[Federal Register Volume 62, Number 183 (Monday, September 22, 1997)]
[Rules and Regulations]
[Pages 49572-49579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25044]



[[Page 49571]]

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Part IV





Department of Housing and Urban Development





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24 CFR Part 971



Assessment of the Reasonable Revitalization Potential of Certain Public 
Housing Required by Law; Final Rule

  Federal Register / Vol. 62, No. 183 / Monday, September 22, 1997 / 
Rules and Regulations  

[[Page 49572]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 971

[Docket No. FR-4120-I-09]
RIN 2577-AB79


Assessment of the Reasonable Revitalization Potential of Certain 
Public Housing Required by Law

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Interim rule.

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SUMMARY: On September 26, 1996, HUD published a notice implementing 
section 202 of the Omnibus Consolidated Rescissions and Appropriations 
Act of 1996. Section 202 requires PHAs to identify certain distressed 
public housing developments that cost more than Section 8 rental 
assistance and cannot be reasonably revitalized. Households in 
occupancy that will be affected by the activities will be offered 
tenant-based or project-based assistance (that can include other public 
housing units) and will be relocated, to other decent, safe, sanitary, 
and affordable housing which is, to the maximum extent practicable, 
housing of their choice. After residents are relocated, the distressed 
developments (or affected buildings) for which no reasonable means of 
revitalization exists will be removed from the public housing 
inventory. The September 26, 1996 notice invited public comments. This 
interim rule takes into consideration the comments received on the 
September 26, 1996 notice and codifies the modified requirements in a 
new part 971.

DATES: Effective date: October 22, 1997.
    Comment due date: November 21, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interim rule to the Office of the General Counsel, Rules Docket 
Clerk, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, S.W., Washington, D.C. 20410-0500. Comments should 
refer to the above docket number and title. A copy of each 
communication submitted will be available for public inspection and 
copying during regular business hours (weekdays 7:30 a.m. to 5:30 p.m. 
Eastern time) at the above address. Facsimile (FAX) comments are not 
acceptable.

FOR FURTHER INFORMATION CONTACT: Rod Solomon, Senior Director for 
Policy and Legislation, Office of Public and Indian Housing, Department 
of Housing and Urban Development, 451 Seventh Street, S.W., Washington, 
D.C. 20410, telephone (voice): (202) 708-0713 (This is not a toll-free 
number.) For hearing-and speech-impaired persons, this number may be 
accessed via text telephone by dialing the Federal Information Relay 
Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act

    The information collection requirements contained in this interim 
rule have been approved by the Office of Management and Budget (OMB) in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520), and assigned OMB control number 2577-0210. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection displays a valid 
control number.

II. The September 26, 1996 Federal Register Notice

    On September 26, 1996, the Department published at 61 FR 50632, a 
notice to implement section 202 of the Omnibus Consolidated Rescissions 
and Appropriations Act of 1996 (Pub. L. 104-134, approved April 26, 
1996) (``OCRA''). Section 202 requires PHAs to identify certain 
distressed public housing developments that cost more than Section 8 
rental assistance and cannot be reasonably revitalized. Households in 
occupancy that will be affected by the activities will be offered 
tenant-based or project-based assistance (that can include other public 
housing units) and will be relocated, to other decent, safe, sanitary, 
and affordable housing which is, to the maximum extent practicable, 
housing of their choice. After residents are relocated, the distressed 
developments (or affected buildings) for which no reasonable means of 
revitalization exists will be removed from the public housing 
inventory.
    As mandated by section 202, this requirement covers developments 
that (1) are on the same or contiguous sites, (2) contain more than 300 
units, (3) have a vacancy rate of at least ten percent for units not in 
funded, on-schedule modernization programs, (4) cannot be revitalized 
through reasonable programs, and (5) are more expensive than tenant-
based assistance. These developments must be removed from the public 
housing inventory within five years. Plans to do so must be developed 
in consultation with affected public housing residents and the local 
government containing the public housing. The term ``developments,'' as 
used in the statute and in this rule, includes applicable portions of 
developments. Tenant-based assistance or relocation to other public or 
assisted housing (to the maximum extent practicable, of the tenant's 
choice) must be offered to public housing residents whose developments 
will be removed from the inventory.
    As required by section 202, the September 26, 1996 notice 
established standards to permit implementation in fiscal year 
1996.1 The standards tracked section 202(a) of OCRA and 
became effective September 30, 1996. On December 26, 1996, at 61 FR 
68048, the Department issued a notice which amended the time frames 
that the Department set in the September 26, 1996 notice for 
accomplishing the standards necessary for compliance with section 202. 
On March 24, 1997, at 62 FR 13894, and on July 2, 1997, at 62 FR 35828, 
the Department issued notices which further amended the time frames.
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    \1\ The standards set forth in the September 26, 1996 notice are 
organized to coincide with the following statutory provisions:
    (A) Be on the same or contiguous sites.
    (B) Total more than 300 dwelling units.
    (C) Have a vacancy rate of at least ten percent for dwelling 
units not in funded, on-schedule modernization programs.
    (D) Have an estimated cost of continued operation and 
modernization of the developments as public housing in excess of the 
cost of providing tenant-based assistance under section 8 of the 
United States Housing Act of 1937 for all families in occupancy, 
based on appropriate indicators of cost (such as the percentage of 
total development cost required for modernization).
    (E) Be identified as distressed housing that the public housing 
agency cannot assure the long-term viability as public housing 
through reasonable revitalization, density reduction, or achievement 
of a broader range of household income.
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    Section 202 is a continuing requirement. For FY 1997, the time 
frames were established by Federal Register notices referenced above. 
The Department is considering, as of FY 1998, requiring one submission 
to be due at the time of submission of the Comprehensive Grant Plan or 
as a part of the Comprehensive Grant Plan. Comments are invited on this 
consideration, as well as other aspects of the proposed timing and 
consultation process.

III. Summary of Changes to the September 26, 1996 Federal Register 
Notice

    The interim rule makes the following changes to the provisions set 
out in the September 26, 1996 notice:
    1. Appropriate resident participation and involvement is 
emphasized.
    2. When determining whether a property is subject to the 
requirements,

[[Page 49573]]

PHAs can now use vacancy data from either their last confirmed PHMAP 
certification, as reported on the Form HUD-51234 (Report on Occupancy), 
or more recent data which demonstrates improvement in occupancy rates.
    3. The per occupied unit cost test for continuing to operate the 
current, partially occupied development is eliminated. Instead, the 
cost test used will be the cost of providing a development that is 
viable over the long term.
    4. For definition of viability, the income mix standards are 
changed to emphasize a site's ability to attract and retain a 
reasonable mix of households with full-time workers.
    5. Changes to the post-revitalization cost test include reduced 
accrual costs for a revitalized development to better reflect 
modernization costs and the amount of investment made in the property, 
and inclusion of certain demolition and relocation costs as a cost of 
Section 8 rental assistance. Though the requirement remains for most 
developments to amortize modernization over a 20 year period rather 
than over a thirty year period, PHAs may present a thirty year 
amortization when revitalization is equivalent to new construction. 
Revitalization will only be considered reasonable where its cost does 
not exceed the cost of Section 8 rental assistance. All sources of 
funds for the revitalization effort must be identified, and the funds 
must be on hand if the PHA proposes to revitalize the development.
    6. Where the PHA will demolish all of the units in a development, 
or the portion thereof, that is subject to section 202, section 202 
requirements will be satisfied once the demolition occurs and its 
standards will not be applied further to the PHA's use of the site.

IV. Discussion of Public Comments on the September 26, 1996 Federal 
Register Notice

    The September 26, 1996 notice invited public comment, and five 
commenters responded. In general, the commenters expressed concern in 
several areas. First, the process followed to develop and publish the 
notice was questioned. Second, the need for tenant consultation at all 
stages was stressed. Third, various issues were raised regarding the 
cost tests, specifically whether both the pre- and post-revitalization 
cost tests adequately reflected true and accurate costs. Further, many 
comments considered the outcome of post-revitalization scenarios, 
including the reasonableness of the ``definition'' of long-term 
viability, and the availability of sufficient Section 8 rental 
assistance. Finally, several commenters questioned if the outcome meant 
fewer housing resources for those in need.
    A summary of the comments, with HUD's responses, follows:
    Administrative Process and Legal Requirements Comment: The 
September 26, 1996 notice is invalid because:

--The Administrative Procedures Act was ignored. There was not a 
proposed and final rulemaking (and no good cause exception) with 
submission to Congress and the Comptroller General. HUD has usurped the 
rulemaking process as described in Part 10 of 24 Code of Federal 
Regulations.
--The statutory authority for the program lapsed on October 1, 1996, 
and there has been no legal extension.
--The notice was published on September 26, 1996 with an effective date 
of September 30, 1996. This was not sufficient; there is a need for a 
proposed and a final rule.
--The legislative language indicates that the process for 
implementation (and not actual implementation) begin by September 30, 
1996.

    Response: The September 26, 1996 notice is valid for the following 
reasons:

--Advance notice and public comment were not required before issuance 
of the document because the document was a notice and not a rule. 
Section 202 of OCRA does not contain a provision that mandates 
rulemaking before implementation of this section. Furthermore, section 
202 directs the Secretary to establish standards for implementation and 
guidelines for developing a conversion plan. The notice did not go 
beyond the provisions of the statute, but provided the standards and 
guidelines required by the statute. With respect to the latter, HUD 
solicited public comment from representatives of groups most affected. 
As stated in the published Notice, the comments were taken into 
consideration.
--Since the document was not a rule, it did not have to be submitted 
for Congressional review of final rules and did not have to comply with 
the 15-day pre-publication and 30-day delayed effective date 
requirements for rules under section 7(o) of the HUD Act.
--Section 202 mandates that the Secretary establish standards to permit 
implementation of this section in Fiscal Year 1996. The statute was 
passed on April 26, 1996, and it would have been unreasonable to expect 
full implementation, through proposed and final rulemaking, by 
September 30, 1996. HUD made every effort to publish these standards as 
soon as possible, after informal consultation with representative 
groups. Despite the tight deadline and the necessary review procedures 
(including review by OMB), HUD was able to publish the standards on 
September 26, 1996.

Tenant Consultation and Relocation

    Comment: Tenant consultation is not addressed. There is a need for 
tenant consultation at all stages of the process, with detail provided 
on what is expected (in terms of tenant consultation) at each stage.
    Response: The Department agrees that it is important to involve 
tenants at all stages of the assessment process, and the September 26, 
1996 notice does discuss the statute's requirement for consultation 
with applicable public housing tenants of the affected developments.
    On December 26, 1996, the Department published another notice (61 
FR 68048), which clarifies that PHAS must provide, as an initial step, 
copies of their submissions for Standards A to C to the appropriate 
tenant councils and groups.
    This interim rule further details, at Sec. 971.9, the PHAs' 
requirements to consult with appropriate tenant groups when conducting 
a viability assessment and developing conversion plans.
    Comment: The notice needs to further address tenant relocation, 
expand relocation requirements and reference the Uniform Relocation 
Act.
    Response: The section entitled ``Plan for Removal of Units From 
Public Housing Inventories; Implementation'' in the September 26, 1996 
notice includes a discussion of the relocation process, including 
alternatives, resources and the statutory requirement for consultation.
    This interim rule cross-references to the regulatory provisions on 
displacement and relocation at 24 CFR 970.5 which include applicability 
of the Uniform Relocation Assistance and Real Property Acquisition 
Policies Act of 1970 (42 U.S.C. 4601-4655) and the implementing 
regulations at 49 CFR part 24.

Cost Test Issues

    Comment: The formula creates inflated costs per public housing 
unit, while undercounting the costs of Section 8 rental assistance.
    The formula unfairly favors Section 8 by comparing the cost of all 
public housing units to the cost of Section 8 for only tenants 
currently in occupancy, by

[[Page 49574]]

failing to capture inflation, and by overstating accrual needs.
    The calculation disadvantages public housing.
    The calculation fails to capture the inherent value of a public 
housing development.
    Demolition and relocation costs should be included on the Section 8 
side of the calculation.
    The calculation overly penalizes a substantially vacant 
development.
    Response: Several changes have been made to the cost test as a 
result of these comments and the experiences of HUD and its 
consultants. With the changes, the interim rule provides a better 
comparison between the costs of a public housing unit versus the costs 
of Section 8 rental assistance.
    The cost test in the notice for continuing to administer the 
current, partially occupied development typically required layers of 
assumptions to estimate costs and to express these costs per occupied 
unit. Moreover, while that test attempted to accurately include current 
costs per occupied unit, no public housing authority proposes to 
continue to administer a development for two decades in a partially 
occupied state. Thus, HUD has decided to drop the initial cost test and 
to rely on the cost test for a revitalized, fully occupied development.
    The cost test for the revitalized development will require 
realistic estimates for physically upgrading and then maintaining a 
viable development. Although current operating costs of the development 
will no longer be required for an independent cost test, these current 
costs will be used as one of the standards to show that the projected 
operating costs of the revitalized development are plausible. In 
particular, the discussion of projected costs must justify any estimate 
of per unit costs of the revitalized development that are significantly 
lower than the current operating costs per occupied unit of the 
development (or an estimate of those costs).
    The accrual number for the post-revitalization cost test is now 
determined by taking the Total Development Cost (TDC), multiplying it 
by a coefficient of .02, and dividing by 12. Commenters thought that 
higher levels of modernization at the start of an accrual cycle should 
lower the accrual costs for many years to come. HUD agrees. To reflect 
these views, the accrual model for the revitalization stage (now the 
only stage) will first deduct from the TDC half the per unit cost of 
modernization, before multiplying the coefficient of .02 (a fifty year 
cycle) and dividing by 12 to make a monthly estimate. Thus, if the 
modernization cost per unit equalled the TDC, the estimated accrual per 
month would be halved.
    An amount for demolition, site preparation and relocation will now 
be included as a cost of Section 8 rental assistance. Commenters said 
that demolition of buildings on site is a cost that should be covered 
by the Section 8 alternative. HUD agrees. The interim rule takes into 
account basic demolition costs of units that would otherwise be 
occupied under a viability plan and treats them as a capital cost to be 
amortized on the Section 8 side. The per unit costs of basic demolition 
and relocation will be actual costs based on comparable experience, but 
can be no higher than 10 percent of the TDC of a two bedroom walkup in 
the area. This cap is higher than the typical cost of demolition 
sustained by buildings demolished in the Hope VI program.
    Some commenters suggested that extensive revitalization of a 
development will extend its useful life as low income housing to well 
beyond the twenty years of a viability test. Although some developments 
with the right mix of site, initial construction, management, tenants, 
and neighborhood remain viable well past twenty years, such extended 
viability cannot be assumed--especially for developments with the 
vacancy problems of those on the 202 list. The expenditure of 
modernization funds will not necessarily ensure viability past twenty 
years. Rather than generally extending the amortization period from 
twenty to thirty years, and rather than stiffening the viability test 
from twenty to thirty years, the interim rule instead will use a thirty 
year period only when revitalization is equivalent to new construction. 
Even for developments with a twenty year amortization, the cost test 
will recognize the value of large-scale modernization by reducing the 
ongoing cost of accrual (See above).
    A somewhat different view of value is that public housing merits an 
insurance value because it will always be there to serve low income 
residents, whereas private rental housing might become much less 
available. Insurance value, however, is not easily computed and a 
marked decline in the supply of private rental housing for low income 
households will be reflected in a higher Fair Market Rent (FMR) 
standard.

Post-Revitalization Scenarios

    Comment: The definition of long-term viability is too stringent; 
not all covered developments need density reduction; the income-mix 
requirement is unrealistic.
    The criteria for long-term viability are problematic. Additional 
field work needs to be done to determine more adequately what is viable 
in the long-term (e.g., what is reasonable in terms of income mix).
    The definition of long-term viability is too vague.
    HUD needs to clarify what is meant by ``substantially exceeds 
Section 8 cost test.''
    The use of the Total Development Cost guidelines is inappropriate.
    Response: The basic elements required for reasonable revitalization 
have been retained. Viability has been defined elsewhere as the 
achievement of structural/system soundness and full occupancy at 
reasonable cost (see 24 CFR 968.315(e)(4)); and a reasonable source of 
funding also is an obvious requirement. Experience has shown, in 
addition, that achievement of physical soundness and full occupancy is 
not always enough to achieve viability in the long term. Section 202's 
inclusion of ``density reduction'' and ``achievement of a broader range 
of household income'', as measures to be taken in pursuit of long-term 
viability, indicate Congress' understanding that excessive density and 
concentration of very-low-income households can be serious impediments 
to the viability of public housing.
    A fundamental aspect of this standard is the definition of long-
term viability. For this purpose, HUD will continue to consider twenty 
years (or at least 30 years when the investment is equivalent to new 
construction) to be ``long term''. Twenty years is in keeping with the 
expected life of modernization improvements, as reflected by the length 
of annual contributions contracts covering modernization grant awards. 
[See section 14(b)(2) of the United States Housing Act of 1937 as 
amended, 42 U.S.C. 1437 et seq.]
    This interim rule, nevertheless, in some respects modifies the 
``definition'' of long-term viability. First, density requirements are 
clarified. PHAs no longer need demonstrate reduced density to assure 
long-term viability, but must show that the density proposed in the 
revitalized site is appropriate for the property and the site.
    Second, income mix requirements are loosened somewhat. Some 
commenters thought that requiring an income mix estimated as 25 percent 
of households over time having an income of 30 to 50% of the area 
median income was too rigorous as a threshold standard for viability. 
HUD agrees. The interim rule will moderate the standard, so that the 
revitalized development must be able to attract over time a significant 
mix of

[[Page 49575]]

households with at least one full-time worker (for example, at least 20 
percent with an income at least 30 percent of the area median). The 
presence of some income mix is essential to the long-term social 
viability of a family development and is cited in the statute, and 
pegging that mix to a significant presence of full-time workers with a 
range of modest incomes is a minimum way to have a mix.
    After consideration of the comments and in light of the statute's 
purpose, the interim rule states that reasonable revitalization must be 
able to be carried out with currently available funds and for no more 
than the cost of Section 8 rental assistance.
    Commenters indicated that use of Total Development Cost (TDC) 
guidelines as a measure on which to judge reasonable reconstruction 
costs is inappropriate. Though HUD is reviewing possible changes in the 
applicability of TDC to reconstruction costs on an expedited basis, 
PHAs must continue to use the TDC until such changes are finalized.
    Comment: The time frames for response are not realistic, especially 
for the development of a revitalization plan.
    Response: The time frames for submission have been modified 
accordingly and the new time frames were published in notices in the 
Federal Register on December 26, 1996, March 24, 1997, and July 2, 
1997. The July 2, 1997 notice extended the deadlines for submissions to 
HUD field offices as follows:

Accomplish Standards A to C by January 31, 1997 (was December 29, 1996)
Accomplish Standard D and E thirty (30) days after the effective date 
of the interim rule (was June 30, 1997)
Submit conversion plan ninety (90) days after accomplishing Standards D 
and E (was September 26, 1997)

PHAs now have more time to comply with all of the requirements of 
Section 202, and to develop a plan to either remove units from the 
public housing inventory or revitalize the development. Additional time 
will be provided to PHAs to modify plans or submissions if needed to 
comply with this interim rule.
    Comment: The rule should stress the need for all plans to be 
consistent with the Consolidated Plan.
    Response: As required by the statute, the interim rule will 
reiterate that any conversion plan must be approved by the local 
officials as not inconsistent with the Consolidated Plan.
    Comment: HUD needs to indicate how a PHA can appeal if it disagrees 
with the HUD contractor.
    Response: As stated in the September 26, 1996 notice, for sites 
where HUD has contracted with consultants for assessments, PHA 
responsibilities under this section are independent of any activities 
of the consultants. PHAs are responsible for submitting documentation 
in accordance with the requirements, but may use the consultants' 
assessments if they choose. Even where the PHA agrees with the 
consultant's findings, HUD reserves the right to make its own 
assessment of the evidence. In cases where a PHA disagrees with the 
consultant's findings and recommendations, the PHA's independent 
submission will serve as an initial indicator of disagreement. HUD will 
follow up in such situations accordingly, and may require additional 
documentation from the PHA or the consultant.

Potential Loss of Low Income Housing Resources

    Comment: There needs to be a Section 8 rental assistance allocation 
to offset the loss of hard units.
    There are not sufficient Section 8 resources available to meet the 
demand.
    A commitment for replacement units is necessary before PHAs 
proceed.
    Response: HUD has awarded several thousand section 8 rental 
certificates and vouchers in fiscal years 1995 and 1996 for relocation 
housing or replacement of developments covered by this interim rule. 
The fiscal year 1997 appropriation of Section 8 rental assistance that 
can be used for section 202 purposes appears sufficient. HUD has 
requested that Congress appropriate a sufficient number of Section 8 
certificates and vouchers for this purpose in fiscal year 1998.
    Comment: The rule does not adequately consider the needs of the 
current residents, or those on the waiting list.
    The rule places a burden on the Section 8 rental market, which will 
be a problem for certain communities.
    The rule fails to adequately consider the need for hard units in 
certain communities.
    There is a need for additional project-based housing in some 
communities.
    This ``one size fits all'' solution is not applicable to all cases.
    Response: The law and the interim rule allow for implementation of 
a conversion plan over a period of up to five years, to provide some 
flexibility to adapt to local situations.

This Interim Rule

    This interim rule takes into consideration the comments received on 
the September 26, 1996 notice and codifies the modified requirements, 
as discussed above, in a new part 971. This interim rule also provides 
for establishment of the time frames for compliance with section 202 by 
publication of a notice annually in the Federal Register.

Justification for Interim Rule

    The Department generally publishes a rule for public comment before 
issuing a rule for effect, in accordance with its regulations on 
rulemaking in 24 CFR part 10. However, part 10 provides that prior 
public procedure will be omitted if HUD determines that it is 
``impracticable, unnecessary, or contrary to the public interest'' (24 
CFR 10.1).
    This interim rule provides further information on provisions that 
are already in effect, and modifies several of the requirements in 
accordance with public comments received on the September 26, 1996 
Federal Register notice. It is important that these changes be 
applicable to those PHAs subject to section 202 in fiscal year 1997.
    In the interest of obtaining the fullest participation possible in 
determining the proper means of administering the section 202 
provisions, and in addition to the comment process that occurred with 
respect to the Notice, the Department invites public comment on the 
interim rule. The comments received within the 60-day comment period 
will be considered during development of a final rule that ultimately 
will supersede this interim rule.

Findings and Certifications

Executive Order 12866

    This interim rule was reviewed by the Office of Management and 
Budget (OMB) under Executive Order 12866 on Regulatory Planning and 
Review, issued by the President on September 30, 1993. Any changes made 
in the rule subsequent to its submission to OMB are identified in the 
docket file, which is available for public inspection as provided under 
the section of this preamble entitled ``Address.''

Impact on the Environment

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969, 42 U.S.C. 4332. The Finding of No Significant Impact is available 
for public inspection and copying during regular business hours (7:30 
a.m. to 5:30 p.m.) in the Office of the Rules Docket Clerk, Room 10276, 
451 Seventh Street, S.W., Washington, D.C. 20410-0500.

[[Page 49576]]

Federalism Impact

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this interim rule do not have significant impact on States 
or their political subdivisions since the provisions of this interim 
rule apply to only a small percentage of PHAs that have developments 
with more than 300 units and adjusted vacancy rates of ten percent or 
more.

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this interim rule before publication and 
by approving it certifies that this interim rule will not have a 
significant impact on a substantial number of small entities, because 
the provisions of this interim rule apply to only a small percentage of 
PHAs that have developments with more than 300 units and adjusted 
vacancy rates of ten percent or more.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for the programs 
affected by this interim rule is 14.855.

List of Subjects in 24 CFR Part 971

    Grant programs--housing and community development, Public housing, 
Reporting and recordkeeping requirements.

    Accordingly, title 24 of the Code of Federal Regulations is amended 
to add a new part 971 to read as follows:

PART 971--ASSESSMENT OF THE REASONABLE REVITALIZATION POTENTIAL OF 
CERTAIN PUBLIC HOUSING REQUIRED BY LAW

Sec.
971.1  Purpose.
971.3  Standards for identifying developments.
971.5  Long-term viability.
971.7  Plan for removal of units from public housing inventories.
971.9  Tenant and local government consultation.
971.11  Hope VI developments.
971.13  HUD enforcement authority.

    Authority: Pub. L. 104-134; 42 U.S.C. 3535(d).


Sec. 971.1  Purpose.

    Section 202 of the Omnibus Consolidated Rescissions and 
Appropriations Act of 1996 (Pub.L. 104-134, approved April 26, 1996) 
(``OCRA'') requires PHAs to identify certain distressed public housing 
developments that cost more than Section 8 rental assistance and cannot 
be reasonably revitalized. Households in occupancy that will be 
affected by the activities will be offered tenant-based or project-
based assistance (that can include other public housing units) and will 
be relocated, to other decent, safe, sanitary, and affordable housing 
which is, to the maximum extent practicable, housing of their choice. 
After residents are relocated, the distressed developments (or affected 
buildings) for which no reasonable means of revitalization exists will 
be removed from the public housing inventory.


Sec. 971.3  Standards for identifying developments.

    (a) PHAs shall use the following standards for identifying 
developments or portions thereof which are subject to section 202's 
requirement that PHAs develop and carry out plans for the removal over 
time from the public housing inventory. These standards track section 
202(a) of OCRA. The development, or portions thereof, must:
    (1) Be on the same or contiguous sites. (OCRA Sec. 202(a)(1)). This 
standard and the standard set forth in paragraph (a)(2) of this section 
refer to the actual number and location of units, irrespective of HUD 
development project numbers.
    (2) Total more than 300 dwelling units. (OCRA Sec. 202(a)(2)).
    (3) Have a vacancy rate of at least ten percent for dwelling units 
not in funded, on-schedule modernization. (OCRA Sec. 202(a)(3)). For 
this determination, PHAs and HUD shall use the data the PHA relied upon 
for its last Public Housing Management Assessment Program (PHMAP) 
certification, as reported on the Form HUD-51234 (Report on Occupancy), 
or more recent data which demonstrates improvement in occupancy rates. 
Units in the following categories shall not be included in this 
calculation:
    (i) Vacant units in an approved demolition or disposition program;
    (ii) Vacant units in which resident property has been abandoned, 
but only if State law requires the property to be left in the unit for 
some period of time, and only for the period stated in the law;
    (iii) Vacant units that have sustained casualty damage, but only 
until the insurance claim is adjusted; and
    (iv) Units that are occupied by employees of the PHA and units that 
are utilized for resident services.
    (4) Have an estimated cost of continued operation and modernization 
of the developments as public housing in excess of the cost of 
providing tenant-based assistance under section 8 of the United States 
Housing Act of 1937 for all families in occupancy, based on appropriate 
indicators of cost (such as the percentage of total development cost 
required for modernization). (OCRA Sec. 202(a)(5)).
    (i) For purposes of this determination, the costs used for public 
housing shall be those necessary to produce a revitalized development 
as described in the paragraph (a)(5) of this section.
    (ii) These costs, including estimated operating costs, 
modernization costs and accrual needs must be used to develop a per 
unit monthly cost of continuing the development as public housing.
    (iii) That per unit monthly cost of public housing must be compared 
to the per unit monthly Section 8 cost.
    (iv) Both the method to be used and an example are included in the 
Appendix to this part.
    (5) Be identified as distressed housing that the PHA cannot assure 
the long-term viability as public housing through reasonable 
revitalization, density reduction, or achievement of a broader range of 
household income. (OCRA Sec. 202(a)(4)). [See Sec. 971.5.]
    (b) Properties meeting the standards set forth in paragraphs (a)(1) 
through (3) of this section will be assumed to be ``distressed'' unless 
the PHA can show that the property fails the standard set forth in 
paragraph (a)(3) of this section for reasons that are temporary in 
duration and are unlikely to recur.
    (c) Where the PHA will demolish all of the units in a development, 
or the portion thereof, that is subject to section 202, section 202 
requirements will be satisfied once the demolition occurs and its 
standards will not be applied further to the use of the site.
    (d) PHAs will meet the test for assuring long-term viability of 
identified housing only if it is probable that, after reasonable 
investment, for at least twenty years (or at least 30 years for 
rehabilitation equivalent to new construction) the development can 
sustain structural/system soundness and full occupancy; will not be 
excessively densely configured relative to standards for similar 
(typically family) housing in the community; will not constitute an 
excessive concentration of very low-income families; and has no other 
site impairments which clearly should disqualify the site from 
continuation as public housing.


Sec. 971.5  Long-term viability.

    (a) Reasonable investment. (1) Proposed revitalization costs for 
viability must be reasonable. Such costs must not exceed, and 
ordinarily would be substantially less than, 90 percent of HUD's total 
development cost limit for

[[Page 49577]]

the units proposed to be revitalized (100 percent of the total 
development cost limit for any ``infill'' new construction subject to 
this regulation). The revitalization cost estimate used in the PHA's 
most recent comprehensive plan for modernization is to be used for this 
purpose, unless a PHA demonstrates or HUD determines that another cost 
estimate is clearly more realistic to ensure viability and to sustain 
the operating costs that are described in paragraph (a)(2) of this 
section.
    (2) The overall projected cost of the revitalized development must 
not exceed the Section 8 cost under the method contained in the 
Appendix to this part, even if the cost of revitalization is a lower 
percentage of the TDC than the limits stated in paragraph (a)(1) of 
this section.
    (3) The source of funding for such a revitalization program must be 
identified and already available. In addition to other resources 
already available to the PHA, a PHA may assume that future formula 
funds provided through the Comprehensive Grant Program are available 
for this purpose, provided that they are sufficient to permit 
completion of the revitalization within the statutory five year time 
frame. (Comprehensive plans must be amended accordingly.)
    (b) Density. Density reduction measures would have to result in a 
public housing community with a density approaching that which prevails 
in the community for similar types of housing (typically family), or a 
lower density. If the development's density already meets this 
description, further reduction in density is not a requirement.
    (c) Income mix. (1) Measures generally will be required to broaden 
the range of resident incomes to include over time a significant mix of 
households with at least one full-time worker (for example, at least 20 
percent with an income at least 30 percent of median area income). 
Measures to achieve a broader range of household incomes must be 
realistic in view of the site's location. Evidence of such realism 
typically would include some mix of incomes of other households located 
in the same census tract or neighborhood, or unique advantages of the 
public housing site.
    (2) For purposes of judging appropriateness of density reduction 
and broader range of income measures, overall size of the public 
housing site and its number of dwelling units will be considered. The 
concerns these measures would address generally are greater as the 
site's size and number of dwelling units increase.


Sec. 971.7  Plan for removal of units from public housing inventories.

    (a) Time frames. Section 202 is a continuing requirement, and the 
Secretary will establish time frames for submission of necessary 
information annually through publication of a Federal Register notice.
    (b) Plan for removal. With respect to any development that meets 
all of the standards listed, the PHA shall develop a plan for removal 
of the affected public housing units from the inventory. The plan 
should consider relocation alternatives for households in occupancy, 
including other public housing and Section 8 tenant-based assistance, 
and shall provide for relocation from the units as soon as possible. 
For planning purposes, PHAs shall assume that HUD will be able to 
provide in a timely fashion any necessary Section 8 rental assistance. 
The plan shall include:
    (1) A listing of the public housing units to be removed from the 
inventory;
    (2) The number of households to be relocated, by bedroom size;
    (3) Identification and obligation status of any previously approved 
CIAP, modernization, or major reconstruction funds for the distressed 
development and PHA recommendations concerning transfer of these funds 
to Section 8 or alternative public housing uses;
    (4) The relocation resources that will be necessary, including a 
request for any necessary Section 8 and a description of actual or 
potential public or other assisted housing vacancies that can be used 
as relocation housing;
    (5) A schedule for relocation and removal of units from the public 
housing inventory;
    (6) Provision for notifying families residing in the development, 
in a timely fashion, that the development shall be removed from the 
public housing inventory; informing such families that they will 
receive tenant-based or project-based assistance; providing any 
necessary counselling with respect to the relocation, including a 
request for any necessary counseling funds; and assuring that such 
families are relocated as necessary to other decent, safe, sanitary and 
affordable housing which is, to the maximum extent possible, housing of 
their choice;
    (7) The displacement and relocation provisions set forth in 24 CFR 
970.5.
    (8) A record indicating compliance with the statute's requirements 
for consultation with applicable public housing tenants of the affected 
development and the unit of local government where the public housing 
is located, as set forth in Sec. 971.9.
    (c) Section 18 of the United States Housing Act of 1937 shall not 
apply to demolition of developments removed from PHA inventories under 
this section, but shall apply to any proposed dispositions of such 
developments or their sites. HUD's review of any such disposition 
application will take into account that the development has been 
required to be removed from the PHA's inventory.
    (d) For purposes of determining operating subsidy eligibility under 
the Performance Funding System (PFS), the submitted plan will be 
considered the equivalent of a formal request to remove dwelling units 
from the PHA's inventory and ACC and approval (or acceptance). The PHA 
will receive written notification that the plan has been approved (or 
accepted). Units that are vacant or vacated on or after the written 
notification date will be treated as approved for deprogramming under 
Sec. 990.108(b)(1) of this chapter and also will be provided the phase-
down of subsidy pursuant to Sec. 990.114 of this chapter.

(Approved by the Office of Management and Budget under control 
number 2577-0210).


Sec. 971.9  Tenant and local government consultation.

    (a) PHAs are required to proceed in consultation with affected 
public housing residents. PHAs must provide copies of their submissions 
complying with Secs. 971.3(a) (1) through (3) to the appropriate tenant 
councils and resident groups before or immediately after these 
submissions are provided to HUD.
    (b) PHAs must:
    (1) Hold a meeting with the residents of the affected sites and 
explain the requirements of section 202 of OCRA;
    (2) Provide an outline of the submission(s) complying with 
Sec. 971.3(a) (4) and (5) to affected residents; and
    (3) Provide a reasonable comment period for residents and must 
provide a summary of the resident comments to HUD.
    (c) PHAs must prepare conversion plans in consultation with 
affected tenants and must:
    (1) Hold a meeting with affected residents and provide draft copies 
of the plan; and
    (2) Provide a reasonable comment period for residents and must 
provide a summary of the resident comments to HUD.
    (d) The conversion plan must be approved by the local officials as 
not inconsistent with the Consolidated Plan.


Sec. 971.11  HOPE VI developments.

    Developments with HOPE VI implementation grants that have

[[Page 49578]]

approved HOPE VI revitalization plans will be treated as having shown 
the ability to achieve long-term viability with reasonable 
revitalization plans. Future HUD actions to approve or deny proposed 
HOPE VI implementation grant revitalization plans will be taken with 
consideration of the standards for section 202. Developments with HOPE 
VI planning or implementation grants, but without approved HOPE VI 
revitalization plans, are fully subject to section 202 standards and 
requirements.


Sec. 971.13  HUD enforcement authority.

    Section 202 provides HUD authority to ensure that certain 
distressed developments are properly identified and removed from PHA 
inventories. Specifically, HUD may:
    (a) Direct a PHA to cease additional spending in connection with a 
development which meets or is likely to meet the statutory criteria, 
except as necessary to ensure decent, safe and sanitary housing until 
an appropriate course of action is approved;
    (b) Identify developments which fall within the statutory criteria 
where a PHA has failed to do so properly;
    (c) Take appropriate actions to ensure the removal of developments 
from the inventory where the PHA has failed to adequately develop or 
implement a plan to do so; and
    (d) Authorize or direct the transfer of capital funds committed to 
or on behalf of the development (including comprehensive improvement 
assistance, comprehensive grant amounts attributable to the 
development's share of funds under the formula, and major 
reconstruction of obsolete projects funds) to tenant-based assistance 
or appropriate site revitalization for the agency.

Appendix to Part 971: Methodology of Comparing Cost of Public Housing 
With Cost of Tenant-Based Assistance

I. Public Housing

    The costs used for public housing shall be those necessary to 
produce a revitalized development as described in the next 
paragraph. These costs, including estimated operating costs, 
modernization costs and costs to address accrual needs must be used 
to develop a per unit monthly cost of continuing the development as 
public housing. That per unit monthly cost of public housing must be 
compared to the per unit monthly Section 8 cost. The estimated cost 
of the continued operation and modernization as public housing shall 
be calculated as the sum of total operating, modernization, and 
accrual costs, expressed on a monthly per occupied unit basis. The 
costs shall be expressed in current dollar terms for the period for 
which the most recent Section 8 costs are available.

A. Operating Costs

    1. The proposed revitalization plan must indicate how unusually 
high current operating expenses (e.g, security, supportive services, 
maintenance, utilities) will be reduced as a result of post-
revitalization changes in occupancy, density and building 
configuration, income mix and management. The plan must make a 
realistic projection of overall operating costs per occupied unit in 
the revitalized development, by relating those operating costs to 
the expected occupancy rate, tenant composition, physical 
configuration and management structure of the revitalized 
development. The projected costs should also address the comparable 
costs of buildings or developments whose siting, configuration, and 
tenant mix is similar to that of the revitalized public housing 
development.
    2. The development's operating cost (including all overhead 
costs pro-rated to the development--including a Payment in Lieu of 
Taxes (PILOT) or some other comparable payment, and including 
utilities and utility allowances) shall be expressed as total 
operating costs per month, divided by the number of units occupied 
by households. For example, if a development will have 1,000 units 
occupied by households and will have $300,000 monthly in non-utility 
costs (including pro-rated overhead costs and appropriate 
P.I.L.O.T.) and $100,000 monthly in utility costs paid by the 
authority and $50,000 monthly in utility allowances that are 
deducted from tenant rental payments to the authority because 
tenants paid some utility bills directly to the utility company, 
then the development's monthly operating cost per occupied unit is 
$450--the sum of $300 per unit in non-utility costs, $100 per unit 
in direct utility costs, and $50 per unit in utility allowance 
costs.
    3. In justifying the operating cost estimates as realistic, the 
plan should link the cost estimates to its assumptions about the 
level and rate of occupancy, the per-unit funding of modernization, 
any physical reconfiguration that will result from modernization, 
any planned changes in the surrounding neighborhood and security 
costs. The plan should also show whether developments or buildings 
in viable condition in similar neighborhoods have achieved the 
income mix and occupancy rate projected for the revitalized 
development. The plan should also show how the operating costs of 
the similar developments or buildings compare to the operating costs 
projected for the development.
    4. In addition to presenting evidence that the operating costs 
of the revitalized development are plausible, when the per-unit 
operating cost of the renovated development is more than ten percent 
lower than the current per-unit operating cost of the development, 
then the plan should detail how the revitalized development will 
achieve its reduction in costs. To determine the extent to which 
projected operating costs are lower than current operating costs, 
the current per-unit operating costs of the development will be 
estimated as follows:
    a. If the development has reliable operating costs and if the 
overall vacancy rate is less than twenty percent, then these costs 
will be divided by the sum of all occupied units and vacant units 
fully funded under PFS plus fifty percent of all units not fully 
funded under PFS. For instance, if the total monthly operating costs 
of the current development are $6.6 million and it has 1,000 
occupied units and 200 vacant units not fully funded under PFS (or a 
17 percent overall vacancy rate), then the $6.6 million is divided 
by 1100--1000 plus 50 percent of 200--to give a per unit figure of 
$600 per unit month. By this example, the current costs of $600 per 
occupied unit are at least ten percent higher than the projected 
costs per occupied unit of $450 for the revitalized development, and 
the reduction in costs would have to be detailed.
    b.If the development currently lacks reliable cost data or has a 
vacancy rate of twenty percent or higher, then its current per unit 
costs will be estimated as follows. First, the per unit cost of the 
entire authority will be computed, with total costs divided by the 
sum of all occupied units and vacant units fully funded under PFS 
plus fifty percent of all vacant units not fully funded under PFS. 
Second, this amount will be multiplied by the ratio of the bedroom 
adjustment factor of the development to the bedroom adjustment 
factor of the Housing Authority. The bedroom adjustment factor, 
which is based on national rent averages for units grouped by the 
number of bedrooms and which has been used by HUD to adjust for 
costs of units when the number of bedrooms vary, assigns to each 
unit the following factors:.70 for 0-bedroom units, .85 for 1-
bedroom units, 1.0 for 2-bedroom units, 1.25 for 3-bedroom units, 
1.40 for 4-bedroom units, 1.61 for 5-bedroom units, and 1.82 for 6 
or more bedroom units. The bedroom adjustment factor is the unit-
weighted average of the distribution. For instance, if the 
development with one thousand occupied units had in occupancy 500 
two-bedroom units and 500 three-bedroom units, then its bedroom 
adjustment factor would be 1.125--500 times 1.0 plus 500 times 1.25, 
the sum divided by 1,000. Where necessary, HUD field offices will 
arrange for assistance in the calculation of the bedroom adjustment 
factors of the Housing Authority and its affected developments.
    c. As an example of estimating development operating costs from 
PHA operating costs, suppose that the Housing Authority had a total 
monthly operating cost per unit of $500 and a bedroom adjustment 
factor of .90, and suppose that the development had a bedroom 
adjustment factor of 1.125. Then, the development's estimated 
current monthly operating cost per occupied unit would be $625--or 
$500 times 1.25 (the ratio of 1.125 to .90).

B. Modernization

    The cost of modernization is the initial revitalization cost to 
meet viability standards, that cost amortized over twenty years 
(which is equivalent to fifteen years at a three percent annual real 
capital cost for the initial outlay). Expressed in monthly terms, 
the modernization cost is divided by 180 (or 15 years times 12 
months). Thus, if the initial modernization outlay to meet viability 
standards is $60 million for 1,000 units, then the per-unit outlay 
is $60,000 and the

[[Page 49579]]

amortized modernization cost is $333 per unit per month (or $60,000 
divided by 180). However, when revitalization would be equivalent to 
new construction and the PHA thus is permitted to amortize the 
proposed cost over thirty years (which is equivalent to twenty-two 
and one-half years at a three percent annual real capital cost to 
the initial outlay), the modernization cost will be divided by 270, 
the product of 22.5 and 12, to give a cost per unit month of $222.

C. Accrual

    The monthly per occupied unit cost of accrual (i.e., replacement 
needs) will be estimated by using the latest published HUD unit 
total development cost limits for the area and applying them to the 
development's structure type and bedroom distribution after 
modernization, then subtracting from that figure half the per-unit 
cost of modernization, then multiplying that figure by .02 ( 
representing a fifty year replacement cycle), and dividing this 
product by 12 to get a monthly cost. For example, if the development 
will remain a walkup structure containing five hundred two-bedroom 
occupied and five hundred three-bedroom occupied units, if HUD's 
Total Development Cost limit for the area is $70,000 for two-bedroom 
walkup structures and $92,000 for three-bedroom walkup structures, 
and if the per unit cost of modernization is $60,000, then the 
estimated monthly cost of accrual per occupied unit is $85. This is 
the result of multiplying the value of $51,000--the cost guideline 
value of $81,000 minus half the modernization value of $60,000--by 
.02 and then dividing by 12.

D. Overall Cost

    The overall current cost for continuing the development as 
public housing is the sum of its monthly post-revitalization 
operating cost estimates, its monthly modernization cost per 
occupied unit, and its estimated monthly accrual cost per occupied 
unit. For example, if the operating cost per occupied unit month is 
$450 and the amortized modernization cost is $333 and the accrual 
cost is $85, the overall monthly cost per occupied unit is $868.

II. Tenant-Based Assistance

    The estimated cost of providing tenant-based assistance under 
Section 8 for all households in occupancy shall be calculated as the 
unit-weighted averaging of the monthly Fair Market Rents for units 
of the applicable bedroom size; plus the administrative fee 
applicable to newly funded Section 8 rental assistance during the 
year used for calculating public housing operating costs (e.g., the 
administrative fee for units funded from 10/1/95 through 9/30/96 is 
based on column C of the January 24, 1995 Federal Register, at 60 FR 
4764, and the administrative fee for units funded from 10/1/96 
through 9/30/97 is based on column B of the March 12, 1997 Federal 
Register, at 62 FR 11526); plus the amortized cost of demolishing 
the occupied public housing units, where the cost per unit is not to 
exceed ten percent of the TDC prior to amortization. For example, if 
the development has five hundred occupied two-bedroom units and five 
hundred occupied three-bedroom units and if the Fair Market Rent in 
the area is $600 for two bedroom units and is $800 for three bedroom 
units and if the administrative fee comes to $46 per unit, and if 
the cost of demolishing 1000 occupied units is $5 million, then the 
per unit monthly cost of tenant based assistance is $774 ($700 for 
the unit-weighted average of Fair Market Rents, or 500 times $600 
plus 500 times $800 with the sum divided by 1,000; plus $46 for the 
administrative fee; plus $28 for the amortized cost of demolition 
and tenant relocation (including any necessary counseling), or $5000 
per unit divided by 180 in this example). This Section 8 cost would 
then be compared to the cost of revitalized public housing 
development--in the example of this section, the revitalized public 
housing cost of $868 monthly per occupied unit would exceed the 
Section 8 cost of $774 monthly per occupied unit by 12 percent. The 
PHA would have to prepare a conversion plan for the property.

III. Detailing the Section-8 Cost Comparison: A Summary Table

    The Section 8 cost comparison methods are summarized, using the 
example provided in this section III.
    A. Key Data, Development: The revitalized development has 1000 
occupied units. All of the units are in walkup buildings. The 1000 
occupied units will consist of 500 two-bedroom units and 500 three-
bedroom units. The total current operating costs attributable to the 
development are $300,000 per month in non-utility costs, $100,000 in 
utility costs paid by the PHA, and $50,000 in utility allowance 
expenses for utilities paid directly by the tenants to the utility 
company. Also, the modernization cost for revitalization is 
$60,000,000, or $60,000 per occupied unit. This will provide 
standards for viability but not standards for new construction. The 
cost of demolition and relocation of the 1000 occupied units is $5 
million, or $5000 per unit, based on recent experience.
    B. Key Data, Area: The unit total development cost limit is 
$70,000 for two-bedroom walkups and $92,000 for three-bedroom 
walkups. The two-bedroom Fair Market Rent is $600 and the three-
bedroom Fair Market Rent is $800. The applicable monthly 
administrative fee amount, in column B of the March 12, 1997 Federal 
Register Notice, at 62 FR 11526, is $46.
    C. Preliminary Computation of the Per-Unit Average Total 
Development Cost of the Development: This results from applying the 
location's unit total development cost by structure type and number 
of bedrooms to the occupied units of the development. In this 
example, five hundred units are valued at $70,000 and five hundred 
units are valued at $92,000 and the unit-weighted average is 
$81,000.
    D. Current Per Unit Monthly Occupied Costs of Public Housing:
    1. Operating Cost--$450 (total monthly costs divided by occupied 
units: in this example, the sum of $300,000 and $100,000 and 
$50,000--divided by 1,000 units).
    2. Amortized Modernization Cost--$333 ($60,000 per unit divided 
by 180 for standards less than those of new construction).
    3. Estimated Accrual Cost--$85 (the per-unit average total 
development cost minus half of the modernization cost per unit, 
times .02 divided by 12 months: in this example, $51,000 times .02 
and then divided by 12).
    4. Total per unit public housing costs--$868.
    E. Current per unit monthly occupied costs of section 8:
    1. Unit-weighted Fair Market Rents--$700 (the unit-weighted 
average of the Fair Market Rents of occupied bedrooms: in this 
example, 500 times $600 plus 500 times $800, divided by 1000).
    2. Administrative Fee--$46.
    3. Amortized Demolition and Relocation Cost--$28 ($5000 per unit 
divided by 180).
    4. Total per unit section 8 costs--$774.
    F. Result: In this example, because revitalized public housing 
costs exceed current Section 8 costs, a conversion plan for the 
property would be required.

    Dated: August 22, 1997.
Kevin Emanuel Marchman,
Acting Assistant Secretary for Public and Indian Housing.
[FR Doc. 97-25044 Filed 9-19-97; 8:45 am]
BILLING CODE 4210-33-P