[Federal Register Volume 64, Number 25 (Monday, February 8, 1999)]
[Rules and Regulations]
[Pages 5939-5949]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2860]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Part 1309

RIN 0970-AB31


Head Start Program

AGENCY: Administration on Children, Youth and Families (ACYF), 
Administration for Children and Families (ACF), HHS.

ACTION: Final rule.

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SUMMARY: The Administration on Children, Youth and Families is issuing 
this final rule to implement the statutory provision that authorizes 
Head Start grantees to use grant funds to purchase facilities in which 
to operate Head Start programs.

EFFECTIVE DATES: March 10, 1999. The information collection 
requirements of Secs. 1309.10, 1309.40 and 1309.41 shall be effective 
on the day they are approved by the Office of Management and Budget 
(OMB). The OMB approval numbers and date of approval of the information 
collection requirements will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Douglas Klafehn, Deputy Associate 
Commissioner, Head Start Bureau, Administration for Children, Youth and 
Families, P.O. Box 1182, Washington, DC 20013; (202) 205-8572.

SUPPLEMENTARY INFORMATION:

I. Program Purpose

    Head Start is authorized under the Head Start Act (42 U.S.C. 9801 
et seq.). It is a national program providing comprehensive 
developmental services to low-income preschool children, primarily age 
three to the age of compulsory school attendance, and their families. 
To help enrolled children achieve their full potential, Head Start 
programs provide comprehensive health, nutritional, educational, social 
and other services. Also, section 645A of the Head Start Act provides 
authority to fund programs for families with infants and toddlers. 
Programs receiving funds under the authority of this section are 
referred to as early Head Start programs.
    Head Start programs are required to provide for the direct 
participation of the parents of enrolled children in the development, 
conduct, and direction of local programs. Parents also receive training 
and education to foster their understanding of and involvement in the 
development of their children. In fiscal year 1997 Head Start served 
approximately 794,000 children through a network of over 2,000 grantee 
and delegate agencies.
    While Head Start is intended to serve primarily children whose 
families have incomes at or below the poverty line, or who receive 
public assistance, Head Start regulations permit up to ten percent of 
the children in local programs to be from families who do not meet 
these low-income criteria. Tribal grantees can exceed this limit under 
certain conditions. The Act also requires that a minimum of ten percent 
of the enrollment opportunities in each program be made available to 
children with disabilities. Such children are expected to participate 
in the full range of Head Start services and activities with their non-
disabled peers and to receive needed special education and related 
services.

II. Purpose of the Rule

    The Administration for Children and Families (ACF) is establishing 
a final rule governing the purchase of facilities by Head Start 
grantees. The purpose of this Rule is to implement the statutory 
authority of Head Start grantees to use grant funds to purchase 
facilities in which to operate Head Start programs. This authority, 
found in section 644(f) of the Head Start Act (42 U.S.C. 9839), was 
granted in October 1992. The Act allows grantees to apply for grant 
funds to purchase facilities to carry out Head Start programs and 
directs the Secretary to establish uniform procedures for Head Start 
agencies to request such funds. Additional authority for this Rule is 
found in section 644(c) of the Head Start Act, which mandates the 
Secretary to prescribe rules or regulations to supplement section 
644(f). In March 1994 Congress added provisions to section 644(f) 
allowing grantees to apply for approval of facility purchases made 
after December 31, 1986.

III. Summary of the Major Provisions of the Final Rule

    A summary the major provisions of the final rule is as follows. The 
rule:
     Specifies what information must be included in the written 
application grantees must submit to request to use grant funds to 
purchase a facility, including what must be included in the cost 
comparison which grantees must submit as part of their application;
     Requires certain measures to be taken to protect the 
Federal interest in facilities purchased in whole or in part with ACF 
grant funds;
     Requires that grantees which acquire facilities with grant 
funds obtain specified types of insurance and maintain the property 
acquired in a manner consistent with the purpose for which funds were 
provided and in compliance with applicable building codes and 
standards; and
     Includes within the definition of ``facility'' modular 
units, and requires grantees which seek funding to purchase a modular 
unit to comply with these regulations, which include provisions 
applicable only to the purchase of modular units.

IV. Rulemaking History

    On December 1, 1994, the Department published a Notice of Proposed 
Rulemaking (NPRM) in the Federal Register (59 FR 61575), proposing to 
establish a rule to implement the

[[Page 5940]]

statutory provision authorizing the use of Head Start grant funds for 
the purchase of facilities to be used to operate Head Start programs. 
Copies of the proposed rule were mailed to all Head Start grantees and 
delegate agencies. Interested persons were given 60 days in which to 
comment on the proposed rule. During the sixty day comment period the 
Department received comments from twelve respondents. The respondents 
included seven Head Start grantees and five public and private agencies 
interested in Head Start facility matters.
    Prior to publication of the NPRM Congress amended the Head Start 
Act to authorize Head Start grantees to use grant funds to construct 
and make major renovations to their facilities. This amendment to the 
Head Start Act, section 644(g), became effective in 1994. Proposed 
procedures to implement this new authority are set out in a Notice of 
Proposed Rulemaking published elsewhere today in this Federal Register. 
The procedures on construction and major renovation when made final 
will amend this final rule so that 45 CFR part 1309 will cover, in one 
single rule, the use of grant funds to purchase, construct and make 
major renovations to Head Start facilities.

Section-by-Section Discussion of the Comments Received

    Of the twelve parties who submitted comments to the NPRM, three 
were general expressions of support for the proposed rule. Only those 
sections for which comments were made or to which technical changes 
were made are discussed below. The discussion of the sections follow 
the order of the NPRM table of contents and a notation is made wherever 
the section designations have been changed or deleted in the final 
rule.

Section 1309.2--Approval of Previously Purchased Facilities

    Comment: We received one comment on the application of these 
procedures to facilities purchased prior to the enactment of the 
statute authorizing the use of grant funds to purchase facilities. The 
respondent states that the wording on previous purchases is confusing 
and the provision itself unfair and should not be included in the rule 
because all previous purchases should have met the requirements in 
place at the time the facilities were purchased.
    Response: In March 1994, Congress added to the Head Start Act the 
provision allowing grantees to apply for facility purchases made after 
December 31, 1986. This requires that the rule refer to both 
prospective purchases and purchases already made, which results in 
wording that is necessarily somewhat awkward in places. To address this 
we have changed the definition of ``Purchase'' Sec. 1309.3 by adding at 
the end ``Purchase also refers to an approved purchase of a facility 
which commenced between December 31, 1986, and October 7, 1992, as 
permitted by the Head Start Act and Sec. 1309.2 of this part''. This 
has allowed the deletion of most of the references to previously 
purchased facilities in the rule. Where clarity of a particular 
provision of the rule required explicit reference to previously 
purchased facilities, that phrase was left in the provision in 
question.

Section 1309.3--Definitions

    Comment: One comment to this section, asking for further definition 
of the phrase ``modular units,'' was received. The comment states that 
in the past many trailers, mobile classrooms, and modular units have 
been used by Head Start grantees, and questions have arisen as to when 
they were to be considered ``equipment'' and when they were considered 
``real property subject to the full facility purchase requirements.''
    Response: Section 644(f) of the Head Start Act, which this rule 
implements, states that the ``Secretary shall establish uniform 
procedures for Head Start agencies to request approval to purchase 
facilities * * * to be used to carry out Head Start programs.'' The Act 
makes no distinction between ``equipment'' and ``real property,'' or 
between temporary and permanent facilities. The policy of this rule, 
which we believe is consistent with the meaning of the Act, is that the 
purchase of modular units is subject to the provisions of the rule if 
they will be used to operate a Head Start program.
    The definition of ``useful life'' as defined in the NPRM is vague 
and has been deleted.
    For clarification purposes, we have added a definition of ``Head 
Start center or a direct support facility for a Head Start program'' 
and made minor edits to several definitions. We revised the definition 
of ``grantee'' to include reference to ``for-profit'' agency in 
accordance with the Head Act Reauthorization Amendments in the Coats 
Human Services Amendments of 1998, Pub. L 105-285.

Section 1309.10--Application

    Comments--General: Several respondents to this section expressed 
concern that grantees might lose a facility they propose to purchase 
because of delays in securing ACF approval of their application. Two 
suggestions were received for dealing with this concern. One respondent 
proposes that there be an expedited approval process for facilities 
which are defined, according to established criteria, as ``at risk of 
being sold.'' The same respondent suggests that we establish 
``parameters'' in making grant awards for facility purchases and allow 
a replacement property meeting these ``parameters'' to be purchased 
within 90 days if the original site is no longer available. Another 
respondent proposes that the application process be divided into two 
stages. The first stage would involve general approval of a facility 
purchase for a particular grantee as a policy matter. At this stage, 
the Department would determine whether the grantee's current space is 
inadequate and whether a waiver of non-federal share would be approved 
if requested, but would not be asked to approve the purchase of an 
actual facility the grantee is proposing to buy. The second stage would 
be a ``deal-specific'' approval, designed to allow decisions on a 
proposed purchase to be made relatively quickly and predictably. In 
this stage, requests for purchase of particular buildings would be 
reviewed, based on cost comparisons, environmental impact studies, and 
the condition of the proposed facility.
    Response: We do not agree that it would be advisable to apply any 
special circumstances for the review of an application for a property 
``at risk of being sold'' as suggested by one respondent. The decisions 
made by the responsible HHS approving official should not be hastened 
by the pressure of another buyer's interest in a property, but should 
be made based upon the merits of the application.
    However, the concern expressed by the respondents that the review 
of applications for facility purchases be conducted expeditiously is 
understandable. In response to these concerns, a new Sec. 1309.12 
entitled ``Timely decisions'' has been added to the final rule. Section 
1309.12 states that ``The responsible HHS official shall promptly 
review and make final decisions regarding completed applications under 
this part.''
    In order to expedite the application review process, we strongly 
encourage all grantees considering the purchase of a facility to 
discuss their facility needs with the responsible HHS official prior to 
submitting the formal application or beginning negotiation for the 
purchase of the facility. As part of these discussions, the grantee and 
HHS approving official would consider whether the grantee's current 
space is

[[Page 5941]]

adequate and whether funds to complete the purchase and meet any 
ongoing financing commitments are available, or would be available at 
the time purchase is made. We believe that as a result of these early 
discussions, the grantee would be in a better position to submit a 
complete application which could receive prompt review.
    Once a formal application is received by ACF, under these final 
rules, ACF would complete the review of the application within 60 days 
of receipt of the application. To the extent that the grantee works 
closely with ACF in this process, the review may be completed in less 
than 60 days. Applicants may contact their Regional Administrator to 
request a review of their initial determination.
    Grantees are cautioned that they should not take any irrevocable 
action, such as entering into a purchase contract, until they have 
received a written confirmation of the Department's final decision that 
Head Start funds may be used to purchase the facility.
    Comment--Section 1309.10(g): We received one comment on paragraph 
(g) of Sec. 1309.10, which concerns grantees which apply for grant 
funds to purchase a facility based on the fact that a lack of 
alternative facilities will prevent the operation of the program. The 
respondent expresses a concern that this criterion is too strict and 
should be changed to allow a purchase if the purchase of the facility 
will improve program operation.
    Response: This respondent's suggestion cannot be adopted. Section 
644(f)(2)(C) of the Head Start Act mandates that a grantee seeking 
approval to use grant funds to purchase a facility demonstrate either 
that the proposed purchase will result in savings when compared to the 
costs that would be incurred to acquire the use of an alternative 
facility to carry out the program, or that there are no alternative 
facilities and the lack of alternative facilities will prevent the 
operation of the program. These two criteria are specific and we are 
thus unable to disregard the language of the statute in favor of the 
much broader criterion suggested in the comment. However, a 
clarification was added to this paragraph which requires that the 
statement explaining how it was determined that there is or was a lack 
of alternative facilities, be supported, whenever possible, by a 
written statement from a licensed real estate professional in the 
grantee's area.
    Comments--Section 1309.10(i): Paragraph (i) of Sec. 1309.10, which 
requires facility purchase applications to include information on the 
effect the purchase would have on the grantee's ability to meet the 
non-Federal share requirement, received one comment, which proposes 
that the non-Federal share requirement be waived for up to three years 
for programs which lose non-Federal contributions as a result of buying 
a facility, and that programs be allowed to use the full amount of non-
federal contributions received in one year for a facility toward 
meeting the requirement for non-Federal share in future years.
    Response: Non-Federal contributions, which are required by section 
640(b) of the Head Start Act, are provided on a budget period basis. 
The commentor is suggesting that grantees who are relying heavily on 
accruing non-Federal share by occupying a building free of cost or at 
below market cost would lose this non-Federal share when purchasing a 
facility and may require several years to establish their required non-
Federal match. However, there is no provision for providing blanket 
waiver requests across budget periods. Waiver requests must be 
submitted annually and are considered on a case-by-case basis against 
the statutory criteria.
    Comment--Section 1309.10(j): A comment on paragraph (j) of 
Sec. 1309.10 asks that we allow the requirement of certification by a 
licensed engineer to be fulfilled by the state official who reviews the 
plans and inspects child care facilities for licensing. The respondent 
states that in rural areas it is sometimes difficult to obtain 
professional services such as those of an engineer.
    Response: The requirement of this paragraph is not that a private 
engineer make the certification, but that a person qualified to do so 
certifies that the building is structurally sound. With this in mind we 
have made a change in the language of this section to allow, in 
addition to licensed engineers, licensed architects to make the 
certification. While this change does not specifically address the 
suggestion made in the comment, it does broaden the categories of 
professionals who may make the certification, which should alleviate 
the difficulty some grantees might have experienced in obtaining this 
service. And, we reiterate that any engineer or architect qualified to 
judge the structural soundness of buildings of this type may make the 
certification. This in no way restricts grantees to using engineers or 
architects from the private sector.
    Comment--Section 1309.10(k): The provision in paragraph (k) of 
Sec. 1309.10 on one-time fees and expenses which are not subject to the 
limit on administrative costs received two comments. One respondent 
suggests that the words ``loan fees and related expenses'' be added to 
the illustrative list of one-time expenses in this paragraph. The other 
respondent states that expenses related to ownership, such as mortgage 
payments and maintenance costs, should be considered program costs not 
subject to the administrative costs limitation. If this cannot be done, 
the respondent states, the Department should recognize that waivers of 
the administrative cost limitation will have to be granted in these 
cases.
    Response: We have adopted the first respondent's suggestion to add 
the words ``loan fees and related expenses'' to the illustrative list 
of one-time expenses in this paragraph. The suggestion of the second 
respondent has not been adopted. Grantees must analyze and categorize 
their costs as either development and administrative or program, 
depending on the nature and function of the expense, but may categorize 
costs as dual benefit costs if they are both administrative and 
programmatic in nature (see 45 CFR 1301.32). Space and related costs 
are frequently dual benefit costs, but categorization of costs must be 
done by each grantee based on the circumstances involved. The granting 
of waivers of the limitation on administrative costs is governed by 45 
CFR 1301.32(g), which limits the granting of such waivers to situations 
in which development and administrative costs are being incurred but 
the provision of program services has not begun or has been suspended.
    Comments--Section 1309.10(n): We received two comments on paragraph 
(n) of Sec. 1309.10, which requires the application to include an 
assessment of the impact of the proposed acquisition on the human 
environment pursuant to the National Environmental Policy Act (NEPA) if 
the acquisition involves significant renovation or a significant change 
in land use. One respondent requested that we define more clearly 
``significant change in land use'' and ``human environment,'' and a 
second respondent asked that we define as clearly as possible when the 
NEPA applies.
    Response: We recognize that Head Start grantees may have little or 
no experience with the NEPA and that more information and guidance is 
needed to help provide an understanding of the law and its implementing 
regulations. This guidance will be furnished to grantees and will 
include a discussion of such terms as ``significant change in land 
use'' and ``human environment.''

[[Page 5942]]

    Since publication of the NPRM a draft report of the Office of 
Inspector General of the Department of Health and Human Services on 
Head Start facility purchases has pointed out that ACF needs to have, 
as part of the information submitted by a grantee seeking approval of 
the use of grant funds to purchase a facility, information concerning 
possible environmental hazards present in the facility and land. The 
draft report states that ``The presence of environmental hazards can 
result in facilities that are unusable because the facilities cannot be 
licensed as safe for children'' and ``cleanup of hazards may be too 
costly and cause delays in using the Head Start facility.'' We agree 
with these statements and have added the phrase ``and a report showing 
the results of tests for environmental hazards present in the facility, 
ground water and soil, (or justification why such testing is not 
necessary)'' to paragraph (n) of Sec. 1309.10 of the final rule.
    Clarifying language was added to paragraph (h) in order to require 
the disclosure of information about ``balloon'' or other unconventional 
mortgage arrangements to ensure that future mortgage obligations can be 
met.

Section 1309.11--Cost Comparison

    Comment--General: A comment was received which proposes that 
grantees which purchase facilities be required to take training in 
facilities management and preventive maintenance, and establish a 
funded reserve of up to five to ten percent of project cost for major 
repairs, with the unexpended balance of the fund from each year carried 
over to the next year.
    Response: We will encourage grantees which purchase facilities to 
use their training and technical assistance funds to purchase needed 
training. The use of grant funds to establish or pay into a reserve or 
contingency fund is prohibited by the Office of Management and Budget 
Circular A-122.
    Comment--Section 1309.11(c): A comment was received proposing to 
add a provision to paragraph (c) of Sec. 1309.11 to increase the 
operating budgets of programs that have spent little or nothing on 
their current facilities. The same respondent suggests that, to 
increase the funds available to pay for facilities, a predictable 
federal source of funds be established to provide equity grants in the 
range of 20 to 25 percent of total project costs.
    Response: Congress, when it amended the Head Start Act to authorize 
the purchase of facilities with Head Start grant funds, did not 
separately appropriate or earmark funds for this purpose. The 
legislative history of this section indicates that it was not the 
intent of Congress to fund facility purchases at the expense of 
enrollment or the provision of services to Head Start children and 
families.
    Comment--Section 1309.11(d): One respondent expressed a concern 
that the cost comparison section does not include any discussion of the 
capitalization of mortgage payments for a facility.
    Response: Paragraph (d)(2) of Sec. 1309.11 specifies mortgage 
payments as an ongoing cost which must be separately delineated in the 
application. Nothing in the cost comparison section or any other part 
of the final rule is meant to discourage grantees from obtaining bank 
or other financing and from using grant funds to pay mortgages (both 
principal and interest). In fact, grantees are encouraged to obtain 
loans to finance facility purchases, since in most cases ACF will be 
unable to provide more than a part of the funds needed to purchase a 
facility unless the debt is amortized.
    Comment--Section 1309.11(e): The ten year period for the cost 
comparison in the case of the proposed purchase of modular units drew a 
comment from one respondent, who states that it is arbitrary to allow a 
twenty year comparison for other-than-modular buildings and only a ten 
year comparison for modular units.
    Response: ACF believes it is reasonable to impose a shorter 
comparison period for the purchase of modular units because they are on 
average less durable than traditional buildings. As was said in the 
preamble to the NPRM, the time periods for the comparison were chosen 
to achieve simplicity and consistency in the preparation and review of 
the applications, taking into account several factors, including the 
expected useful life of the facility and the period of the loan which 
may be needed to make the purchase.
    Comment--Section 1309.11(f): There was one comment to paragraph (f) 
of Sec. 1309.11 which states that if the facility is to be used for 
purposes in addition to the operation of the Head Start program, 
charges for use of the facility must be made by the grantee. The 
Preamble to the NPRM states that this paragraph prohibits shared 
ownership of facilities purchased with Head Start grant funds, and the 
respondent expresses the view that shared ownership should be allowed 
where costs are shared proportionately between the Head Start program 
and other entities.
    Response: As a result of the comments in response to the NPRM, we 
have reconsidered our previous statement that we would not consider 
requests for funding which involved co-ownership of a facility. We will 
consider such proposals under the following circumstances where: the 
federal interest in the property can be fully protected; co-ownership 
will not impair the use of the property for Head Start purposes either 
now or in the future; and co-ownership does not create a prospect that 
the Federal government will be called on to undertake extensive or 
burdensome action to protect its interest in the property. One way to 
meet the first test is for a grantee to propose to purchase ownership 
of a unit in a project organized as condominium. Commercial as well as 
residential facilities can be organized as condominiums. The Head Start 
grantee would own a separate interest in the portion of the facility it 
uses to conduct its program, and a share in the undivided interest in 
the common elements of the project. The separation of the grantee's 
interest in the space which is used for its programs from that of other 
co-owners will limit the difficulties raised by the entanglement of the 
Federal interest with those of the facility's non-grantee owner.
    While we continue to have these concerns about co-ownership, here 
in the final rule we are taking a more flexible approach to this 
question and will allow co-ownership, subject to approval of the 
responsible HHS official. This approval may be withheld if the official 
has reason to question the financial capability of the proposed co-
owner to meet debt obligations it assumes to pay for the purchase.

Section 1309.21--Recording of Federal Interest and Other Protection of 
Federal Interest

    Two comments were received on Sec. 1309.21 of the NPRM. This 
section of the NPRM has been redesignated as Secs. 1309.21 and 1309.22 
in the final rule to separate and clarify the provisions dealing with 
protection of the Federal interest (Sec. 1309.21 of the final rule) and 
those concerning the rights and responsibilities of various parties in 
the case of a grantee's default on a mortgage (Sec. 1309.22 of the 
final rule). Section 1309.22 of the NPRM has been renumbered 
Sec. 1309.23 of the final rule.
    Comment--Section 1309.21(a): There was one comment on paragraph (a) 
of Sec. 1309.21 of the NPRM (redesignated as paragraph (d) in the final 
rule), which concerns the protection of the Federal interest in 
facilities purchased with grant funds. The respondent states that the 
exact nature of the federal interest should be specified in the final 
rule.

[[Page 5943]]

Presumably, the respondent states, the interest will take the form of a 
restrictive covenant running with the land, which would generally not 
affect the lien priority of a lender's acquisition loan, as opposed to 
a lien instrument which could affect the lien priority of a lender's 
loan.
    One respondent states that the final rule should, to the extent 
possible, standardize and describe the procedures ACF will use to 
authorize facility purchases which involve mortgages, provide a 
projected time frame for approval by ACF, and identify the criteria 
(i.e., loan structure and terms) ACF will employ in approving a 
mortgage. The respondent also suggests that the final rule expressly 
state that any lien priorities of HHS are subordinate to those of a 
lender providing an acquisition loan.
    Response: In response to the first comment existing regulations and 
case law establish that the Federal Government has a beneficial 
ownership interest in all funds on hand with the grantee and property 
purchased with grant funds. The Federal Government's beneficial 
ownership interest can affect the lender's priority unless the Federal 
Government subordinates its interest. There has been a practice in 
other grant programs to allow banks to take a first lien position on 
property acquired by a grantee using a blend of grant and mortgage 
funds where necessary to obtain mortgage financing. If ACF and the 
mortgagee or creditor agree to subordinate ACF's Federal interest to 
the mortgagee's or creditor's interest in the property, that agreement 
must be set forth in a written subordination agreement that is signed 
by the responsible HHS official and that complies with 45 CFR 1309.21 
and any other applicable Federal law.
    A new paragraph (a) in Sec. 1309.21 allows for a subordination of 
interest subject to several qualifications. Paragraph (b) of this 
section imposes restrictions on the use and disposition of the property 
and paragraph (c) prohibits the use of the facility for other than the 
purpose for which the facility was funded without the written approval 
of the responsible HHS official. The provisions contained in paragraphs 
(b) and (c) of section 1309.21 are based on the provisions found in 45 
CFR parts 74 and 92 and respond to the comment suggesting that ACF 
explain the requirements for mortgage loan agreements. The new 
Sec. 1309.22 was added to state the requirements for loan agreements in 
assigning rights and responsibilities in the event of grantee's default 
on mortgage, withdrawal or termination.
    In Sec. 1309.21, a new paragraph (f) describes certain provisions 
that must be included in subordination agreements in which the interest 
of the Federal Government in the subject facility has been 
subordinated. (A ``subordination agreement'' is an agreement by which 
one party agrees that its interest in real property should have a lower 
priority than the interest of another party.) The regulations provide 
that, in the event of a default under a mortgage in which the Federal 
Government has subordinated its interest, the lender must notify the 
Department as provided in the regulation, and that the notification 
must include a statement prominently displayed at the top of its first 
page that ``The Federal Interest in certain real property or equipment 
used for the Head Start program may be at risk, immediately give this 
notice to the appropriate government official.'' This notification is 
necessary to ensure that the Federal Government will receive adequate 
notice that the Federal interest in the property is at risk.
    Comment--Section 1309.21(d)--(Section 1309.31(b) and (c) of the 
final rule): One comment was received on this paragraph, which concerns 
protection of the Federal interest in modular units which are purchased 
with grant funds and which are not permanently affixed to the land, or 
which are affixed to land which is not owned by the grantee. The 
respondent states that the final rule should more clearly define ``not 
permanently affixed to the land,'' and should clarify what approvals 
would be needed in the event the modular unit must be moved to another 
location.
    Response: Paragraph (d) of Sec. 1309.21 of the NPRM has been 
redesignated paragraph (b) of Sec. 1309.31 of the final rule with the 
paragraph that comprised Sec. 1309.31 in the NPRM designated as 
paragraph (a). This rule is not the appropriate place to try to 
precisely state when modular units are or are not ``permanently affixed 
to the land.'' For our purposes, the plain meaning of these words will 
suffice. The respondent's second point, concerning the moving of 
modular units to another location, raises a valid question and has been 
addressed by the addition of the sentence ``A modular unit which has 
been approved for installation in one location may not be moved to 
another location without the written permission of the responsible HHS 
official'' to new paragraph (c) in this section.
    Comment--Section 1309.21(e)--(Section 1309.22 in final rule): One 
respondent states that the final rule should, to the extent possible, 
standardize and describe the procedures ACF will use to authorize 
facility purchases which involve mortgages, provide a projected time 
frame for approval by ACF, and identify the criteria (i.e., loan 
structure and terms) ACF will employ in approving a mortgage.
    Response: Section 1309.21(e) of the NPRM has been substantially 
revised. This section of the final rule reflects suggestions made in 
the comment and our experience dealing with lenders who have loaned 
money to Head Start grantees to finance the purchase of facilities. 
Section 1309.22(a) of the final rule contains provisions required in a 
mortgage agreement, signed by a grantee which is borrowing money to 
finance the purchase of a facility, regarding circumstances in which 
the grantee defaults on the loan or ceases to be the designated Head 
Start agency. The purpose of this section is to make sure that Head 
Start facilities continue to be available to provide services to 
children and families in the community and are not lost to Head Start 
because of the failure of a grantee to meet its mortgage commitments, 
or because the grantee leaves the program. In carrying out this purpose 
we have sought to be reasonable and fair to all parties involved, 
including the lender, while protecting HHS's interest in the property.
    The final rule includes a description of the terms which must be 
included in the mortgage agreement for a facility purchased with Head 
Start grant funds. These are agreements which must be followed if the 
grantee defaults or the grantee agency ceases to be the designated Head 
Start agency. While no attempt is made to specify all the terms which 
such agreements must contain, Sec. 1309.22(a) does establish certain 
required provisions of these agreements. For example, such agreements 
must provide that in the case of a default by the grantee ACF has the 
right to ensure the default is cured by the grantee or another agency 
designated by ACF. The successor grantee would assume obligations and 
rights under the loan and mortgage agreements with the lender. The 
assumption of obligations under the loan is subject to the approval of 
the mortgagee or creditor, which may not be unreasonably withheld. ACF 
is requiring that the agreement provides ACF 60 days upon notification 
by the grantee of default to ensure the default is cured. The 60 day 
period is an increase over the 30 day period required in the NPRM. ACF 
is lengthening the required period before foreclosure because it is 
likely that the agency will need the full 60 days in some instances

[[Page 5944]]

to intervene. The Head Start program's response will require 
determining why the grantee did not fulfill its obligations under the 
mortgage, whether it has the capacity to resolve the problem without 
the intervention of the Head Start program, whether additional 
assistance is needed, and whether the grantee's failure is grounds for 
summary suspension. If the grantee is suspended, an interim grantee 
will have to be identified which will continue to operate the Head 
Start program.
    ACF has revised the language in paragraph (c) to provide that the 
mortgagee or creditor shall pay ACF that percentage of the proceeds 
from the foreclosure sale of the property attributable to the Federal 
share in the value of the property. The new language more clearly 
states the requirement for calculating the amount of the sale proceeds 
due the Federal Government. The Federal share of a facility purchased 
with Head Start grant funds and sold after foreclosure by a lender is 
calculated based on the amount of the Federal contribution to the cost 
of acquiring the facility. For a facility purchased through use of a 
mortgage the amount of the Federal contribution includes grant funds 
used for the down payment on the facility, payments on the principal 
and interest on the mortgage and the cost of any renovations.

Section 1309.22--Insurance, Bonding and Maintenance (Sec. 1309.23 of 
Final Rule)

    Comments: One comment to Sec. 1309.22(a)(i) of the NPRM (now 
Sec. 1309.23 of the final rule) states that it is assumed that this 
provision is not intended to prevent lenders from obtaining standard 
mortgagee title insurance coverage to safeguard their interests in the 
facility. A second respondent suggests that, in addition to title 
insurance and physical destruction insurance, other insurance, such as 
general liability and builder's risk insurance, will be needed to 
reflect ownership and contractual obligations. This comment states that 
physical destruction insurance should cover the ``replacement value'' 
rather than the ``full appraised value of the facility,'' since an 
appraisal may not reflect the actual cost of the facility and its 
contents.
    Response: The assumption of the first respondent is correct. With 
respect to the second comment, we have changed Sec. 1309.22(a) of the 
NPRM (Sec. 1309.23(a) of the final rule) to require grantees to provide 
the same insurance coverage as they provide to other property owned by 
them, but not less than the coverage delineated in this rule, and 
physical destruction insurance for the full replacement value of the 
facility. General liability insurance is covered by 45 CFR 1301.11(a), 
which requires private Head Start grantees and delegate agencies to 
carry reasonable amounts of student accident insurance, liability 
insurance for accidents on their premises, and transportation liability 
insurance.

Section 1309.33--Inspection

    Comment: This section, which concerns the inspection of modular 
unit installations, received one comment, which suggests that we allow 
state officials to do these inspections. The reason is the same as the 
reason for the comment made to Sec. 1309.10(j), above, that in rural 
areas it may be difficult to obtain engineers to do the inspections.
    Response: Our response here is the same as it for the similar 
comment to Sec. 1309.10(j): We have changed the language of the NPRM to 
allow architects as well as engineers to make the inspections, but have 
not otherwise altered the NPRM. As with Sec. 1309.10(j), we wish to 
make it clear that any engineer or architect qualified to judge the 
soundness of the modular unit and its installation--whether working in 
the private or public sector--may make the certification.

Section 1309.41--Record Retention

    Comment: A comment was received stating that it should be 
explicitly stated that the record-keeping requirements of this section 
are not meant to apply to lenders.
    Response: The NPRM states that all records pertinent to the 
purchase must be maintained by the grantee for the period stated. Since 
this is clear by itself, we state here only that this requirement 
applies to Head Start grantees only and has no application to lenders.

Section 1309.42--Audit of Mortgage; Five Year Appraisal--(Reference to 
Five Year Appraisal Has Been Deleted From the Final Rule)

    Comment: A comment on this section, which requires an appraisal of 
the value of a facility purchased with grant funds at least once every 
five years, states that the appraisal will be unnecessary and a poor 
use of program money.
    Response: Upon reconsideration, we agree with the respondent that 
the requirement of an appraisal of the property at least once every 
five years is unnecessary and not the best use of scarce grant funds. 
We have deleted this requirement.

Section 1309.43--Use of Grant Funds to Pay Fees

    We received no comments on this section and made no technical 
changes.

Section 1309.44--Program Income (Deleted From the Final Rule)

    Comments: Two comments on this section disagree with the mandate of 
this section that program income, other than income from the sale of 
equipment or real property purchased with grant funds, be deducted from 
the total allowable costs of the budget period in which the income was 
produced.
    Response: Generally, grantees are authorized to use program income 
under the additional costs alternative (which allows the use of the 
income to further eligible program objectives) unless there are 
persuasive reasons not to allow this alternative. The NPRM, however, 
limits the use of income derived from a facility purchased with grant 
funds to the deductive alternative, which requires the income to be 
deducted from the grantee's total costs for the budget period. Upon 
reflection, we are no longer convinced that there are persuasive 
reasons to limit grantees' flexibility on the use of this program 
income as a general rule, and this section has been deleted to reflect 
this change. Questions regarding program income from the sale or rental 
of real property purchased with grant funds will be answered by 
reference to the applicable provisions of 45 CFR part 74 or part 92. We 
wish to encourage grantees to collocate services with other service 
providers in the community and to use the facility, and program income 
generated from it, to further the goals and objectives of the program.

Section 1309.45--Independent Analysis (Redesignated Sec. 1309.44 in 
This Final Rule)

    Comment: One comment to this section was received, which proposed 
that this analysis should be conducted within 45 days to avoid the risk 
of grantees losing lenders and facilities.
    Response: We appreciate that the independent analysis should not 
unduly delay a decision on the application. On the other hand if there 
were an unusually complicated transaction presented it would not be 
advisable to abandon the analysis because the 45 day period had 
expired. We therefore view this 45 day period as a goal which we expect 
to achieve in the future except under unusual circumstances.
    This section has been redesignated Sec. 1309.44 as a result of the 
deletion of the NPRM section on program income.

[[Page 5945]]

V. Impact Analysis

Executive Order 12866

    Executive Order 12866 requires that regulations be drafted to 
ensure that they are consistent with the priorities and principles set 
forth in the Executive Order. The Department has determined that this 
rule is consistent with these priorities and principles. This Final 
Rule implements the statutory authority for Head Start grantees to 
apply to use grant funds to purchase facilities. Congress made no 
additional appropriation to fund this new authority, however, and so 
any money spent toward the purchase of facilities for Head Start 
programs is money that would have been spent otherwise by the program 
or other programs from the same appropriation amount.

Regulatory Flexibility Act of 1980

    The Regulatory Flexibility Act (5 U.S.C. CH. 6) requires the 
Federal government to anticipate and reduce the impact of rules and 
paperwork requirements on small businesses. For each rule with a 
``significant economic impact on a substantial number of small 
entities'' an analysis must be prepared describing the rule's impact on 
small entities.
    Small entities are defined by the Act to include small businesses, 
small non-profit organizations and small governmental entities. While 
these regulations would affect small entities, they would not affect a 
substantial number. Furthermore, the cost of the application process 
and other activities undertaken as a result of these regulations will 
not have a significant economic impact because the Head Start program 
covers 80% of the allowable costs of grantees under the program. The 
remaining costs associated with compliance are part of the share of 
costs grantees agree to meet from their own resources when they enter 
the Head Start program. For these reasons, the Secretary certifies that 
this rule will not have a significant impact on substantial numbers of 
small entities.

Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995, Pub. L. 104-13, all 
Departments are required to submit to the Office of Management and 
Budget (OMB) for review and approval any reporting or record-keeping 
requirement inherent in a proposed or final rule. This final rule 
contains information collection and record-keeping requirements in 
Secs. 1309.10 (application), 1309.40 (copies of documents), and 1309.41 
(record retention) which have been submitted to OMB for review and 
approval in accordance with the Paperwork Reduction Act.
    The respondents to the information collection requirements in the 
rule are Head Start grantees who may be State or local non-profit 
agencies or organizations. The Department needs to require this 
collection of information in order to assure that grantees who apply 
for approval to purchase a facility with Head Start funds have followed 
certain necessary legal and administrative procedures. Also these 
collection of information requirements are necessary for monitoring 
purposes.
    The grantees who will be affected by these requirements will be 
those who request approval and are approved to purchase facilities for 
the purpose of operating a Head Start program. Based on the average 
number of grantees who have requested approval from the Department 
since the statutory authority became effective, October 7, 1992, the 
estimated annual number of grantees that will be affected is 200.
    The actual submittal of an application (Sec. 1309.10) from a 
grantee to purchase a facility is a one time activity which is preceded 
by a number of preparatory activities. We estimate the time it will 
take to prepare the application in accordance with the requirements of 
this rule is 40 hours per grantee, calculated over a period of time. On 
an annual basis, the total hours estimated for submittal of 
applications from grantees are 8,000.
    For copies of documents (Sec. 1309.40) and record retention 
(Sec. 1309.41) activities, we estimate the number of hours to be 1 hour 
per grantee and the total annual hours for all grantees who submit 
applications to be 200.
    The Administration for Children and Families (ACF) will consider 
comments by the public on these proposed collections of information in:
     Evaluating whether the proposed collections are necessary 
for the proper performance of the functions of ACF, including whether 
the information will have practical utility;
     Evaluating the accuracy of ACF's estimate of the burden of 
the proposed collections of information;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond.
    OMB is required to make a decision concerning the collection of 
information contained in this final rule between 30 and 60 days after 
publication of this document in the Federal Register. Therefore, a 
comment is best assured of having its full effect if OMB receives it 
within 30 days of publication. Written comments to OMB for the proposed 
information collection should be sent directly to the following: Office 
of Management and Budget, Paperwork Reduction Project, 725 17th Street, 
NW, Washington, DC 20503, Attn: Wendy Taylor.

List of Subjects in 45 CFR Part 1309

    Acquisition, Facilities Purchase, Head Start, Real Property, 
Modular Units.

(Catalog of Federal Domestic Assistance Program Number 93.600, 
Project Head Start)

    Dated: August 3, 1998.
Olivia A. Golden,
Assistant Secretary for Children and Families.

    Approved: October 28, 1998.
Donna E. Shalala,
Secretary.

    For the reasons set forth in the Preamble, 45 CFR Chapter XIII is 
amended by adding Part 1309 as follows:

PART 1309--HEAD START FACILITIES PURCHASE

Subpart A--General

Sec.
1309.1  Purpose and application.
1309.2  Approval of previously purchased facilities.
1309.3.  Definitions.

Subpart B--Application Procedures

1309.10  Application.
1309.11  Cost comparison.
1309.12  Timely decisions.

Subpart C--Protection of Federal Interest

1309.20  Title.
1309.21  Recording of Federal interest and other protection of 
Federal interest.
1309.22  Rights and responsibilities in the event of grantee's 
default on mortgage, or withdrawal or termination.
1309.23  Insurance, bonding, and maintenance.

Subpart D--Modular Units

1309.30  General.
1309.31  Site description.
1309.32  Statement of procurement procedure for modular units.
1309.33  Inspection.
1309.34  Costs of installation of modular unit.

Subpart E--Other Administrative Provisions

1309.40  Copies of documents.
1309.41  Record retention.
1309.42  Audit of mortgage.
1309.43  Use of grant funds to pay fees.
1309.44  Independent analysis.

    Authority: 42 U.S.C. 9801 et seq.

Subpart A--General


Sec. 1309.1  Purpose and application.

    This part prescribes regulations implementing sections 644(c) and 
644(f)

[[Page 5946]]

of the Head Start Act, 42 U.S.C. 9801 et seq., as it applies to 
grantees operating Head Start programs under the Act. It describes the 
procedures for applying for Head Start grant funds to purchase 
facilities in which to operate Head Start programs, and the conditions 
under which grant funds may be awarded to purchase facilities. It also 
specifies the measures which must be taken to protect the Federal 
interest in facilities purchased with Head Start grant funds.


Sec. 1309.2  Approval of previously purchased facilities.

    Head Start grantees which purchased facilities after December 31, 
1986, and before October 7, 1992, may request retroactive approval of 
the purchase by submitting an application which conforms to the 
requirements of this Part and the Act. Grant funds may be used to pay 
facility purchase costs incurred only after the responsible HHS 
official approves an application for a previously purchased facility.


Sec. 1309.3  Definitions.

    As used in this part,
    ACF means the Administration for Children and Families in the 
Department of Health and Human Services, and includes the Regional 
Offices.
    Acquire means to purchase in whole or in part with Head Start grant 
funds through payments made in satisfaction of a mortgage agreement 
(both principal and interest), as a down payment, for professional 
fees, for closing costs, and for any other costs associated with the 
purchase of the property that are usual and customary for the locality.
    Act means the Head Start Act, 42 U.S.C. section 9801, et seq.
    ACYF means the Administration on Children, Youth and Families, a 
component of the Administration for Children and Families in the 
Department of Health and Human Services.
    Facility means a structure such as a building or modular unit 
appropriate for use by a Head Start grantee to carry out a Head Start 
program.
    Grant funds means Federal financial assistance received by a 
grantee from ACF to administer a Head Start program pursuant to the 
Head Start Act.
    Grantee means the local public, private non-profit or for-profit 
agency designated to operate a program pursuant to 42 U.S.C. 9836 or 42 
U.S.C. 9840a.
    Head Start center or a direct support facility for a Head Start 
program means a facility used primarily to provide Head Start services 
to children and their families, or for administrative or other 
activities necessary to the conduct of the Head Start program.
    Modular unit means a portable prefabricated structure made at 
another location and moved to a site for use by a Head Start grantee to 
carry out a Head Start program.
    Purchase means to buy an existing facility, either outright or 
through a mortgage. Purchase also refers to an approved purchase of a 
facility, commenced between December 31, 1986 and October 7, 1992, as 
permitted by the Head Start Act, and by Sec. 1309.2 of this part.
    Real property means land, including land improvements, structures 
and appurtenances thereto, excluding movable machinery and equipment.
    Responsible HHS official means the official who is authorized to 
make the grant of financial assistance to operate a Head Start program, 
or such official's designee.

Subpart B--Application Procedures


Sec. 1309.10  Application.

    A grantee which proposes to use grant funds to purchase a facility 
must submit a written application to the responsible HHS official. The 
application must include the following information:
    (a) A legal description of the site of the facility, and an 
explanation of the appropriateness of the location to the grantee's 
service area, including a statement of the effect that purchase of the 
facility has had or will have on the transportation of children to the 
program, on the grantee's ability to collaborate with other child care, 
social services and health providers, and on all other program 
activities and services.
    (b) Plans and specifications of the facility, including information 
on the size and type of structure, the number and a description of the 
rooms and the lot on which the building is located (including the space 
available for a playground and for parking).
    (c) The cost comparison described in Sec. 1309.11 of this part.
    (d) If minor renovations are necessary to make the facility 
suitable to carry out the Head Start program, a description of the 
renovations, and the plans and specifications required by paragraph (b) 
of this section for the facility as it will be after renovations are 
complete.
    (e) The intended uses of the facility, including information 
demonstrating that the facility will be used principally as a Head 
Start center or a direct support facility for a Head Start program. If 
the facility is to be used for purposes in addition to the operation of 
the Head Start program, the grantee must state what portion of the 
facility is to be used for such other purposes.
    (f) Assurance that the facility complies (or will comply after 
completion of the renovations described in paragraph (d) of this 
section) with local licensing and code requirements, the access 
requirements of the Americans with Disabilities Act (ADA), if 
applicable, and section 504 of the Rehabilitation Act of 1973. The 
grantee also will assure that it has met the requirements of the Flood 
Disaster Protection Act of 1973, if applicable.
    (g) If the grantee is claiming that the lack of alternative 
facilities will prevent or would have prevented operation of the 
program, a statement of how it was determined that there is or was a 
lack of alternative facilities. This statement must be supported, 
whenever possible, by a written statement from a licensed real estate 
professional in the grantee's service area. If a grantee requesting 
approval of the previous purchase of a facility is unable to provide 
such statements based on circumstances which existed at the time of the 
purchase, the grantee and the licensed real estate professional may use 
present conditions as a basis for making the determination.
    (h) The terms of any proposed or existing loan(s) related to the 
purchase of the facility and the repayment plans (detailing balloon 
payments or other unconventional terms, if any) and information on all 
other sources of funding of the purchase, including any restrictions or 
conditions imposed by other funding sources.
    (i) A statement of the effect that the purchase of the facility 
would have on the grantee's meeting of the non-Federal share 
requirement of section 640(b) of the Head Start Act, including whether 
the grantee is seeking a waiver of its non-Federal share obligation 
under that section of the Act.
    (j) Certification by a licensed engineer or architect that the 
building is structurally sound and safe for use as a Head Start 
facility. If minor renovations are necessary to make the facility 
suitable for use to carry out a Head Start program, the application 
must include a certification by a licensed engineer or architect as to 
the cost and technical appropriateness of the proposed renovations.
    (k) A statement of the effect that the purchase of a facility would 
have on the grantee's ability to meet the limitation on development and 
administrative costs in section 644(b) of the Head Start Act. One-time 
fees and expenses necessary to the purchase, such as the down payment, 
the cost of necessary minor renovations, loan fees and related

[[Page 5947]]

expenses, and fees paid to attorneys, engineers, and appraisers, are 
not considered to be administrative costs.
    (l) A proposed schedule for acquisition, renovation and occupancy 
of the facility.
    (m) Reasonable assurances that the applicant will obtain, or in the 
case of a previously purchased facility, has obtained a fee simple or 
such other estate or interest in the site sufficient to assure 
undisturbed use and possession for the purpose of operating the Head 
Start program. If the grantee proposes to purchase a facility without 
also purchasing the land on which the facility is situated, the 
application must describe the easement, right of way or land rental it 
will obtain or has obtained to allow it sufficient access to the 
facility.
    (n) An assessment of the impact of the proposed acquisition on the 
human environment if it involves significant renovation or a 
significant change in land use, including substantial increases in 
traffic in the surrounding area due to the provision of Head Start 
transportation services, pursuant to section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) and its 
implementing regulations (40 CFR parts 1500-1508), and a report showing 
the results of tests for environmental hazards present in the facility, 
ground water, and soil (or justification why such testing is not 
necessary). In addition, such information as may be necessary to comply 
with the National Historic Preservation Act of 1966 (16 U.S.C. 470f) 
must be included.
    (o) Assurance that the grantee will comply with the requirements of 
the Uniform Relocation Assistance and Real Property Acquisition 
Policies Act of 1970, as amended (42 U.S.C. 4601 et seq. and 49 CFR 
part 24), and information about the costs that may be incurred due to 
compliance with this Act.
    (p) A statement of the share of the cost of purchase that will be 
paid with grant funds.
    (q) For a grantee seeking approval of a previous purchase, a 
statement of the extent to which it has attempted to comply and will be 
able to comply with the provisions of Sec. 1309.22(a) of this part.
    (r) Such additional information as the responsible HHS official may 
require.


Sec. 1309.11  Cost comparison.

    (a) A grantee proposing to purchase a facility with grant funds 
must submit a detailed estimate of the cost of the proposed purchase, 
including the cost of any necessary minor renovations, and must compare 
the cost of purchasing the proposed facility to the cost of renting an 
alternative facility.
    (b) All costs of purchase and ownership must be identified, 
including, but not limited to, professional fees, minor renovation 
costs, moving expenses, additional transportation costs, maintenance, 
taxes, insurance, and easements, rights of way or land rentals. An 
independent appraisal of the current value of the facility proposed to 
be purchased or previously purchased, made by a professional appraiser, 
must be included.
    (c) The comparison described in paragraph (a) of this section must 
compare the cost of the proposed facility to the cost of the facility 
currently used by the grantee, unless the grantee has no current 
facility, will lose the use of its current facility, intends to 
continue to use its current facility after it purchases the new 
facility, or has shown to the satisfaction of the responsible HHS 
official that its existing facility is inadequate. Where the grantee's 
current facility is not used as the alternate facility, the grantee 
must use for comparison a facility (or facilities) available for lease 
in the grantee's service area and which are usable as a Head Start 
facility (meaning a facility large enough to meet the foreseeable needs 
of the Head Start grantee, and which complies with local licensing and 
code requirements and the access requirements of the Americans With 
Disabilities Act, if applicable, and section 504 of the Rehabilitation 
Act of 1973) or which can be made useable through minor renovation, the 
cost of which shall be included in the cost comparison. In the case of 
an application for approval of the previous purchase of a facility, the 
cost of the present facility must be compared to the cost of the 
facility used by the grantee before purchase of its current facility. 
If the facility used by the grantee before the purchase of its present 
facility was deemed inadequate by the responsible HHS official, the 
grantee had no previous facility, or if the grantee continued to use 
its previous facility after the current facility was purchased the 
alternative facility shall be an available, appropriate facility (or 
facilities) of comparable size that was available for rent in the 
grantee's service area at the time of its purchase of the current 
facility.
    (d) The grantee must separately delineate the following expenses in 
the application:
    (1) One-time costs, including, but not limited to, the down 
payment, professional fees, moving expenses, the cost of site 
preparation and installation of a modular unit, and the costs of 
necessary minor renovations; and
    (2) Ongoing costs, including, but not limited to, mortgage 
payments, insurance premiums, maintenance costs, and property taxes. If 
the grantee is exempt from the payment of property taxes, this fact 
must be stated.
    (e) The period of comparison is twenty years, except that for the 
purchase of a modular unit the period of comparison is ten years. For a 
proposed purchase the period of comparison begins on the date on which 
the proposal is made. For approvals of previous purchases, the period 
of comparison begins on the date the purchase of the facility took 
place.
    (f) If the facility is to be used for purposes in addition to the 
operation of the Head Start program, the cost of use of that part of 
the facility used for such other purposes must be allocated in 
accordance with applicable Office of Management and Budget cost 
principles.


Sec. 1309.12  Timely decisions.

    The responsible HHS official shall promptly review and make final 
decisions regarding completed applications under this part.

Subpart C--Protection of Federal Interest


Sec. 1309.20  Title.

    Title to facilities acquired with grant funds vests with the 
grantee upon acquisition, subject to the provisions of this part.


Sec. 1309.21  Recording of Federal interest and other protection of 
Federal interest.

    (a) The Federal Government has an interest in all real property and 
equipment purchased with grant funds for use as a Head Start facility. 
The responsible HHS official may agree to subordinate the Federal 
interest in such property to that of a lender which finances the 
purchase of the property subject to the conditions set forth in 
paragraph (f) of this section.
    (b) Facilities acquired with grant funds may not be mortgaged or 
used as collateral, or sold or otherwise transferred to another party, 
without the written permission of the responsible HHS official.
    (c) Use of the facility for other than the purpose for which the 
facility was funded, without the express written approval of the 
responsible HHS official, is prohibited.
    (d) Immediately upon purchasing a facility with grant funds, or 
receiving permission to use funds for a previously purchased facility, 
the grantee shall

[[Page 5948]]

record a Notice of Federal Interest in the appropriate official records 
for the jurisdiction in which the facility is located. The Notice shall 
include the following information:
    (1) The date of the award of grant funds for the purchase of the 
property to be used as a Head Start facility, and the address and legal 
description of the property to be purchased;
    (2) That the grant incorporated conditions which include 
restriction on the use of the property and provide for a Federal 
interest in the property;
    (3) That the property may not be used for any purpose inconsistent 
with that authorized by the Head Start Act and applicable regulations;
    (4) That the property may not be mortgaged or used as collateral, 
sold or otherwise transferred to another party, without the written 
permission of the responsible HHS official;
    (5) That these grant conditions and requirements cannot be altered 
or nullified through a transfer of ownership; and
    (6) The name (including signature) and title of the person who 
completed the Notice for the grantee agency, and the date of the 
Notice.
    (e) Grantees must meet all of the requirements in 45 CFR parts 74 
or 92 pertaining to the purchase and disposition of real property, or 
the use and disposal of equipment, as appropriate.
    (f) In subordinating its interest in a facility purchased with 
grant funds, the responsible HHS official does not waive application of 
paragraph (d) of this section and Sec. 1309.22. A written agreement by 
the responsible HHS official to subordinate the Federal interest must 
provide:
    (1)(i) The lender shall notify the Office of the Regional 
Administrator, Administration for Children and Families, the Office of 
the Commissioner, Administration on Children, Youth and Families, 
Washington, D.C., and the Office of the General Counsel, Department of 
Health and Human Services, Washington, DC, or their successor agencies, 
immediately, both telephonically and in writing of any default by the 
Head Start grantee;
    (ii) Written notice of default must be sent by registered mail 
return receipt requested; and,
    (iii) The lender will not foreclose on the property until at least 
60 days after the required notice by the lender has been sent.
    (2) Such notice will include:
    (i) The full names, addresses, and telephone numbers of the lender 
and the Head Start grantee;
    (ii) The following statement prominently displayed at the top of 
the first page of the notice: ``The Federal Interest in certain real 
property or equipment used for the Head Start Program may be at risk. 
Immediately give this notice to the appropriate government official'';
    (iii) The date and nature of the default and the manner in which 
the default may be cured; and
    (iv) In the event that the lender will be exercising its remedy of 
foreclosure or other remedies, the date or expected date of the 
foreclosure or other remedies.
    (3) Head Start grantees which purchase facilities with respect to 
which the responsible HHS official has subordinated the Federal 
Interest to that of the lender must keep the lender informed of the 
current addresses and telephone numbers of the agencies to which the 
lender is obligated under paragraph (b) of this section to give notice 
in the event of a default.


Sec. 1309.22  Rights and responsibilities in the event of grantee's 
default on mortgage, or withdrawal or termination.

    (a) The mortgage agreement, or security agreement in the case of a 
modular unit which is proposed to be purchased under a chattel 
mortgage, shall provide in the case of default by the grantee or the 
withdrawal or termination of the grantee from the Head Start program 
that ACF may intervene. In the case of a default, the mortgage 
agreement or security agreement must provide that ACF may intervene to 
ensure that the default is cured by the grantee or another agency 
designated by ACF and that the lender shall accept the payment of money 
or performance of any other obligation by ACF's designee, for the 
grantee, as if such payment of money or performance had been made by 
the grantee. The agreement shall also provide that ACF will have a 
period of 60 days after notification by the grantee of default in which 
to intervene to attempt to cure the default. The agreement shall 
further provide that in the event of a default, or the withdrawal or 
termination of the grantee the mortgage may be assumed by an 
organization designated by ACF. The mortgagee or creditor will have the 
right to approve the organization designated to assume the mortgage, 
but such approval will not be withheld except for good reason. The 
provisions required for inclusion in mortgages must be included in the 
mortgages of previously purchased facilities unless a convincing 
justification for not doing so is shown by the Head Start grantee.
    (b) The grantee must immediately provide the responsible HHS 
official with both telephonic and written notification of a default of 
any description on the part of the grantee under a real property or 
chattel mortgage.
    (c) In the event that a default is not cured and foreclosure takes 
place, the mortgagee or creditor shall pay ACF that percentage of the 
proceeds from the foreclosure sale of the property attributable to the 
Federal share as defined in 45 CFR 74.2, or, if part 92 is applicable, 
to ACF's share as defined in 45 CFR 92.3. If ACF and the mortgagee or 
creditor have agreed that ACF's Federal interest will be subordinated 
to the mortgagee's or creditor's interest in the property, that 
agreement must be set forth in a written subordination agreement that 
is signed by the responsible HHS official and that complies with 
Sec. 1309.21 and any other applicable Federal law.


Sec. 1309.23  Insurance, bonding and maintenance.

    (a) At the time of acquiring a facility or receiving approval for 
the previous purchase of a facility, the grantee shall obtain insurance 
coverage for the facility which is of the same type as the coverage it 
has obtained for other real property it owns, which includes student 
liability insurance and which at least meets the requirements of the 
coverage specified in paragraphs (a)(1) and (2) of this section as 
follows:
    (1) A title insurance policy which insures the fee interest in the 
facility for an amount not less than the full appraised value as 
approved by ACF, or the amount of the purchase price, whichever is 
greater, and which contains an endorsement identifying ACF as a loss 
payee to be reimbursed if the title fails. If no endorsement naming ACF 
as loss payee is made, the grantee is required to pay ACF the title 
insurance proceeds it receives in the event of title failure; and
    (2) A physical destruction insurance policy, including flood 
insurance where appropriate, which insures the full replacement value 
of the facility from risk of partial and total physical destruction. 
The insurance policy is to be maintained for the period of time the 
facility is owned by the grantee.
    (b) The grantee shall submit copies of such insurance policies to 
ACF within five days of acquiring the facility or receiving approval 
for the previous purchase of a facility. If the grantee has not 
received the policies in time to submit copies within this period, it 
shall submit evidence that it has obtained the appropriate insurance

[[Page 5949]]

policies within five days of acquiring the facility or receiving 
approval for the previous purchase of a facility, and it shall submit 
copies of the policies within five days of its receipt of them.
    (c) The grantee must maintain facilities acquired with grant funds 
in a manner consistent with the purposes for which the funds were 
provided and in compliance with State and local government property 
standards and building codes.

Subpart D--Modular Units


Sec. 1309.30  General.

    In addition to the special requirements of Secs. 1309.31-1309.34 of 
this part, the proposed purchase or request for approval of a previous 
purchase of a modular unit is subject to all of the requirements of 
this part with the following exceptions:
    (a) Section 1309.10(j) of this part, which requires a certification 
by a licensed engineer or architect of the structural soundness of a 
facility prior to approval of an application for grant funds, is 
replaced by Sec. 1309.33; and
    (b) Section 1309.21(d) of this part does not apply to the proposed 
purchase of modular units if the land on which the unit is installed is 
not owned by the grantee.


Sec. 1309.31  Site description.

    (a) An application for the purchase or approval of a previous 
purchase of a modular unit must state specifically where the modular 
unit will be installed, and whether the land on which the modular unit 
will be installed will be purchased by the grantee. If the grantee does 
not propose to purchase land on which to install the modular unit or if 
the previously purchased modular unit is located on land not owned by 
the grantee, the application must state who owns the land on which the 
modular unit is or will be situated and describe the easement, right-
of-way or land rental it will obtain or has obtained to allow it 
sufficient access to the modular unit.
    (b) Modular units which are purchased with grant funds and which 
are not permanently affixed to land, or which are affixed to land which 
is not owned by the grantee, must have posted in a conspicuous place 
the following notice: ``On (date), the Department of Health and Human 
Services (DHHS) awarded (grant number) to (Name of grantee). The grant 
provided Federal funds for conduct of a Head Start program, including 
purchase of this modular unit. The grant incorporated conditions which 
included restrictions on the use and disposition of this property, and 
provided for a continuing Federal interest in the property. 
Specifically, the property may not be used for any purpose other than 
the purpose for which the facility was funded, without the express 
written approval of the responsible DHHS official, or sold or 
transferred to another party without the written permission of the 
responsible DHHS official. These conditions are in accordance with the 
statutory provisions set forth in 42 U.S.C. 9839; the regulatory 
provisions set forth in 45 CFR part 1309, 45 CFR part 74 and 45 CFR 
part 92; and Administration for Children and Families' grants policy.''
    (c) A modular unit which has been approved for purchase and 
installation in one location may not be moved to another location 
without the written permission of the responsible HHS official.


Sec. 1309.32  Statement of procurement procedure for modular units.

    (a) An application for the purchase of a modular unit must include 
a statement describing the procedures which will be used by the grantee 
to purchase the modular unit.
    (b) This statement must include a copy of the specifications for 
the unit which is proposed to be purchased and assurance that the 
grantee will comply with procurement procedures in 45 CFR parts 74 and 
92, including assurance that all transactions will be conducted in a 
manner to provide, to the maximum extent practical, open and free 
competition. A grantee requesting approval of a previous purchase of a 
modular unit also must include a copy of the specifications for its 
unit.


Sec. 1309.33  Inspection.

    A grantee which purchases a modular unit with grant funds or 
receives approval of a previous purchase must have the modular unit 
inspected by a licensed engineer or architect within 15 calendar days 
of its installation or approval of a previous purchase, and must submit 
to the responsible HHS official the engineer's or architect's 
inspection report within 30 calendar days of the inspection.


Sec. 1309.34  Costs of installation of modular unit.

    Consistent with the cost principles referred to in 45 CFR part 74 
and 45 CFR part 92, all reasonable costs necessary to the installation 
of a modular unit the purchase of which has been approved by the 
responsible HHS official are payable with grant funds. Such costs 
include, but are not limited to, payments for public utility hook-ups, 
site surveys and soil investigations.

Subpart E--Other Administrative Provisions


Sec. 1309.40  Copies of documents.

    Certified copies of the deed, loan instrument, mortgage, and any 
other legal documents related to the purchase of the facility or to the 
discharge of any debt secured by the facility must be submitted to the 
responsible HHS official within ten days of their execution.


Sec. 1309.41  Record retention.

    All records pertinent to the purchase of a facility must be 
retained by the grantee for a period equal to the period of the 
grantee's ownership of the facility plus three years.


Sec. 1309.42  Audit of mortgage.

    Any audit of a grantee which has purchased a facility with grant 
funds shall include an audit of any mortgage or encumbrance on the 
facility. Reasonable and necessary fees for this audit are payable with 
grant funds.


Sec. 1309.43  Use of grant funds to pay fees.

    Consistent with the cost principles referred to in 45 CFR part 74 
and 45 CFR part 92, reasonable fees and costs associated with and 
necessary to the purchase of a facility (including reasonable and 
necessary fees and costs incurred prior to the submission of an 
application under Sec. 1309.10 of this part or prior to the purchase of 
the facility) are payable with grant funds, but require prior, written 
approval of the responsible HHS official.


Sec. 1309.44  Independent analysis.

    (a) The responsible HHS official may direct the grantee applying 
for funds to purchase a facility to obtain an independent analysis of 
the cost comparison submitted by the grantee pursuant to Sec. 1309.11 
of this part, or the statement under Sec. 1309.10(g) of this part, or 
both, if, in the judgment of the official, such an analysis is 
necessary to adequately review a proposal submitted under this part.
    (b) The analysis shall be in writing and shall be made by a 
qualified, disinterested real estate professional in the community in 
which the property proposed to be purchased is situated.
    (c) Section 1309.43 of this part applies to payment of the cost of 
the analysis.

[FR Doc. 99-2860 Filed 2-5-99; 8:45 am]
BILLING CODE 4184-01-P