[Federal Register Volume 63, Number 167 (Friday, August 28, 1998)]
[Rules and Regulations]
[Pages 46104-46108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23144]


      

[[Page 46103]]

_______________________________________________________________________

Part II





Housing and Urban Development





_______________________________________________________________________



24 CFR Part 968



Modernization Funding Replacement Housing Factor; Final Rule

  Federal Register / Vol. 63, No. 167 / Friday, August 28, 1998 / Rules 
and Regulations  

[[Page 46104]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 968

[Docket No. FR-4125-F-02]
RIN 2577-AB71


Replacement Housing Factor in Modernization Funding

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This rule revises the regulations that govern the formula 
allocation of modernization funding under the Comprehensive Grant 
Program (CGP) to add to the formula a replacement housing factor that 
would maintain, for five years, a portion of funding that otherwise 
would be lost by a CGP housing agency when the number of its public 
housing units are reduced as a result of demolition, disposition, or 
conversion. The preserved funding must be used for accelerated 
renovation and reoccupancy of vacant, viable units, or for construction 
or acquisition of replacement housing units--to the extent that the 
funds are authorized for such use. The rule takes effect in Federal 
Fiscal Year (FY) 1998, based on demolition, disposition and conversion 
of units between October 1, 1996 and September 30, 1997.
    This rule is needed to encourage public housing agencies (PHAs) to 
demolish, dispose of, or convert units that are not providing decent, 
safe, and sanitary housing and either develop replacement units or 
accelerate renovation of the existing units.

DATES: Effective date. September 28, 1998.

FOR FURTHER INFORMATION CONTACT: William Flood, Director, Office of 
Capital Improvements, Office of Public Housing Investments, Room 4134, 
Department of Housing and Urban Development, 451 Seventh Street, SW, 
Washington, DC 20410, telephone number (202) 708-1640, extension 4185. 
(This telephone number is not toll-free.) 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. Changes From Proposed Rule

    The proposed rule in this proceeding was published on September 10, 
1997 (62 FR 47740). This final rule includes several changes from the 
proposed rule. Most are being made in response to public comments, as 
discussed in greater detail below. Changes made in response to comments 
are to clarify that a PHA must request application of the replacement 
housing factor in order for it to be applied; to clarify that 
replacement housing must be produced in accordance with the 
Department's development regulations (24 CFR part 941); and to specify 
additional procedures applicable to PHAs that are troubled or mod-
troubled that want to have this factor applied--either to rehabilitate 
vacant but viable units or to develop new replacement units. In 
addition, the rule clarifies that replacement housing may be undertaken 
with funding from fiscal years in which it is an authorized use of 
modernization funds. Also, the rule provides that use of replacement 
reserve is not required for emergencies if the amount that otherwise 
would be used from that reserve is an accumulation from application of 
the replacement housing factor that is necessary so that replacement 
housing can be provided efficiently and effectively.

II. Discussion of Public Comments

    There were seven public comments received on the proposed rule. 
Three of the comments were from organizations representing PHAs and 
four were from PHAs. Two of the three organizations were opposed to the 
rule, while all four PHAs were supportive.

A. Need for the Rule

1. Comments on Who Benefits
    Some commenters believed the rule is very much needed to help PHAs 
cope with the sudden losses in funding they would otherwise experience 
when demolishing large numbers of units. One organization stated that 
it is ``an important first step in addressing the lack of resources 
available for much-needed replacement housing.'' However, a few 
commenters stated that the change is not justified and that the rule 
does not promote equity and fairness in the CGP distribution but favors 
large city PHAs, including those who have already benefited from 
special funding under HOPE VI and MROP. One organization also 
challenged HUD's statement that ``replacement vouchers do not meet some 
local needs as well as hard replacement units do.'' It argued that HUD 
has touted the relative value of tenant-based over project-based 
assistance.
    According to one PHA, the replacement housing factor will 
disproportionately benefit a relatively few, large housing authorities, 
which already have received yearly CGP allocations based on large 
numbers of units that have not been housing anyone. An organization 
stated that the Department has not demonstrated that ``central cities 
have tight housing markets.'' It contended that the National Housing 
Survey ``consistently demonstrates that the highest vacancy rates and 
lowest rents are in the central cities.'' It stated that the rule will 
result in less funding for housing in areas outside the central cities, 
and stated that this is not justified.
    This same organization also criticized the rule as continuing to 
``reward failure'' by giving additional funding to agencies regardless 
of their capacity to use the funds well. It claimed that of the 40 
agencies that would benefit from the factor, the majority are either 
troubled or mod-troubled and that the rule provides no measures to 
assure adequate performance. The recommendation made was that HUD 
should consider adding a replacement factor only for those agencies 
that are neither troubled nor mod-troubled.
2. HUD Response
    With respect to the creation of ``hard replacement units'' as 
opposed to tenant based assistance, the Department believes both 
approaches should be used to replace demolished public housing. The 
approach taken in this rule provides funding for replacement of about 
20 percent of the units. The Department also is asking for additional 
funding for the HOPE VI program, which will provide more hard units, 
and for new Section 8 certificates and vouchers to support tenant-based 
assistance for many families.
    The reference to ``tight housing markets'' in the proposed rule was 
found only in the introductory summary at the beginning of the rule. 
The Department does not place primary reliance on the existence of a 
tight housing market in any particular city for this factor to be 
applicable. A primary purpose of the rule is to provide an incentive to 
PHAs that have units in extremely poor condition to demolish or dispose 
of or convert the units, supporting revitalization activity in the 
areas where such housing is now a blight. In fact, to the extent that 
the rule increases demolition, there may be an overall decrease in 
units in a particular market, since there is insufficient funding for 
100 percent replacement of the reduced number of public housing units. 
In view of the large proportion of eligible low income households not 
living in affordable housing, virtually all communities can use either 
vacancy renovation funds or the relatively small amount of replacement 
housing made

[[Page 46105]]

possible by this rule to provide more housing opportunities.
    It is true that this rule benefits primarily large cities, although 
all city housing agencies with at least 250 units that are demolishing 
or disposing of public housing are eligible. That result is 
appropriate, because that is where there is the largest number of units 
to be demolished and replaced. This rule does not affect the 
modernization rule that governs small PHAs--those with fewer than 250 
units--generally in smaller localities, which are subject to the 
Comprehensive Improvement Assistance Program instead of the CGP. Some 
of the PHAs that will benefit from this rule have received HOPE VI and 
MROP funding, but not all of them. In any case, such funds are offset 
before this rule is applied, so that there is no double benefit.
    With respect to receipt of funds by a troubled or mod-troubled PHA 
that is not already under the direction of HUD or a court-appointed 
receiver, the Department is requiring (in Secs. 968.103 (e)(3)(ii)(D) 
and (f)(4)(ii)(D)) that such a PHA use an Alternative Management Entity 
(as described in 24 CFR 901.5) for oversight of replacement housing 
development. In addition, in all efforts to carry out activities funded 
by the replacement housing factor, including accelerated renovation of 
vacant and viable units, a troubled or mod-troubled PHA is required to 
comply with the Memorandum of Agreement (MOA) that was executed with 
HUD in connection with the finding that it is troubled, under the 
Public Housing Management Assessment Program (24 CFR 901.135), and any 
corrective actions required by HUD in accordance with this part's 
performance review section (Sec. 968.335).
3. Comment on How to Calculate the Benefit
    One PHA stated an example of how it thought the changes to the 
formula to account for additional backlog need and accrual need would 
apply to its circumstances, based on the example given in the preamble 
of the proposed rule, and asked whether its estimate was accurate.
4. HUD Response
    The estimate was not accurate, but when the rule is implemented, 
HUD will provide each authority with a description of the method and 
its application to the data of that housing authority. In the meantime, 
a PHA may develop its own estimate by starting with the number of units 
subject to the replacement factor formula in a year, and multiplying 
that number by the average funding received per comprehensive grant 
unit in the most current year. (To obtain this average, divide total 
funding for the Comprehensive Grant program by the total units funded 
under the program.) In the first year, one-third of the product will be 
the replacement factor funding. In the second year, two-thirds of the 
product will be the replacement factor funding. In years three through 
five, the entire product will be the replacement factor funding. 
Thereafter, the units will have no replacement factor funding. Of 
course, the process is a rolling one, so that additional units may be 
demolished, converted, or disposed of in more than one year of a five-
year period, adding to the backlog and accrual needs in later years.

B. Adequacy and Timing of Funding

1. Comments on Timing
    Among those who supported the idea of providing a replacement 
housing factor, a recommendation was made that HUD permit one of three 
options to facilitate financing of replacement housing: (a) permit the 
PHA to ``bank'' the funds until all replacement housing factor funds 
are received; (b) advance the five years of funding in the first year; 
or (c) allow the PHA to use other resources in the early years and 
repay itself for its contribution as the replacement housing factor 
funds are received. These options would respond to a concern about the 
difficulty of funding replacement construction with funding that would 
not be fully available for five years.
    The length of time over which the replacement housing factor would 
apply also was an issue. Some commenters felt the period was too short, 
while others felt that it was too long. One commenter stated that 
because the phase-out is most drastic after the fifth year, there would 
be an outcry for slower decreases after that year, extending the factor 
even longer. Another PHA stated that the period should be longer, so 
that the effect felt would be more gradual.
2. HUD Response
    Large PHAs may be able to phase construction in such a way as to 
have adequate funding available in any given year. Of the three options 
specified by one commenter and outlined above, the first and third are 
acceptable, under appropriate circumstances.
    If a PHA wants to build up reserves in a particular year to spend 
in a following year for replacement housing, it could establish a 
reserve under the current Sec. 968.112(f)(1)(ii) for such a purpose if 
its annual replacement housing funding would be inadequate to cover its 
replacement housing needs in an efficient and effective manner. The 
rule is being modified to assure that this policy can be carried out.
    Ordinarily, under Sec. 968.112(f)(4), the PHA would be required to 
use the funds in the replacement reserve to cover emergency 
modernization needs--to the extent that adequate funds otherwise were 
not available--if the PHA had an emergency need during the period when 
it is building up the replacement reserve. (The CGP is flexible enough 
to permit a PHA to reorder its priorities when it encounters an 
emergency modernization need, so that the PHA could then use funds 
otherwise earmarked for a particular modernization use for the 
emergency and fund the original priority in a later year.) The 
availability of the replacement reserve for replacement housing is 
central to the purposes of this rule: to encourage demolition, 
disposition, and conversion of units that are not viable and to provide 
an additional resource for replacement housing and for the accelerated 
renovation of units that can be renovated and reoccupied. Therefore, to 
assure that an emergency modernization would not undermine these 
purposes, this rule adds a sentence to Sec. 968.112(f) to provide that 
use of the replacement reserve is not required for emergencies if the 
amount that otherwise would be used from that reserve is an 
accumulation from application of the replacement housing factor.
    With respect to a loan repayment option, HUD has no authority to 
advance the five years of funding made available under the application 
of this factor in the first year.
    When considering what year's funding to use for various purposes, 
PHAs must be conscious of permissible uses under the appropriation act 
for the various years. For example, FY 1997 and FY 1996 Comp Grant 
funds may be used for replacement housing purposes. Fiscal Year 1998 
funds are not yet authorized for such use, although they may be used 
for accelerated renovation and reoccupancy of vacant, viable units. A 
reference to this variation in authority for different years' funds is 
added to Secs. 968.103(e)(3)(ii)(B) and (f)(4)(ii)(B).
    HUD will not consider changing the period over which this 
replacement housing factor is used. Five years was chosen because it is 
a short enough time so that PHAs that are not significantly decreasing 
their number of units would see increases in their allocations within a 
reasonable period, but PHAs that are significantly decreasing their 
number of units would see enough of an impact from the factor to be 
motivated to

[[Page 46106]]

pursue the much-needed demolition and replacement of those units and 
would have a significant additional resource for this purpose.
3. Comments on Other Funding for Replacement Housing
    An organization stated that section 202 of the Omnibus Consolidated 
Rescissions and Appropriations Act of 1996 required PHAs to identify 
certain distressed public housing developments to be removed from the 
public housing inventory within five years, after relocation of the 
tenants with tenant-based or project-based assistance. The rule 
provides that the replacement housing factor applies only if ``the 
reduced units are not otherwise receiving funding for replacement 
housing or vacancy renovation.'' The organization asked whether 
``funding for replacement housing'' includes existing vouchers, new 
vouchers, or relocation to other public housing.
4. HUD Response
    PHAs that have received tenant-based assistance or have relocated 
households to other public housing are eligible for application of the 
replacement housing factor. If a PHA already has received vouchers, it 
remains eligible for this factor. If a PHA has not received vouchers 
and it applies for application of this factor first, then it will not 
be eligible for vouchers to replace the units involved. Relocation of 
tenants to other public housing does not disqualify a PHA from 
application of this factor to replace those hard units. The units 
renovated or replaced with funds received under the replacement housing 
factor may not have received funding, however, under the public housing 
development program, Major Reconstruction of Obsolete Public Housing 
(MROP), or HOPE VI program for the purpose of replacement housing or 
accelerated renovation. They may not receive future HOPE VI funds for 
this purpose, either.
5. Comments on Amount of Funding
    One PHA expressed reservations about the adequacy of the funding 
resulting from the replacement housing factor as described to support 
replacement of twenty percent of the units demolished, disposed of, or 
converted. It proposed an alternative for determining the amount of 
funding to be preserved: not using the amount that a particular PHA 
would have received if it had not reduced its number of units, but on 
the aggregate amount of funding that is subject to reduction as a 
result of demolition, disposition, or conversion--allocated among only 
the PHAs that do propose replacement housing. This PHA also stated that 
it is unclear whether the funds resulting from the current three-year 
phase-out will continue to be received in addition to the replacement 
housing factor funds, or whether the current phase-out funds become the 
replacement housing factor funds (at least in part).
    Concerned about adequate funding levels for construction of 
replacement housing, one organization suggested that HUD continue to 
seek other sources of funding, as well. A PHA recommended that HUD 
consider funding for a higher percentage of replacement units for PHAs 
with a high demand for housing that are located in cities with tight 
affordable housing markets.
6. HUD Response
    It is not the intent of this rule to provide an increase above the 
amount of modernization funding to which the PHA would have been 
entitled if there had been no demolition, disposition, or conversion. 
If a community does not need the funds that would be restored by the 
replacement housing factor, they should remain available for general 
distribution under the formula. With respect to the adequacy of 
funding, that issue is discussed above in section A2.
    The funding now available under the three-year phase-out will not 
become a portion of the replacement housing factor funds but instead 
will continue to be available for all modernization needs.

C. Procedures

1. Comments on Universal Applicability
    In the preamble to the proposed rule, it was stated that a PHA must 
request use of the replacement housing factor when updating its annual 
formula characteristics report. The rule text, at Sec. 968.103(e)(3) 
and (f)(4), did not repeat the requirement that a PHA request use of 
the factor. Commenters differed on the preferred resolution of this 
difference. One PHA preferred that the replacement housing factor only 
be applied to those PHAs that specifically request it, while an 
organization recommended that the factor be applied automatically to 
every PHA that would be eligible.
    This element is particularly important to the first year of its 
applicability, since some PHAs may already have returned the 
information for the period ending on September 30, 1997, and therefore 
may not have requested use of the factor for which they will be 
eligible under a final rule.
2. HUD Response
    The rule text has been revised to correspond to what was described 
in the preamble of the proposed rule (see Secs. 968.103(e)(3)(ii)(C) 
and (f)(4)(ii)(C)). Since the time has already passed for PHAs to 
indicate whether they wanted this factor applied for the demolitions, 
dispositions, and conversions that took place between October 1, 1996 
and September 30, 1997, the Department has asked all qualified PHAs 
whether they want to have the factor applied in the letter transmitting 
the annual formula amount which is already calculated using the formula 
characteristics for the same period of time. For the purpose of funding 
such requests, the Department has held back a very limited amount of 
funds during the current funding cycle. In future years, such a request 
may be handled in a different fashion.
3. Comments on Determination of Units Covered
    PHAs asked what procedures are to be used when disclosing the units 
that are the subject of demolition, disposition, or conversion. They 
also asked which happens first--approval of a demolition, disposition, 
or conversion application, or identification in the Formula 
Characteristics Report of units to be demolished, disposed of, or 
converted.
4. HUD Response
    The approval process is that HUD approves an application for 
demolition, disposition, or conversion in order for the housing 
authority to be eligible for the replacement housing factor. In the 
case of developments that are the subject of mandatory conversion 
(under Section 202 of the Omnibus Consolidated Rescissions and 
Appropriations Act of 1996), HUD approves a conversion plan before the 
PHA is eligible.
    In the annual letter transmitting to PHAs the annual formula amount 
for the period from October 1, 1996 through September 30, 1997, the 
Department has already asked PHAs that had demolitions, dispositions, 
and conversions during that period whether they want to have the factor 
applied. The data used to determine the applicability of the factor to 
a particular PHA is found in HUD's own systems, including information 
garnered from plans for demolition, disposition, and conversion 
approved by HUD and validated by the PHA.

D. Additional constraints

1. Comments
    Improvements suggested to the proposed rule were to require a 
feasible, reasonably specific replacement plan that includes milestones 
to be met to avoid recapture of the funds, and to

[[Page 46107]]

limit the funds made available under the factor so that the primary 
purpose of modernization funds can still be realized.
2. HUD Response
    As clarified in this final rule (Secs. 968.103(e)(3)(ii)(E) and 
(f)(4)(ii)(E)), the replacement units must be constructed in accordance 
with the Public Housing Development regulations, 24 CFR 941 (including 
the sanctions under Sec. 941.501), which require submission of a 
project development schedule. The appropriateness of the amount of 
funds subject to this rule has been discussed above.

E. Additional flexibility

1. Comments
    If a PHA is state-wide, it may prefer the flexibility of being able 
to provide replacement units in a different community within its 
jurisdiction than the one in which units are being demolished, disposed 
of, or converted. Suggesting that this be permitted, the PHA asked what 
area's Total Development Cost (TDC) limit would be used to establish 
the replacement housing factor funding level.
2. HUD Response
    HUD agrees that a multi-jurisdictional PHA should be able to 
replace housing where it is most needed within its territory, using the 
TDC for the area where the replacement housing is being built.

III. Findings and Certifications

A. Public Reporting Burden

    This final rule contains no new information collection requirements 
that would require review by the Office of Management and Budget under 
the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520). 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. 

B. Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this final rule, and in so 
doing certifies that this rule will not have a significant economic 
impact on a substantial number of small entities. This final rule only 
affects PHAs with 250 or more units, eligible for formula funding under 
the CGP and primarily affects larger PHAs, which have experienced the 
greatest unit reduction.

C. Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made in connection with development of a proposed rule on this 
subject, 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). That Finding of No Significant Impact is 
applicable to this final rule as well, and it is available for public 
inspection and copying during regular business hours (7:30 a.m. to 5:30 
p.m.) in the Regulations Division of the Office of General Counsel, 
Room 10276, 451 Seventh Street, SW, Washington, DC 20410-0500.

D. 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 rule do not have significant impact on States or 
their political subdivisions, or the relationship between the Federal 
Government and State and local governments, or on the distribution of 
power and responsibilities among the various levels of government. As a 
result, the rule is not subject to review under the Order. The rule 
merely preserves funding that otherwise would be lost to local housing 
agencies that have experienced significant loss of units.

E. Unfunded Mandates Reform Act

    The Secretary, in accordance with the Unfunded Mandates Reform Act 
of 1995, 2 U.S.C. 1532, has reviewed this rule before publication and 
by approving it certifies that this rule does not impose a Federal 
mandate that will result in the expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year.

F. Regulatory Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action,'' as defined in 
section 3(f) of the Order. Any changes made to this rule as a result of 
that review are clearly identified in the docket file. The docket file 
is available for public inspection between 7:30 a.m. and 5:30 p.m. in 
the Regulations Division of the Office of General Counsel, Room 10276, 
Department of Housing and Urban Development, 451 Seventh Street, SW, 
Washington, DC 20410-0500.

G. Catalog

    The Catalog of Federal Domestic Assistance number for the program 
affected by this final rule is 14.850.

List of Subjects in 24 CFR 968

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

    Accordingly, part 968 of title 24 of the Code of Federal 
Regulations is amended as follows:

PART 968--PUBLIC HOUSING MODERNIZATION

    The authority citation for part 968 continues to read as follows:

    Authority: 42 U.S.C. 1437d, 1437l, and 3535(d).

    Section 968.103 is amended as follows:
    a. Paragraphs (e)(3) and (e)(4) are redesignated as paragraphs 
(e)(4) and (e)(5), respectively;
    b. New paragraphs (e)(3) and (f)(4) are added, to read as follows:


Sec. 968.103  Allocation of funds under section 14.

* * * * *
    (e) * * *
    (3) Replacement factor to reflect backlog need for developments 
with demolition, disposition, or conversion occurring on or after 
October 1, 1996.
    (i) PHAs that have a reduction in units attributable to demolition, 
disposition, or conversion of units during the period (reflected in 
data maintained by HUD) that lowers the formula unit count for the 
Comprehensive Grant formula calculations qualify for application of a 
replacement housing factor, subject to satisfaction of criteria stated 
in paragraph (e)(3)(ii) of this section. The factor will be added, 
where applicable, for the first five years after such reduction, and 
consists of 50 percent of the published Total Development Cost for a 
two-bedroom unit in a walkup type structure for the period April 3, 
1996 through April 30, 1997, multiplied times the number of units to be 
demolished, disposed of, or converted. The total relative backlog need 
of the PHA resulting from application of this replacement factor cannot 
exceed the share it would have had if the demolition, disposition, or 
conversion had not taken place.
    (ii) A PHA is eligible for application of this factor only if the 
PHA satisfies the following criteria:
    (A) The PHA requests the application of the replacement factor;

[[Page 46108]]

    (B) The restored funding that results from the use of the 
replacement factor is used to provide replacement housing (in any year 
in which replacement housing is an eligible activity) or accelerated 
renovation of vacant but viable units, in accordance with the PHA's 
five-year action plan, approved by HUD (see Sec. 968.315);
    (C) The PHA does not receive funding under the public housing 
development; Major Reconstruction of Obsolete Public Housing, or HOPE 
VI programs for the units developed or modernized with funds received 
under this replacement housing factor;
    (D) A PHA that has been determined by HUD to be troubled or mod-
troubled that is not already under the direction of HUD or a court-
appointed receiver, in accordance with part 901 of this chapter, must 
use an Alternative Management Entity as defined in Sec. 901.5 of this 
chapter for development of replacement housing and must comply with any 
applicable provisions of its Memorandum of Agreement executed with HUD 
under that part; and
    (E) Any development of replacement housing by any PHA must be done 
in accordance with part 941 of this chapter.
    (iii) If the PHA does not use the restored funding that results 
from the use of the replacement factor to provide replacement housing 
or renovate vacant units in a timely fashion, in accordance with 
Sec. 968.125 and Sec. 941.501 of this chapter, and make reasonable 
progress on such use of the funding, in accordance with 
Sec. 968.335(a)(3) and Sec. 941.501, HUD may require appropriate 
corrective action under Sec. 968.335 and Sec. 941.501; may recapture 
and reallocate the funds; or may use other remedies available to HUD.
* * * * *
    (f) * * *
    (4) Replacement factor to reflect accrual need for developments 
with demolition, disposition, or conversion occurring on or after 
October 1, 1996. (i) PHAs that have a reduction in units attributable 
to demolition, disposition, or conversion of units during the period 
(reflected in data maintained by HUD) that lowers the formula unit 
count for the Comprehensive Grant formula calculations qualify for 
application of a replacement housing factor, subject to satisfaction of 
criteria stated in paragraph (f)(4)(ii) of this section. The factor 
will be added, where applicable, for the first five years after such 
reduction, and consists of two percent of the published Total 
Development Cost for a two-bedroom unit in a walkup type structure for 
the period April 3, 1996 through April 30, 1997, multiplied times the 
number of units to be demolished, disposed of, or converted. The total 
relative accrual need of the PHA resulting from application of this 
replacement factor cannot exceed the share it would have had if the 
demolition, disposition, or conversion had not taken place.
    (ii) A PHA is eligible for application of this factor only if the 
PHA satisfies the following criteria:
    (A) The PHA requests the application of the replacement factor;
    (B) The restored funding that results from the use of the 
replacement factor is used to provide replacement housing (in any year 
in which replacement housing is an eligible activity) or accelerated 
renovation of vacant but viable units, in accordance with the PHA's 
five-year action plan, approved by HUD (see Sec. 968.315);
    (C) The PHA does not receive funding under the public housing 
development, Major Reconstruction of Obsolete Public Housing, or HOPE 
VI programs for the units developed or modernized with funding received 
under this replacement housing factor;
    (D) A PHA that has been determined by HUD to be troubled or mod-
troubled, in accordance with part 901 of this chapter that is not 
already under the direction of HUD or a court-appointed receiver, must 
use an Alternative Management Entity as defined in Sec. 901.5 of this 
chapter for development of replacement housing and must comply with any 
applicable provisions of its Memorandum of Agreement executed with HUD 
under that part; and
    (E) Any development of replacement housing by any PHA must be done 
in accordance with part 941 of this chapter.
    (iii) If the PHA does not use the restored funding that results 
from the use of the replacement factor to provide replacement housing 
or renovate vacant units in a timely fashion, in accordance with 
Sec. 968.125 and Sec. 941.501 of this chapter, and make reasonable 
progress on such use of the funding, in accordance with 
Sec. 968.335(a)(3) and Sec. 941.501, HUD may require appropriate 
corrective action under Sec. 968.335 and Sec. 941.501; may recapture 
and reallocate the funds; or may use other remedies available to HUD.
* * * * *
    3. Section 968.112 is amended by adding a new sentence to the end 
of paragraph (f)(4), to read as follows:


Sec. 968.112  Eligible costs.

* * * * *
    (f) * * *
    (4) * * * Use of the replacement reserve is not required for 
emergencies if the amount that otherwise would be used from that 
reserve is an accumulation from application of the replacement housing 
factor (Sec. 968.103(e) (3) and (f)(4)) that is necessary so that 
replacement housing can be provided efficiently and effectively.
* * * * *
    Dated: August 25, 1998.
Deborah Vincent,
General Deputy Assistant Secretary for Public and Indian Housing.
[FR Doc. 98-23144 Filed 8-27-98; 8:45 am]
BILLING CODE 4210-33-P