing businesses, each of which is 
expected to be a microenterprise at the time it is formed.
    5. In Sec. 570.202, paragraph (a)(1) is revised to read as follows:


Sec. 570.202  Eligible rehabilitation and preservation activities.

    (a) * * *
    (1) Privately owned buildings and improvements for residential 
purposes; improvements to a single-family residential property which is 
also used as a place of business, which are required in order to 
operate the business, need not be considered to be rehabilitation of a 
commercial or industrial building, if the improvements also provide 
general benefit to the residential occupants of the building;
* * * * *
    6. Section 570.203 is 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 
eligible 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; management of assisted 
activities; and the screening, referral, and placement of applicants 
for employment opportunities generated by CDBG-eligible economic 
development activities, including the costs of providing necessary 
training for persons filling those positions.
    7. Section 570.204 is revised to read as follows:


Sec. 570.204  Special activities by Community-Based Development 
Organizations (CBDOs).

    (a) Eligible activities. The recipient may provide CDBG funds as 
grants or loans to any CBDO 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 includes 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 includes activities that 
increase economic opportunity, principally for persons of low- and 
moderate-income, or that stimulate or retain businesses or permanent 
jobs, including projects that include one or more such activities that 
are clearly needed to address a lack of affordable housing accessible 
to existing or planned jobs and those activities specified at 24 CFR 
91.1(a)(1)(iii);
    (3) Energy conservation project includes activities that address 
energy conservation, principally for the benefit of the residents of 
the recipient's jurisdiction; and
    (4) To carry out a project means that the CBDO 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.
    (b) Ineligible activities. Notwithstanding that CBDOs 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) Carrying out public services that do not meet the requirements 
of Sec. 570.201(e), except that:
    (i) Services carried out under this section that are specifically 
designed to increase economic opportunities through job training and 
placement and other employment support services, including, but not 
limited to, peer support programs, counseling, child care, 
transportation, and other similar services; and
    (ii) Services of any type carried out under this section pursuant 
to a strategy approved by HUD under the provisions of 24 CFR 91.215(e) 
shall not be subject to the limitations in Sec. 570.201(e)(1) or (2), 
as applicable;
    (3) Providing assistance to activities that would otherwise be 
eligible under Sec. 570.203 that do not meet the requirements of 
Sec. 570.209; or
    (4) 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 CBDOs. (1) A CBDO 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 [[Page 1945]] and economic development activities) primarily 
within an identified geographic area of operation within 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 or senior officers of private establishments 
and other institutions located in and serving 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; and
    (viii) Is free to contract for goods and services from vendors of 
its own choosing.
    (2) A CBDO that does not meet the criteria in paragraph (c)(1) of 
this section may also qualify as an eligible entity 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 an 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).
    (3) A CBDO that does not qualify under paragraphs (c) (1) or (2) of 
this section may also be determined to qualify as an eligible entity 
under this section if the recipient demonstrates to the satisfaction of 
HUD, through the provision of information regarding the organization's 
charter and by-laws, that the organization is sufficiently similar in 
purpose, function, and scope to those entities qualifying under 
paragraphs (c) (1) or (2) of this section.
    8. Section 570.207 is amended by revising paragraphs (b) 
introductory text and (b)(3)(iii) to read as follows:


Sec. 570.207  Ineligible activities.

* * * * *
    (b) The following activites may not be assisted with CDBG funds 
unless authorized under provisions of Sec. 570.203 or as otherwise 
specifically noted herein or when carried out by a entity under the 
provisions of Sec. 570.204.
* * * * *
    (3) * * *
    (iii) When carried out by an entity pursuant to Sec. 570.204(a);
* * * * *
    9. Section 570.208 is amended by:
    a. Revising the paragraph heading of paragraph (a), revising 
paragraph (a)(1)(i), the first sentence in paragraph (a)(1)(iv), and 
adding a new paragraph (a)(1)(v);
    b. Revising paragraph (a)(2)(i) introductory text and by adding new 
paragraphs (a)(2)(iii) and (a)(2)(iv);
    c. Revising the introductory text of paragraph (a)(3);
    d. Revising paragraph (a)(4); and
    e. Adding new paragraphs (d)(5), (d)(6), and (d)(7), 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.
* * * * *
    (iv) In determining whether there is a sufficiently large 
percentage of low and moderate income persons residing in the area 
served by an activity to qualify under paragraphs (a)(1)(i), (ii), or 
(v) of this section, the most recently available decennial census 
information shall be used to the fullest extent feasible, together with 
the Section 8 income limits that would have applied at the time the 
income information was collected by the Census Bureau. * * *
    (v) Activities meeting the requirements of paragraph (d)(5)(i) of 
this section may be considered to qualify under this paragraph, 
provided that the area covered by the strategy is primarily residential 
and contains a percentage of low- and moderate-income residents that is 
no less than the percentage computed by HUD pursuant to paragraph 
(a)(1)(ii) of this section but in no event less than 51 percent. 
Activities meeting the requirements of paragraph (d)(6)(i) of this 
section may also be considered to qualify under paragraph (a)(1) of 
this section.
    (2) Limited clientele activities. (i) An activity which benefits a 
limited clientele, at least 51 percent of whom are low- or moderate-
income persons. (The following kinds of activities may not qualify 
under paragraph (a)(2) of this section: activities, the benefits of 
which are available to all the residents of an area; activities 
involving the acquisition, construction or rehabilitation of property 
for housing; or activities where the benefit to low- and moderate-
income persons to be considered is the creation or retention of jobs, 
except as provided in paragraph (a)(2)(iv) of this section.) To qualify 
under paragraph (a)(2) of this section, the activity must meet one of 
the following tests:
* * * * *
    (iii) A microenterprise assistance activity carried out in 
accordance with the provisions of Sec. 570.201(o) with respect to those 
owners of microenterprises and persons developing microenterprises 
assisted under the activity during each program year who 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. [[Page 1946]] 
    (iv) An activity designed to provide job training and placement 
and/or other employment support services, including, but not limited 
to, peer support programs, counseling, child care, transportation, and 
other similar services, in which the percentage of low- and moderate-
income persons assisted is less than 51 percent may qualify under this 
paragraph in the following limited circumstance:
    (A) In such cases where such training or provision of supportive 
services assists business(es), the only use of CDBG assistance for the 
project is to provide the job training and/or supportive services; and
    (B) The proportion of the total cost of the project borne by CDBG 
funds is no greater than the proportion of the total number of persons 
assisted who are low or moderate income.
    (3) Housing activities. An eligible activity carried out for the 
purpose of providing or improving permanent residential structures 
which, upon completion, will be occupied by low- and moderate-income 
households. This would include, but not necessarily be limited to, the 
acquisition or rehabilitation of property, conversion of non-
residential structures, and new housing construction. If the structure 
contains two dwelling units, at least one must be so occupied, and if 
the structure contains more than two dwelling units, at least 51 
percent of the units must be so occupied. Where two or more rental 
buildings being assisted are or will be located on the same or 
contiguous properties, and the buildings will be under common ownership 
and management, the grouped buildings may be considered for this 
purpose as a single structure. Where housing activities being assisted 
meet the requirements of paragraph Sec. 570.208 (d)(5)(ii) or 
(d)(6)(ii) of this section, all such housing may also be considered for 
this purpose as a single structure. For rental housing, occupancy by 
low and moderate income households must be at affordable rents to 
qualify under this criterion. The recipient shall adopt and make public 
its standards for determining ``affordable rents'' for this purpose. 
The following shall also qualify under this criterion:
* * * * *
    (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) 
that either:
    (1) Meets the requirements of paragraph (a)(4)(v) of this section; 
or
    (2) Has 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) that meets the requirements of paragraph 
(a)(4)(v) of this section and the job under consideration is to be 
located within that census tract.
    (v) A census tract (or block numbering area) qualifies for the 
presumptions permitted under paragraphs (a)(4)(iv)(A)(1) and (B) of 
this section if it is either part of a Federally-designated Empowerment 
Zone or Enterprise Community or meets the following criteria:
    (A) It has a poverty rate of at least 20 percent as determined by 
the most recently available decennial census information;
    (B) It does not include any portion of a central business district, 
as this term is used in the most recent Census of Retail Trade, unless 
the tract has a poverty rate of at least 30 percent as determined by 
the most recently available decennial census information; and
    (C) It evidences pervasive poverty and general distress by meeting 
at least one of the following standards:
    (1) All block groups in the census tract have poverty rates of at 
least 20 percent;
    (2) The specific activity being undertaken is located in a block 
group that has a poverty rate of at least 20 percent; or
    (3) Upon the written request of the recipient, HUD determines that 
the census tract exhibits other objectively determinable signs of 
general distress such as high incidence of crime, narcotics use, 
homelessness, abandoned housing, and deteriorated infrastructure or 
substantial population decline.
    (vi) 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) Where CDBG funds are used by a recipient or subrecipient to 
provide technical assistance to businesses, this requirement may be met 
by aggregating the jobs created or retained by all of the businesses 
receiving technical assistance during each program year.
    (D) Where CDBG funds are used for activities meeting the criteria 
listed at Sec. 570.209(b)(2)(v), this requirement may be met by 
aggregating the jobs created or retained by all businesses for which 
CDBG assistance is obligated for such activities during the program 
year, except as provided at paragraph (d)(7) of this section.
    (E) Where CDBG funds are used by a Community Development Financial 
Institution to carry out activities for the purpose of creating or 
retaining jobs, this requirement may be met by 
[[Page 1947]] aggregating the jobs created or retained by all 
businesses for which CDBG assistance is obligated for such activities 
during the program year, except as provided at paragraph (d)(7) of this 
section.
    (F) Where CDBG funds are used for public facilities or improvements 
which will result in the creation or retention of jobs by more than one 
business, this requirement may be met by aggregating the jobs created 
or retained by all such businesses as a result of the public facility 
or improvement.
    (1) Where the public facility or improvement is undertaken 
principally for the benefit of one or more particular businesses, but 
where other businesses might also benefit from the assisted activity, 
the requirement may be met by aggregating only the jobs created or 
retained by those businesses for which the facility/improvement is 
principally undertaken, provided that the cost (in CDBG funds) for the 
facility/improvement is less than $10,000 per permanent full-time 
equivalent job to be created or retained by those businesses.
    (2) In any case where the cost per job to be created or retained 
(as determined under paragraph (a)(4)(v)(C)(1) of this section) is 
$10,000 or more, the requirement must be met by aggregating the jobs 
created or retained as a result of the public facility or improvement 
by all businesses in the service area of the facility/improvement. This 
aggregation must include businesses which, as a result of the public 
facility/improvement, locate or expand in the service area of the 
facility/improvement between the date the recipient identifies the 
activity in its final statement and the date one year after the 
physical completion of the facility/improvement. In addition, the 
assisted activity must comply with the public benefit standards at 
Sec. 570.209(b).
* * * * *
    (d) * * *
    (5) Where the grantee has elected to prepare an area revitalization 
strategy pursuant to the authority of Sec. 91.215(e) of this title and 
HUD has approved the strategy, the grantee may also elect the following 
options:
    (i) Activities undertaken pursuant to the strategy for the purpose 
of creating or retaining jobs may, at the option of the grantee, be 
considered to meet the requirements of this paragraph under the 
criteria at paragraph (a)(1)(v) of this section in lieu of the criteria 
at paragraph (a)(4) of this section; and
    (ii) All housing activities in the area for which, pursuant to the 
strategy, CDBG assistance is obligated during the program year may be 
considered to be a single structure for purposes of applying the 
criteria at paragraph (a)(3) of this section.
    (6) Where CDBG-assisted activities are carried out by a Community 
Development Financial Institution whose charter limits its investment 
area to a primarily residential area consisting of at least 51 percent 
low- and moderate-income persons, the grantee may also elect the 
following options:
    (i) Activities carried out by the Community Development Financial 
Institution for the purpose of creating or retaining jobs may, at the 
option of the grantee, be considered to meet the requirements of this 
paragraph under the criteria at paragraph (a)(1)(v) of this section in 
lieu of the criteria at paragraph (a)(4) of this section; and
    (ii) All housing activities for which the Community Development 
Financial Institution obligates CDBG assistance during the program year 
may be considered to be a single structure for purposes of applying the 
criteria at paragraph (a)(3) of this section.
    (7) Where an activity meeting the criteria at Sec. 570.209(b)(2)(v) 
may also meet the requirements of either paragraph (d)(5)(i) or 
(d)(6)(i) of this section, the grantee may elect to qualify the 
activity under either the area benefit criteria at paragraph (a)(1)(v) 
of this section or the job aggregation criteria at paragraph 
(a)(4)(vi)(D) of this section, but not both. Where an activity may meet 
the job aggregation criteria at both paragraphs (a)(4)(vi) (D) and (E) 
of this section, the grantee may elect to qualify the activity under 
either criterion, but not both.
    10. A new Sec. 570.209 is added to subpart C 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 to 
activities that are eligible for CDBG assistance under Sec. 570.203. 
These guidelines also apply to activities carried out under the 
authority of Sec. 570.204 that would otherwise be eligible under 
Sec. 570.203, were it not for the involvement of a Community-Based 
Development Organization (CBDO). (This would include activities where a 
CBDO makes loans to for-profit businesses.) 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. HUD has developed guidelines that are designed 
to provide the recipient with a framework for financially underwriting 
and selecting CDBG-assisted economic development projects which are 
financially viable and will make the most effective use of the CDBG 
funds. These guidelines, also referred to as the underwriting 
guidelines, are published as appendix A to this part. The use of the 
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. Where appropriate, HUD's 
underwriting guidelines 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 to 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 objectives of 
the underwriting guidelines are to ensure:
    (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.
    (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 below identify the types of public benefit that will be 
recognized 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. 
Certain public facilities and [[Page 1948]] improvements eligible under 
Sec. 570.201(c) of the regulations, which are undertaken for economic 
development purposes, are also subject to these standards, as specified 
in Sec. 570.208(a)(4)(vi)(D)(2).
    (1) Standards for activities in the aggregate. Activities covered 
by these guidelines must, in the aggregate, either:
    (i) Create or retain at least one full-time equivalent, permanent 
job per $35,000 of CDBG funds used; or
    (ii) Provide goods or services to residents of an area, such that 
the number of low- and moderate-income persons residing in the areas 
served by the assisted businesses amounts to at least one low- and 
moderate-income person per $350 of CDBG funds used.
    (2) Applying the aggregate standards. (i) A metropolitan city or an 
urban county shall apply the aggregate standards under paragraph (b)(1) 
of this section to all applicable activities for which CDBG funds are 
first obligated within each single CDBG program year, without regard to 
the source year of the funds used for the activities. A grantee under 
the HUD-Administered Small Cities or Insular Areas CDBG programs shall 
apply the aggregate standards under paragraph (b)(1) of this section to 
all funds obligated for applicable activities from a given grant; 
program income obligated for applicable activities will, for these 
purposes, be aggregated with the most recent open grant. For any time 
period in which a community has no open HUD-Administered or Insular 
Areas grants, the aggregate standards shall be applied to all 
applicable activities for which program income is obligated during that 
period.
    (ii) The grantee shall apply the aggregate standards to the number 
of jobs to be created/retained, or to the number of persons residing in 
the area served (as applicable), as determined at the time funds are 
obligated to activities.
    (iii) Where an activity is expected both to create or retain jobs 
and to provide goods or services to residents of an area, the grantee 
may elect to count the activity under either the jobs standard or the 
area residents standard, but not both.
    (iv) Where CDBG assistance for an activity is limited to job 
training and placement and/or other employment support services, the 
jobs assisted with CDBG funds shall be considered to be created or 
retained jobs for the purposes of applying the aggregate standards.
    (v) Any activity subject to these guidelines which meets one or 
more of the following criteria may, at the grantee's option, be 
excluded from the aggregate standards described in paragraph (b)(1) of 
this section:
    (A) Provides jobs exclusively for unemployed persons or 
participants in one or more of the following programs:
    (1) Jobs Training Partnership Act (JTPA);
    (2) Jobs Opportunities for Basic Skills (JOBS); or
    (3) Aid to Families with Dependent Children (AFDC);
    (B) Provides jobs predominantly for residents of Public and Indian 
Housing units;
    (C) Provides jobs predominantly for homeless persons;
    (D) Provides jobs predominantly for low-skilled, low- and moderate-
income persons, where the business agrees to provide clear 
opportunities for promotion and economic advancement, such as through 
the provision of training;
    (E) Provides jobs predominantly for persons residing within a 
census tract (or block numbering area) that has at least 20 percent of 
its residents who are in poverty;
    (F) Provides 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;
    (G) Stabilizes or revitalizes a neighborhood that has at least 70 
percent of its residents who are low- and moderate-income;
    (H) Provides assistance to a Community Development Financial 
Institution that serve an area that is predominantly low- and moderate-
income persons;
    (I) Provides assistance to a Community-Based Development 
Organization serving a neighborhood that has at least 70 percent of its 
residents who are low- and moderate-income;
    (J) Provides employment opportunities that are an integral 
component of a project designed to promote spatial deconcentration of 
low- and moderate-income and minority persons;
    (K) With prior HUD approval, provides substantial benefit to low-
income persons through other innovative approaches;
    (L) Provides services to the residents of an area pursuant to a 
strategy approved by HUD under the provisions of Sec. 91.215(e) of this 
title;
    (M) Creates or retains jobs through businesses assisted in an area 
pursuant to a strategy approved by HUD under the provisions of 
Sec. 91.215(e) of this title.
    (3) Standards for individual activities. Any activity subject to 
these guidelines which falls into one or more of the following 
categories will be considered by HUD to provide insufficient public 
benefit, and therefore may under no circumstances be assisted with CDBG 
funds:
    (i) The amount of CDBG assistance exceeds either of the following, 
as applicable:
    (A) $50,000 per full-time equivalent, permanent job created or 
retained; or
    (B) $1,000 per low- and moderate-income person to which goods or 
services are provided by the activity.
    (ii) The activity consists of or includes any of the following:
    (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 recreational 
benefit to users or members clearly outweighs employment or other 
benefits to low- and moderate-income persons;
    (D) Acquisition of land for which the specific proposed use has not 
yet been identified; and
    (E) Assistance to a for-profit business while that business or any 
other business owned by the same person(s) or entity(ies) is the 
subject of unresolved findings of noncompliance relating to previous 
CDBG assistance provided by the recipient.
    (4) Applying the individual activity standards. (i) Where an 
activity is expected both to create or retain jobs and to provide goods 
or services to residents of an area, it will be disqualified only if 
the amount of CDBG assistance exceeds both of the amounts in paragraph 
(b)(3)(i) of this section.
    (ii) The individual activity standards in paragraph (b)(3)(i) of 
this section shall be applied to the number of jobs to be created or 
retained, or to the number of persons residing in the area served (as 
applicable), as determined at the time funds are obligated to 
activities.
    (iii) Where CDBG assistance for an activity is limited to job 
training and placement and/or other employment support services, the 
jobs assisted with CDBG funds shall be considered to be created or 
retained jobs for the purposes of applying the individual activity 
standards in paragraph (b)(3)(i) of this section.
    (c) Amendments to economic development projects after review 
determinations. If, after the grantee enters into a contract to provide 
assistance to a project, the scope or financial elements of the project 
change [[Page 1949]] to the extent that a significant contract 
amendment is appropriate, the project should be reevaluated under these 
and the recipient's guidelines. (This would include, for example, 
situations where the business requests a change in the amount or terms 
of assistance being provided, or an extension to the loan payment 
period required in the contract.) If a reevaluation of the project 
indicates that the financial elements and public benefit to be derived 
have also substantially changed, then the recipient should make 
appropriate adjustments in the amount, type, terms or conditions of 
CDBG assistance which has been offered, to reflect the impact of the 
substantial change. (For example, if a change in the project elements 
results in a substantial reduction of the total project costs, it may 
be appropriate for the recipient to reduce the amount of total CDBG 
assistance.) If the amount of CDBG assistance provided to the project 
is increased, the amended project must still comply with the public 
benefit standards under paragraph (b) of this section.
    (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 anticipated when the CDBG assistance was obligated. If the 
grantee's actual results show a pattern of substantial variation from 
anticipated results, 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 Community Development Block Grant Program

    11. Section 570.482 is amended by adding paragraphs (c), (d), (e), 
(f), and (g) to read as follows:


Sec. 570.482   Eligible activities.

* * * * *
    (c) Provision of Assistance for Microenterprise Development. 
Microenterprise development activities eligible under Section 
105(a)(23) of the Housing and Community Development Act of 1974 (the 
Act), as amended, (42 U.S.C. 5301 et seq.) 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).
    (d) Provision of Public Services. The following activities 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:
    (1) Support services provided under Section 105(a)(23) of the 
Housing and Community Development Act of 1974, as amended, and 
paragraph (c) of this section; and
    (2) Services carried out under the provisions of Section 105(a)(15) 
of the Housing and Community Development Act of 1974, as amended, that 
are specifically designed to increase economic opportunities through 
job training and placement and other employment support services, 
including, but not limited to, peer support programs, counseling, child 
care, transportation, and other similar services.
    (e) Guidelines and Objectives for Evaluating Project Costs and 
Financial Requirements--(1) Applicability. The following guidelines, 
also referred to as the underwriting 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 to activities that are eligible for CDBG assistance under 
section 105(a)(17) of the Act, 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. The use of the 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. The underwriting guidelines are designed to provide 
the recipient with a framework for financially underwriting and 
selecting CDBG-assisted economic development projects which are 
financially viable and will make the most effective use of the CDBG 
funds. Where appropriate, HUD's underwriting guidelines 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 to 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. These underwriting guidelines are published 
as appendix A to this part. The objectives of the underwriting 
guidelines are to ensure:
    (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.
    (f) 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 
standards. The standards set forth below identify the types of public 
benefit that will be recognized for this purpose and the minimum level 
of each that must be obtained for the amount of CDBG funds used. These 
standards are applicable to activities that are eligible for CDBG 
assistance under section 105(a)(17) of the Act, 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. Certain public facilities and 
improvements eligible under Section 105(a)(2) of the Act, which are 
undertaken for economic development purposes, are also subject to these 
standards, as specified in Sec. 570.483(b)(4)(vi)(F)(2). 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) Standards for activities in the aggregate. Activities covered 
by these standards must, in the aggregate, either:
    (i) Create or retain at least one full-time equivalent, permanent 
job per $35,000 of CDBG funds used; or
    (ii) Provide goods or services to residents of an area, such that 
the number of low- and moderate-income persons residing in the areas 
served by the assisted businesses amounts to at least one low- and 
moderate-income person per $350 of CDBG funds used.
    (3) Applying the aggregate standards. (i) A state shall apply the 
aggregate [[Page 1950]] standards under paragraph (e)(2) of this 
section 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.
    (ii) The grantee shall apply the aggregate standards to the number 
of jobs to be created/retained, or to the number of persons residing in 
the area served (as applicable), as determined at the time funds are 
obligated to activities.
    (iii) Where an activity is expected both to create or retain jobs 
and to provide goods or services to residents of an area, the grantee 
may elect to count the activity under either the jobs standard or the 
area residents standard, but not both.
    (iv) Where CDBG assistance for an activity is limited to job 
training and placement and/or other employment support services, the 
jobs assisted with CDBG funds shall be considered to be created or 
retained jobs for the purposes of applying the aggregate standards.
    (v) Any activity subject to these standards which meets one or more 
of the following criteria may, at the grantee's option, be excluded 
from the aggregate standards described in paragraph (f)(2) of this 
section:
    (A) Provides jobs exclusively for unemployed persons or 
participants in one or more of the following programs:
    (1) Jobs Training Partnership Act (JTPA);
    (2) Jobs Opportunities for Basic Skills (JOBS); or
    (3) Aid to Families with Dependent Children (AFDC);
    (B) Provides jobs predominantly for residents of Public and Indian 
Housing units;
    (C) Provides jobs predominantly for homeless persons;
    (D) Provides jobs predominantly for low-skilled, low- and moderate-
income persons, where the business agrees to provide clear 
opportunities for promotion and economic advancement, such as through 
the provision of training;
    (E) Provides jobs predominantly for persons residing within a 
census tract (or block numbering area) that has at least 20 percent of 
its residents who are in poverty;
    (F) Provides 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;
    (G) Stabilizes or revitalizes a neighborhood income that has at 
least 70 percent of its residents who are low- and moderate-income;
    (H) Provides assistance to a Community Development Financial 
Institution (as defined in the Community Development Banking and 
Financial Institutions Act of 1994, (12 U.S.C. 4701 note)) serving an 
area that has at least 70 percent of its residents who are low- and 
moderate-income;
    (I) Provides assistance to an organization eligible to carry out 
activities under section 105(a)(15) of the Act serving an area that has 
at least 70 percent of its residents who are low- and moderate-income;
    (J) Provides employment opportunities that are an integral 
component of a project designed to promote spatial deconcentration of 
low- and moderate-income and minority persons;
    (K) With prior HUD approval, provides substantial benefit to low-
income persons through other innovative approaches.
    (4) Standards for individual activities. Any activity subject to 
these standards which falls into one or more of the following 
categories will be considered by HUD to provide insufficient public 
benefit, and therefore may under no circumstances be assisted with CDBG 
funds:
    (i) The amount of CDBG assistance exceeds either of the following, 
as applicable:
    (A) $50,000 per full-time equivalent, permanent job created or 
retained; or
    (B) $1,000 per low- and moderate-income person to which goods or 
services are provided by the activity.
    (ii) The activity consists of or includes any of the following:
    (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 recreational 
benefit to users or members clearly outweighs employment or other 
benefits to low- and moderate-income persons;
    (D) Acquisition of land for which the specific proposed use has not 
yet been identified; and
    (E) Assistance to a for-profit business while that business or any 
other business owned by the same person(s) or entity(ies) is the 
subject of unresolved findings of noncompliance relating to previous 
CDBG assistance provided by the recipient.
    (5) Applying the individual activity standards. (i) Where an 
activity is expected both to create or retain jobs and to provide goods 
or services to residents of an area, it will be disqualified only if 
the amount of CDBG assistance exceeds both of the amounts in paragraph 
(f)(4)(i) of this section.
    (ii) The individual activity tests in paragraph (f)(4)(i) of this 
section shall be applied to the number of jobs to be created or 
retained, or to the number of persons residing in the area served (as 
applicable), as determined at the time funds are obligated to 
activities.
    (iii) Where CDBG assistance for an activity is limited to job 
training and placement and/or other employment support services, the 
jobs assisted with CDBG funds shall be considered to be created or 
retained jobs for the purposes of applying the individual activity 
standards in paragraph (f)(4)(i) of this section.
    (6) Documentation. The state and its grant recipients 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 anticipated when the CDBG assistance was 
obligated. If a state grant recipient's actual results show a pattern 
of substantial variation from anticipated results, the state and its 
recipient are expected to take those actions reasonably within their 
respective control to improve the accuracy of the projections. If the 
actual results demonstrate that the state has failed the public benefit 
standards, HUD may require the state to meet more stringent standards 
in future years as appropriate.
    (g) Amendments to economic development projects after review 
determinations. If, after the grantee enters into a contract to provide 
assistance to a project, the scope or financial elements of the project 
change to the extent that a significant contract amendment is 
appropriate, the project should be reevaluated under these and the 
recipient's guidelines. (This would include, for example, situations 
where the business requests a change in the amount or terms of 
assistance being provided, or an extension to the loan payment period 
required in the contract.) If a reevaluation of the project indicates 
that the financial elements and public benefit to be derived have also 
substantially changed, then the recipient should make appropriate 
adjustments in the amount, type, terms [[Page 1951]] or conditions of 
CDBG assistance which has been offered, to reflect the impact of the 
substantial change. (For example, if a change in the project elements 
results in a substantial reduction of the total project costs, it may 
be appropriate for the recipient to reduce the amount of total CDBG 
assistance.) If the amount of CDBG assistance provided to the project 
is increased, the amended project must still comply with the public 
benefit standards under paragraph (f) of this section.
    12. Section 570.483 is amended by:
    a. Revising the section heading;
    b. Adding a new paragraph (b)(1)(iv):
    c. Revising paragraph (b)(2)(i)(C), and adding new paragraphs 
(b)(2)(iv) and (b)(2)(v);
    d. Revising paragraph (b)(3) introductory text;
    e. Redesignating paragraph (b)(4)(iv) as (b)(4)(vi), and by adding 
new paragraphs (b)(4)(iv) and (v);
    f. Revising newly designated paragraph (b)(4)(vi)(B);
    g. Redesignating newly designated paragraph (b)(4)(vi)(c) as 
paragraph (b)(4)(vi)(F) and revising it;
    h. Adding new paragraphs (b)(4)(vi)(C), (D) and (E); and
    i. Adding new paragraphs (e)(4) and (5), to read as follows:


Sec. 570.483  Criteria for national objectives.

* * * * *
    (b) * * *
    (1) * * *
    (iv) Activities meeting the requirements of paragraph (e)(4)(i) of 
this section may also be considered to qualify under this paragraph 
(b).
    (2) * * *
    (i) * * *
    (C) Activities where the benefit to low- and moderate-income 
persons to be considered is the creation or retention of jobs, except 
as provided in paragraph (b)(2)(v) of this section.
* * * * *
    (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) and limited to microenterprises) with respect to those 
owners of microenterprises and persons developing microenterprises 
assisted under the activity who 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.
    (v) An activity designed to provide job training and placement and/
or other employment support services, including, but not limited to, 
peer support programs, counseling, child care, transportation, and 
other similar services, in which the percentage of low- and moderate-
income persons assisted is less than 51 percent may qualify under this 
paragraph in the following limited circumstances:
    (A) In such cases where such training or provision of supportive 
services is an integrally-related component of a larger project, the 
only use of CDBG assistance for the project is to provide the job 
training and/or supportive services; and
    (B) The proportion of the total cost of the project borne by CDBG 
funds is no greater than the proportion of the total number of persons 
assisted who are low or moderate income.
    (3) Housing activities. An eligible activity carried out for the 
purpose of providing or improving permanent residential structures 
which, upon completion, will be occupied by low- and moderate-income 
households. This would include, but not necessarily be limited to, the 
acquisition or rehabilitation of property, conversion of non-
residential structures, and new housing construction. If the structure 
contains two dwelling units, at least one must be so occupied, and if 
the structure contains more than two dwelling units, at least 51 
percent of the units must be so occupied. Where two or more rental 
buildings being assisted are or will be located on the same or 
contiguous properties, and the buildings will be under common ownership 
and management, the grouped buildings may be considered for this 
purpose as a single structure. Where housing activities being assisted 
meet the requirements of paragraph (e)(4)(ii) of this section, all such 
housing may also be considered for this purpose as a single structure. 
For rental housing, occupancy by low and moderate income households 
must be at affordable rents to qualify under this criterion. The 
recipient shall adopt and make public its standards for determining 
``affordable rents'' for this purpose. The following shall also qualify 
under this criterion:
* * * * *
    (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) 
that either:
    (1) Meets the requirements of paragraph (b)(4)(v) of this section; 
or
    (2) Has 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) that meets the requirements of paragraph 
(b)(4)(v) of this section and the job under consideration is to be 
located within that census tract.
    (v) A census tract (or block numbering area) qualifies for the 
presumptions permitted under paragraphs (b)(4)(iv) (A)(1) and (B) of 
this section if it is either part of a Federally-designated Empowerment 
Zone or Enterprise Community or meets the following criteria:
    (A) It has a poverty rate of at least 20 percent as determined by 
the most recently available decennial census information;
    (B) It does not include any portion of a central business district, 
as this term is used in the most recent Census of Retail Trade, unless 
the tract has a poverty rate of at least 30 percent as determined by 
the most recently available decennial census information; and
    (C) It evidences pervasive poverty and general distress by meeting 
at least one of the following standards:
    (1) All block groups in the census tract have poverty rates of at 
least 20 percent;
    (2) The specific activity being undertaken is located in a block 
group that has a poverty rate of at least 20 percent; or
    (3) Upon the written request of the recipient, HUD determines that 
the census tract exhibits other objectively determinable signs of 
general distress such as high incidence of crime, narcotics use, 
homelessness, abandoned housing, and deteriorated infrastructure or 
substantial population decline.
    (vi) * * *
    (B) Where CDBG funds are used to pay for the staff and overhead 
costs of a subrecipient specified in section 105(a)(15) of the Act 
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 any one-year period.
    (C) Where CDBG funds are used by a recipient or subrecipient to 
provide technical assistance to businesses, this requirement may be met 
by aggregating the jobs created or retained by all of the businesses 
receiving technical assistance during any one-year period.
    (D) Where CDBG funds are used for activities meeting the criteria 
listed at Sec. 570.482(f)(3)(v), this requirement may be met by 
aggregating the jobs created or retained by all businesses for which 
CDBG assistance is obligated for such activities during any one-year 
period, except as provided at paragraph (e)(5) of this 
section. [[Page 1952]] 
    (E) Where CDBG funds are used by a Community Development Financial 
Institution to carry out activities for the purpose of creating or 
retaining jobs, this requirement may be met by aggregating the jobs 
created or retained by all businesses for which CDBG assistance is 
obligated for such activities during any one-year period, except as 
provided at paragraph (e)(5) of this section.
    (F) Where CDBG funds are used for public facilities or improvements 
which will result in the creation or retention of jobs by more than one 
business, this requirement may be met by aggregating the jobs created 
or retained by all such businesses as a result of the public facility 
or improvement.
    (1) Where the public facility or improvement is undertaken 
principally for the benefit of one or more particular businesses, but 
where other businesses might also benefit from the assisted activity, 
the requirement may be met by aggregating only the jobs created or 
retained by those businesses for which the facility/improvement is 
principally undertaken, provided that the cost (in CDBG funds) for the 
facility/improvement is less than $10,000 per permanent full-time 
equivalent job to be created or retained by those businesses.
    (2) In any case where the cost per job to be created or retained 
(as determined under paragraph (b)(4)(iii)(C)(1) of this section) is 
$10,000 or more, the requirement must be met by aggregating the jobs 
created or retained as a result of the public facility or improvement 
by all businesses in the service area of the facility/improvement. This 
aggregation must include businesses which, as a result of the public 
facility/improvement, locate or expand in the service area of the 
public facility/improvement between the date the state awards the CDBG 
funds to the recipient and the date one year after the physical 
completion of the public facility/improvement. In addition, the 
assisted activity must comply with the public benefit standards at 
Sec. 570.482(e).
* * * * *
    (e) * * *
    (4) Where CDBG-assisted activities are carried out by a Community 
Development Financial Institution whose charter limits its investment 
area to a primarily residential area consisting of at least 51 percent 
low- and moderate-income persons, the unit of general local government 
may also elect the following options:
    (i) Activities carried out by the Community Development Financial 
Institution for the purpose of creating or retaining jobs may, at the 
option of the unit of general local government, be considered to meet 
the requirements of this paragraph under the criteria at paragraph 
(b)(1)(iv) of this section in lieu of the criteria at paragraph (b)(4) 
of this section; and
    (ii) All housing activities for which the Community Development 
Financial Institution obligates CDBG assistance during any one-year 
period may be considered to be a single structure for purposes of 
applying the criteria at paragraph (b)(3) of this section.
    (5) Where an activity meeting the criteria at Sec. 570.482(f)(3)(v) 
also meets the requirements at paragraph (e)(4)(i) of this section, the 
unit of general local government may elect to qualify the activity 
under either the area benefit criteria at paragraph (b)(1)(iv) of this 
section or the job aggregation criteria at paragraph (b)(4)(vi)(D) of 
this section, but not both. Where an activity may meet the job 
aggregation criteria at both paragraphs (b)(4)(vi) (D) and (E) of this 
section, the unit of general local government may elect to qualify the 
activity under either criterion, but not both.
* * * * *
    13. Section 570.489 is amended by:
    a. Revising paragraph (e)(1) introductory text;
    b. Redesignating paragraph (e)(2) as paragraph (e)(3); and
    c. Adding a new paragraph (e)(2), to read as follows:


Sec. 570.489  Program administrative requirements.

* * * * *
    (e) Program income. (1) For the purposes of this subpart, ``program 
income'' is defined as gross income received by a state, a unit of 
general local government or a subrecipient of a unit of general local 
government that was generated from the use of CDBG funds, except as 
provided in paragraph (e)(2) of this section. When income is generated 
by an activity that is only partially assisted with CDBG funds, the 
income shall be prorated to reflect the percentage of CDBG funds used 
(e.g., a single loan supported by CDBG funds and other funds; a single 
parcel of land purchased with CDBG funds and other funds). Program 
income includes, but is not limited to, the following:
* * * * *
    (2) ``Program income'' does not include the following:
    (i) The total amount of funds which is less than $25,000 received 
in a single year that is retained by a unit of general local government 
and its subrecipients;
    (ii) Amounts generated by activities eligible under section 
105(a)(15) of the Act and carried out by an entity under the authority 
of section 105(a)(15) of the Act;
    (iii) Amounts generated by activities that are financed by a loan 
guaranteed under Section 108 of the Act and meet one or more of the 
public benefit criteria specified at Sec. 570.482(f)(3)(v) or are 
carried out in conjunction with a grant under Section 108(q) of the Act 
in an area determined by HUD to meet the eligibility requirements for 
designation as an Urban Empowerment Zone pursuant to 24 CFR part 597, 
subpart B. Such exclusion shall not apply if CDBG funds are used to 
repay the guaranteed loan. When such a guaranteed loan is partially 
repaid with CDBG funds, the amount generated shall be prorated to 
reflect the percentage of CDBG funds used. Amounts generated by 
activities financed with loans guaranteed under Section 108 of the Act 
which are not defined as program income shall be treated as 
miscellaneous revenue and shall not be subject to any of the 
requirements of this part. However, such treatment shall not affect the 
right of the Secretary to require the Section 108 borrower to pledge 
such amounts as security for the guaranteed loan. The determination 
whether such amounts shall constitute program income shall be governed 
by the provisions of the contract required at Sec. 570.705(b)(1).
* * * * *

Subpart J--Grant Administration

    14. Section 570.500 is amended by revising paragraph (a) 
introductory text; by adding a new paragraph (a)(4); and by revising 
paragraph (c); to read as follows:


Sec. 570.500  Definitions.

* * * * *
    (a) Program income means gross income received by the recipient or 
a subrecipient directly generated from the use of CDBG funds, except as 
provided in paragraph (a)(4) of this section.
* * * * *
    (4) Program income does not include:
    (i) Any income received in a single program year by the recipient 
and all its subrecipients if the total amount of such income does not 
exceed $25,000; and
    (ii) Amounts generated by activities that are financed by a loan 
guaranteed under Section 108 of the Act and meet one or more of the 
public benefit criteria specified at Sec. 570.209(b)(2)(v) or are 
carried out in conjunction with a grant under Section 108(q) in an area 
determined by HUD to meet the eligibility requirements for designation 
as an Urban Empowerment Zone pursuant to 24 CFR part 597, subpart B. 
Such exclusion shall not apply if CDBG [[Page 1953]] funds are used to 
repay the guaranteed loan. When such a guaranteed loan is partially 
repaid with CDBG funds, the amount generated shall be prorated to 
reflect the percentage of CDBG funds used. Amounts generated by 
activities financed with loans guaranteed under Section 108 which are 
not defined as program income shall be treated as miscellaneous revenue 
and shall not be subject to any of the requirements of this Part. 
However, such treatment shall not affect the right of the Secretary to 
require the Section 108 borrower to pledge such amounts as security for 
the guaranteed loan. The determination whether such amounts shall 
constitute program income shall be governed by the provisions of the 
contract required at Sec. 570.705(b)(1).
* * * * *
    (c) Subrecipient means a public or private nonprofit agency, 
authority or organization, or a for-profit entity authorized under 
Sec. 570.201(o), receiving CDBG funds from the recipient to undertake 
activities eligible for such assistance under Subpart C of this part. 
The term excludes an entity receiving CDBG funds from the recipient 
under the authority of Sec. 570.204. 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.
    15. Section 570.506 is amended by revising paragraph (b) 
introductory text; by removing the semicolon at the end of paragraph 
(b)(2)(iii) and adding a period in its place; by redesignating 
paragraphs (b)(7) through (b)(11) as paragraphs (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, the data source used for determining the percentage, and a 
description of the pervasive poverty and general distress in the census 
tract in sufficient detail to demonstrate how the census tract met the 
criteria in Sec. 570.208(a)(4)(v), as applicable.
* * * * *
    (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.
* * * * *
    16. Appendix A is added to part 570 to read as follows:

Appendix A to Part 570--Guidelines and Objectives for Evaluating 
Project Costs and Financial Requirements

    I. 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 which are financially viable and will make the 
most effective use of the CDBG funds. The use of these underwriting 
guidelines as published by HUD is not mandatory. However, grantees 
electing not to use these underwriting 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 underwriting 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.
    II. Where appropriate, HUD's underwriting guidelines 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 to take into 
account the differences in the capacity and level of sophistication 
among businesses of differing sizes.
    III. Recipients are encouraged, when they develop their own 
programs and underwriting criteria, to also take these factors into 
account. For example, a recipient administering a program providing 
only technical assistance to small businesses might choose to apply 
underwriting guidelines to the technical assistance program as a 
whole, rather than to each instance of assistance to a business. 
Given the nature and dollar value of such a program, a recipient 
might choose to limit its evaluation to factors such as the extent 
of need for this type of assistance by the target group of 
businesses and the extent to which this type of assistance is 
already available.
    IV. The objectives of the underwriting guidelines are to ensure:
    (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.
    i. Project costs are reasonable. i. 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 
[[Page 1954]] 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.
    ii. 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. i. 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.
    ii. 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:
    A. 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
    B. 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.
    iii. 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 might 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. i. 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:
    A. 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
    B. 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.
    ii. 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, 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. Recipients should be guided by the principle of not 
placing CDBG funds at significantly greater risk than non-CDBG 
funds. 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.

    Dated: December 22, 1994.
Mark C. Gordon,
General Deputy Assistant Secretary for Community Planning and 
Development.
[FR Doc. 94-32151 Filed 12-29-94; 4:33 pm]
BILLING CODE 4210-29-P