[Federal Register Volume 63, Number 176 (Friday, September 11, 1998)]
[Rules and Regulations]
[Pages 48926-48955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24284]



[[Page 48925]]

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Part IV





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Parts 401 and 402



Multifamily Housing Mortgage and Housing Assistance Restructuring 
Program and Renewal of Expiring Section 8 Project-Based Assistance 
Contracts; Interim Rule

  Federal Register / Vol. 63, No. 176 / Friday, September 11, 1998 / 
Rules and Regulations  

[[Page 48926]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 401 and 402

[Docket No. FR-4298-I-01]
RIN 2502-AH09


Multifamily Housing Mortgage and Housing Assistance Restructuring 
Program (Mark-to-Market) and Renewal of Expiring Section 8 Project-
Based Assistance Contracts

AGENCY: Office of the Secretary, HUD.

ACTION: Interim rule.

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SUMMARY: This interim rule implements recently-enacted legislation that 
created a Mark-to-Market Program through which section 8 rents for 
multifamily projects with HUD-insured or HUD-held mortgages will be 
reduced. The purpose of the program is to preserve low-income rental 
housing affordability while reducing the long-term costs of Federal 
rental assistance, including project-based assistance, and minimizing 
the adverse effect on the FHA insurance funds. The Mark-to-Market 
Program will be implemented through Mortgage Restructuring and Rental 
Assistance Sufficiency Plans to be developed for individual projects by 
Participating Administrative Entities selected by HUD. The interim rule 
also implements legislation for renewal of section 8 project-based 
assistance contracts for projects outside of the Mark-to-Market 
Program.

DATES: Effective Date: October 13, 1998.
    Comment Due Date: October 26, 1998.

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, DC 20410. Communications 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 (7:30 a.m.-5:30 p.m. eastern time) at the above 
address. HUD will not accept comments sent by facsimile (FAX). (In 
addition, see the Paperwork Reduction Act heading under the Findings 
and Certifications section of this preamble regarding submission of 
comments on the information collection burden.) See SUPPLEMENTARY 
INFORMATION section for electronic access and filing information.

FOR FURTHER INFORMATION CONTACT: Dan Sullivan, Department of Housing 
and Urban Development, 451 7th St., Washington DC 20410. Telephone: 
202-708-0547. (This is not a toll-free number.) For hearing- and 
speech-impaired persons, this number may be accessed via TTY by calling 
the Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutes

    The Multifamily Assisted Housing Reform and Affordability Act of 
1997, title V of Pub. L. 105-65 (approved October 27, 1997), 42 U.S.C. 
1437f note (MAHRA), was enacted to reduce the cost of Federal housing 
assistance, enhance HUD's administration of such assistance, and to 
ensure the continued affordability of units in certain multifamily 
housing projects. The projects involved are projects with: (1) HUD-
insured or HUD-held mortgages; and (2) contracts for project-based 
rental assistance from HUD, primarily through the section 8 program, 
for which the average rents for assisted units exceed the rent of 
comparable properties. MAHRA authorizes a new Mark-to-Market Program 
designed to preserve low-income rental housing affordability while 
reducing the long-term costs of Federal rental assistance, including 
project-based assistance from HUD. This will be accomplished by (1) 
reducing project rents to no more than comparable market rents (with 
certain exceptions discussed below), (2) restructuring the HUD-insured 
or HUD-held financing so that the monthly payments on the first 
mortgage can be paid from the reduced rental levels, (3) performing any 
needed rehabilitation of the project, and (4) ensuring competent 
management of the project. The project will be subject to long-term use 
affordability restrictions.
    MAHRA is intended to provide a long-term solution to the rapidly 
growing cost to the Federal Government of assisting affordable rental 
housing. Over 800,000 housing units in approximately 8,500 multifamily 
projects have been financed with FHA-insured mortgages and supported by 
project-based section 8 housing assistance payment (HAP) contracts. In 
many cases, these HAP contracts currently provide for rents for 
assisted units which substantially exceed the rents for comparable 
unassisted units in the local market. Starting in Fiscal Year 1996, 
those contracts began to expire, and Congress and the Administration 
have been providing one-year extensions of expiring contracts. While 
annual HAP contract extensions for these projects maintain an important 
housing resource, they come at great expense. Every year more contracts 
expired, compounding the cost of annual extensions. In 1996, HUD 
estimated that in 10 years the annual cost of renewing the contracts on 
current terms would rise to approximately $7 billion, or one-third of 
HUD's budget. If the section 8 assistance were simply reduced or 
eliminated, there would be an increased likelihood that these projects 
would be unable to meet their financial obligations including operating 
expenses, current and future capital needs, and debt service payments 
on FHA-insured or HUD-held mortgages.
    To begin to address this growing problem, Congress authorized 
demonstration programs. The initial demonstration (the 1996 
demonstration) was authorized by section 210 of the Departments of 
Veterans Affairs and Housing and Urban Development, and Independent 
Agencies Appropriations Act, 1996, as a demonstration for Fiscal Years 
1996 and 1997 for 15,000 units in projects with insured mortgages and 
section 8 contracts with rents in excess of fair market rents. Section 
210 authorized HUD to designate third parties to act on its behalf in 
connection with the demonstration. The Department published notices 
regarding the 1996 demonstration at 61 FR 34664 (July 2, 1996) and 61 
FR 28757 (July 25, 1996).
    Congress repealed the 1996 demonstration authority and replaced it 
with the demonstration authorized by sections 211 and 212 of the 
Departments of Veterans Affairs and Housing and Urban Development, and 
Independent Agencies Appropriations Act, 1997 (the 1997 demonstration) 
for projects with insured mortgages and project-based assistance 
contracts expiring in Fiscal Year 1997 with aggregate rents in excess 
of 120 percent of fair market rents (see HUD's Guidelines published at 
62 FR 3566, January 23, 1997). The 1997 demonstration was limited to 
50,000 units. HUD relied on third-party designees to perform many 
important functions.
    In section 522(b) of the Departments of Veterans Affairs and 
Housing and Urban Development, and Independent Agencies Appropriations 
Act, 1998, Congress extended the 1997 demonstration, without any volume 
limitation, to projects with contracts expiring in Fiscal Year 1998. 
The new 1998 demonstration is generally the same as the 1997 
demonstration, with certain modifications, and is a transitional 
program to permit time for HUD to prepare this rule and take other 
necessary steps to implement a Mark-to-Market Program for projects with 
above-

[[Page 48927]]

market rents and contracts expiring in Fiscal Year 1999 and later (see 
HUD guidelines at 63 FR 36130, July 1, 1998).
    MAHRA builds on the demonstration program with similar objectives 
and many similar provisions, but also some significant differences. 
Organizationally, MAHRA establishes a new Office of Multifamily Housing 
Assistance Restructuring (OMHAR) within HUD to develop and actively 
manage, administer, and oversee the Mark-to-Market Program through a 
decentralized structure of Participating Administrative Entities 
(PAEs). OMHAR will establish the framework of the Program through 
regulations and will manage the program by selecting and monitoring 
Participating Administrative Entities (PAEs). In recognition of limited 
HUD resources, MAHRA gives PAEs the role of negotiating with the owners 
of individual projects and developing the Mortgage Restructuring and 
Rental Sufficiency Plans (``Restructuring Plans'') that will establish 
the future responsibilities of the owner, the PAE and HUD for projects 
that are marked-to-market. PAEs will be State housing finance agencies 
or local housing agencies, or nonprofit or for-profit entities in 
partnership with public entities. OMHAR may itself act as the PAE with 
respect to selected projects. OMHAR will prescribe the specific 
responsibilities of each PAE in Portfolio Restructuring Agreements to 
be negotiated.
    MAHRA also contains substantive differences from the previous 
demonstrations. For example, it includes projects with HUD-held 
mortgages in addition to HUD-insured mortgages and requires (as does 
the 1998 demonstration) a second mortgage with deferred payment from 
net cash flow after accounting for all project expenses.
    Section 524 of MAHRA authorizes renewal of section 8 project-based 
assistance contracts for projects without Restructuring Plans under the 
Mark-to-Market Program, including renewals that are not eligible for 
Plans and those for which the owner do not request Plans. Renewals must 
be at rents not exceeding comparable market rents except for certain 
exception projects.

B. Current Implementation of MAHRA

    While determining the best way to implement MAHRA, HUD sought ideas 
from a wide variety of non-proprietary, nationally-based organizations 
with diverse viewpoints and interests. HUD received many ``concept 
papers'' from these organizations presenting many different 
perspectives of which HUD needed to be aware. These concept papers do 
not represent HUD policy or any official advisory committee, but were 
useful in helping to focus HUD's attention on the most important issues 
to be decided in development of the Mark-to-Market Program. The concept 
papers are available to the public on the Mark-to-Market Internet web 
site identified below.
    In February 1998, after review of the concept papers, HUD officials 
attended a series of meeting where they heard the views from members of 
a working group representing the organizations that had developed the 
concept papers. Although none of this interim rule is the product of 
the working group members, the views expressed to HUD were of great 
benefit in ensuring that HUD was exposed to the widest possible variety 
of viewpoints on issues and concerns of those to be affected by the 
Mark-to-Market Program. Notes from these working group sessions are 
also available on the web site.
    HUD is drafting a Program Manual to give program participants 
operational guidance to supplement this interim rule and the final 
rule. The Manual will be made publicly available as soon as it is 
completed. This interim rule will take effect 30 days after publication 
and commenters should not delay submitting comments in anticipation of 
any additional material that may be in the Manual.
    HUD has taken two other steps toward preliminary implementation of 
the Mark-to-Market Program. As part of HUD's ``SuperNOFA'' for Economic 
Development and Empowerment Program published on April 30, 1998 in the 
Federal Register (63 FR 23876), HUD announced the availability of 
funding for Intermediary Technical Assistance Grants (ITAG) and 
Outreach and Training Grants (OTAG). These programs will assist tenant 
and local community groups, State and local governments, and other 
groups with funding for technical assistance so they can participate 
meaningfully in the Mark-to-Market Program. State-or community-wide 
nonprofit or public entity intermediaries to distribute these funds are 
selected competitively.
    HUD has also issued a Request for Qualifications (RFQ) for eligible 
entities interested in being Participating Administrative Entities, 63 
FR 44102, August 17, 1998. When this interim rule takes effect, HUD 
expects to have made substantial progress toward having a PAE 
infrastructure in place and will begin assigning assets (eligible 
projects with expiring section 8 contracts) as soon as each PAE 
executes its Project Restructuring Agreement (PRA) with HUD. HUD will 
provide training for PAEs.
    Beginning in October 1998, HUD also expects to begin extending, on 
an interim basis as provided in the rule, contracts expiring in Fiscal 
Year 1999 for eligible projects pending either development of requested 
Restructuring Plans or full review of requests for renewal under 
section 524 of MAHRA.
    On July 21, 1998, the Treasury Department issued Revenue Ruling 98-
34 clarifying the tax impact of the mortgage restructuring required for 
the Mark-to-Market Program. This ruling (published in 1998-31 I.R.B. at 
page 12, August 3, 1998) reduces uncertainty and is expected to 
mitigate many concerns of owners who are eligible to participate in the 
Mark-to-Market Program.
    MAHRA provides that before publication of final regulations HUD is 
to conduct at least three public forums at which organizations 
representing various groups identified in MAHRA may express views 
concerning HUD's proposed disposition of recommendations from those 
groups. The Department expects to conduct these forums within several 
weeks after publication of this interim rule, with tentative locations 
in New York, Chicago, and San Francisco. The exact location and date, 
and an information contact, will be posted on the Mark-to-Market web 
site (see below).
    HUD will make additional information on the Mark-to-Market Program 
available on HUD's Internet web site, currently at http://www.hud.gov/
fha/mfh/pre/premenu.html. Among other information, HUD will provide a 
list of addresses of HUD HUBs that have jurisdiction over the Program, 
a list of PAEs that have been selected, and a list of potentially-
eligible projects.
    MAHRA directs HUD to issue this interim rule, which (in addition to 
MAHRA) will serve as the legal authority for the Mark-to-Market Program 
and for extension of expiring section 8 project-based contracts until 
OMHAR issues the required final rule. HUD will not process contract 
renewals under this rule until October 1, 1998. HUD intends to issue 
one or more Notices with additional information on contract renewal 
procedures. OMHAR will develop and issue a final rule as required by 
MAHRA as soon as feasible after it has considered the public comments 
to be submitted regarding this interim rule. The Program will operate 
based on this interim rule until the final rule takes effect.

[[Page 48928]]

II. Content of Part 401

    Two new parts are added to title 24 of the Code of Federal 
Regulations. Part 401 covers the new Mark-to-Market Program including 
renewals of section 8 contracts under the Program. Part 401 also covers 
the determination of whether an eligible project will be given a 
contract renewal without a Restructuring Plan. Part 402 covers section 
8 contract renewals without a Restructuring Plan (i.e., outside of the 
Mark-to-Market Program).
    Part 401 is divided into the following subparts:

Subpart A--General Provisions; Eligibility
Subpart B--Participating Administrative Entity (PAE) and Portfolio 
Restructuring Agreement (PRA)
Subpart C--Restructuring Plan
Subpart D--Implementation of the Restructuring Plan after Closing
Subpart E--Section 8 Requirements for Restructured Projects
Subpart F--Owner Dispute of Rejection and Administrative Appeal

    Specific sections in these subparts are discussed below under the 
section headings.

Subpart A--General Provisions; Eligibility

Section 401.1  What is the Purpose of Part 401?

    Section 401.1 explains that part 401 contains the regulations 
implementing the Mark-to-Market legislation, including the renewal of 
section 8 assistance for restructured projects. The section references 
sections 511(b) and 512(2) of MAHRA which detail the purpose and scope 
of the Mark-to-Market Program. In general, the Program is intended to 
enhance HUD's administration and oversight of projects with section 8 
assisted housing through delegation of certain functions to State 
housing finance agencies and local housing agencies and other nonprofit 
and for-entities as Participating Administrative Entities (PAEs). 
Pursuant to Portfolio Restructuring Agreements (PRAs), PAEs will 
develop Restructuring Plans for assigned projects to ensure continued 
availability of affordable multifamily housing through reduction of 
rents, restructuring of mortgage obligations if required, needed 
rehabilitation, and assurance of competent management, with the 
objective of reducing the long-term costs to the Government for such 
housing and minimizing the adverse effect on the FHA insurance funds. 
The Program includes projects with HUD-insured and HUD-held mortgages, 
HUD-provided project-based rental assistance contracts that expire on 
October 1, 1998 or later, and rents that are above comparable market 
rents (eligible projects) subject to exceptions described in 
Sec. 401.100.

Section 401.2  What Special Definitions Apply to This Part?

    Section 401.2 identifies the statute (MAHRA) which created the 
Mark-to-Market program. It also identifies the terms that are defined 
in MAHRA and used in the rule, and defines the following additional 
terms that are used in the rule: affiliate, applicable Federal rate, 
community-based nonprofit organization, comparable market rents, 
disabled family, elderly family, eligible project, HUD, NHA, owner, 
PAE, PCA, PRA, priority purchaser, Rental Assistance Assessment Plan, 
Restructured Rent, Restructuring Plan, section 541(b) claim, section 8, 
tenant organization, and unit of local government. In the definition of 
HUD, it is explained that HUD means the Director of OMHAR for matters 
that MAHRA specifically assigns to OMHAR. Otherwise, HUD means the 
Department of Housing and Urban Development generally, acting through 
the Secretary and other responsible organizations and officials of the 
Department. FHA mortgage insurance matters are the responsibility of 
the Assistant Secretary for Housing-Federal Housing Commissioner, who 
is also responsible for most section 8 project-based assistance. The 
Assistant Secretary for Public and Indian Housing is responsible for 
project-based moderate rehabilitation contracts and for tenant-based 
assistance (vouchers and certificates). HUD's new Real Estate 
Assessment Center and Enforcement Center are also likely to have a role 
in carrying out some HUD functions under the rule. The rule does not 
attempt to sort out these responsibilities within HUD, which are 
covered by internal delegations of authority.

Section 401.99  What Actions Must an Owner Take to Request a Section 8 
Contract Renewal?

    Section 401.99 explains three procedures to be followed by owners 
who request renewals of section 8 project-based assistance contracts. 
If the owner of an eligible project requests a Restructuring Plan the 
owner must, at least 3 months before the project-based assistance 
contract expires (or as soon as practicable if the contract will expire 
less than 3 months after the effective date of this interim rule), 
certify to HUD that, to the best of the owner's knowledge, project 
rents exceed comparable market rents and neither the owner nor any 
affiliate is suspended or debarred (or that the owner proposes a 
voluntary sale of the project). HUD will assign the project to a PAE 
which will contact the owner. The owner will submit an application to 
the PAE with the information necessary to enable the PAE to begin 
development of a Restructuring Plan. The owner must also contact the 
mortgagee to determine the mortgagee's willingness to consider a 
modification of the first mortgage as part of the Restructuring Plan. 
Both the owner and the mortgagee are expected to cooperate with the PAE 
in the development of the Plan, as provided in Sec. 401.402. The PAE 
will perform an underwriting analysis. After development of a 
Restructuring Plan and mutual execution of a Restructuring Commitment, 
the PAE will coordinate the closing using standard form documents 
(which will be made available to the owner for review at the beginning 
of the restructuring process.)
    If the owner of an eligible project does not request a 
Restructuring Plan, the owner must submit to HUD the certification 
described above in the same time frame with the following additional 
items: a comparable market rent analysis indicating that the rents are 
above comparable market rents (using the approach described in 
Sec. 401.410); the prior fiscal year's annual audited financial 
statement for the project; and the owner's evaluation of the physical 
condition of the project. The request will be considered in accordance 
with Sec. 401.601. Finally, because part 401 is limited to projects 
eligible for a Restructuring Plan, this section refers the owner to 
Sec. 402.5 if the project is not eligible for restructuring but the 
owner wants project-based assistance renewed.

Section 401.100  Which Projects are Eligible for a Restructuring Plan 
Under This Part?

    Section 401.100 incorporates the statutory requirements in section 
512(2) of MAHRA for an eligible project. The section explains that 
project rent exceeds the rent of comparable properties, as required by 
section 512(2)(A), if the gross potential rent revenue (i.e., at 100 
percent occupancy) for the project-based assisted units in the project 
at current gross rents exceeds the gross potential rent for those units 
(at 100 percent occupancy) using comparable market rents.
    Section 401.100 excludes projects identified in section 514(h) of 
MAHRA: (1) projects with primary financing or mortgage insurance from 
State or local governments or their agencies or instrumentalities; (2) 
projects for the elderly financed under the HUD section 202 program or 
the Department of

[[Page 48929]]

Agriculture's section 515 program; or (3) projects with section 8 
moderate rehabilitation contracts for single room occupancy dwellings.
    Because of the express prohibition in section 514(h)(1) of MAHRA, 
under current law the interim rule does not permit a Restructuring Plan 
for any project with State or local government primary financing. HUD 
is aware that Congress is considering amendment of section 514(h) to 
exclude only those projects with State or local primary financing that 
are identified in section 524(a)(2)(B) of MAHRA. If the law is so 
amended, the effect of that change would be automatically reflected in 
this section without the need for revision.

Section 401.101  Which Owners Are Ineligible for a Restructuring Plan?

    Section 401.101 states that an owner's request for a Restructuring 
Plan will not be considered if the owner or an affiliate is debarred or 
suspended, unless a sale or transfer is proposed. (Section 401.480 
discusses project sales or transfers.) The owner may follow the dispute 
and administrative appeal procedures in subpart F. The owner may 
dispute whether there is debarment or suspension, under procedures set 
forth in Sec. 401.645, but may not reopen the question of whether a 
debarment or suspension was properly imposed. The owner's request may 
also be rejected later as provided in Sec. 401.403.

Subpart B--Participating Administrative Entity (PAE) and Portfolio 
Restructuring Agreement (PRA)

    Except for situations when HUD will itself undertake the functions 
of the PAE for a project due to lack of any other qualified PAE, HUD 
will select a PAE and enter into a Portfolio Restructuring Agreement 
with the PAE. The PAE obtains the necessary information about the 
project that will enable it to develop a viable Restructuring Plan for 
ensuring that the goals of MAHRA are met for a project, and becomes 
responsible for ensuring implementation of the Plan after HUD approval. 
The PAE maintains communications with all affected parties including 
the owner, tenants, the community, and HUD. The specific role of each 
PAE will be detailed in its PRA with HUD. HUD's Program Manual will 
contain detailed guidance on the information collection process, 
including the information needed and the respective roles of the PAE, 
owner, mortgagee/servicer and others.

Section 401.200  Who May Be a PAE?

    Section 512(10) of MAHRA permits a public agency (including a State 
housing finance agency or a local housing agency), a nonprofit 
organization, or a for-profit entity, to act as a PAE. The PAE may not 
have any outstanding violations of civil rights laws, determined in 
accordance with criteria in use by HUD. Section 513(b)(7)(A) of MAHRA 
requires that any for-profit entity serving as a PAE do so in 
partnership with a public entity, which may include HUD. Section 
513(b)(6)(B) of MAHRA requires the prior approval of HUD for any 
delegation or transfer of responsibilities by a State housing finance 
agency or a local housing agency. Section 401.200 of the rule includes 
all of these provisions, with the additional requirements that a 
nonprofit PAE also partner with a public purpose entity and that all 
delegations be approved by HUD in the PRA. This section also clarifies 
that a partnership must meet all legal requirements for a partnership.

Section 401.201  How Does HUD Select PAEs?

    Section 401.201 explains that HUD will select PAEs in accordance 
with the statutory selection criteria and additional selection criteria 
established by HUD. The selection method will be determined by HUD, and 
may be through a request for qualifications (RFQ). As discussed in Part 
I of this Supplementary Information, HUD's initial selections will be 
through an RFQ.
    The rule gives a one-time priority to qualified State housing 
finance agencies and local housing agencies by giving them exclusive 
consideration for an initial period after HUD has received responses to 
the initial RFQ. During the initial period, HUD will consider other 
entities as PAEs only to the extent that HUD has been unable to 
identify qualified State housing finance agencies or local housing 
agencies who are interested in serving as PAEs, or that projects have 
not been assigned to a qualified agency. If more than one qualified 
agency responding to the initial RFQ expresses interest for projects in 
the same jurisdiction, HUD will provide the responding agencies an 
opportunity to agree on an allocation of responsibility between 
themselves before HUD will make a selection in accordance with section 
513(b)(2) of MAHRA. If no PAE is selected for a project in the Mark-to-
Market program due to lack of qualified interested entities, HUD will 
itself serve as PAE.

Section 401.300  What Is a PRA?

    In accordance with section 513(a)(2) of MAHRA, Sec. 401.300 
describes the PRA as an agreement between HUD and the PAE to define 
their respective rights and responsibilities in connection with 
development and implementation of Restructuring Plans. The PRA must 
contain the matters required by section 513(a)(2) of MAHRA. The 
following sections in this subpart B explain some of the statutory 
requirements for a PRA and other requirements of HUD.

Section 401.301  Business Arrangements

    Section 401.301 lists some of the basic elements regarding business 
arrangements under the PRA. The PRA must specify: (a) the 
responsibilities of each partner of the PAE in carrying out the PRA; 
(b) the resources each partner will provide to accomplish its 
responsibilities; and (c) all compensation to each partner, direct or 
indirect.

Section 401.302  PRA Administrative Requirements

    Section 513(a)(2)(A) of MAHRA characterizes the PRA as a 
``cooperative agreement''. Generally, a cooperative agreement is used 
when
    (1) The principal purpose of the relationship is to transfer a 
thing of value to the State, local government, or other recipient to 
carry out a public purpose of support or stimulation authorized by a 
law of the United States instead of acquiring (by purchase, lease, or 
barter) property or services for the direct benefit or use of the 
United States Government; and
    (2) Substantial involvement is expected between the executive 
agency and the State, local government, or other recipient when 
carrying out the activity contemplated in the agreement.
    (31 U.S.C. 6306.) HUD has concluded that Congress did not intend 
the PRA to be a ``cooperative agreement'' within this strict definition 
so that certain legal provisions that ordinarily apply to such 
cooperative agreements are not directly applicable to PRAs. The primary 
purpose of the PAE lies not in using public funds to carry out the 
purposes of MAHRA, but in enlisting the resources and expertise that 
Congress felt were lacking at HUD. At the same time, the PAE is not a 
mere provider of services to HUD. It is performing an independent, 
statutorily-defined role. It appears that Congress used the term 
``cooperative agreement'' in a general sense to emphasize that HUD was 
not simply procuring the services of a PAE, nor making a grant to a 
PAE, but that HUD should not otherwise be constrained by the ordinary 
consequences of designating a legal instrument as a cooperative 
agreement.

[[Page 48930]]

    MAHRA itself is very specific on the purpose and contents of a 
Portfolio Restructuring Agreement and the unique relationship that it 
creates. Thus, HUD has concluded that it would be inappropriate to 
subject a PRA to 24 CFR parts 84 (``Grants and Agreements with 
Institutions of Higher Education, Hospitals, and Other Non-profit 
Organizations'') and 85 (``Administrative Requirements for Grants and 
Cooperative Agreements to State, Local and Federally-Recognized Indian 
Tribal Governments''). Similarly, the PRA is not subject to procurement 
contract requirements.
    All PAEs are subject to recordkeeping and inspection and audit of 
records as provided in this section. Reporting requirements for the PAE 
will be contained in the PRA.

Section 401.303  PRA  Indemnity Provisions for SHFAs and HAs

    Section 401.303 implements section 513(a)(2)(G) of MAHRA, which 
requires the PRA to provide that HUD indemnify a PAE against lawsuits 
and penalties for action taken pursuant to the PRA (except for willful 
misconduct or negligence), but only if the PAE is a State housing 
finance agency or a local housing agency. HUD interprets the statutory 
indemnification as extending only to agencies that are named as the PAE 
in the PRA, and not to agencies that may have partnered with another 
public or private entity that is named as the PAE. The indemnification 
also does not extend to partners of agencies named as PAEs, even if the 
partners are agencies that would receive indemnification if named in 
the PRA as PAE. Section 401.303 makes clear that HUD's obligation to 
indemnify is contingent upon the availability of funds that may legally 
be used for this purpose.

Section 401.304  PRA Provisions on PAE Compensation

    Section 401.304 provides that the PRA will contain provisions on 
compensation to the PAE regarding a base fee and reimbursement of 
expenses, and may provide for incentive fees. The function of the PAE 
is a unique one for which there is little experience in determining 
appropriate fees that will both attract competent entities and result 
in cost-effective performance. In the interim rule, HUD is deferring 
setting any limits on the actual amount or method of calculation of the 
base fee and incentive fee. The RFQ for prospective PAEs asks them to 
provide an estimate of the required fee. As a result of reviewing this 
information, negotiating the actual fee arrangements for initial PAEs 
and refining the precise duties of PAEs in the initial PRA development 
process, and considering the information and ideas received through the 
public comment process on the interim rule, HUD intends to include in 
the final rule more specific provisions on the amount and method of 
calculation of the base fee and incentive fee. Fees may be different 
for the public body PAEs selected in ``Phase I'' of the RFQ process 
than for those selected for ``Phase II''.

Section 401.307  Ongoing Responsibility of PAE

    Section 401.307 states that the PRA must provide for ongoing 
activities necessary to implement the Restructuring Plan. This may be 
accomplished through later amendments once the Plan is developed.

Section 401.309  PRA Term and Termination Provisions; Other Remedies

    The PRA will have a term of 1 year, to be renewed for successive 
terms of 1 year with the mutual agreement of both parties subsequent to 
HUD review of performance. The PRA will provide for final compensation 
to the PAE and allocation of existing responsibilities if the PRA is 
not renewed. A PRA will be subject to termination by HUD at any time 
for cause, with any final compensation for matters performed by the PAE 
to that point to be paid by HUD as provided in the PRA, subject to 
HUD's right of set-off. If cause for termination exists, HUD may order 
an immediate transfer of some or all of the PAE's duties to another PAE 
designated by HUD, with a temporary waiver of termination pending 
satisfactory completion of an orderly transfer. During the term of a 
PRA, or notwithstanding any termination of a PRA, HUD may seek its 
actual, direct, and consequential damages from any PAE failure to 
comply with its obligations under the PRA. The remedies under 
Sec. 401.309 are cumulative and in addition to any other remedies or 
rights HUD may have under the terms of the PRA, at law, or otherwise.

Section 401.310  Conflicts of Interest

    Section 401.310 addresses conflicts of interest for a PAE and 
related persons included in the definition of ``restricted person'': a 
management official, controlling party or other party under common 
control, or employee, agent or contractor of the PAE performing 
services under the PRA. A conflict of interest exists when a PAE or 
restricted person either (1) has personal, business, or financial 
interests or relationships that would lead a reasonable and 
knowledgeable person to question the integrity or impartiality of those 
acting for the PAE; or (2) in a lawsuit, is an adverse party either to 
HUD or to the owner of a project under the PAE's PRA. In general, HUD 
will avoid dealing with a PAE with a conflict of interest. The conflict 
may be eliminated by the PAE, or may be waived by HUD. Waiver will be 
reserved for situations when HUD's interest in the PAE's participation 
outweighs the concern that a reasonable person may question the 
integrity of HUD's operations.
    This section sets forth procedures for addressing conflict of 
interest questions that arise before and after selection of a PAE. 
Conflicts of interest after selection may, if left uncorrected, lead to 
declaration of default under the PRA and termination, and other 
remedies described in Sec. 401.313.

Section 401.311  Standards of Conduct

    A PAE and restricted persons are subject to minimum ethical 
standards set forth in section 401.311. The standards prohibit matters 
such as solicitation by the PAE of items of value from a person with an 
interest in the performance of the PAE, improperly using property that 
is under the PAE's charge because of the PRA, using its status as PAE 
for the benefit of a third party except as contemplated by the PRA, or 
making unauthorized commitments on behalf of HUD. Section 401.311 cites 
relevant criminal provisions of the U.S. Code.

Section 401.312  Confidentiality of Information

    Section 401.312 requires the PAE and restricted persons to protect 
avoid misuse of confidential information.

Section 401.313  Consequences of PAE Violations; Finality of HUD 
Decision

    Section 401.313 makes clear the severe consequences that may follow 
from violation by a PAE or restricted persons of Secs. 401.310-.312. As 
appropriate, HUD may declare a PAE in default under an existing PRA, 
terminate a PRA under the termination-for-cause provision of 
Sec. 401.309(b), remove a PAE's eligibility for award of a PRA or to 
receive projects for restructuring, become liable for damages to HUD 
arising from termination, or exercise any other rights HUD may have. A 
HUD decision is final with no further administrative review available.

[[Page 48931]]

Section 401.314  Environmental Review Responsibilities

    Section 401.314 states that HUD is legally required to retain any 
environmental review responsibilities under 24 CFR part 50, and that 
any required environmental review will occur before HUD executes a 
Restructuring Commitment (see Sec. 401.405). Without delegating any 
decision-making authority to the PAE, HUD may include in the PRA a 
provision providing for PAE completion of forms/or and checklists to 
assist HUD in complying with its requirements under environmental 
regulations.

Subpart C--Restructuring Plan

Section 401.400  Required Elements of a Restructuring Plan

    Section 401.400 provides overall guidance on what a Restructuring 
Plan must contain. A Restructuring Plan is required for each project 
undergoing restructuring under the Mark-to-Market Program. The PAE 
develops the Plan. Subpart C provides detailed guidance for major 
elements of a Restructuring Plan in addition to those specifically 
mentioned in MAHRA.

Section 401.401  Consolidated Plans

    Section 401.401 describes the circumstances under which HUD may 
consider a Consolidated Restructuring Plan for multiple projects.

Section 401.402  Cooperation with Owner and Qualified Mortgagee in 
Restructuring Plan Development

    Section 401.402 provides guidance for implementation of the 
requirement in section 514(a)(2) of MAHRA for PAE cooperation with the 
project owner and qualified mortgagee in development of the 
Restructuring Plan. The owner is expected to submit a proposal to the 
PAE with the basic elements of a restructuring that the owner finds 
acceptable. The owner must actively work with the PAE and other 
necessary third parties to develop that restructuring, if acceptable to 
the PAE, or a modified or substitute restructuring proposed by the PAE. 
If the owner fails to cooperate to the satisfaction of the PAE, and HUD 
agrees, the PAE will refuse to continue with development of a 
Restructuring Plan. The PAE will ensure that the owner contacts the 
qualified mortgagee to obtain project history and to explore 
modification of the existing mortgage if feasible. If the qualified 
mortgagee does not cooperate in modifying the mortgage, the PAE and the 
owner may continue to develop a Plan to restructure the loan using 
alternative financing.

Section 401.403  Rejection of a Request for a Restructuring Plan 
Because of Actions or Omissions of the Owner or Affiliate or Project 
Condition

    Section 401.403 implements part of section 516(a) of MAHRA. 
(Section 516(a) is also implemented by Secs. 401.101 and 402.7.) Under 
Sec. 401.403, the PAE is responsible for a further more complete and 
ongoing assessment of owner and project eligibility while a 
Restructuring Plan is developed. The PAE must advise HUD, and may elect 
not to continue with consideration of the Restructuring Plan or the 
closing on the Plan (see Sec. 401.407), if at any time any of the 
following conditions exist: (1) the owner or an affiliate is debarred 
or suspended; (2) the owner or an affiliate has engaged in material 
adverse financial or managerial actions or omissions as described in 
section 516(a) of MAHRA, which may include actions that have resulted 
in imposition of a Limited Denial of Participation (LDP) or a proposed 
debarment under 24 CFR part 25, or outstanding violations of civil 
rights laws; or (3) the project does not meet the housing quality 
standards in Sec. 401.453. HUD may reject an owner's request for a 
Restructuring Plan for any of these reasons.
    An ineligible owner may agree to development of a Restructuring 
Plan involving sale or transfer of the project. In subpart F, the rule 
provides a procedure for owner dispute and administrative review of 
rejection under this section.

Section 401.404  Proposed Restructuring Commitment

    Section 401.404 requires the PAE to submit a completed 
Restructuring Plan and proposed Restructuring Commitment to HUD for its 
review and approval before delivering it to the project owner. The 
proposed Commitment will incorporate the Restructuring Plan and include 
standard terms and the following project-specific information: (1) the 
lender, loan amount, interest rate and term of mortgages or any 
unsecured financing for the restructuring and rehabilitation, and any 
credit enhancement; (2) amount of any payment of a section 541(b) claim 
by HUD; (3) type of section 8 assistance and the restructured section 8 
rents; (4) any required rehabilitation and the source of the owner 
contribution, and escrow arrangements; (5) the use of project accounts 
for other than rehabilitation; (6) terms of any sale or transfer of the 
project; (7) a schedule of sources and uses of funds and project 
account balances; and (8) other conditions to the commitment required 
by HUD.

Section 401.405  Restructuring Commitment Review and Approval by HUD

    Section 401.405 provides for HUD to approve the Plan as submitted, 
require changes as a condition for approval, or reject the Plan. HUD 
will inform the PAE of the reasons for rejection. The subpart F dispute 
and appeal procedure will apply. At a minimum, HUD review will address 
any provisions of the Plan and the proposed Restructuring Commitment 
involving the disposition of accounts of the Treasury of the United 
States, in according with various provisions of MAHRA that make clear 
that HUD retains control of such accounts. HUD review may be either 
technical or administrative depending on amount of payment of claim, 
rehabilitation cost and any other pertinent provisions of the PRA.

Section 401.406  Execution of Restructuring Commitment

    The PAE will deliver to the owner for execution a proposed 
Restructuring Commitment as the final element of a HUD-approved 
Restructuring Plan. If the owner executes the HUD-approved 
Restructuring Commitment, the PAE will prepare for closing under 
Sec. 401.407. An owner that does not execute a Restructuring Commitment 
has 10 days to appeal the terms of the Restructuring Commitment and 
seek a modification under subpart F.

Section 401.407  Closing Conducted by PAE

    Section 401.407 provides that the PAE must arrange for the closing 
after the owner has executed the Restructuring Commitment. All 
necessary legal documents will be executed at the closing, using 
standard legal instruments acceptable to HUD with modifications only as 
necessary to comply with applicable State or local law or as approved 
by HUD. If the project will continue to have a mortgage insured or held 
by HUD, the regulatory agreement between HUD and the owner will be 
retained and any necessary amendments to reflect the Restructuring Plan 
will be executed at closing. HUD's Program Manual will provide detailed 
guidance on how a closing should be conducted and how closing documents 
should be distributed.

Section 401.408  Affordability and Use Restrictions Required

    Section 401.408 implements section 514(e)(6) of MAHRA, which 
requires the Restructuring Plan to provide for

[[Page 48932]]

affordability and use restrictions on the project, for a term of at 
least 30 years, consistent with the long-term physical and financial 
viability and character of the project as affordable housing. These 
affordability restrictions will be reflected in recorded covenants (a 
Use Agreement) running with the land. The PAE has the discretion to 
require restrictions for a longer, but not a shorter, period. The 
project must continue to be used for residential use with no reduction 
in the number of residential units without HUD approval.
    During a period when at least 20 percent of the units in a project 
receive project-based assistance, the affordability restrictions 
applicable to such assistance will apply. When the Restructuring Plan 
provides for continuation of project-based assistance, section 515 of 
MAHRA requires HUD (directly or through a PAE) to offer to renew or 
extend expiring contracts, subject to availability of appropriated 
funds. The owner is required to accept the offers.
    At any time when fewer than 20 percent of the units in a project 
receive project-based assistance, the Use Agreement will require 
conformance to the rent and the tenant income profile used in the Low 
Income Housing Tax Credit Program (LIHTC) for any project that is 
restructured (i.e., either rents set for 20 percent of the units at 30 
percent of 50 percent of median income or for 40 percent of the units 
at 30 percent of 60 percent of median income.) Where the LIHTC rent and 
income profile is more restrictive than the market rents at the time of 
restructuring, the underwriting analysis will take this into account. 
The type and size of units that satisfy the affordability requirements 
must be comparable to the entire project.
    The Use Agreement will specify which interested parties in addition 
to HUD and the PAE will have rights of enforcement; they may include 
tenants, tenant organizations, and affected units of local government, 
but HUD will retain the right to approve amendments to the Use 
Agreement without requiring the consent of the other parties with 
enforcement rights. The Use Agreement will contain appropriate 
financial and other reporting requirements for the owner, as determined 
by HUD, to ensure that HUD and the PAE have adequate information to 
enforce compliance with the Agreement.

Section 401.410  Standards for Determining Comparable Market Rents

    Section 401.410 provides guidance to the PAE for determining 
comparable market rents. An owner should also follow this guidance when 
making a preliminary determination of eligibility under 
Secs. 401.99(a)(1) and 402.6(b). The PAE uses comparable market rents 
both for purposes of confirming the eligibility of the project (because 
it cannot develop a Restructuring Plan for a project at or below 
comparable market rents) and for purposes of determining the initial 
rents under a section 8 contract renewal when rents must be reduced to 
comparable market rents. The determination of whether rents in a 
project are comparable to market rents considers only the rents for 
units in the project that receive project-based assistance.
    Comparable market rents are defined (based on the definition of 
``comparable properties'' in section 512(1) of MAHRA) as the rents 
charged for similar multifamily projects in the same market area, where 
practicable, that (1) are not receiving project-based assistance (for 
this purpose only, the term includes section 202/811 projects for the 
elderly and persons with disabilities in addition to the statutory 
definition) and (2) are determined by the PAE to be similar to the 
project as to neighborhood (including risk of crime), type of location, 
access, street appeal, age, property and unit amenities, utilities, and 
other characteristics including rent control and others considered 
relevant by the PAE (e.g., the impact of affordability restrictions 
which could constrain a project's net operating income.) If a project 
used as a comparable needs rehabilitation to meet the non-luxury 
standard that a Mark-to-Market project must meet after rehabilitation 
(see Sec. 401.452), appropriate adjustments should be made. The PAE 
must define the market broadly enough to include a reasonable number of 
projects (at least three) that have a high degree of similarity using 
the factors identified in the rule. If necessary, the PAE should use 
non-comparable housing stock in the market, with appropriate 
adjustments, if necessary to identify an adequate number of comparable 
properties. If this is inadequate, comparable properties outside the 
market with appropriate adjustments may be considered. The PAE should 
set comparable market rent at 90 percent of section 8 Fair Market Rents 
only as a last resort if no meaningful comparison of projects is 
possible following the guidance in this section.

Section 401.411  Guidelines for Determining Exception Rents

    Section 401.411 applies to cases where section 514(g)(2) of MAHRA 
permits the use of ``exception rents'' instead of comparable market 
rents. Exception rents may be used in the Restructuring Plan only if 
the PAE has determined that the housing needs of the tenants and the 
community cannot be adequately addressed through a Restructuring Plan 
that provides for comparable market rents, and if comparable market 
rents would provide an income inadequate to operate the project 
(negative Net Operating Income or NOI projects).
    Exception rents are those that exceed rent levels at comparable 
market rents but that do not exceed 120 percent of the fair market rent 
for the market area. For up to five percent of the units with contracts 
expiring in the fiscal year, HUD may waive the 120 percent requirement 
on a project-by-project basis upon on a PAE documented determination of 
special need. The PAE's determination of special need must address why 
the housing needs of the tenants and the community could not be 
adequately addressed through implementation of the comparable market 
rent limitation typical of projects undergoing a Restructuring Plan.
    The PAE may approve exception rents only for negative NOI projects, 
which could not support all operating expenses if rents were based on 
the comparable market rent. In order to receive exception rents, these 
negative NOI projects must be determined by the PAE to be positive 
social assets in the community whose operating expense levels and lack 
of debt service capacity are not a function of bad management. They 
should be unique, appropriately situated, and affordable housing, with 
no other comparable housing alternatives available in the submarket. If 
they were not restructured at exception rents, the outcome would be 
displacement of those who would experience difficulty in finding 
comparable housing, such as the elderly, persons with disabilities and 
large families.
    When exception rents are used, the rent is a budget-based rent 
based on the factors listed in section 514(g)(3) which include debt 
service (allowed only on the second mortgage under Sec. 401.461 or to 
support a rehabilitation loan included in the Restructuring Plan), 
project operating expenses, a PAE-determined allowance for losses due 
to vacancies and uncollected rents, a PAE-determined allowance for a 
reasonable rate of return to the owner (which may be established to 
provide incentive for owners who meet the housing quality standards in 
Sec. 401.453 and the property management standards in Sec. 401.484), 
contributions to adequate reserves, and other necessary project 
operating expenses as determined by the PAE.

[[Page 48933]]

    For each fiscal year, HUD approval of exception rents is limited to 
20 percent of the units with contracts expiring in the fiscal year 
unless HUD grants a waiver based on a PAE documentation of special 
need.

Section 401.412  Adjustment of Rents With Operating Cost Adjustment 
Factor (OCAF)

    Section 401.412 explains the adjustment of rents for contract 
renewals under a Restructuring Plan using an operating cost adjustment 
factor (OCAF) as required by section 514(e)(2) of MAHRA. The OCAF will 
be derived from an analysis of the change in operating expenses in 
various geographic areas, and will be published by HUD annually. An 
OCAF may be positive or negative. The OCAF methodology for determining 
adjusted rent levels is also applied to calculation of rent levels 
outside of Restructuring Plans under Secs. 402.4 and 402.5 except when 
HUD determines to apply budget-based adjustments as permitted by those 
sections. Under Sec. 401.412, adjusted rent levels are calculated by 
multiplying an adjusted base rent level for the project by the OCAF. 
The adjusted base rent level is the difference between the current 
aggregate project rents and the debt service.
    For the section 8 moderate rehabilitation program (other than for 
single room occupancy dwellings under section 441 of the Stewart B. 
McKinney Homeless Assistance Act), rents for contracts renewed under 
Sec. 402.5 will be adjusted by applying an OCAF to the base rent, minus 
any costs associated with debt service for the cost of property 
acquisition. The OCAF will be applied to rents for each unit size 
assisted under the renewal contracts.

Section 401.420  When Must the Restructuring Plan Require Project-based 
Assistance?

    Section 401.420 implements section 515(c)(1) of MAHRA, which 
provides for mandatory renewal of project-based assistance in a 
Restructuring Plan for projects in tight rental markets, projects 
occupied predominantly (at least 50% of units) by elderly or disabled 
families, and cooperative housing projects. The rule provides that a 
tight rental market exists when the PAE determines that the market-wide 
vacancy rate is at or below 6 percent.

Sction 401.421  Rental Assistance Assessment Plan

    Consistent with section 515(c)(2) of MAHRA, Sec. 401.421 requires 
the PAE to develop (after consultation with the owner) a Rental 
Assistance Assessment Plan for any project not covered by Sec. 401.420 
to determine whether assistance should be renewed for a project as 
project-based assistance or whether some or all of the assisted units 
should be converted to tenant-based assistance. Section 515(c)(2)(B) 
requires an assessment of the impact of converting to tenant-based 
assistance and the impact of extending project-based assistance on 
eight specific areas described in section 515(c)(2)(B). The PAE must 
consider the cost of providing assistance, comparing the applicable 
payment standard for tenant-based assistance to the project's adjusted 
rent levels determined under Sec. 401.410 or Sec. 401.411. In addition, 
the PAE must consider the other matters listed in section 515(c)(2)(B) 
of MAHRA to be assessed as part of the Plan, and the applicable 
Consolidated Plan developed under part 91 of this title. In addition to 
these statutory considerations, Sec. 401.421 requires a PAE to consider 
the local Consolidated Plan under 24 CFR part 91. The PAE may allow up 
to 5 years for a conversion to tenant-based assistance if needed for 
the financial viability of the project. In accordance with section 
515(c)(2)(C) of MAHRA, the PAE must report at least semi-annually to 
HUD on projects for which the Restructuring Plan either: (1) provides 
for renewal of project-based assistance even though tenants generally 
supported tenant-based assistance; or (2) provides for renewal with 
tenant-based assistance.

Section 401.450  Owner Evaluation of Physical Condition

    The Restructuring Plan must provide for rehabilitation of the 
project necessary to achieve the property standards set forth in 
Sec. 401.452. The first step in developing this part of the Plan is an 
evaluation by the owner of the physical condition and rehabilitation 
needs of the project, which is provided to the PAE as part of the PAE's 
initial data collection for the project. The evaluation must contain 
the following information:
    (1) All work items needed to bring the project to the property 
standard in Sec. 401.452, including deferred maintenance and any needed 
repairs including work items likely to be needed in the next 12 months;
    (2) The capital repair or replacement items that will be necessary 
to maintain the long-term physical integrity of the property;
    (3) Plans for funding rehabilitation needs under the Restructuring 
Plan, including the source of required non-project funds to be 
contributed by the owner; and
    (4) An estimate of the initial deposit, if any, and the estimated 
monthly deposit to the reserve for replacement account for the next 20 
years.

Section 401.451  PAE Physical Condition Analysis (PCA)

    Under Sec. 401.451, the PAE is responsible for an independent 
evaluation of the rehabilitation needs (a Physical Condition Analysis, 
or PCA) of the project, and for reviewing and certifying to the 
accuracy of the owner's evaluation (which may be modified to address 
deficiencies identified by the PAE.) Both the project's immediate 
physical condition and rehabilitation needs, and its long term 
maintenance and replacement needs, must be evaluated and addressed in 
the PAE's review. The owner must immediately complete any work items 
needed to address physical needs that are immediate threats to health 
or safety. If this is not done, the PAE must evaluate the project's 35 
eligibility for a Restructuring Plan under Sec. 401.403, which permits 
rejection of certain projects in poor condition. The rule allows 
rejection of the request for a Restructuring Plan if the PAE cannot 
certify the owner's evaluation. Based on the completed PCA, the PAE 
also must consider rejecting a request for a Restructuring Plan even if 
there are no remaining immediate health and safety threats, if the PAE 
cannot determine that proceeding with a Restructuring Plan with 
necessary rehabilitation is more cost-effective in terms of Federal 
resources than rejecting the Request for a Restructuring Plan under 
Sec. 401.403(b)(3) and providing tenant-based assistance for displaced 
tenants under Sec. 401.602. HUD will provide guidance to PAEs for 
making the cost-effectiveness determination. The PAE must also advise 
HUD of the impact on tenants and the community of not proceeding with 
the Restructuring Plan. Rejections under this section may be disputed 
and appealed under subpart F.

Section 401.452  Property Standards for Rehabilitation

    The standard for rehabilitation is a non-luxury standard adequate 
for the rental market intended at the original approval of the project-
based assistance. The physical needs identified should be those 
necessary for the project to retain its original market position as an 
affordable project in decent, safe and sanitary condition (recognizing 
any evolution of standards appropriate for such a project). The 
rehabilitation should include those improvements the project requires 
to rent at all in the non-subsidized market, resulting in a marketable 
project that competes on

[[Page 48934]]

rent rather than on amenities. Rehabilitation must be in accordance 
with 24 CFR part 8, which contains requirements for accessibility to 
persons with disabilities, to the extent applicable. Where a range of 
options exists, the least costly options for rehabilitation should be 
chosen within that range, when both capital and operating costs are 
taken into consideration.

Section 401.453  Housing Quality Standards

    Section 401.453 requires the owner to maintain the project in a 
decent safe and sanitary condition based on the housing quality 
standards identified in Sec. 401.453. These standards apply as long as 
the Use Agreement under Sec. 401.408 is in effect. Whenever the project 
is receiving project-based assistance, the applicable standards will be 
the physical condition standards for HUD housing under 24 CFR 5.703, 
published on September 1, 1998 (63 FR 46566). Otherwise, local codes 
will serve as the standards as long as local codes are as strict as HUD 
standards and do not severely restrict housing choice in the view of 
the PAE. In addition, any unit in which the tenant receives tenant-
based assistance must comply with the housing quality standards of the 
section 8 tenant-based programs (24 CFR 982.401). Section 401.453 also 
requires the Restructuring Plan to provide for necessary replacement 
reserves.

Section 401.460  Modification or Refinancing of First Mortgage

    Section 401.460 explains the standards for restructuring with a 
modified or refinanced first mortgage. This section provides for a 
variety of approaches to restructuring, which may include modification 
of the insured mortgage or refinancing with or without FHA insurance or 
other credit enhancement. The first mortgage will be a fully 
amortizing, level payment mortgage with a principal amount sustainable 
at rent levels that do not exceed the lower of section 8 rents allowed 
under the Mark-to-Market Program or rents permitted under the Use 
Agreement under Sec. 401.408. Interest rates and other terms must be 
competitive in the market.
    As part of sizing the first mortgage, the PAE should take into 
account any need for financing needed rehabilitation. The determination 
of the modified or refinanced first mortgage amount and the claim 
payment amount are directly related, and the claim payment under 
Sec. 401.471 may be increased, in order to make proceeds from a 
refinanced first mortgage available for rehabilitation. A similar 
adjustment in the first mortgage amount is permitted in the case of 
HUD-held mortgage debt although no claim payment is involved.
    In the Program Manual, HUD will provide detailed guidance for PAE 
underwriting of the first and second mortgage. The PAE will be fully 
responsible for the second mortgage underwriting, while underwriting 
the first mortgage will also require the involvement of the mortgagee 
(and HUD, if refinancing involves FHA mortgage insurance or risk-
sharing.) Due to the significant potential for conflicts of interest if 
the PAE provides the first mortgage financing, HUD will apply an 
exceptionally high level of review whenever this is proposed as part of 
the Restructuring Plan.
    The monthly payment for the first mortgage under the Mark-to-Market 
Program will not exceed the current first mortgage payment. Interest 
rates and other terms must be competitive. Fees and costs above normal 
processing fees for a modification and refinancing will be paid by the 
owner from non-project funds and will not be financed through the first 
mortgage.
    Credit enhancement for the refinanced mortgage may be provided for 
in the Restructuring Plan but is not required. If FHA continues to 
provide credit enhancement through mortgage insurance, any new 
insurance for a refinanced first mortgage will be provided under the 
usual FHA legal requirements but insurance for the refinanced mortgage 
will be documented through amendment of the existing insurance contract 
under section 517(b)(3) of MAHRA rather than through a new insurance 
contract. FHA will issue the commitment and endorse the mortgage for 
insurance, but may adapt its procedures to make appropriate use of the 
PAE.
    If FHA credit enhancement for a refinanced first mortgage is 
provided through risk-sharing under 24 CFR part 266, the usual legal 
requirements under part 266 will apply but the PAE will need special 
HUD approval if it seeks to engage in risk-sharing for the project, and 
the conflict of interest provisions in Sec. 401.700 will apply. This 
will involve, for example, more detailed HUD involvement in 
underwriting than would otherwise be applicable under part 266.
    Credit enhancement may also be provided by a non-FHA party. The 
rule recognizes that there may be a conflict between the credit 
enhancer's usual requirements and the requirements of the interim rule. 
Although all non-statutory provisions in the interim rule are subject 
to waiver under 24 CFR 5.110, the interim rule advises that HUD will 
consider waiver to accommodate a provider of credit enhancement only if 
the waiver will not materially impair achievement of the purposes of 
MAHRA and if the waiver is essential to meet the legitimate business or 
legal requirements of the provider of credit enhancement.
    Some projects eligible for the Mark-to-Market Program are subject 
to more than one FHA-insured loan. A common combination is a section 
236 first mortgage (often quite small) and a section 241(f) second 
mortgage. The feasibility of a Restructuring Plan for these projects 
will depend heavily on how the Plan deals with the junior insured 
mortgage. MAHRA does not deal expressly with this situation, but HUD 
has concluded that MAHRA permits restructuring of both insured 
mortgages. A section 541(b) claim might also be paid in connection with 
the existing insured second mortgage if needed, because section 
517(b)(1) does not limit the payment of claim to a single insured 
mortgage. The modified or refinanced first mortgage required by 
Sec. 401.460 would secure the debt that remained owing on the existing 
insured mortgages after payment of claims. Section 517(a)(1)(B) of 
MAHRA requires a second mortgage under a Restructuring Plan (discussed 
under Sec. 401.461) in an amount that does not exceed the difference 
between the first mortgage under Sec. 401.460 and the indebtedness 
under the existing insured debt. The result could be the replacement of 
both of the existing insured first and second mortgages with both a 
first mortgage with payments sustainable through the rents allowed by 
the Restructuring Plan and a second mortgage with deferred payments, 
with the sum of the two mortgage amounts not exceeding the sum of all 
insured mortgage amounts before restructuring.
    There may be projects with multiple insured mortgages that can be 
successfully restructured without the need for full payment of claim on 
the existing insured first mortgage. In that case, the existing insured 
second mortgage could be left unchanged, modified, or refinanced, if 
subordinated to the new second mortgage required by MAHRA (see 
discussion under the next section.)

Section 401.461  HUD-Held Second Mortgage

    Section 401.461 provides standards for the new second mortgage that 
must be given to HUD whenever the insured or HUD-held mortgage debt is 
written down through payment of a claim. The

[[Page 48935]]

new second mortgage is limited to an amount that the PAE reasonably 
expects to be repaid by the owner based on objective criteria such as 
the amount of anticipated net cash flow, trending assumptions, 
amortization provisions, and expected residual value of the project. It 
will bear simple interest of at least 1 percent but no more than the 
applicable Federal rate determined by the Department of the Treasury. 
The term will be concomitant with the term of the first mortgage under 
Sec. 401.460 or, if there is none, the term will be set by HUD. The 
mortgage will become due and payable earlier in accordance with 
Sec. 401.461(b)(3) if the first mortgage is terminated or paid in full 
(unless HUD provides otherwise in the case on a nominal first mortgage 
amount), if the mortgage is assumed by a purchaser of the project in 
violation of HUD guidelines, or if the owner fails to cure a statutory 
violation or a violation of a HUD requirement. Acceleration by HUD may 
be appealed under subpart F.
    At least 75 percent of the project's net cash flow after payment of 
first mortgage debt service and operating expenses must be used to pay 
principal and interest on the second mortgage. The Restructuring Plan 
may provide for up to 25 percent of net cash flow to be paid to an 
owner who meets certain property management and housing quality 
standards.
    HUD will consider modification or forgiveness of the second 
mortgage under the authority of section 517(a)(5) of MAHRA only if (1) 
the project has been sold or transferred to a priority purchaser under 
Sec. 401.480, and (2) HUD determines that modification or forgiveness 
is necessary for recapitalization to preserve the project as affordable 
housing.
    If the amount of a partial claim under Sec. 401.471 exceeds the 
principal amount of the second mortgage, Sec. 401.461(c) permits HUD to 
require the owner to give an additional subordinate mortgage on the 
project to HUD to secure repayment of the excess. This additional 
mortgage will be subordinate to other HUD-held mortgages, will bear 
interest at the same rate as the second mortgage under Sec. 401.461(a), 
and will require no payments except payment in full when the second 
mortgage under Sec. 401.461(a) is paid in full.

Section 401.471  HUD Payment of a Section 541(b) Claim

    HUD payment of a section 541(b) claim is the means by which one or 
more FHA-insured or HUD-held mortgages will be paid down to the level 
of debt that can be supported at market rents. Section 541(b) of the 
National Housing Act permits HUD to pay an insurance claim from the 
appropriate insurance fund for a mortgage that is not in default. In 
some cases, the debt than can be supported will remain in place through 
a modification and reamortization of the existing mortgage debt. In 
other cases it will be taken out by a new lender as a refinance of the 
existing mortgage debt. All payments of claim will be made by HUD, from 
the appropriate insurance fund, to the mortgagee on behalf of the 
mortgagor. Section 517(b)(1) of MAHRA currently specifically directs 
that a partial payment of claim be made under section 541(b) of the 
National Housing Act, which authorizes partial payments on mortgages 
not in default in connection with the Mark-to-Market Program. Section 
517(b)(1) also specifically includes a full payment of a claim as a 
possible restructuring tool, but there is no provision in the National 
Housing Act equivalent to section 541(b) that expressly authorizes full 
payment of claims for mortgages not in default. The ordinary authority 
for making full payments of claims on FHA-insured multifamily mortgages 
is section 207(g) of the National Housing Act, which applies only to 
mortgages in default. HUD will not approve any Restructuring Plan 
providing for a full payment of claim on a mortgage not in default 
unless HUD is satisfied that there is legal authority to use the 
appropriate FHA insurance fund to pay the claim. That may require a 
technical legislative amendment. Until HUD is able to make such full 
payments, any claim paid on a mortgage not in default would be a 
partial claim that leaves at least a nominal amount of the insured 
mortgage unpaid or paid from other sources, such as project accounts or 
owner contributions.

Section 401.472  Rehabilitation Funding

    Section 517(b)(7) of MAHRA identifies some potential sources for 
funding needed rehabilitation of the project that are included in 
Sec. 401.472. If project accounts (e.g., residual receipts, surplus 
cash and replacement reserve accounts) have amounts that exceed the 
initial deposit needed for the replacement reserve account, the excess 
must be used for rehabilitation before the other sources are used. 
Other potential sources include: (1) restructuring of the first 
mortgage debt to facilitate additional borrowing for rehabilitation (as 
discussed under Sec. 401.460); (2) grants under the rehabilitation 
grant program under section 236(s) of the NHA (as discussed under 
Sec. 401.473); and (3) increases in section 8 budget authority for 
section 8 assistance contracts (to the extent HUD has determined that 
funding from this source is available). Rehabilitation funding will be 
disbursed through an escrow agent or other means determined by HUD.
    HUD will implement section 517(b)(7)(B) of MAHRA by requiring the 
owner to contribute from non-project funds at least 20 percent of the 
total cost of rehabilitation. A reasonable proportion of the owner's 
contribution must come from non-governmental resources. HUD will 
provide further guidance in its Program Manual on the requirement for 
owner contribution from non-governmental resources. HUD estimates the 
requirement will be a minimum of 3 percent of the total cost of 
rehabilitation.
    The PAE may require a larger owner contribution for a particular 
project. To the extent the owner voluntarily provides more than the 
required 20 percent, the PAE may consider allowing in the Restructuring 
Plan for more extensive rehabilitation and appropriate adjustments to 
the reserves for replacement analysis. The PAE may exempt housing 
cooperatives from the owner contribution requirement.

Section 401.473  HUD Grants for Rehabilitation Under Section 236(s) of 
NHA

    This section authorizes rehabilitation grants under Restructuring 
Plans. HUD has concluded that rehabilitation grants under section 
236(s) of the National Housing Act (NHA), as added by section 531 of 
MAHRA, may be made available under authority of this interim rule for 
Mark-to-Market projects. HUD's usual practice is to implement a new 
grant program through either a proposed/final rule procedure or, if 
that procedure allows insufficient time for obligation of appropriated 
funds before they lapse, through a Notice of Funding Availability 
(NOFA). However, by implementing the various requirements of the Mark-
to-Market Program, this interim rule will ensure that any use of 
section 236(s) grant funds in connection with a Restructuring Plan, 
before separate grant regulations are issued, is in accord with 
statutory requirements as long as an appropriate grant agreement is 
used by HUD. There is no requirement for a competitive grant process 
using a NOFA under section 102 of the HUD Reform Act of 1989. HUD has 
concluded there would be no public benefit in delaying the availability 
of section 236(s) grant funds for Mark-to-Market projects until after a 
separate rulemaking procedure was completed. HUD expects to pursue a

[[Page 48936]]

separate rulemaking procedure before any use of the section 236(s) 
grant authority outside of the Mark-to-Market Program. Section 401.473 
permits HUD to delegate grant administration of a section 236(s) 
rehabilitation grant to a PAE that is a government entity, as provided 
in section 236(s)(5) of the NHA (added by section 531 of MAHRA), and to 
pay for grant administration from grant funds if they are available for 
this purpose.

Section 401.474  Project Accounts

    Section 401.474 permits the Restructuring Plan to provide for the 
use of project accounts. Accounts of one project may be used for other 
eligible projects if: (1) the projects are included in a consolidated 
Restructuring Plan under Sec. 401.400(a)(2); and (2) the funds are used 
to fund project rehabilitation or to reduce the amount of a claim paid 
by HUD under Sec. 401.471. The Restructuring Plan may provide for up to 
10 percent of the excess project funds to be paid to the owner after 
completion of the rehabilitation required by the Restructuring Plan.

Section 401.480  Voluntary Sale or Transfer of Project

    Section 401.480 covers the voluntary sale or transfer of a project 
as part of the Restructuring Plan. An eligible owner may request sale 
or transfer. If the owner is determined to be ineligible for a 
Restructuring Plan under Sec. 401.101 or 401.403, a Restructuring Plan 
can be developed only if it involves sale or transfer.
    The owner must notify HUD or the PAE of the owner's intent to 
transfer the property. If the owner is determined to be ineligible 
under Sec. 401.101 or Sec. 401.403, this notice must be received by HUD 
or the PAE within 30 days after the owner receives notice of rejection 
and all objection and appeals procedures have been concluded, if 
applicable. Otherwise, the owner should provide the notice as part of 
its initial request for a Restructuring Plan or at any later time when 
it is still feasible, in the determination of the PAE, to develop a 
Restructuring Plan involving sale or transfer.
    An ineligible owner must inform the PAE of any intention to accept 
a purchase offer, subject to PAE approval and HUD approval of the 
Restructuring Plan. The owner must also prepare a notice to potential 
purchasers that describes the project and the procedure for submitting 
purchaser offers. The notice must be in a form acceptable to HUD and 
will be subject to review and approval by HUD or the PAE. The owner 
must distribute and publish an approved notice as required by HUD.
    This section gives a preference to certain ``priority purchaser'' 
groups, defined as tenant organizations, tenant-endorsed community-
based nonprofit organizations, and tenant-endorsed public agency 
purchasers. HUD may also establish qualifications for priority 
purchasers. If an owner has been rejected, the PAE must not develop a 
Restructuring Plan involving a sale or transfer to a non-priority 
purchaser unless it determines that there is no interested qualified 
priority purchaser, or that no feasible Restructuring Plan can be 
developed involving a sale or transfer to a qualified priority 
purchaser.
    All project sales are subject to PAE approval and HUD approval of 
the Restructuring Plan.

Section 401.481  Subsidy Layering Limitations on HUD Funds

    Section 401.481 explains the subsidy layering certification that a 
PAE must make under section 514(e)(7) of MAHRA. The purpose of the 
subsidy layering certification procedure is to ensure that any HUD 
assistance provided to the owner of a project under the Restructuring 
Plan is no more than is necessary to permit the project to continue to 
house a tenant mix comparable in income to the tenant income mix of the 
project before the Restructuring Plan is implemented, after taking into 
account other Federal, State or local governmental assistance of any 
kind such as grants, loans, guarantees, or tax credits or other tax 
benefits.
    HUD is generally required to make a subsidy layering certification 
under section 102(d) of the HUD Reform Act of 1989 when HUD assistance 
is provided. Section 911 of the Housing and Community Development Act 
of 1992 provided for HUD delegation of the subsidy layering 
certification requirements to certain State or local agencies (defined 
in section 42 of the Internal Revenue Code of 1986 as ``housing credit 
agencies'' or HCAs) for projects receiving a low-income housing tax 
credit (LIHTC). MAHRA does not explicitly provide for assumption of 
HUD's duties under section 102(d) by a PAE, but HUD does not consider 
it Congress' intention to require HUD to duplicate the PAE's efforts by 
performing separate section 102(d) subsidy layering certifications in 
connection with HUD assistance that was included in a Restructuring 
Plan approved by HUD with benefit of the PAE's subsidy layering 
certification. That would be inconsistent with the express MAHRA 
provision for a PAE subsidy layering certification, and with the 
general approach of MAHRA in making the PAE responsible for the 
analysis and development of Restructuring Plans for individual 
projects. Therefore, HUD may rely on the PAE's certification and does 
not need to perform a separate subsidy layering analysis.
    If the PAE is an HCA with delegated authority under section 911, it 
will perform the subsidy layering certification for MAHRA using 
procedures substantially similar to the published HUD guidelines for 
section 102(d) certifications under section 911. Such a PAE may, and 
any other PAE must, submit for HUD approval other subsidy layering 
certification procedures that follow the section 911 guidelines to the 
extent feasible and appropriate.
    The PAE's subsidy layering analysis should not restrict the 
availability of HUD assistance solely because an owner is able to 
obtain public resources, such as grants, for use as some or all of the 
owner's required contribution toward rehabilitation costs (see 
Sec. 401.472(b)) from public resources.

Sec. 401.483  Leasing Units to Certificate and Voucher Holders

    Section 514(e)(9) of the Act only prohibits refusal to lease a 
``reasonable number'' of units to section 8 voucher or certificate 
holders because of their status as voucher or certificate holders. HUD 
has determined that for a project under the Mark-to-Market Program, the 
``reasonable number'' of units that should be available to voucher or 
certificate holders is 100 percent of the units. Under Sec. 401.483, 
the Restructuring Plan will not permit an owner to reject any 
prospective tenants solely because of their status as holders of 
vouchers or certificates.

Sec. 401.484  Property Management Standards

    Section 401.484 implements part of section 518 of MAHRA, which 
requires a PAE to establish management standards for a project pursuant 
to HUD guidelines and consistent with industry standards. Section 
401.484 also relates to implementation of sections 514(e)(4) and 
517(a)(3) of MAHRA. HUD's guidelines set forth in this section require 
the property manager to, at a minimum:
    (1) Protect the physical integrity of the property over the long 
term through appropriate requirements for preventative maintenance, 
repair or replacement (compliance with this standard would be evidenced 
by no unscheduled deferred maintenance,

[[Page 48937]]

complete maintenance records with work performed in a workmanlike 
manner at competitive costs, and ``satisfactory'' reviews by HUD);
    (2) Ensure the routine cleaning of the building and grounds;
    (3) Maintain good relations with the tenants;
    (4) Protect the financial integrity of the project by operating 
with the budget provided by the owner, with competitive and reasonable 
operating expenses and appropriate insurance;
    (5) Take measures to achieve physical safety and maintenance of 
insurance; and
    (6) Comply with any other HUD management requirements including 
termination of the management agent for cause.
    HUD will provide additional guidance on management standards in the 
program manual. The PAE's management standards must also conform to any 
HUD guidelines and industry standards on conflicts of interest between 
owners, managers and contractors.

Section 401.500  Required Notices to Third Parties; Section 401.501  
Who Is Entitled To Receive Notices Under Sec. 401.500?

    Under Secs. 401.500 and 401.501, a PAE must solicit and document 
the consideration of tenant and local community comments. These 
sections describe the procedures for ensuring that third parties 
affected by the restructuring of a project through the Mark-to-Market 
Program are kept informed and provided the opportunity to provide 
comments at crucial stages of the process. Section 401.500 describes 
two notices that will be used to keep interested third parties 
informed: (1) a notice of intent to restructure and of a consultation 
meeting in 20-60 days; and (2) a notice of the completed Restructuring 
Plan . Each notice is to be given by the owner to: (1) each project 
tenant, or a tenant association; (2) the Chief Executive Officer of the 
unit of general local government; and (3) the Director of the Public 
Housing Authority (PHA) with jurisdiction over the project. The PAE or 
HUD may also identify any neighborhood representatives and other 
affected parties that should receive one of more of these notices.
    The PAE must also conduct a consultation meeting to receive oral 
presentations and comments on the desired contents of a Restructuring 
Plan, desired contents of a Rental Assistance Assessment Plan (if one 
is required), and on any proposed transfer of the project. The PAE will 
invite participation by at least the parties entitled to receive 
notices.
    Section 514(b) of MAHRA requires HUD to establish notice procedures 
and hearing requirements for tenants and owners concerning the dates 
for the expiration of project-based assistance contracts for any 
eligible multifamily housing project. For projects being restructured 
through the Mark-to-Market Program, HUD considers this provision 
satisfied through the notice and consultation meeting provisions of 
these sections. Specifically, Sec. 401.500(b)(1)(iv) requires notice of 
the date of expiration for the contract (which may be a contract 
extended during Restructuring Plan development under Sec. 401.600), and 
the consultation meeting will give all interested parties an adequate 
opportunity for a hearing on any concerns associated with expiring 
project-based assistance.
    HUD does not interpret section 514(b) as applicable if an owner of 
an eligible project does not pursue restructuring under the Mark-to-
Market Program, either by choice, because of the exceptions in section 
514(h) of MAHRA, or because the owner or project is rejected under 
section 516. In particular, if a contract will not be renewed, HUD does 
not consider that Congress intended to impose additional notice 
requirements beyond the 180-day or 12-month notice of non-renewal 
required by section 8(c)(9) of the U.S. Housing Act of 1937 or section 
514(d) of MAHRA, respectively, whichever applies, and the 90-day notice 
of rent increase under section 8(c)(8) of the 1937 Act (see 
Sec. 401.602). If a contract is being renewed for a project not being 
restructured, there would be no apparent purpose for a notice 
requirement. In addition, HUD does not consider that Congress intended 
to require a hearing for tenants and owners concerning the expiration 
of contracts for projects not being restructured under the Mark-to-Mark 
Program.

Subpart D--Implementation of the Restructuring Plan After Closing

Section 401.550  Monitoring and Compliance Agreement

    Section 401.550 implements section 519 of MAHRA by providing for 
periodic monitoring (including onsite inspections) and by generally 
requiring PAEs to ensure that owners comply with approved Restructuring 
Plans, including execution and recording of a Use Agreement. As long as 
there is a PAE for the project that is qualified to be a section 8 
administrator (i.e., a State or local housing agency), the PAE will be 
responsible for monitoring and enforcement; if not, HUD will perform 
those functions. The onsite inspections under this section will be 
required to follow uniform inspection procedures of HUD in 24 CFR 5.705 
published on September 1, 1998 (63 FR 46566). The GAO and HUD 
(including HUD's Office of Inspector General) also may audit a project 
with a Restructuring Plan pursuant to section 519(c) of MAHRA. HUD 
intends to include in the final rule more specific provisions regarding 
the means by which PAEs who are State or local housing agencies (i.e., 
``Phase I'' applicants under the RFQ) will enforce compliance with the 
Restructuring Plans. HUD views the continuing involvement of the PAEs 
in the monitoring and compliance process as an important enhancement of 
HUD's own efforts. HUD welcomes the views of State and local housing 
agencies and others regarding the availability of effective enforcement 
tools that may be feasible and cost-effective means of ensuring long-
term compliance by project owners, including enforcement tools that 
have been successfully used by the agencies.

Section 401.552  Servicing of Second Mortgage

    HUD or its designee will be responsible for servicing the second 
mortgage including the determination of the amount of the net cash flow 
receivable by the owner. HUD may designate the PAE as servicer with its 
consent.

Section 401.554  Contract Administration

    Section 401.554 requires HUD to offer to any PAE qualified to be 
the section 8 contract administrator the opportunity to serve as 
contract administrator. The term ``qualified'' is intended to indicate 
that a contract administrator must meet both statutory requirements of 
the United States Housing Act of 1937 (e.g., be a public housing 
agency) and any additional requirements of HUD established under the 
applicable section 8 program by the responsible HUD officials. As 
contract administrator, the PAE must offer to renew section 8 contracts 
in accordance with the Restructuring Plan as provided in section 515(a) 
of MAHRA.
    A contract administrator for section 8 tenant-based assistance 
provided under this rule has a significantly different and expanded 
role far beyond the scope of a section 8 project-based administrator. 
For instance, the section 8 tenant-based contract administrator is 
responsible for administering the assistance throughout its 
jurisdiction, not just in the particular project. The PAE and any other

[[Page 48938]]

prospective tenant-based contract administrators are advised to 
carefully review the tenant-based program regulations at part 982, with 
particular emphasis on Sec. 982.51 (``HA authority to administer 
program'') and Sec. 982.153 (``HA responsibilities''). Any PAE 
proposing to serve as contract administrator must understand that a 
section 8 tenant-based assistance administrator's duties may extend 
beyond the usual responsibilities of a contract administrator due the 
need to ensure appropriate treatment of displaced tenants in accordance 
with the ``portability'' provisions of MAHRA.

Subpart E--Section 8 Requirements for Restructured Projects

Section 401.595 Contract and Regulatory Provisions

    Section 401.595 provides that the provisions of 24 CFR chapter VIII 
(i.e., other section 8 program regulations) will apply only to the 
extent, if any, provided in the contract. In accordance with section 
515(c)(5) of MAHRA, 24 CFR part 983 will not apply.

Section 401.600 Will a Section 8 Contract be Extended if it Would 
Expire While an Owner's Request for a Restructuring Plan is Pending?

    Under Sec. 401.600, an owner that has requested development of a 
Restructuring Plan may receive a section 8 contract extension at 
current rents for the shortest reasonable period needed for the PAE to 
complete a Restructuring Plan for the project (generally, not more than 
9 months). Any extension of the contract beyond 1 year pending closing 
on the Restructuring Plan would be at comparable market rents or 
exception rents, but would not affect the project's continued 
eligibility for the Mark-to-Market Program.
    Although section 514(c) of MAHRA may be interpreted to require 
immediate reduction to comparable market rents, HUD has concluded that 
the provision is better reconciled with MAHRA as a whole if it is 
interpreted to permit an extension at current rents for a reasonable 
period, along the lines of the current Portfolio Reengineering 
demonstrations, with further extensions at comparable market rents (or 
exception rents, if applicable) if a Restructuring Plan is underway but 
has not been developed and approved expeditiously. This will avoid the 
abrupt disruption that section 514(c) appears designed to avoid when an 
eligible owner has requested a Restructuring Plan.

Section 401.601 Consideration of an Owner's Request to Renew an 
Expiring Contract Without a Restructuring Plan

    Section 401.601 provides a procedure for considering an eligible 
owner's request for renewal of an expiring contract without requesting 
a Restructuring Plan. Because rents must exceed comparable market rents 
for Sec. 401.100 to apply, this section of the interim rule does not 
apply to projects with rents at or below comparable market rents.
    HUD or the PAE will determine whether renewal under Sec. 402.4 at 
rents that do not exceed comparable market rents would be sufficient to 
maintain an adequate debt service coverage ratio on the first mortgage 
and necessary project reserves. If so, the contract renewal will be 
processed under new Sec. 402.4. If not, a Restructuring Plan must be 
developed by a PAE before further consideration of the owner's request. 
HUD is not defining ``adequate debt service'' in this interim rule but 
intends to provide guidance to PAEs in the Program Manual.

Section 401.602 Tenant Protections if an Expiring Contract is not 
Renewed.

    The rule does not require an owner who is eligible to apply for a 
Restructuring Plan under Sec. 401.100 and has an expiring project-based 
contract to apply. The rule permits the owner not to request a 
Restructuring Plan and not to renew the contract if the owner provides 
the 180-day notice of non-renewal under section 8(c)(9) of the United 
States Housing Act of 1937 and the 90-day notice of any resulting rent 
increases under section 8(c)(8) of that Act. An owner who does not give 
the proper notices must continue to permit residents to stay in their 
units without increasing the tenant portion of the rent until a period 
equivalent to the required notice period (180 or 90 days, as 
applicable) has expired after the later of the date proper notice was 
given or the date the contract expired. The same obligation applies if 
the owner requested a Restructuring Plan but was rejected by HUD or the 
PAE under Sec. 401.101 or 401.403.
    An owner who has requested a Restructuring Plan and is not rejected 
may not fail to renew an expiring contract without giving the 12-month 
notice to HUD and tenants required by section 514(d) of MAHRA and the 
90-day notice of any resulting rent increases under section 8(c)(8) of 
the United States Housing Act of 1937. If the notice is not given, the 
tenants have similar protections as discussed in the preceding 
paragraph, except that 12 months applies instead of 180 days.
    If a contract is not renewed, HUD will make tenant-based assistance 
available to tenants in two circumstances. As provided in section 
514(d) of MAHRA, HUD will make such assistance available to all tenants 
residing in units assisted under the expiring contract if the owner 
does not renew project-based assistance. As provided in section 516(d) 
of MAHRA, HUD will make tenant-based assistance available to all 
tenants residing in a project at the time HUD or the PAE reject an 
owner or a project under Secs. 401.102 or 401.403 if: (1) the tenant is 
a low-income family; or (2) the tenant is receiving tenant-based 
assistance. Both tenant-based assistance, and the availability of funds 
for moving expenses of displaced tenants, will depend on the 
availability of funds under future appropriations Acts.

Section 401.605 Project-Based Assistance Provisions

    Section 401.605 indicates that the project-based assistance 
restructured rents will be determined under the Restructuring Plan.

Section 401.606 Tenant-Based Assistance Provisions

    Section 401.606 complies with section 515(c)(3) of MAHRA by 
providing that, if the Restructuring Plan provides for tenant-based 
assistance, assistance under part 982 will be offered to each eligible 
family assisted under the section 8 project-based assistance contract 
on the date of expiration. The Department intends to revise as soon as 
possible, by interim rule, the section 8 tenant-based regulations at 
part 982 to incorporate the unique statutory provisions of section 
515(c)(4) of MAHRA for the tenant-based assistance offered to families 
through a Restructuring Plan.

Section 401.607 Contract Term

    Renewals will be for a term determined by HUD by the appropriate 
HUD office, but the owner is not required to accept a renewal beyond 
the 30-year term of the use and affordability restrictions required 
under the Mark-to-Market Program.

Subpart F--Owner Dispute of Rejection and Administrative Appeal

Section 401.645 How Does the Owner Dispute a Notice of Rejection?

    Section 401.645 provides the owner an opportunity to dispute the 
following: (1) when a request for a Restructuring Plan is rejected; (2) 
when a request for a section 8 contract renewal is rejected; (3) when a 
PAE cannot continue with a

[[Page 48939]]

Restructuring Plan because of lack of owner cooperation under 
Sec. 401.402; and (4) when HUD rejects a proposed Restructuring 
Commitment submitted by a PAE. HUD or the PAE will notify the owner of 
the reasons for a rejection and provide a 30-day period to submit 
written objections or cure the problem. If no objection is submitted, 
the rejection is not subject to judicial review under section 516(c) of 
MAHRA. If an objection is submitted, HUD or the PAE will send the owner 
a final decision affirming, modifying, or reversing the initial 
rejection with reasons for the decision. This final decision is 
appealable under Sec. 401.650.

Section 401.650 When May the Owner Make an Administrative Appeal of a 
Final Decision Under This Subpart?

    An owner may appeal a final decision under Sec. 401.645(b) if 
written objection was made. In addition, an owner may appeal a decision 
of HUD to approve a Restructuring Commitment if the owner does not 
execute the Commitment, and a decision of HUD to accelerate the HUD-
held second mortgage under Sec. 401.461(a).

Section 401.651 Appeal Procedures

    Section 401.651 provides a simple, expeditious means through which 
an owner may make a presentation (written, oral, and/or through a 
representative) at a conference with an official of HUD who was not 
involved in making the decision under appeal. The HUD or PAE official 
who issued the decision under appeal will also participate.
    An owner must appeal any decision within 10 days of receiving 
notice of the decision. The appeal will be decided by a written 
decision issued within 20 days of the conference. Days will be computed 
as provided in 24 CFR 26.16, but the hearing procedures of part 26 of 
this title do not otherwise apply. Although representation by legal 
counsel is permitted, the appeal procedure under this part is intended 
to be informal, without rules of evidence or presentation of witnesses. 
Its purpose is to ensure that no pertinent facts have been overlooked 
and to avoid serious errors of judgment.

Section 401.652 No Judicial Review

    Section 401.652 states that the decision of a reviewing official 
under Sec. 401.651 is a final determination for purposes of section 
516(c) of MAHRA, which forbids judicial review of a final 
determination.

III. Content of Part 402

Section 402.1 What is the Purpose of Part 402?

    Section 402.1 explains that part 402 sets out the terms and 
conditions under which HUD will renew project-based assistance section 
8 contracts under section 524(a)(1) or (2) of MAHRA. Part 402 deals 
exclusively with the renewal of section 8 contracts for projects 
without a Restructuring Plan under the Mark-to-Market Program under 
part 401. Therefore, either the Office of Housing or the Office of 
Public and Indian Housing is responsible for the contract extension. 
However, part 402 is included under the new CFR chapter for the Office 
of Multifamily Housing Assistance Restructuring (OMHAR) because of 
section 522(a)(1) of MAHRA, which provides that regulations 
implementing subtitle A of MAHRA (including section 524) are to be 
issued by the Director of OMHAR. Secretary Cuomo has signed this 
interim rule as provided in section 522(a)(1) because no Director has 
yet been appointed.

Section 402.2 Definitions

    Section 402.2 applies the definitions in part 401 to part 402.

Section 402.3 Contract Provisions

    Section 401.3 provides that the provisions of 24 CFR chapter VIII 
(i.e., other section 8 program regulations) will apply only to the 
extent, if any, provided in the contract. Part 983 of 24 CFR will not 
apply, in accordance with section 515(c)(5) of MAHRA.

Section 402.4 Contract Renewals Under Section 524(a)(1) of MAHRA

    Section 402.4 sets out the basic rule on section 8 contract 
renewals for projects that are not involved in the Mark-to-Market 
Program under part 401. If the project is eligible for the Mark-to-
Market Program under part 401, the owner's request for renewal will be 
processed under Sec. 401.601 to determine whether a Restructuring Plan 
is needed before a renewal proceeds under this part 402. This section 
implements section 524(a)(1) of MAHRA by authorizing renewal at rents 
that do not exceed market comparable rents, with future rent 
adjustments using the operating cost adjustment factor (OCAF) as 
provided for the Mark-to-Market Program under Sec. 401.412, except that 
rents may be redetermined using a budget-based rent adjustment from 
time-to-time at the discretion of HUD. OCAF and budget-based 
adjustments may be positive or negative. If the owner of a project so 
requests, Sec. 402.4 will not apply to a project in certain classes of 
``exception projects'' identified in section 524(a)(2) of MAHRA, which 
are covered in the next section.

Section 402.5 Contract Renewals Under Section 524(a)(2) of MAHRA

    Section 402.5 concerns renewals under section 524(a)(2) of MAHRA, 
only at the request of the owner, for the following classes of 
``exception projects'':
    (1) A project for which the primary financing or mortgage insurance 
was provided by a unit of State government or a unit of general local 
government (or an agency or instrumentality of either) and was not 
insured under the NHA;
    (2) A project for which the primary financing was provided by a 
unit of State government or a unit of general local government (or an 
agency or instrumentality of either) and the financing involved 
mortgage insurance under the NHA, such that the implementation of a 
Restructuring Plan is in conflict with applicable law or agreements 
governing such financing;
    (3) A project for the elderly financed under section 202 of the 
Housing Act of 1959 or section 515 of the Housing Act of 1949;
    (4) A project that has an expiring contract section 8 moderate 
rehabilitation contract for single room occupancy dwellings; or
    (5) A project that does not qualify as an eligible project under 
part 401 of this chapter (i.e., because rents do not exceed comparable 
market rents or because there is no HUD-insured or HUD-held mortgage).

(The second class of projects is described in section 524(a)(2)(B) of 
MAHRA. Unless section 514(h) of MAHRA is amended, no projects will fall 
in that category, as explained in Part II of this Supplementary 
Information under Sec. 401.100.)
     The first four categories are included in Sec. 402.5(b)(1); the 
last category is included in Sec. 402.5(b)(2). The owner of an 
exception project identified in Sec. 402.5(b) may request renewal under 
either Sec. 402.4 or this Sec. 402.5. The owner of a project identified 
in Sec. 402.5(b)(2) that has a HUD-insured or HUD-held mortgage may 
proceed under this Sec. 402.5 only if the HUD analysis confirms that 
project rents are below comparable market rents.
    If the owner of an exception project requests renewal of project-
based assistance under this section, HUD is required (subject to a 
right to reject under Sec. 402.7, and confirmation of rents levels for 
a project under Sec. 402.5(b)(2))) to renew the expiring contract with 
initial rents at the lesser of: (1) existing rents adjusted by an 
operating cost

[[Page 48940]]

adjustment factor (OCAF) established by HUD; (2) a budget-based rent 
determined in accordance with the statutory directions for determining 
budget-based rent under the Mark-to-Market Program (except that HUD 
rather than a PAE will determine operating expenses and HUD may adjust 
the debt service component to reflect competitive interest rates); or 
(3) in the case of a contract under the section 8 moderate 
rehabilitation program (other than for a single room occupancy 
dwelling), the base rent adjusted by applying an OCAF to the base rent, 
minus any costs associated with debt service, with the OCAF to be 
applied to rents for each unit size assisted under the renewal 
contracts.
    Rent adjustments at contract renewal will use the same OCAF allowed 
under Sec. 401.412 for the Mark-to-Market Program, except that rents 
may be redetermined using a budget-based rent adjustment from time-to-
time at the discretion of HUD. OCAF and budget-based adjustments may be 
positive or negative. The HUD official responsible for the particular 
section 8 program involved will determine the term of any initial and 
subsequent renewals, subject to the availability of appropriated funds.

Section 402.6 What Actions Must an Owner Take to Request Section 8 
Contract Renewal Under This Part?

    Section 402.6 provides a procedure for requesting renewal under 
part 402 which is similar to Sec. 401.99 for Mark-to-Market projects. 
At least 3 months before the expiration date of any project-based 
assistance on a project, or as soon as practicable if the contract 
expires less than 3 months after the effective date of this interim 
rule, the owner must submit to HUD (or the contract administrator for a 
contract under the moderate rehabilitation program): (1) a 
certification that neither the owner nor any affiliate is suspended or 
debarred; (2) a comparable market rent analysis indicating that project 
rents are above comparable market rents (using the same approach in 
Sec. 401.410 for the Mark-to-Market Program) except for most exception 
projects; and (3) if the owner is seeking renewal under Sec. 402.4, the 
most recent annual audited financial statement for the project, and the 
owner's evaluation of physical needs complying with Sec. 401.450. Rent 
comparability is to be determined by an independent State-certified 
general appraiser hired by the owner, using the guidance given to the 
PAE under Sec. 401.410. An interim contract extension may be provided 
when an owner's request for renewal under Sec. 402.4 or 
Sec. 402.5(b)(2) is pending.
    These procedures do not apply to renewals of section 8 moderate 
rehabilitation contracts (other than contracts for single room 
occupancy dwellings under section 441 of the Stewart B. McKinney 
Homeless Assistance Act.) HUD's Assistant Secretary for Public and 
Indian Housing will issue separate procedures.

Section 402.7  Refusal to Consider an Owner's Request for a Section 8 
Contract Renewal Because of Actions or Omissions of Owner or Affiliate

    To ensure that contracts are not renewed for unacceptable owners, 
Sec. 402.7 permits HUD to reject a renewal request in a manner similar 
to Sec. 401.403 for projects eligible for Mark-to-Market restructuring. 
The dispute and administrative appeal provisions of subpart F of part 
401 apply.

Section 402.8  Tenant Protections if an Expiring Contract is not 
Renewed

    Section 402.8 is similar to Sec. 401.602. If an owner fails to 
renew an expiring contract for section 8 project-based assistance, the 
owner must provide the 180-day advance notice of non-renewal under 
section 8(c)(9) of the United States Housing Act of 1937 and the 90-day 
notice of rent increase under section 8(c)(8) of that Act. An owner who 
does not give the proper notice must continue to permit residents to 
stay in their units without increasing the tenant portion of the rent 
until 180 days (or 90 days, depending on which notice was not given in 
a timely manner) after the later of the date proper notice was given or 
the date the contract expires.

Electronic Access and Filing Addresses

    If you wish to comment on this interim rule, you may submit 
comments through HUD's Public Comment Webpage accessible through the 
Internet at http://www.hud.gov/ogc/regcom2.htm/. That webpage will 
enable you to create an e-mail message containing your comments. Your 
comments will be sent to the Rules Docket Clerk and will be available 
to any person. If you send your comment through the Public Comment 
Webpage, please DO NOT also send a paper copy of your comment.

Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in Secs. 401.101, 
401.102, 401.200, 401.202, 401.302, 401.403, 401.404, 401.405, 401.410, 
401.421, 401.473, 401.480, 401.481, 401.500, 401.450, 401.451, 401.601, 
401.602, 401.603, 401.651, 402.4 and 402.6 of this interim rule have 
been submitted to the Office of Management and Budget (OMB) for 
emergency review and approval in accordance with the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501-3520). In accordance with the 
Paperwork Reduction Act, HUD 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. The OMB control number, 
when assigned, will be published in the Federal Register, together with 
any changes in the information collection requirements that may result 
from the approval process. The OMB approval number will be assigned 
before the rule takes effect.
    In addition, HUD has submitted to OMB a request for non-emergency 
approval for the information collection requirements of this interim 
rule and for an extension of the approval of the information collection 
requirements contained in the Request for Qualifications (RFQ) 
published on August 17, 1998, at 63 FR 44102. (The information 
collection requirements in the RFQ were approved by OMB on an emergency 
basis through February 28, 1999 with OMB control no. 2502-0531.)
    In accordance with 5 CFR 1320.5(a)(1)(iv), the Department is 
setting forth the following concerning the collections of information:
    (1) Title of the information collection proposal:
    Multifamily Housing Mortgage and Housing Assistance Restructuring 
Program (Mark-to-Market) Regulations and Request for Qualifications 
(RFQ)
    (2) Summary of the collection of information:
    The rule and the RFQ seek information from entities that may become 
participating administrative entities. The information concerns these 
entities' capacity and experience relating to their respective 
abilities to carry out the statutory functions of PAEs. The rule also 
contains collections of information from owners relating to mortgage 
restructurings.
    (3) Description of the need for the information and its proposed 
use:
    The information is needed to determine the qualifications of 
entities to become PAEs. It is also needed develop statutorily required 
mortgage restructuring and rental assistance sufficiency plans. 
Finally, the information includes notices and related documents that 
implement various statutory procedures.
    (4) Description of the likely respondents, including the estimated 
number of likely respondents, and proposed frequency of response to the 
collection of information:

[[Page 48941]]

    Respondent will include entities applying for and that are PAEs, 
owners of projects HUD-insured or -held mortgages with expiring Section 
8 contracts. The estimated number of respondents and frequency of 
response is included in paragraph (5), immediately below.
    (5) Estimate of the total reporting and recordkeeping burden that 
will result from the collection of information:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Responses      Total                                          
           Information collection                                            Number of       per         annual     Hours per   Total Hours   Regulatory
                                                                            respondents   respondent   responses     response                 reference 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Owner Request for MRRAS Plan...............  .............................          250            1          250          100       25,000      401.101
                                             Owner cost/benefit analysis..          235            1          235            1  ...........      401.480
                                             Evaluation of rehabilitation           235            1          235           35  ...........      401.451
                                              needs.                                                                                                    
Owner request to renew Section 8 without an  .............................          160            1          160           15        2,400      402.4  
 MRRAS plan.                                                                                                                                            
                                             Owner submission in                    140            1          140           40        5,600      402.6  
                                              connection with 524(a)                                                                                    
                                              renewal.                                                                                                  
                                             Owner notice of non-renewal..           20            1           20            2           40      401.602
                                             PAE notice to owner of                  10            1           10           15          150      401.603
                                              refusal to consider request.                                                                              
                                             Owner appeal of a decision...           27            1           27           16          432      401.651
Owner's notice of intent to sell...........  .............................           25            1           25            1           25      401.481
Information needed to develop a HUD-         .............................          250            1          250          140       35,000      401.200
 approved MRRAS plan.                                                                                                                            401.403
                                                                                                                                                 401.404
                                             Third party notice...........          250            1          250            3          750      401.405
                                             Market comparable rent                 250            1          250           40       10,000      401.410
                                              determination.                                                                                            
                                             Information needed to develop          250            1          250           10        2,500      401.421
                                              a rental assistance plan.                                                                                 
                                             Physical needs assessment....          250            1          250           40       10,000      401.451
                                             Third party notices..........          250            1          250            2          500      401.601
                                             PAE subsidy layering                   250            1          250           20        5,000      401.500
                                              certification.                                                                                            
                                             PAE Notice of Refusal........           25            1           25           10          250      401.102
                                             Owner request for                       20            1           20            3           60      401.102
                                              administrative review.                                                                                    
Response to RFQ............................  .............................           50            1           50           40        2,000      401.202
PAE Record Keeping.........................  .............................           45  ...........  ...........           10  ...........      401.302
PAE reporting..............................  .............................           45  ...........  ...........           10  ...........      401.302
PAE reports on projects subject to RAA plan  .............................           45            1           45           30        1,350      401.450
Notice of rejection........................  .............................           10            1           10           10          100      401.473
                                                                           -----------------------------------------------------------------------------
    Totals.................................  .............................  ...........  ...........        3,002      101,157                          
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning the 
collection of information in this interim rule and the Request for 
Qualifications published on August 17, 1998, at 63 FR 44102 to:
    (1) Evaluate whether the collection of information is necessary for 
the proper performance of the functions of the agency, including 
whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond; including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this interim rule. Comments must 
refer to this interim rule by name and docket number (FR-4298).
    Comments on the emergency submission must be submitted by September 
18, 1998. Comments on the regular non-emergency submission must be 
submitted by November 10, 1998.
    Submit comments to: Joseph F. Lackey, Jr., HUD Desk Officer, Office 
of Management and Budget, New Executive Office Building, Washington, DC 
20503; and
    Reports Liaison Officer, Oliver Walker, Department of Housing and 
Urban Development, 451 7th Street, SW, Room 9116, Washington, DC 20410.

Justification for Interim Rule and Shortened Comment Period

    It is the general practice of the Department to provide a 60-day 
public comment period on all rules in accordance with 24 CFR part 10. 
However, section 522(a)(1) of MAHRA requires that this rule be issued 
as an interim rule; i.e., as a rule that will take

[[Page 48942]]

effect without the benefit of public comments. Section 522(a)(2) 
requires subsequent issuance of a final rule by October 27, 1998 or, if 
later, 3 months after the Director of the Office of Multifamily Housing 
Assistance Restructuring is appointed. Hence, the Department invites 
public comment on the interim rule, but is providing a 45-day comment 
period instead of the usual 60-day period in order to minimize the 
period of operation under the interim rule as desired by Congress. The 
comments received within the 45-day comment period will be considered 
during development of a final rule that will supersede this interim 
rule as soon as feasible. In order to provide the fullest and most 
expedient access to the provisions of this interim rule, HUD will make 
it available on the World Wide Web at http://www.hud.gov on the date of 
publication in the Federal Register.
    This interim rule also contains a partial implementation of the 
rehabilitation grant authority of section 236(s) of the National 
Housing Act, as added by section 531 of MAHRA. The interim rule 
authority in section 522(a)(1) of MAHRA directly applies only to 
subtitle A of MAHRA, and section 531 appears in subtitle B. However, 
the Department has concluded that section 522(a)(1) is authority for a 
limited implementation of section 236(s) through an interim rule as 
part of the Mark-to-Market Program because a rehabilitation grant 
included in a Restructuring Plan in compliance with part 401 will 
necessarily comply with the statutory and other desirable regulatory 
requirements for a section 236(s) grant. No public purpose would be 
served by a separate rule that duplicated many of the part 401 
requirements in the context of a grant made as part of a Restructuring 
Plan, and HUD does not read the statute as requiring the separate rule.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4223). The Finding is available for public inspection 
between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules 
Docket Clerk, Office of General Counsel, Room 10276, Department of 
Housing and Urban Development, 451 7th Street, SW, Washington, DC 
20410.

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this interim 
rule under Executive Order 12866, Regulatory Planning and Review, 
issued by the President on September 30, 1993. OMB determined that this 
rule is a ``significant regulatory action,'' (but not economically 
significant) as defined in section 3(f) of the Order. The interim rule 
will have effects outside the government, such as rehabilitation costs 
and associated benefits of improved housing. Based on experience under 
earlier demonstration authority, HUD has estimated that these effects 
outside of the Government do not total more than $100 million annually.
    Any changes made in this rule subsequent to its submission to OMB 
are identified in the docket file The docket file is available for 
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the 
Office of the Rules Docket Clerk, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW, Washington, DC.

Regulatory Flexibility Act

    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 rule does not have a significant 
economic impact on a substantial number of small entities. The rule 
implements recently-enacted legislation that created a Mark-to-Market 
Program through which section 8 rents for multifamily projects with 
HUD-insured or HUD-held mortgages will be reduced in order to preserve 
low-income rental housing affordability while reducing the long-term 
costs of project-based rental assistance and minimizing the adverse 
effect on the FHA insurance funds. As the preamble to the rule 
explains, section 8 assistance is costly to the Federal Government and 
the cost is rising. To preserve affordable housing, the Congress 
determined that reduction of section 8 assistance was necessary. 
Reduction or elimination of section 8 assistance without some type of 
transition or conversion process may mean that current projects 
assisted by section 8 may be unable to meet their financial obligations 
including operating expenses, current and future capital needs, and 
debt service payments--particularly payments on FHA-insured mortgages. 
To avoid this situation, the authorizing legislation and this interim 
rule provides for a mortgage restructuring program.
    In this interim rule, the Department strives to provide flexible 
requirements in order to reduce any burden on small entities. Owners of 
eligible projects that are small entities, who might otherwise be 
unable to meet their monthly mortgage payments after HUD reduces 
section 8 rents to comparable market rents as mandated by law, are 
provided an opportunity to receive a reduction in monthly mortgage 
payments if they request a mortgage restructuring under the rule. As 
conditions of the mortgage restructuring the owners will be required to 
rehabilitate the project so that it meets minimum standards of housing 
quality and to provide for competent management. These are not new 
economic burdens on owners, but are project matters which owners 
already have a responsibility to address and should be addressing even 
without mortgage restructuring. The only actions required of the owner 
are those needed to ensure that a project provide decent and safe 
housing to those intended to benefit from the Federal programs involved 
(FHA mortgage insurance and section 8 housing assistance payments.) 
Again, under existing HUD regulations and contracts, owners are now 
subject to a decent, safe, and sanitary standard or a good repair 
standard. Owners choosing to request a mortgage restructuring under 
this interim rule will continue to serve the same tenant income mix as 
before and will not be required to provide additional affordable 
housing.
    Some of the Participating Administrative Entities (PAEs) selected 
under the interim rule, such as nonprofit organizations and for-profit 
entities, may be small entities. In the interim rule HUD has chosen to 
preserve for the PAE substantial discretion, within the limits of the 
statute, to choose the most cost-effective way of undertaking the 
mortgage restructuring of projects assigned to the PAE. No more 
projects will be assigned to a PAE than a PAE is able and willing to 
deal with. Each nonprofit and for-profit PAEs will partner with a 
public entity to provide additional resources and reduce the burden of 
undertaking restructurings.
    Nothing in the interim rule imposes an adverse or disproportionate 
burden on a small entity. Small entities are specifically invited, 
however, to comment on whether this interim rule will significantly 
affect them, in accordance with the instructions in the DATES and 
ADDRESSES sections in the preamble of this interim rule. Such comments 
will be considered when a final rule is developed.

[[Page 48943]]

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this interim rule do not have substantial direct effects 
on States or their political subdivisions, or the relationship between 
the Federal Government and the States, or on the distribution of power 
and responsibilities among the various levels of government. As a 
result, the interim rule is not subject to review under the Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on State, 
local, and tribal governments, and the private sector. This rule does 
not impose any Federal mandates on any State, local, or tribal 
governments, or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 401

    Grant programs-housing and community development, Housing, Housing 
assistance payments, Housing standards, Insured loans, Loan programs-
housing and community development, Low and moderate income housing, 
Mortgage insurance, Mortgages, Rent subsidies, Reporting and 
recordkeeping requirements.

24 CFR Part 402

    Housing, Housing assistance payments, Low and moderate income 
housing, Rent subsidies.

    For the reasons set forth in the preamble, 24 CFR is amended by 
adding a new Chapter IV, which consists of parts 401 and 402, to read 
as follows:

CHAPTER IV--OFFICE OF MULTIFAMILY HOUSING ASSISTANCE RESTRUCTURING, 
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

PART 401--MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE 
RESTRUCTURING PROGRAM (MARK TO MARKET).

PART 402--PROJECT-BASED SECTION 8 CONTRACT RENEWAL WITHOUT 
RESTRUCTURING UNDER SECTION 524 (a) OF MAHRA.

PART 401--MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE 
RESTRUCTURING PROGRAM (MARK-TO-MARKET)

Subpart A--General Provisions; Eligibility

Sec.
401.1  What is the purpose of part 401?
401.2  What special definitions apply to this part?
401.99  What actions must an owner take to request a section 8 
contract renewal?
401.100  Which projects are eligible for a Restructuring Plan under 
this part?
401.101  Which owners are ineligible for a Restructuring Plan?

Subpart B--Participating Administrative Entity (PAE) and Portfolio 
Restructuring Agreement (PRA)

401.200  Who may be a PAE?
401.201  How does HUD select PAEs?
401.300  What is a PRA?
401.301  Business arrangements.
401.302  PRA administrative requirements.
401.303  PRA indemnity provisions for SHFAs and HAs.
401.304  PRA provisions on PAE compensation.
401.307  On-going responsibility of PAE.
401.309  PRA term and termination provisions; other remedies.
401.310  Conflicts of interest.
401.311  Standards of conduct.
401.312  Confidentiality of information.
401.313  Consequences of PAE violations; finality of HUD 
determination.
401.314  Environmental review responsibilities.

Subpart C--Restructuring Plan

401.400 Required elements of a Restructuring Plan.
401.401  Consolidated Plans.
401.402  Cooperation with owner and qualified mortgagee in 
Restructuring Plan development.
401.403  Rejection of a request for a Restructuring Plan because of 
actions or omissions of owner or affiliate or project condition.
401.404  Proposed Restructuring Commitment.
401.405  Restructuring Commitment review and approval by HUD.
401.406  Execution of Restructuring Commitment.
401.407  Closing conducted by PAE.
401.408  Affordability and use restrictions required.
401.410  Standards for determining comparable market rents.
401.411  Guidelines for determining exception rents.
401.412  Adjustment of rents with operating cost adjustment factor 
(OCAF).
401.420  When must the Restructuring Plan require project-based 
assistance?
401.421  Rental Assistance Assessment Plan.
401.450  Owner evaluation of physical condition.
401.451  PAE Physical Condition Analysis (PCA).
401.452  Property standards for rehabilitation.
401.453  Housing quality standards.
401.460  Modification or refinancing of first mortgage.
401.461  HUD-held second mortgage.
401.471  HUD payment of a section 541(b) claim.
401.472  Rehabilitation funding.
401.473  HUD grants for rehabilitation under section 236(s) of NHA.
401.474  Project accounts.
401.480  Voluntary sale or transfer of project.
401.481  Subsidy layering limitations on HUD funds.
401.483  Leasing units to certificate and voucher holders.
401.484  Property management standards.
401.500  Required notices to third parties.
401.501  Who is entitled to receive notices under Sec. 401.500?

Subpart D--Implementation of the Restructuring Plan After Closing

401.550  Monitoring and compliance agreements.
401.552  Servicing of second mortgage.
401.554   Contract administration.

Subpart E--Section 8 Requirements for Restructured Projects

401.595  Contract and regulatory provisions.
401.600  Will a section 8 contract be extended if it would expire 
while an owner's request for a Restructuring Plan is pending?
401.601  Consideration of an owner's request to renew an expiring 
contract without a Restructuring Plan.
401.602  Tenant protections if an expiring contract is not renewed.
401.605  Project-based assistance provisions.
401.606  Tenant-based assistance provisions.
401.607  Contract term.

Subpart F--Owner Dispute of Rejection and Administrative Appeal

401.645  How does the owner dispute a notice of rejection?
401.650  When may the owner make an administrative appeal of a final 
decision under this subpart?
401.651  Appeal procedures.
401.652  No judicial review.

    Authority: 12 U.S.C. 1715z-1 and 1735f-19(b); 42 U.S.C. 1437f 
note and 3535(d).

Subpart A--General Provisions; Eligibility


Sec. 401.1  What is the purpose of part 401?

    This part contains the regulations implementing the authority in 
the

[[Page 48944]]

Multifamily Assisted Housing Reform and Affordability Act of 1997 
(MAHRA) for the Mark-to-Market Program including the renewal of 
project-based assistance contracts for eligible projects without 
restructuring. Section 511(b) of MAHRA details the purposes, and 
section 512(2) details the scope, of the Program.


Sec. 401.2  What special definitions apply to this part?

    (a) MAHRA means the Multifamily Assisted Housing Reform and 
Affordability Act of 1997, title V of Pub. L. 105-65, 42 U.S.C. 1437f 
note.
    (b) Statutory terms. Terms defined in section 512 of MAHRA are used 
in this part in accordance with their statutory meaning. These terms 
are: comparable properties, expiring contract, expiration date, fair 
market rent, mortgage restructuring and rental assistance sufficiency 
plan, nonprofit organization, qualified mortgagee, portfolio 
restructuring agreement, participating administrative entity, project-
based assistance, renewal, State, tenant-based assistance, and unit of 
general local government.
    (c) Other terms. As used in this part, the term--
    Affiliate means an affiliate of the owner or an affiliate of the 
purchaser, as such terms are defined in section 516(a) of MAHRA.
    Applicable Federal rate has the meaning given in section 1274(d) of 
the Internal Revenue Code of 1986.
    Community-based nonprofit organization means a non-profit 
organization that maintains at least one-third of its governing board's 
membership for low-income residents from the local community, or for 
elected representatives of community organizations that represent low-
income residents.
    Comparable market rents has the meaning given in Sec. 401.410(b).
    Disabled family has the meaning given in Sec. 5.403(b) of this 
title.
    Elderly family has the meaning given in Sec. 5.403(b) of this 
title.
    Eligible project means a project with a mortgage insured or held by 
HUD, project-based assistance expiring on or after October 1, 1998, and 
rents for assisted units exceeding comparable market rents; and 
otherwise meeting the definition of ``eligible multifamily housing 
project'' in section 512(2) of MAHRA.
    HUD means the Director of the Office of Multifamily Housing 
Assistance Restructuring (OMHAR) or a HUD official authorized to act in 
lieu of the Director, when used in reference to provisions of MAHRA 
that give responsibilities to the Director, and otherwise has the 
meaning given in Sec. 5.100 of this title.
    NHA means the National Housing Act, 12 U.S.C. 1702 et seq.
    Owner means the owner of a project and any purchaser of the 
project.
    PAE means a participating administrative entity as defined in 
section 512(10) of MAHRA, or HUD when appropriate in accordance with 
section 513(b)(4) of MAHRA.
    PCA means a physical condition assessment of a project prepared by 
a PAE under Sec. 401.451.
    PRA means a portfolio restructuring agreement as defined in section 
512(9) of MAHRA.
    Priority purchaser means a purchaser meeting qualifications 
established by HUD that is:
    (1) A tenant organization or
    (2) A tenant-endorsed community-based nonprofit organization or 
public agency.
    Rental Assistance Assessment Plan means the plan described in 
section 515(c)(2) of MAHRA.
    Restructured rent means the rent determined at the time of 
restructuring in accordance with section 514(g) of MAHRA.
    Restructuring Plan means the Mortgage Restructuring and Rental 
Assistance Sufficiency Plan described in section 514 of MAHRA.
    Section 8 means section 8 of the United States Housing Act of 1937, 
42 U.S.C. 1437f.
    Section 541(b) claim means a claim paid by HUD under an insurance 
contract under authority of section 541(b) of the National Housing Act, 
12 U.S.C. 1735f-19(b).
    Tenant organization means an organization that meets regularly, 
whose officers are elected by a majority of heads of households of 
occupied units, and whose membership is open to all tenants of a 
project.
    Unit of local government means the smallest unit of general local 
government in which the project is located.


Sec. 401.99  What actions must an owner take to request a section 8 
contract renewal?

    (a) Requesting Restructuring Plan. An owner may request a section 8 
contract renewal as part of a Restructuring Plan by, at least 3 months 
before the expiration date of any project-based assistance or as soon 
as practicable if the contract will expire before January 13, 1999, 
certifying to HUD that to the best of the owner's knowledge:
    (1) Project rents are above comparable market rents; and
    (2) Neither the owner nor any affiliate is suspended or debarred, 
or, if so, a voluntary sale transfer of the property is proposed in 
accordance with Sec. 401.480.
    (b) Eligible but not requesting Restructuring Plan. If an owner is 
eligible for a Restructuring Plan but requests a renewal of project-
based assistance without a Plan, HUD will consider the request, in 
accordance with Sec. 401.601 if, at least 3 months before the 
expiration date of any project-based assistance or as soon as 
practicable if the contract will expire before January 1, 1999, an 
owner provides to HUD the certification required in paragraph (a) of 
this section, and the following additional information:
    (1) A comparable market rent analysis;
    (2) The prior fiscal year's audited financial statement for the 
project;
    (3) An owner's evaluation of physical condition as provided in 
Sec. 401.450; and
    (4) Such other documents as the PAE or HUD may require.
    (c) Not eligible for Restructuring Plan. Section 402.5 of this 
chapter addresses renewal of project-based assistance for a project not 
eligible for a Restructuring Plan.


Sec. 401.100  Which projects are eligible for a Restructuring Plan 
under this part?

    General eligibility. A Restructuring Plan may be requested by an 
owner of an eligible project that:
    (a) Has project-based assistance with an expiration date of October 
1, 1998, or later;
    (b) Has current gross potential rent for the project-based assisted 
units that exceeds the gross potential rent for the project based 
assisted units using comparable market rents; and
    (c) Is not described in section 514(h) of MAHRA.


Sec. 401.101  Which owners are ineligible for a Restructuring Plan?

    The request of an owner of an eligible project for a Restructuring 
Plan will not be considered if the owner or an affiliate is debarred or 
suspended under part 24 of this title, unless a sale or transfer of the 
property is proposed in accordance with Sec. 401.480.

Subpart B--Participating Administrative Entity (PAE) and Portfolio 
Restructuring Agreement (PRA)


Sec. 401.200  Who may be a PAE?

    A PAE must qualify under the definition in section 512(10) of 
MAHRA. It must not have any outstanding violations of civil rights 
laws, determined in accordance with criteria in use by HUD. If the PAE 
is a private entity, whether nonprofit or for-profit, it must enter 
into a partnership

[[Page 48945]]

with a public purpose entity, which may include HUD. The formed entity 
must meet all legal requirements for a partnership. A PAE may delegate 
responsibilities only as stated in the PRA.


Sec. 401.201  How does HUD select PAEs?

    (a) Selection of PAE. HUD will select qualified PAEs in accordance 
with the criteria established in 513(b) of MAHRA and criteria 
established by HUD. The selection method is within HUD's discretion, 
including but not limited to a request for qualifications.
    (b) Priority for public agencies. HUD will provide a one-time 
priority period for State Housing Finance Agencies and local housing 
agencies to qualify as the PAEs for their jurisdictions. If more than 
one agency qualifies for the same jurisdiction, HUD will provide an 
opportunity for the agencies to allocate responsibility for projects in 
the jurisdiction. If the agencies are unable to agree, HUD will choose 
a PAE in accordance with section 513(b)(2) of MAHRA.
    (c) Qualification for PAE by nonprofit and for profit entities. 
After the priority period expires, HUD will consider other eligible 
entities as PAEs for jurisdictions in which no public agency has 
qualified as the PAE, or for projects that have not been assigned to a 
qualified public agency.
    (d) No PAE for project. If HUD does not select a PAE for a project, 
HUD may perform the functions of the PAE, or contract with other 
qualified entities to perform those functions.


Sec. 401.300  What is a PRA?

    A PRA is an agreement between HUD and a PAE that delineates rights 
and responsibilities in connection with development and implementation 
of a Restructuring Plan. The PRA must contain the matters required by 
section 513(a)(2) of MAHRA, and Secs. 401.301 through 401.309, as well 
as other terms and conditions required by HUD.


Sec. 401.301  Business arrangements.

    If the PAE is in a partnership, the PRA must specify the following:
    (a) The responsibilities of each partner regarding the 
Restructuring Plan;
    (b) The resources each partner will provide to accomplish its 
designated responsibilities; and
    (c) All compensation to each partner, whether direct or indirect.


Sec. 401.302  PRA administrative requirements.

    (a) Inapplicability of certain requirements. Parts 84 and 85 of 
this title and contract procurement requirements do not apply to a PRA.
    (b) Recordkeeping. The PAE must keep complete and accurate records 
of all activities related to the PAE's performance under the PRA. The 
PAE must retain the records for at least 3 years after the PRA 
terminates.
    (c) Inspection of records and audit. Upon reasonable notice, the 
PAE must permit the Comptroller General of the United States and HUD 
(including representatives of the HUD Office of Inspector General) to 
inspect, audit and copy any records required to be retained under this 
section.


401.303  PRA indemnity provisions for SHFAs and HAs.

    When a PRA requires HUD to indemnify a PAE in accordance with 
section 513(a)(2)(G) of MAHRA, any payment under this indemnity is 
contingent upon the availability of funds that are permitted by law to 
be used for this purpose.


Sec. 401.304  PRA provisions on PAE compensation.

    (a) Base fee. The PRA will provide for a base fee to be paid by 
HUD.
    (b) Incentives. The PRA may provide for incentives to be paid by 
HUD for achievement of stated objectives.
    (c) Expenses. The PRA will identify expenses incurred by the PAE 
that will qualify for reimbursement by HUD.


Sec. 401.307  On-going responsibility of PAE.

    The PRA must provide for on-going activities necessary to implement 
the Restructuring Plan after the closing under Sec. 401.407.


Sec. 401.309  PRA term and termination provisions; other remedies.

    (a) 1-year term with renewals. The PRA will have a term of 1 year, 
to be renewed for successive terms of 1 year with the mutual agreement 
of both parties. The PRA will provide for HUD to pay final compensation 
to the PAE and to assign responsibility for continuing activities if 
the PRA is not renewed.
    (b) Termination for cause. A PRA will be subject to termination by 
HUD at any time for cause, with payment required by HUD as provided in 
the PRA only for matters performed by the PAE to the date of 
termination. When cause for termination exists, HUD may order an 
immediate transfer of some or all of the PAE's duties to another PAE 
designated by HUD. HUD may temporarily waive its right of immediate 
termination for cause in order to allow an orderly transfer of duties 
and responsibilities under a PRA, without waiving the right of 
termination after the transfer has been completed to HUD's 
satisfaction. HUD will retain the right of set-off against any payments 
due as well as such other rights afforded at law and in equity.
    (c) Liability for damages. During the term of a PRA, or 
notwithstanding any termination of a PRA, HUD may seek its actual, 
direct, and consequential damages from any PAE failure to comply with 
its obligations under the PRA.
    (d) Cumulative remedies. The remedies under this section are 
cumulative and in addition to any other remedies or rights HUD may have 
under the terms of the PRA, at law, or otherwise.


Sec. 401.310  Conflicts of interest.

    (a) Definitions. (1) Conflict of interest. A conflict of interest 
is a situation in which a PAE or other restricted person has:
    (i) A financial interest in a matter relating to the PRA;
    (ii) One or more personal, business, or financial interests or 
relationships which would cause a reasonable person with knowledge of 
the relevant facts to question the integrity or impartiality of those 
who are or will be acting under the PRA; or
    (iii) Is taking an adverse position to HUD or to an owner whose 
project is covered by a PRA in a lawsuit, administrative proceeding or 
other contested matter.
    (2) Control means the power to vote, directly or indirectly, 25 
percent or more of any class of the voting stock of a company; the 
ability to direct in any manner the election of a majority of a company 
(or other entity's) directors or trustees; or the ability to exercise a 
controlling influence over the company or entity's management and 
policies. For purposes of this definition, a general partner of a 
limited partnership is presumed to be in control of that partnership.
    (3) Restricted person means a PAE; any management official of the 
PAE; any legal entity that is under the control of the PAE, is in 
control of the PAE or is under common control with the PAE; or any 
employee, agent or contractor of the PAE, or employee of such agent or 
contractor, who will perform or has performed services under a PRA with 
HUD.
    (b) General prohibitions. (1) The PAE may not permit conflicts of 
interest to exist without obtaining a waiver in accordance with this 
section.
    (2) The PAE must establish procedures to identify conflicts of 
interest and to ensure that conflicts of interest do not arise or 
continue, subject

[[Page 48946]]

to waiver under paragraph (c) of this section.
    (3) HUD will not enter into PRAs with potential PAEs who have 
conflicts of interest associated with a particular project, or permit 
PAEs to continue performance under existing PRAs when such PAEs have 
conflicts of interest, unless such conflicts have been eliminated to 
HUD's satisfaction by the PAE or potential PAE or are waived by HUD.
    (4) The PAE has a continuing obligation to take all action 
necessary to identify whether it or any other restricted person has a 
conflict of interest.
    (c) Waivers. HUD will waive conflicts of interest only when, in 
light of all relevant circumstances, the interests of HUD in the PAE's 
or another restricted persons's participation outweigh the concern that 
a reasonable person may question the integrity of HUD's operations.
    (d) Conflicts of interest arising prior to PAE selection. (1) 
Request for review of conflicts of interest. (i) A potential PAE, with 
its request to HUD for consideration for selection as a PAE, must 
identify existing conflicts of interest and may make a written request 
for a determination as to the existence of a conflict of interest, may 
request that the conflict of interest, if any, be waived, or may 
propose how it could eliminate the conflict.
    (ii) If, after submitting a request but prior to selection, a 
potential PAE discovers that it has a conflict, it must notify HUD in 
writing within 10 days of submitting the request or prior to selection, 
whichever is earlier. The potential PAE may, with its notices, request 
that the conflict be waived or may propose how it may eliminate the 
conflict. The potential PAE may also request a determination as to the 
existence of the conflict.
    (2) Review by HUD. Subject to the restrictions set forth in this 
section, HUD in its sole discretion may determine whether a conflict of 
interest exists, may waive the conflict of interest, or may approve in 
writing a PAE's proposal to eliminate a conflict of interest.
    (e) Conflicts of interest that arise or are discovered after PAE 
selection. (1) A PAE must notify HUD in writing within 10 days after 
discovering that it or another restricted person has a conflict of 
interest. Such notification must contain a detailed description of the 
conflict of interest and state how the PAE intends to eliminate the 
conflict. The PAE may also request a determination as to the existence 
of a conflict.
    (2) HUD will, after receipt of such notification or other discovery 
of the PAE's conflict or potential conflict of interest, take such 
action as it determines is in its best interests, which may involve 
proceeding under Sec. 401.313 or as provided in paragraph (e)(2) of 
this section. HUD may notify the PAE in writing of its findings as to 
whether a conflict of interest exists and the basis for such 
determination, whether or not a waiver will be granted, or whether 
corrective actions may be taken in order to eliminate the conflict of 
interest. Corrective action must be completed by the PAE not later than 
30 days after notification is mailed by HUD unless HUD, at its sole 
discretion, determines that it is in its best interests to grant the 
PAE an extension in which to complete the corrective action.
    (f) Reconsideration of decisions. Decisions issued pursuant to this 
section may be reconsidered by HUD upon application by the PAE. Such 
requests must be in writing and must contain the basis for the request. 
HUD may, at its discretion and after determining that it is in its best 
interests, stay any corrective or other actions previously ordered 
pending reconsideration of a decision.


Sec. 401.311  Standards of conduct.

    (a) Minimum ethical standards for PAEs. In connection with the 
performance of any PRA and during the term of such PRA, a PAE or other 
restricted person (as defined in Sec. 401.310) may not:
    (1) Solicit for itself or others favors, gifts, or other items of 
monetary value from any person who is seeking official action from HUD 
or the PAE in connection with the PRA or has interests which may be 
substantially affected by the restricted person's performance or 
nonperformance of duties to HUD;
    (2) Use improperly or allow the improper use of HUD property, or 
property over which the restricted person has supervision or charge by 
reason of the PRA;
    (3) Use its status as PAE for its own benefit, or the financial or 
business benefit of a third party, except as contemplated by the PRA; 
or
    (4) Make any unauthorized promise or commitment on behalf of HUD.
    (b) 18 U.S.C. 201. Pursuant to 18 U.S.C. 201, whoever acts for or 
on behalf of HUD in connection with the matters covered by this part is 
deemed to be a public official. Public officials are prohibited from 
soliciting or accepting anything of value in return for being 
influenced in the performance of official actions. Violators are 
subject to criminal sanctions.
    (c) 18 U.S.C. 1001. Pursuant to 18 U.S.C. 1001, whoever knowingly 
and willingly falsifies a material fact, makes a false statement or 
utilizes a false writing in connection with a PRA is subject to 
criminal sanctions. Other Federal civil statutes also apply to making 
false statements to the United States.
    (d) 18 U.S.C. 207. Former government employees are subject to the 
prohibitions found at 18 U.S.C. 207.


Sec. 401.312  Confidentiality of information.

    A PAE and every other restricted person (as defined in 
Sec. 401.310) has a duty to protect confidential information and to 
prevent its use to further a private interest other than as 
contemplated by the PRA. As used in this section, confidential 
information means information that a PAE or other restricted person 
obtains from or on behalf of HUD or a third party in connection with a 
PRA but does not include information generally available to the public 
unless the information becomes available to the public as a result of 
unauthorized disclosure by the PAE or another restricted person.


Sec. 401.313  Consequences of PAE violations; finality of 
determination.

    (a) Effect on PRA. If a PAE, potential PAE or other restricted 
person (as defined in Sec. 401.310) violates Secs. 401.310, 410.311, or 
401.312, HUD may:
    (1) Find the PAE unqualified to enter into a PRA, or unqualified to 
receive additional projects for restructuring under an existing PRA;
    (2) Find the PAE in default under an existing PRA with the right of 
termination for cause under Sec. 401.309; or
    (3) Seek its actual, direct, and consequential damages from a PAE 
whose conflicts of interest, failure to comply with confidentiality 
requirements, or failure to comply with the minimum ethical standards 
for PAEs that were the basis for termination of a PRA.
    (b) Cumulative remedies. The remedies under this section are 
cumulative and in addition to any other remedies or rights HUD may have 
under the terms of the PRA, at law, or otherwise.
    (c) Finality of determination. Any determination made by HUD 
pursuant to this section is at HUD's sole discretion and is not subject 
to further administrative review.

[[Page 48947]]

Sec. 401.314  Environmental review responsibilities.

    HUD will retain all responsibility for environmental review under 
part 50 of this title. Any required review will be completed before any 
HUD execution of the Restructuring Commitment under Sec. 401.405.

Subpart C--Restructuring Plan


Sec. 401.400  Required elements of a Restructuring Plan.

    (a) General. A PAE is responsible for the development of a 
Restructuring Plan for each project included in its PRA.
    (b) Required elements. The Restructuring Plan must contain a 
narrative that fully describes the restructure transaction. The 
Restructuring Plan must include the elements required at Section 514 of 
MAHRA. The Restructuring Plan must describe the use of any 
restructuring tools listed at section 517(a) and (b) of MAHRA, and must 
contain other requirements as determined by HUD.


Sec. 401.401  Consolidated Plans.

    A PAE may request HUD to approve a Consolidated Restructuring Plan 
that presents an overall strategy for more than one project included in 
the PRA. HUD will consider approval of a Consolidated Restructuring 
Plan for projects having common ownership, geographic proximity, common 
mortgagee or servicer, or other factors that contribute to more 
efficient use of the PAE's resources. Notwithstanding the more 
efficient use of a PAE's resources, HUD will not approve any 
Consolidated Restructuring Plans that have a detrimental effect on 
tenants or the community, or a higher cost to the Federal government.


Sec. 401.402  Cooperation with owner and qualified mortgagee in 
Restructuring Plan development.

    A PAE must comply with section 514(a)(2) of MAHRA by using its best 
efforts to seek the cooperation of the owner and qualified mortgagee or 
its designee in the development of the Restructuring Plan. If the owner 
fails to cooperate to the satisfaction of the PAE and HUD agrees, the 
PAE must notify the owner that the PAE will not develop a Restructuring 
Plan. This notice will be a final decision subject to dispute and 
administrative appeal under subpart F of this part. If the qualified 
mortgagee does not cooperate in modifying the mortgage, the PAE and 
owner may continue to develop a Restructuring Plan to restructure the 
loan using alternative financing.


Sec. 401.403  Rejection of a request for a Restructuring Plan because 
of actions or omissions of owner or affiliate or project condition.

    (a) Ongoing determination of owner and project eligibility. 
Notwithstanding an initial determination to accept the owner's request 
for a Restructuring Plan, the PAE is responsible for a further more 
complete and ongoing assessment of the eligibility of the owner and 
project while the Restructuring Plan is developed. The PAE must advise 
HUD if at any time any of the grounds for rejection listed in paragraph 
(b) of this section exist.
    (b) Grounds for rejection. HUD may elect not to permit continued 
consideration of the Restructuring Plan if at any time before closing 
under Sec. 401.407:
    (1) The owner or an affiliate is debarred or suspended under part 
24 of this title;
    (2) HUD or the PAE determines that the owner or an affiliate has 
engaged in material adverse financial or managerial actions or 
omissions as described at section 516(a) and (b) of MAHRA, including 
any outstanding violations of civil rights laws in connection any 
project of the owner or affiliate; or
    (3) HUD or the PAE determines that the project does not meet the 
housing quality standards in Sec. 401.453 and that the poor condition 
of the project is not likely to be remedied in a cost-effective manner 
through the Restructuring Plan.
    (c) Dispute and appeal. An owner may dispute a rejection under this 
section and seek administrative review under the procedures in subpart 
F of this part.


Sec. 401.404  Proposed Restructuring Commitment.

    A PAE must submit a Restructuring Plan and a proposed Restructuring 
Commitment to HUD for approval, prior to submitting the Commitment to 
the owner for execution. The proposed Restructuring Commitment must be 
in a form approved by HUD, incorporate the Restructuring Plan, and 
include the following:
    (a) The lender, loan amount, interest rate, and term of any 
mortgages or unsecured financing for the mortgage restructuring and 
rehabilitation, and any credit enhancement;
    (b) The amount of any payment of a section 541(b) claim;
    (c) The type of section 8 assistance and the section 8 restructured 
rents;
    (d) The rehabilitation required, the source of the owner 
contribution, and escrow arrangements;
    (e) The uses for project accounts;
    (f) The terms of any sale or transfer of the project; and
    (g) A schedule setting forth all sources and uses of funds to 
implement the Restructuring Plan, including setting forth the balances 
of project accounts before and after restructuring; and
    (h) Other terms and conditions prescribed by HUD.


Sec. 401.405  Restructuring Commitment review and approval by HUD.

    HUD will either approve the Restructuring Commitment as submitted, 
require changes as a condition for approval, or reject the Plan. If the 
Plan is rejected, HUD will inform the PAE of the reasons for rejection. 
HUD's rejection of the Plan is subject to the dispute and 
administrative appeal provisions of subpart F of this part.


Sec. 401.406  Execution of Restructuring Commitment.

    When HUD approves the Restructuring Commitment, the PAE will 
deliver the Restructuring Commitment to the owner for execution. The 
Restructuring Commitment becomes binding upon execution by the owner. 
An owner who does not execute the Restructuring Commitment may appeal 
its terms and seek modification under subpart F of this part.


Sec. 401.407  Closing conducted by PAE.

    After the owner has executed the Restructuring Commitment, the PAE 
must arrange for a closing to execute all documents necessary for 
implementation of the Restructuring Plan. The PAE must use standard 
documents approved by HUD, with modifications only as necessary to 
comply with applicable State or local laws, or such other modifications 
as are approved in writing by HUD.


Sec. 401.408  Affordability and use restrictions required.

    (a) General. The Restructuring Plan must provide that the project 
will be subject to affordability and use restrictions in a Use 
Agreement acceptable to HUD. The Use Agreement must be recorded and in 
effect for at least 30 years. It must include at least the provisions 
required by this section.
    (b) Use restriction. The project must continue to be used for 
residential use with no reduction in the number of residential units 
without prior HUD approval.
    (c) Affordability restrictions. Except during a period when at 
least 20 percent of the units in a project receive project-based 
assistance:
    (1) At least 20 percent of the units in the project must be leased 
to families whose adjusted income does not exceed 50 percent of the 
area median income as

[[Page 48948]]

determined by HUD, with adjustments for household size, at rents no 
greater than 30 percent of 50 percent of the area median income; or
    (2) At least 40 percent of the units in the project must be leased 
to families whose adjusted income does not exceed 60 percent of the 
area median income as determined by HUD, with adjustments for household 
size, at rents no greater than 30 percent of 60 percent of the area 
median income.
    (d) Comparable configuration. The type and size of the units that 
satisfy the affordability restrictions of paragraph (c) of this section 
must be comparable to the type and size of the units for the project as 
a whole.
    (e) Owner obligation to accept assistance. Subject to the 
availability of appropriated funds, the owner of the project must 
accept any offer of project-based or tenant-based assistance renewal or 
extension so long as the offer is in accordance with the terms and 
conditions specified in the Restructuring Plan.
    (f) Reporting. The Use Agreement must contain appropriate financial 
and other reporting requirements for the owner.
    (g) Enforcement and amendment. The Use Agreement will be 
enforceable by interested parties to be specified in the Agreement, 
which may include HUD, the PAE, project tenants, organizations 
representing project tenants, and the unit of local government.
    (h) Modifications. HUD will retain the right to approve 
modifications of the Use Agreement agreed to by the owner without the 
consent of any other party, including those having the right of 
enforcement.


Sec. 401.410  Standards for determining comparable market rents.

    (a) When are comparable market rents required? The Restructuring 
Plan must establish restructured rents at comparable market rents 
unless the PAE finds that exception rents are necessary under 
Sec. 401.411.
    (b) Comparable market rents defined. Comparable market rents are 
the rents charged for properties that the PAE determines to be 
comparable properties as defined in section 512(1) of MAHRA, except 
that projects assisted under part 891 of this title may not be taken 
into account. For purposes of section 512(1), other relevant 
characteristics include any applicable rent control and other 
characteristics determined by the PAE.
    (c) Methodology for determining comparable market rents. If the PAE 
is unable to identify at least three comparable properties within the 
local market, the PAE may:
    (1) Use non-comparable housing stock within that market from which 
adjustments can be made; or
    (2) If necessary to go outside the market, use comparable 
properties as far outside the local market as it finds reasonable, from 
which adjustments can be made.
    (d) Using FMR as last resort. If the PAE is unable to identify 
enough properties under paragraph (c) of this section, the rents must 
be set at 90 percent of the Fair Market Rents for the relevant market 
area.


Sec. 401.411  Guidelines for determining exception rents.

    (a) When do exception rents apply? (1) The Restructuring Plan may 
provide for exception rents established under section 514(g) of MAHRA 
if the PAE determines that project income under the rent levels 
established under Sec. 401.410 would be inadequate to meet the costs of 
operating the project as described in paragraph (b) of this section and 
that the housing needs of the tenants and the community could not be 
adequately addressed.
    (2) In any fiscal year, the PAE may not request HUD to approve 
Restructuring Plans with exception rents for more than 20 percent of 
all units covered by the PRA, except that HUD may approve a waiver of 
this 20 percent limitation based on the PAE's narrative explanation of 
special need.
    (b) How are exception rents calculated? Exception rents must be set 
at a level sufficient to support the costs of operating the project. 
The PAE must take into account the cost items listed in section 
514(g)(3)(A) through (E) of MAHRA, except that debt service is limited 
to payment of the second mortgage under Sec. 401.461(a) or a 
rehabilitation loan included in the Restructuring Plan. The exception 
rent must not exceed 120 percent of the Fair Market Rent for the market 
area, except that HUD may approve an exception rent greater than 120 
percent of Fair Market Rent, based on a narrative explanation of 
special need submitted by the PAE, subject to the 5 percent limitation 
in section 514(g)(2)(A) of MAHRA.


Sec. 401.412  Adjustment of rents with operating cost adjustment factor 
(OCAF).

    (a) OCAF required for Restructuring Plan. The Restructuring Plan 
must provide for annual adjustment of the restructured rents by an OCAF 
determined by HUD and applied as provided in this section. An OCAF may 
be positive or negative.
    (b) Application of OCAF. HUD will apply the OCAF to the previous 
year's contract rent less the portion of that rent paid for debt 
service. Paragraph (b) of this section applies to renewals of contracts 
in subsequent years which receive restructured rents under either 
section 514(g)(1) or (2) of MAHRA.


Sec. 401.420  When must the Restructuring Plan require project-based 
assistance?

    (a) Criteria in MAHRA. The Restructuring Plan must provide for the 
section 8 contract to be renewed as project-based assistance, subject 
to the availability of funds for this purpose, if the PAE determines 
that one or more of the circumstances described in section 
515(c)(1)(A), (B), or (C) of MAHRA exists.
    (b) Meaning of ``predominant''. For purposes of section 
515(c)(1)(B), project has a predominant number of units occupied by 
elderly families, disabled families, or elderly and disabled families 
if at least 50 percent of the units are occupied by these families.
    (c) Tight rental market. The conditions of section 515(c)(1)(A) are 
met if the PAE determines that there is a market-wide vacancy rate of 6 
percent or less.


Sec. 401.421  Rental Assistance Assessment Plan.

    (a) Plan required. For any project not subject to mandatory 
project-based assistance under Sec. 401.420, the PAE must develop a 
Rental Assistance Assessment Plan in accordance with section 515(c)(2) 
of MAHRA to determine whether assistance should be renewed as project-
based assistance or whether some or all of the assisted units should be 
converted to tenant-based assistance.
    (b) Matters to be assessed. The PAE must consider the cost of 
providing assistance, comparing the applicable payment standard for 
tenant-based assistance to the project's adjusted rent levels 
determined under Sec. 401.410 or Sec. 401.411. In addition, the PAE 
must consider the other matters listed in section 515(c)(2)(B) of MAHRA 
to be assessed as part of the Plan, and the applicable Consolidated 
Plan developed under part 91 of this title.
    (c) Conversion may be phased in. Any conversion from project-based 
assistance to tenant-based assistance may occur over a period of not 
more than 5 years if the PAE decides the transition period is needed 
for the financial viability of the project.
    (d) Reports to HUD. The PAE must report to HUD on the matters 
specified in section 515(c)(2)(C) of MAHRA at least semi-annually.

[[Page 48949]]

Sec. 401.450  Owner evaluation of physical condition.

    (a) Initial evaluation. The owner must evaluate the physical 
condition of the project and provide the following information to the 
PAE in a form acceptable to the PAE:
    (1) All work items required to bring the project to the standard in 
Sec. 401.452;
    (2) The capital repair or replacement items that will be necessary 
to maintain the long-term physical integrity of the property;
    (3) A plan for funding the rehabilitation work included in 
paragraph (a)(1) of this section, which work must be completed in a 
timely manner after closing the restructuring transaction, that 
identifies the source of the required owner contribution of non-project 
funds; and
    (4) An estimate of the initial deposit, if any, and the estimated 
monthly deposit to the reserve for replacement account for the next 20 
years.
    (b) Reconsideration and modification of evaluation. If the PAE, 
after its independent review under Sec. 401.451, determines that the 
owner's evaluation either fails to address specific necessary work 
items or fails to propose a cost-effective approach to rehabilitation, 
the owner may modify its evaluation to satisfy the concerns of the PAE.


Sec. 401.451  PAE Physical Condition Analysis (PCA).

    (a) Review and certification of owner evaluation. (1) The PAE must 
independently evaluate the physical condition of the project by means 
of a PCA. If the PAE finds any immediate threats to health and safety, 
the owner must complete those work items immediately, or the PAE must 
evaluate the project's eligibility in accordance with 
Sec. 401.403(b)(3).
    (2) After consultation with the owner and an opportunity for the 
owner to modify its evaluation performed under Sec. 401.450, the PAE 
must certify to the accuracy and completeness of the owner's evaluation 
performed under Sec. 401.450 for each project covered by the PRA or 
state that the evaluation fails to address certain items or does not 
propose a cost effective approach.
    (b) Rejection for inaccurate or incomplete owner evaluation. If the 
PAE cannot certify to the accuracy and completeness of the owner's 
evaluation due to its failure to address specific work items or because 
it does not propose a cost effective approach, the PAE must notify HUD. 
If HUD agrees with the PAE's determination, the PAE must notify the 
owner that the request for a Restructuring Plan is rejected.
    (c) Rejection for lack of cost-effectiveness. Based on the 
completed PCA, the PAE must determine whether proceeding with a 
Restructuring Plan with necessary rehabilitation is more cost-effective 
in terms of Federal resources than rejecting the Request for a 
Restructuring Plan under Sec. 401.403(b)(3) and providing tenant-based 
assistance for displaced tenants under Sec. 401.602. HUD will provide 
guidance to PAEs for making the cost-effectiveness determination. If 
the PAE concludes that a request for a Restructuring Plan should be 
rejected because of lack of cost-effectiveness, it must also consider 
the effect on tenants and the community and advise HUD of the effect.
    (d) Dispute and appeal of rejection. The dispute and appeal 
provisions of subpart F of this part apply to rejections under 
paragraphs (b) and (c) of this section.


Sec. 401.452  Property standards for rehabilitation.

    The Restructuring Plan must provide for the level of rehabilitation 
needed to restore the property to the non-luxury standard adequate for 
the rental market for which the project was originally approved. If the 
standard has changed over time, the rehabilitation may include 
improvements to meet current standards. The result of the 
rehabilitation should be a project that can attract non-subsidized 
tenants but competes on rent rather than on amenities. When a range of 
options exists for satisfying the rehabilitation standard or the plan 
for capital replacement, the PAE must choose the least costly option 
considering both capital and operating costs and taking into account 
the remaining useful life of all building systems. Nothing in this part 
exempts rehabilitation from the requirements of part 8 of this title 
concerning accessibility to persons with disabilities.


Sec. 401.453  Housing quality standards.

    (a) Standards. The Restructuring Plan must require the owner to 
maintain the project, for the duration of the Use Agreement under 
Sec. 401.408, in a decent and safe condition that meets the applicable 
standards under this section. As long as project-based assistance is 
provided, the applicable standards are the physical conditions 
standards for HUD housing in Sec. 5.703 of this title. At any other 
time, the applicable standards are the local housing codes or codes 
adopted by the public housing agency if such codes meet or exceed the 
standards in Sec. 5.703 of this title and do not severely restrict 
housing choice or, if there are no such local housing codes or codes 
adopted by the public housing agency, the standards in Sec. 5.703 will 
apply. In addition, any unit in which the tenant receives tenant-based 
assistance must comply with the housing quality standards of the 
section 8 tenant-based programs.
    (b) Reserves. The Restructuring Plan must also provide for reserves 
for capital replacement sufficient to assure the property's long term 
structural integrity so that the property can be maintained as 
affordable housing in decent and safe condition meeting the standards 
of this section.


Sec. 401.460  Modification or refinancing of first mortgage.

    (a) Principal amount. As part of the Restructuring Plan, the PAE 
will determine the size of the restructured first mortgage that will 
result from the modification or refinancing of the existing FHA-insured 
or HUD-held first mortgage. The restructured first mortgage must be in 
the amount that can be supported by net operating income based on the 
lower of the restructured section 8 rents or the rents allowed by the 
Use Agreement under Sec. 401.408. Neither the outstanding principal 
balance of the existing first mortgage, nor the monthly principal and 
interest payments on that debt, may be increased through the 
Restructuring Plan. The debt service coverage used by the PAE must be 
adequate for purposes of the Restructuring Plan and for the 
requirements of any refinancing.
    (b) Fully amortizing. The modified or refinanced first mortgage 
must be fully amortizing through level monthly payments.
    (c) Rates and other terms. Interest rates and other terms of the 
modified or refinanced first mortgage must be competitive in the 
market.
    (d) Fees. Any fees or costs associated with mortgage modification 
or refinancing determined by the PAE to be above normal processing fees 
must be paid by the owner from non-project funds and must not be 
included in the modified or refinanced first mortgage.
    (e) Refinancing. (1) If the holder of the existing FHA-insured 
first mortgage does not agree to modify and re-amortize the outstanding 
loan, the loan must be refinanced.
    (2) The refinancing may be either without credit enhancement or 
with credit enhancement under one of the following:
    (i) FHA mortgage insurance. If the Restructuring Plan provides for 
FHA mortgage insurance for the refinanced first mortgage, the insurance 
will be provided in accordance with all usually

[[Page 48950]]

applicable FHA legal requirements except that insurance will be 
documented as provided in section 517(b)(2) of MAHRA. HUD will issue 
the commitment for mortgage insurance but may adapt its procedures as 
necessary to facilitate development and implementation of a 
Restructuring Plan.
    (ii) Other FHA credit enhancement. If FHA credit enhancement, 
including risk-sharing, is provided under part 266 of this title, the 
credit enhancement will be provided in accordance with all usually-
applicable FHA legal requirements under part 266 of this title, except 
that special approval from HUD will be required before the PAE engages 
in risk-sharing with FHA under part 266 of this title.
    (iii) Credit enhancement from non-FHA sources. If credit 
enhancement is to be provided by a non-FHA source under section 
517(b)(4) of MAHRA, HUD will consider waiver of any non-statutory 
provision in this part only if the waiver will not materially impair 
achievement of the purposes of MAHRA and if the waiver is essential to 
meet the legitimate business or legal requirements of the provider of 
credit enhancement.


Sec. 401.461  HUD-held second mortgage.

    (a) Amount. If the Restructuring Plan provides for payment of a 
section 541(b) claim, the Plan must also provide for a second mortgage 
to HUD in an amount that does not exceed the amount that the PAE 
reasonably expects to be repaid based on objective criteria such as the 
amount of anticipated net cash flow, trending assumptions, amortization 
provisions, and expected residual value of the project. The second 
mortgage also must not exceed the difference between the unpaid 
principal balance on the first mortgage immediately before and after 
restructuring.
    (b) Terms and conditions. (1) The second mortgage must have an 
interest rate of at least 1 percent, but not more than the applicable 
Federal rate. Interest will accrue but not compound.
    (2) The second mortgage must have a term concomitant with the 
modified or refinanced first mortgage. HUD may provide that if the 
first mortgage of a nominal amount is satisfied, the second mortgage 
may continue for a term established by HUD.
    (3)(i) Principal and interest on the second mortgage is payable 
only out of net cash flow during its term. ``Net cash flow'' means that 
portion of project income that remains after the payment of all 
required debt service payments on the modified or refinanced first 
mortgage, if any, including payment of any past due principal or 
interest, and payment of all reasonable and necessary operating 
expenses (including deposits to the reserve for replacement account) 
and any other expenditure approved by HUD.
    (ii) The priority and distribution of net cash flow is as follows:
    (A) HUD or the PAE may approve the payment to the owner of up to 25 
percent of net cash flow based on consideration of relevant conditions 
and circumstances including, but not limited to, the project management 
meeting the management standards prescribed in Sec. 401.484 and the 
project meeting the housing quality standards prescribed in 
Sec. 401.453; and
    (B) All remaining net cash flow will be applied to the principal 
and interest on the second mortgage, until paid in full, and then to 
any additional subordinate mortgage under Sec. 401.461(c).
    (4) HUD may cause the second mortgage to be immediately due and 
payable on the grounds provided in section 517(a)(4) of MAHRA, 
including an assumption of the mortgage in violation of HUD standards 
for approval of transfers of physical assets (if applicable), or the 
owner fails to comply with other HUD requirements after a reasonable 
opportunity for the owner to cure such failure. A decision by HUD in 
this regard is subject to the administrative appeals procedure in 
subpart F of this part.
    (5) HUD will consider modification or forgiveness of all or part of 
the second mortgage only if the project has been sold or transferred to 
a priority purchaser under Sec. 401.480 and HUD determines that 
modification or forgiveness is necessary to recapitalize the project in 
order to preserve it as affordable housing.
    (c) Additional mortgage to HUD. If the amount of a section 541(b) 
claim under Sec. 401.471 exceeds the principal amount of the second 
mortgage, a Restructuring Plan may require the owner to give an 
additional mortgage on the project to HUD to secure repayment of that 
portion of the claim that is not already secured. This additional 
mortgage must be junior in priority to the second mortgage required by 
paragraph (a) of this section, bear interest at the same rate which 
will accrue but not compound, and require no payments except payment in 
full when the second mortgage is satisfied.


Sec. 401.471  HUD payment of a section 541(b) claim.

    HUD will pay a section 541(b) claim from the appropriate insurance 
fund to the insured mortgagee on behalf of the mortgagor to reduce the 
principal balance of the insured mortgage as provided in the 
Restructuring Plan. All section 541(b) claims will be paid in cash. 
Part 207 of this title and sections 207(g) and 541(a) of the NHA do not 
apply to a section 541(b) claim.


Sec. 401.472  Rehabilitation funding.

    (a) Sources of funds. (1) Project accounts. The Restructuring Plan 
for funding rehabilitation must include funds from the project's 
residual receipts account, surplus cash account, residual receipts 
account and other project accounts, to the extent the PAE determines 
that those accounts will not be needed for the initial deposit to the 
reserves.
    (2) Debt restructuring. The Restructuring Plan may provide for 
funding of rehabilitation through a new first mortgage in conjunction 
with a payment of a section 541(b) claim. The payment of claim may be 
in an amount necessary to facilitate the funding of the rehabilitation, 
by reducing the existing first mortgage debt to make refinancing 
proceeds available to fund rehabilitation.
    (3) Section 236(s) rehabilitation grant. The Restructuring Plan may 
include a direct grant from HUD under section 236(s) of the NHA to 
cover a portion of the rehabilitation cost, to the extent that HUD has 
determined that funding is available for such a grant.
    (4) Section 8 budget authority increase. The Restructuring Plan may 
include funding of rehabilitation from budget authority provided to HUD 
for increases in section 8 contracts, to the extent that HUD has 
determined that funding from this source is available.
    (b) Statutory restrictions. Any rehabilitation funded from the 
sources described in paragraph (a) of this section is subject to the 
requirements in section 517(b)(7) of MAHRA for an owner contribution. 
The required owner contribution will be calculated as 20 percent of the 
total cost of rehabilitation, unless it is determined that a higher 
percentage is required. The PAE may exempt housing cooperatives from 
the owner contribution requirement.
    (c) Escrow agent. The Restructuring Plan must provide for progress 
payments for rehabilitation, which must be disbursed by an acceptable 
escrow agent subject to PAE oversight or as otherwise provided by HUD.


Sec. 401.473  HUD grants for rehabilitation under section 236(s) of 
NHA.

    HUD will consider a direct grant for rehabilitation under section 
236(s) of the NHA only if the owner provides an acceptable work 
schedule and cost-analysis that is consistent with the

[[Page 48951]]

owner's evaluation of physical condition under Sec. 401.450, as 
certified by the PAE. The owner must execute a grant agreement with 
terms and conditions acceptable to HUD. If the PAE is a State or local 
government, or an agency or instrumentality of such a government, the 
PAE and HUD may agree that the PAE will be delegated the responsibility 
for the administration of any grant made under Sec. 401.473, if HUD has 
determined that funding for the cost of grant administration is 
available.


Sec. 401.474  Project accounts.

    (a) Accounts from other projects. The accounts listed in 
401.472(a)(1) may be used for other eligible projects only if:
    (1) The projects are included in a Consolidated Restructuring Plan 
under Sec. 401.401; and
    (2) The funds are used for rehabilitation or to reduce a section 
541(b) claim paid by HUD under Sec. 401.471.
    (b) Distribution to owner. The Restructuring Plan may provide for a 
one-time distribution to the owner, not to exceed 10 percent of the 
excess funds in project accounts, after completion of the 
rehabilitation required by the Restructuring Plan.


Sec. 401.480  Voluntary sale or transfer of project.

    (a) May the owner request a Restructuring Plan that includes a sale 
or transfer of the property? The owner may request a Restructuring Plan 
that includes a condition that the property be sold or transferred to a 
purchaser acceptable to HUD in a reasonable period to consummate the 
transaction. The failure to consummate a sale or transfer of the 
property requested under paragraph (a) of this section will neither 
adversely affect an owner's eligibility for a Restructuring Plan nor 
exempt the owner from the requirements of Sec. 401.600.
    (b) When must the Restructuring Plan include a sale or transfer of 
the property? If the owner is determined ineligible pursuant to 
Sec. 401.101 or Sec. 401.403, the Restructuring Plan must include a 
condition that the owner sell or transfer the property to a purchaser 
acceptable to HUD.
    (c) Owner's notice of intent to sell or transfer. If a sale or 
transfer is required under paragraph (b) of this section:
    (1) The owner must provide notice to the PAE affirming the owner's 
intent to sell or transfer the property. This notice must be received 
by the PAE no later than 30 days after a notice of rejection under 
Sec. 401.101 or Sec. 401.403 has become a final determination under 
subpart F of this part.
    (2) The owner must cooperate in selling or transferring the 
property. Failure to do so will result in the PAE's determination to 
reject the owner's request for a Restructuring Plan. The owner must 
distribute and publish, in an appropriate publication, a notice to 
potential purchasers that describes the property, proposed terms of 
sale, and procedures for submitting a purchase offer. The notice in 
form and substance must be acceptable to HUD, and must inform potential 
offerors of a preference for priority purchasers.
    (3) The PAE may develop a Restructuring Plan involving a sale or 
transfer to a non-priority purchaser only if the PAE determines that 
there is no interested qualified priority purchaser, or that a feasible 
Restructuring Plan involving a sale or transfer to a qualified priority 
purchaser cannot be developed.
    (d) Informing PAE; approval required. The owner must inform the PAE 
of any offer to purchase the property and the owner must advise the PAE 
of the substance and on-going status of the owner's discussions with 
any prospective purchaser. The owner's acceptance of the offer must be 
subject to PAE approval, and HUD approval of the Restructuring Plan.


Sec. 401.481  Subsidy layering limitations on HUD funds.

    (a) PAE subsidy layering certification required for Restructuring 
Plan. The PAE must certify to HUD that any Restructuring Plan for which 
it submits a proposed Restructuring Commitment meets the requirements 
of either paragraph (d) or (e) of this section.
    (b) Purpose of subsidy layering certification. The purpose of the 
subsidy layering certification is to ensure that any HUD assistance 
provided to the owner of a project pursuant to a Restructuring Plan is 
no more than is necessary to permit the project to continue to house 
tenants with an income mix comparable to the income mix of the project 
before the Restructuring Plan is implemented, after taking into account 
other Government assistance described in section 102(b)(1) of the 
Department of Housing and Urban Development Act of 1989 (42 U.S.C. 
3545(b)(1)).
    (c) Relationship to section 102(d) of HUD Reform Act. HUD is not 
required to perform a separate subsidy layering analysis under section 
102(d) of the Department of Housing and Urban Development Reform Act of 
1989 (42 U.S.C. 3545(d)), section 911 of the Housing and Community 
Development Act of 1992 (42 U.S.C. 3545 note), or Sec. 4.13 of this 
title for any HUD assistance that is included in the Restructuring 
Plan. HUD will adopt the PAE certification under this section if a HUD 
certification would otherwise be required under section 102(d).
    (d) Certification under existing HUD guidelines. If the PAE has 
delegated authority from HUD to make section 102(d) subsidy layering 
certifications in accordance with section 911 of the Housing and 
Community Development Act of 1992, the PAE may comply with this section 
by using a procedure substantially similar to the procedure described 
in the Administrative Guidelines published on December 15, 1994 (59 FR 
64748), or any subsequent procedure adopted by HUD to implement section 
911.
    (e) Other procedures. If the PAE does not have the delegated 
authority described in paragraph (d) of this section, the PAE must 
submit to HUD for approval proposed procedures for making the subsidy 
layering certification under this section. Any procedures must conform 
to the procedures described in paragraph (d) of this section to the 
extent feasible and appropriate.


Sec. 401.483  Leasing units to certificate and voucher holders.

    A Restructuring Plan must prohibit any refusal of the owner to 
lease a unit solely because of the status of the prospective tenant as 
a section 8 certificate or voucher holder.


Sec. 401.484  Property management standards.

    (a) General. Each PAE is required by section 518 of MAHRA to 
establish management standards consistent with industry standards and 
HUD guidelines. The management standards must be included or referenced 
in the Restructuring Plan.
    (b) HUD guidelines. At a minimum, the PAE's management standards 
must require the project management to:
    (1) Protect the physical integrity of the property over the long 
term through preventative maintenance, repair or replacement;
    (2) Ensure that the building and grounds are routinely cleaned;
    (3) Maintain good relations with the tenants;
    (4) Protect the financial integrity of the project by operating the 
property with competitive and reasonable costs and maintaining 
appropriate property and liability insurance at all times;
    (5) Take all necessary measures to ensure the tenants' physical 
safety; and
    (6) Comply with other provisions that are required by HUD, 
including termination of the management agent for cause.

[[Page 48952]]

    (c) Conflicts of interest. The PAE management standards must also 
conform to any guidelines established by HUD, and industry standards, 
governing conflicts of interest between owners, managers and 
contractors.


Sec. 401.500  Required notices to third parties.

    (a) General. The PAE must solicit, and document the consideration 
of, tenant and local community comments. As a minimum, the notices 
described in paragraphs (b) and (c) of this section, in form and 
substance acceptable to HUD, must be provided. The PAE may require the 
owner to give the notices if permitted by HUD.
    (b) Notice of intent to restructure and consultation meeting. (1) 
This notice must include at a minimum:
    (i) The project, including its name and FHA Project Number;
    (ii) The responsible PAE and contact person, including the address 
and telephone number;
    (iii) The owner's notice of intent to restructure through the Mark-
to-Market Program; and
    (iv) The date of expiration of the project-based assistance.
    (2) This notice must state how comments may be provided to the PAE 
regarding any of the following: the physical condition of the property, 
whether the rental assistance should be tenant-based or project-based, 
any proposed sale or transfer of the property, and other matters 
regarding the property and its management. The notice must establish 
the date, time and place for a public meeting to be held no sooner than 
20 days and no later than 60 days following the date of this notice. 
The public may provide written comments up to the date of the meeting.
    (c) Notice of completion of Restructuring Plan. Within 10 days 
after either the execution of the Restructuring Commitment or a 
decision not to restructure, the PAE must provide a notice that 
describes the completed Restructuring Plan and Restructuring Commitment 
or the reasons not to restructure. Any completed Restructuring Plan and 
Restructuring Commitment must be made available during normal business 
hours to the public, subject to Federal, State and local laws 
restricting access to any information in any of these documents.


Sec. 401.501  Who is entitled to receive notices under Sec. 401.500?

    (a) Recipients of all notices. Each notice required under 
Sec. 401.500 must be given to:
    (1) The tenant for each unit in the project or a tenant 
organization; and
    (2) The Chief Executive Officer of the unit of local government and 
the Director of the Public Housing Authority with jurisdiction over the 
project location.
    (b) Other recipients. The PAE may require notices to be sent to 
neighborhood representatives and other affected parties identified by 
the PAE or HUD.

Subpart D--Implementation of the Restructuring Plan after Closing


Sec. 401.550  Monitoring and compliance agreements.

    (a) Compliance agreements. The PAE must ensure long-term compliance 
by the owner with MAHRA, this part, and the Restructuring Plan. As part 
of this responsibility, the PAE must require each owner with an 
approved Restructuring Plan to record and execute a Use Agreement that 
satisfies the requirements of Sec. 401.408.
    (b) Periodic monitoring and inspection. At least once a year for 
the term of the Use Agreement, a PAE must review the status of each 
project for which it developed an approved Restructuring Plan. 
Monitoring must include on-site inspections.
    (c) HUD acting instead of PAE. HUD will perform, or contract with 
other parties to perform, the PAE's functions under this section if:
    (1) The project is subject to a PRA with a PAE that is not 
qualified to be a section 8 contract administrator; or
    (2) There is no PAE because the project is not currently subject to 
a PRA.


Sec. 401.552  Servicing of second mortgage.

    HUD or its designee will be responsible for servicing the second 
mortgage, including determining the amounts receivable by the owner 
under Sec. 401.461(b)(2). HUD may designate the PAE, with the PAE's 
consent, as servicer for the second mortgage.


Sec. 401.554  Contract administration.

    HUD will offer to any PAE that is qualified to be the section 8 
contract administrator the opportunity to serve as the section 8 
contract administrator for a project restructured under the Mark-to-
Market Program. Qualifications will be determined under both statutory 
requirements and requirements issued by the appropriate office within 
HUD, depending on the type of section 8 assistance that is provided.

Subpart E--Section 8 Requirements for Restructured Projects


Sec. 401.595  Contract and regulatory provisions.

    The provisions of chapter VIII of this title will apply only to the 
extent, if any, provided in the contract. Part 983 of this title will 
not apply.


Sec. 401.600  Will a section 8 contract be extended if it would expire 
while an owner's request for a Restructuring Plan is pending?

    If a contract for an eligible project would expire before a 
Restructuring Plan is implemented, the contract may be extended at 
current rents for up to the earlier of 1 year or closing on the 
Restructuring Plan under Sec. 401.407, with a provision for earlier 
termination if the PAE or HUD determines that an owner is not 
cooperative under Sec. 401.402 or if an owner's request is rejected 
under Sec. 401.403 or Sec. 401.405. Any extension of the contract 
beyond 1 year for a pending Plan must be at comparable market rents or 
exception rents. An extension at comparable market rents or exception 
rents under this section will not affect a project's eligibility for 
the Mark-to-Market Program once it has been initially established under 
this part.


Sec. 401.601  Consideration of an owner's request to renew an expiring 
contract without a Restructuring Plan.

    (a) Applicability of part 402. If HUD or the PAE determines that 
renewal at rents that do not exceed comparable market rents under 
Sec. 402.4 of this chapter would be sufficient to maintain both 
adequate debt service coverage on the HUD-insured or HUD-held mortgage 
and necessary replacement reserves to ensure the long-term physical 
integrity of the project, the project-based assistance will be renewed 
under Sec. 402.4 of this chapter (subject to Sec. 402.7 of this 
chapter) without developing a Restructuring Plan.
    (b) When Restructuring Plan needed. If HUD or the PAE determines 
that renewal at market comparable rents under Sec. 402.4 of this 
chapter would not be sufficient to maintain adequate debt service 
coverage and reserves, HUD or the PAE may require a Restructuring Plan 
before the owner's request will be given further consideration. If HUD 
or the PAE determines that the project's continued operation without a 
Restructuring Plan is not feasible and the owner does not cooperate in 
the development of an acceptable Restructuring Plan, HUD will pursue 
whatever administrative actions it considers necessary.


Sec. 401.602  Tenant protections if an expiring contract is not 
renewed.

    (a) Notice of non-renewal or rent increase. (1) The owner of an 
eligible project who has requested a Restructuring Plan and later fails 
to extend or renew an expiring contract,

[[Page 48953]]

except due to a rejection under Sec. 401.101, Sec. 401.403 or 
Sec. 401.405, must provide a 12-month notice of contract non-renewal to 
tenants and HUD as provided in section 514(d) of MAHRA and a 90-day 
notice of any rent increase to tenants as provided in section 8(c)(8) 
of the United States Housing Act of 1937. HUD may prescribe the form of 
the notices. If the owner gives such 12-month notice, the owner is not 
required to give a separate 180-day notice of contract non-renewal 
under section 8(c)(9) of the United States Housing Act of 1937.
    (2) The owner of an eligible project who has not requested a 
Restructuring Plan, or an owner who requested a Restructuring Plan but 
who has been rejected under Sec. 401.101, Sec. 401.403, or 
Sec. 401.405, must provide 180-day notice of contract non-renewal to 
tenants and HUD under section 8(c)(9) of the United States Housing Act 
of 1937 and 90-day notice of any rent increase to tenants under section 
8(c)(8) of that Act. If the owner gives such 180-day notice, the owner 
is not required to give a separate 12-month notice of non-renewal under 
section 514(d) of MAHRA.
    (b) If owner does not give notice. If an owner described in 
paragraph (a)(1) or (a)(2) of this section does not give timely notice 
of non-renewal, the owner must permit the tenants in assisted units to 
remain in their units for the required notice period (either 12 months 
or 180 days, as applicable) with no increase in the tenant portion of 
their rent. This period will begin on the earlier of the date notice of 
non-renewal was given to the tenants and HUD or the date of expiration 
for the contract. If an owner described in paragraph (a) of this 
section does not give timely notice of any rent increase, the owner 
must permit the tenants in assisted units to remain in their units for 
90 days with no increase in the tenant portion of their rent. This 
period will begin on the earlier of the date notice of any rent 
increase was given to the tenants or the date of expiration for the 
contract. The 90-day period will run concurrently with any applicable 
12-month or 180-day period.
    (c) Availability of tenant-based assistance. Subject to the 
availability of amounts provided in advance in appropriations, HUD will 
make tenant-based assistance available under the following 
circumstances:
    (1) If the owner of an eligible project does not extend or renew 
the project-based assistance, any tenant residing in an assisted unit 
on the date of contract expiration will be eligible to receive 
assistance on the later of the date of expiration or the date the 
owner's obligations under paragraph (b) of this section expire; and
    (2) If a request for a Restructuring Plan is rejected under 
Sec. 401.101, Sec. 401.403, or Sec. 401.405, any tenant who is a low-
income family or who resides in a project-based assisted unit on the 
date of Plan rejection will be eligible to receive assistance on the 
later of the date the Restructuring Plan is rejected, or the date the 
owner's obligation under paragraph (b)(2) of this section expires.


Sec. 401.605  Project-based assistance provisions.

    The project-based assistance rents for a restructured project must 
be the restructured rents determined under the Restructuring Plan in 
accordance with Secs. 401.410 or 401.411.


Sec. 401.606  Tenant-based assistance provisions.

    If the Restructuring Plan provides for tenant-based assistance, 
each assisted family residing in a project-based assisted unit when the 
project-based assistance terminates must be offered tenant-based 
assistance under part 982. The rent levels provided in 515(c)(4) of 
MAHRA will apply except for families already receiving tenant-based 
assistance when the project-based assistance terminates.


Sec. 401.607  Contract term.

    The term of the initial and subsequent contract renewals under this 
part, whether for project-based or tenant-based assistance, will be 
determined by the appropriate HUD official.

Subpart F--Owner Dispute of Rejection and Administrative Appeal


Sec. 401.645  How does the owner dispute a notice of rejection?

    (a) Notice of rejection. HUD will notify the owner of the reasons 
for a rejection under Secs. 401.101, 401.402, 401.403, 401.405 or 
401.451. An owner will have 30 days from receipt of this notice to 
provide written objections or to cure the underlying basis for the 
objections. If the owner does not submit written objections or cure the 
underlying basis for the objections during that period, the decision 
will become a final determination under section 516(c) of MAHRA and is 
not subject to judicial review.
    (b) Final decision after objection; right to administrative review. 
If an owner submits written objections or asserts that the underlying 
basis for the objections is cured, after consideration of the matter 
HUD will send the owner a final decision affirming, modifying, or 
reversing the rejection and setting forth the rationale for the final 
decision.


Sec. 401.650  When may the owner make an administrative appeal of a 
final decision under this subpart?

    The owner has a right to make an administrative appeal of the 
following:
    (a) A final decision by HUD under Sec. 401.645(b) (including a 
final decision under Sec. 402.7 of this chapter);
    (b) A decision by HUD and the PAE to offer a proposed Restructuring 
Commitment that the owner does not execute; and
    (c) A decision by HUD to accelerate the second mortgage under 
Sec. 401.461.


Sec. 401.651  Appeal procedures.

    (a) How to appeal. An owner may submit a written appeal to HUD, 
within 10 days of receipt of written notice of the decision, contesting 
the decision and requesting a conference with HUD. At the conference, 
the owner may submit, in person, in writing, or through a 
representative, its reasons for appealing the decision. The HUD or PAE 
official who issued the decision under appeal may participate in the 
conference and submit in person, in writing, or through a 
representative, the basis for the decision.
    (b) Written decision. Within 20 business days after the conference, 
or 20 business days after any agreed upon extension of time for 
submission of additional materials by or on behalf of the owner, HUD 
will advise the owner in writing of the decision to terminate, modify, 
or affirm the original decision.
    (c) Who is responsible for reviewing appeal? HUD will designate an 
official to review any appeal, conduct the conference and issue the 
written decision. The official designated must be one who was neither 
involved in, nor reports to another involved in, making the decision 
being appealed.


Sec. 401.652  No judicial review.

    The reviewing official's decision under Sec. 401.651 is a final 
determination for purposes of section 516(c) of MAHRA and is not 
subject to judicial review.

PART 402--PROJECT-BASED SECTION 8 CONTRACT RENEWAL WITHOUT 
RESTRUCTURING (UNDER SECTION 524(a) OF MAHRA)

Sec.
402.1  What is the purpose of part 402?
402.2  Definitions.
402.3  Contract provisions.
402.4  Contract renewals under section 524(a)(1) of MAHRA.
402.5  Contract renewals under section 524(a)(2) of MAHRA.
402.6  What actions must an owner take to request section 8 contract 
renewal under this part?

[[Page 48954]]

402.7  Refusal to consider an owner's request for a section 8 
contract renewal because of actions or omissions of owner or 
affiliate.
402.8  Tenant protections if an expiring contract is not renewed.

    Authority: 42 U.S.C. 1437f note and 3535(d).


Sec. 402.1  What is the purpose of part 402?

    This part sets out the terms and conditions under which HUD will 
renew project-based section 8 contracts under the authority provided in 
section 524(a)(1) or (2) of MAHRA. Renewal will also be in accordance 
with Sec. 401.601 of this chapter for projects without a HUD-approved 
Restructuring Plan under part 401 of this chapter. This part permits 
renewal notwithstanding part 24 of this title, but subject to section 
516 of MAHRA (see Sec. 402.7).


Sec. 402.2  Definitions.

    The definitions in Sec. 401.2 of this chapter apply to this part.


Sec. 402.3  Contract provisions.

    The provisions of chapter VIII of this title will apply only to the 
extent, if any, provided in the contract. Part 983 of this title will 
not apply.


Sec. 402.4  Contract renewals under section 524(a)(1) of MAHRA.

    HUD may renew any expiring section 8 project-based assistance 
contract at initial rents that do not exceed comparable market rents. 
If the project is eligible for a Restructuring Plan under part 401 of 
this chapter, the owner's request for a renewal will be processed under 
Sec. 401.601 of this chapter to determine whether a Restructuring Plan 
is needed. After comparable market rents have been initially 
established, any future rent adjustments will be determined by using an 
OCAF as provided in Sec. 401.412 of this chapter, except that rents may 
be re-determined using a budget-based rent adjustment from time-to-time 
at the discretion of HUD. OCAF and budget-based adjustments may be 
positive or negative. The term of the initial and subsequent contract 
renewals under this section will be determined by the appropriate HUD 
official.


Sec. 402.5  Contract renewals under section 524(a)(2) of MAHRA.

    (a) Renewal for exception project at owner's request. HUD will 
renew project-based assistance under this section instead of Sec. 402.4 
if requested by the owner of a project described in paragraph (b) of 
this section. The term of the initial and subsequent contract renewals 
under this section will be determined by the appropriate HUD official.
    (b) Exception projects included. This section applies to:
    (1) A project described in section 524(a)(2)(A) through (D) of 
MAHRA; and
    (2) A project described in section 524(a)(2)(E) of MAHRA.
    (c) Initial rent levels for exception projects. If the owner of 
such a project requests renewal of project-based assistance under this 
section, HUD will initially renew the expiring contract at the lesser 
of:
    (1) Existing rents adjusted by an operating cost adjustment factor 
established by HUD (OCAF);
    (2) A budget-based rent determined in accordance with 
Sec. 514(g)(3)(a) through (e) of MAHRA, except that HUD rather than a 
PAE will determine operating expenses and HUD may adjust the debt 
service component to reflect competitive interest rates; or
    (3) In the case of a contract under the section 8 moderate 
rehabilitation program (other than single room occupancy dwellings 
under section 441 of the Stewart B. McKinney Homeless Assistance Act), 
the base rent adjusted by applying an OCAF to the base rent, minus any 
costs associated with debt service, with the OCAF to be applied to 
rents for each unit size assisted under the renewal contracts.
    (d) Rent adjustments. Rent adjustments (either positive or 
negative) for contracts renewed under this section will be determined 
using an operating cost adjustment factor as provided in Sec. 401.412 
of this chapter, except that rents may be redetermined using a budget-
based rent adjustment from time-to-time at the discretion of HUD. A 
budget-based adjustment may include a rent comparability analysis.


Sec. 402.6  What actions must an owner take to request section 8 
contract renewal under this part?

    (a) Timing and content of request. For renewals of contracts with 
expiration dates on or after October 1, 1998, an owner must submit the 
following information to HUD (or to the contract administrator in the 
case of a contract under the moderate rehabilitation program) at least 
3 months before the expiration date of any project-based section 8 
contract on a project or as soon as practicable if the contract expires 
before January 13, 1999:
    (1) A certification that neither the owner nor any affiliate is 
suspended or debarred;
    (2) A comparable market rent analysis (unless the project is 
eligible under Sec. 402.5(b)(1) or does not have a HUD-insured or HUD-
held mortgage, and the owner is not seeking renewal under Sec. 402.4); 
and
    (3) If an owner is seeking contract renewal under Sec. 402.4, the 
prior fiscal year's audited financial statement for the project and an 
owner's evaluation of physical condition as provided in Sec. 401.450 of 
this chapter.
    (b) Interim extension. While a determination of owner eligibility 
for a request for renewal under Sec. 401.4 or Sec. 401.5(b)(2) of this 
chapter is pending, HUD may extend the contract under Sec. 401.600 of 
this chapter except that the term of the extension will be determined 
by HUD in its sole discretion.
    (c) Exception for moderate rehabilitation contracts. Paragraphs (a) 
and (b) of this section do not apply to requests for renewal of section 
8 moderate rehabilitation contracts (other than for single room 
occupancy dwellings under section 441 of the Stewart B. McKinney 
Homeless Assistance Act). Separate instructions for renewal requests 
will be issued by the appropriate HUD official.


Sec. 402.7  Refusal to consider an owner's request for a section 8 
contract renewal because of actions or omissions of owner or affiliate.

    (a) Determination of eligibility. HUD may elect not to consider the 
request for renewal of project-based assistance if, at any time before 
contract renewal:
    (1) The owner or an affiliate is debarred or suspended under part 
24 of this title; or
    (2) HUD determines that the owner or an affiliate has engaged in 
material adverse financial or managerial actions or omissions as 
described in section 516 of MAHRA, including any outstanding violations 
of civil rights laws in connection with any project of the owner or an 
affiliate.
    (b) Dispute and appeal. An owner may dispute a rejection and seek 
administrative review under the procedures in subpart F of part 401 of 
this chapter.
    (c) Consequences of refusal to consider request. If an owner's 
request for renewal of project based assistance is rejected under this 
section, HUD may provide tenant-based assistance under Sec. 401.602 of 
this chapter.


Sec. 402.8  Tenant protections if an expiring contract is not renewed.

    (a) Notice of non-renewal or rent increase. An owner who is not 
eligible for a Restructuring Plan under the Mark-to-Market Program in 
part 401 of this chapter but who fails to renew an expiring contract 
must provide a 180-day notice of non-renewal to tenants

[[Page 48955]]

and HUD as provided in section 8(c)(9) of the United States Housing Act 
of 1937 and a 90-day notice to tenants of any rent increase as provided 
in section 8(c)(8) of that Act. HUD may prescribe the form of the 
notices.
    (b) If an owner does not give timely notice. If an owner does not 
give timely notice of non-renewal or a rent increase, the owner must 
permit the tenants in assisted units to remain in their units, with no 
increase in the tenant portion of their rent, for a period of 180 or 90 
days, whichever is the required period for the notice that was not 
given. Each period will begin on the earlier of the date notice of non-
renewal was given to the tenants and HUD or the date notice of rent 
increase was given to the tenants, whichever applies, or the date of 
expiration for the contract. A 90-day period under this paragraph (b) 
will run concurrently with any 180-day period under this paragraph (b).

    Dated: August 20, 1998.
Andrew Cuomo,
Secretary.
[FR Doc. 98-24284 Filed 9-10-98; 8:45 am]
BILLING CODE 4210-32-P