[Federal Register Volume 64, Number 247 (Monday, December 27, 1999)]
[Rules and Regulations]
[Pages 72410-72412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33360]



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Part III





Department of Housing and Urban Development





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24 CFR Part 290



Up-Front Grants and Loans in the Disposition of Multifamily Projects; 
Final Rule

  Federal Register / Vol. 64, No. 247 / Monday, December 27, 1999 / 
Rules and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 290

[Docket No. FR-4310-F-02]
RIN 2502-AH12


Up-Front Grants and Loans in the Disposition of Multifamily 
Projects

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: The purpose of this rule is to establish generally applicable 
requirements to govern the use of up-front grants and loans in the 
disposition of HUD-owned multifamily properties by defining the 
projects, sales, and purchasers eligible for up-front grants and loans, 
and setting both a maximum per-unit and overall cap for up-front grant 
amounts.

DATES: Effective Date: January 26, 2000.

FOR FURTHER INFORMATION CONTACT: Marc Harris, Supervisory Project 
Manager, Office of Portfolio Management in Multifamily Housing, 
Department of Housing and Urban Development, Room 6164, 451 7th Street 
SW, Washington, DC 20410, telephone (202) 708-2654. Hearing or speech-
impaired individuals may call 1-800-877-8339 (Federal Information Relay 
Service TTY). (Other than the ``800'' number, these are not toll-free 
numbers.)

SUPPLEMENTARY INFORMATION:

I. Statutory Background and Legislative Changes Since the Proposed 
Rule

    As discussed in the preamble of the proposed rule, HUD's statutory 
authority to manage and dispose of HUD-held multifamily housing 
projects is contained in section 207(k) and (l) of the National Housing 
Act, in section 203 of the Housing and Community Development Amendments 
of 1978 (HCDA 1978) and in section 204 of the Departments of Veterans 
Affairs and Housing and Urban Development, and Independent Agencies 
Appropriations Act, 1997, (approved September 26, 1996, Pub. L. 104-
204), (FY 1997 Appropriations Act). The Department's authority and 
discretion in matters relating to the disposition of multifamily 
housing projects was expanded by section 204 to permit HUD to manage 
and dispose of multifamily properties owned by the Secretary, ``on such 
terms and conditions as the Secretary may determine''. Section 213 of 
the Departments of Veterans Affairs and Housing and Urban Development, 
and Independent Agencies Appropriations Act, 1998 (approved October 27, 
1997, Pub. L. 105-65) (FY 1998 Appropriations Act) added to the 
flexible authority under section 204 that the General Insurance Fund 
(GIF) could be used to provide grants and loans for the necessary costs 
of rehabilitation or demolition, but limited this use of the GIF to FYs 
1997 and 1998. Section 206 of the Departments of Veterans Affairs and 
Housing and Urban Development, and Independent Agencies Appropriations 
Act, 1999, (approved October 21, 1998, Pub. L. 105-276), (FY 1999 
Appropriations Act) and section 537 of the Departments of Veterans 
Affairs and Housing and Urban Development, Independent Agencies 
Appropriations Act, 2000, (approved October 20, 1999, Pub. L. 106-74), 
(FY 2000 Appropriations Act) extend this authority for FY 1999 and FY 
2000, respectively.
    Section 537 of the FY 2000 Appropriations Act also adds 
``construction on the properties (which shall be eligible whether 
vacant or occupied)'' as an eligible activity for a grant or loan 
provided from the General Insurance Fund. Before this amendment, 
Section 8 project-based assistance was the only permissible source of 
up-front grant funding for total rebuilding. As explained in the 
preamble of the proposed rule, the availability of up-front grants for 
any eligible activity is dependent upon the funding made available. If 
Section 8 project-based assistance is not available, or if the 
authorization to use the General Insurance Fund is not extended beyond 
FY 2000, up-front grants and loans will not be available as an option 
in the disposition of multifamily projects.

II. Public Comment on the Proposed Rule

    On July 15, 1999 at 64 FR 38284, HUD published a proposed rule to 
establish generally applicable requirements to govern the use of up-
front grants and loans in the disposition of HUD-owned multifamily 
properties. Four public comments were received on the proposed rule. 
The comments are summarized below, organized according to the sections 
of the proposed rule and, as appropriate, to subject areas within 
individual sections.

Section 290.27(a)

    Comment: The preservation of low-income housing should be given as 
much consideration as cost effectiveness.
    HUD response: The goals of cost-effectiveness and preservation of 
low-income housing are not in conflict, but are complimentary to each 
other. HUD has a finite amount of resources at its disposal, and the 
goal of providing low-income housing is best served by using those 
resources in the most efficient manner. Sales with project-based 
Section 8 and/or up-front grants are not the only way to preserve 
affordable housing. Even though a project may not be eligible for an 
up-front grant, its potential cash flow may be sufficient to allow HUD 
to sell it with requirements that it be repaired and maintained as 
affordable housing, without project-based Section 8 or an up-front 
grant.
    Comment: It is not clear if the up-front grant is made available in 
lieu of project-based rental assistance. The rule should be clarified. 
If that is the intent of the rule, there should be an exception where 
the revitalization of the project is sufficiently crucial to the future 
of the surrounding community to warrant an investment of both up-front 
grants and project-based assistance.
    HUD response: Up-front grants are not made in lieu of project-based 
rental assistance. Both an up-front grant and project-based assistance 
may be provided in combination. The rule is clarified to make this 
point explicit. Up-front grants can also be provided in sales where the 
project is sold with repair and affordability provisions and tenant 
based assistance, such as Rental Housing Vouchers, for eligible 
tenants. The Department prefers the latter option as it provides the 
residents with choice, which they do not have if project-based Section 
8 assistance is used, and assures that the project is repaired and 
maintained as affordable housing.

Section 290.27(b)

    Comment: Project eligibility criteria should allow HUD to provide 
up-front grants to projects HUD finds to be essential to the 
revitalization of its community, even where all of the criteria are not 
strictly met.
    HUD response: HUD agrees that this would be an appropriate factor 
to consider in determining the eligibility of a project for an up-front 
grant. Section 290.27(b)(1) is revised to provide that a HUD finding 
that a project is essential, as affordable housing, to the 
revitalization of its community as an alternative to the requirement 
that 50% of the units in the project must be occupied by very low-
income residents at the time a disposition plan is approved.
    Comment: Flexibility should be provided in the manner in which the 
percentage of very low-income tenants is determined. For example, if 
information is available on only 70% of

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tenants, the 50% requirement should apply only as to them.
    HUD response: HUD disagrees with this comment. When HUD owns a 
project, HUD will have information on all of the tenants. However, this 
final rule provides additional flexibility by adopting the procedure, 
discussed immediately above, of finding a project to be essential to 
the revitalization of its community as an alternative to the 50% low-
income tenant requirement.
    Comment: The vacancy rate should be 6% rather than 4% because 
markets can change dramatically over just a few years. Further, the 
vacancy rate for ``tight housing markets'' under the Multifamily 
Assisted Housing Reform and Affordability Act (MAHRAA) is 6%, and the 
same rate should apply in this rule. In addition, the standard is too 
vague to permit implementation because the relevant market is 
undefined, and data sources permitting evaluation of ``habitable, 
affordable housing'' are not readily available. Overall rental vacancy 
rates under Census data are generally not useful since they are an 
inaccurate indicator of housing submarkets where properties are 
located. The grant is limited to situations where local governments 
have already determined the need, by virtue of the locality to match 
HUD's up-front grant.
    HUD response: HUD disagrees. The vacancy rate used in this rule is 
taken from the definition of sufficient habitable, affordable, rental 
housing currently at 24 CFR 290.3, which deals specifically with the 
disposition of multifamily housing properties and which was subject to 
public review and comment before being adopted.

Section 290.27(c)

    Comment: Up-front grants should also be available in a negotiated 
sale to an existing tenant group with a viable ownership plan or to 
tenant-endorsed, non-profit purchasers committed to long-term 
affordability. To avoid more complicated transactions involving more 
parties and greater transaction costs, HUD should retain flexibility to 
offer a nonprofit purchaser an up-front grant or loan in connection 
with a non-competitive purchase. The proposed rule erodes the 
preference in sec. 203(c)(2)(D) and Sec. 290.13 for the non-competitive 
sale of HUD-owned properties to nonprofit organizations. Also, resident 
council purchasers or nonprofit corporations that have received the 
endorsement of more than 51% of the occupied households in the project 
should be eligible to receive up-front grants in negotiated sales 
without the requirement of a competitive selection process.
    HUD response: To the extent possible, the Department seeks to 
obtain the best purchasers for projects which HUD decides need an up-
front grant. In the past, most up-front grants were awarded on a 
negotiated basis; however, this did not, in all cases, result in the 
strongest purchasers being obtained. Based on this experience, HUD has 
determined that the best way to sell these projects with up-front 
grants is to let potential parties know of the availability of 
projects, and allow them to compete for their purchase. Tenant-endorsed 
and non-profit purchasers committed to long-term affordability should 
be able to prove their track history and provide management and 
development plans which will rank highly in such competitions.
    HUD wants to find the best possible purchaser while at the same 
time considering the interests of tenants and non-profit parties. The 
issue of non-competitive sales has always been a difficult one, 
especially when more than one party is interested in purchasing a 
property. The Department seeks to establish a process under which it 
would be evident to everyone that a purchaser was, in fact, the best 
purchaser, but such a result would not be likely unless HUD seeks 
proposals from more than a single purchaser. If the Department does not 
invite competition of some sort, it will never know if a better owner 
could have been attracted. HUD is willing to spend the time and the 
effort necessary for competitions to obtain the best purchasers.
    The Department is also seeking viable alternatives to shorten the 
selection process by considering a sales process which would pre-
qualify potential non-profit purchasers. Such pre-qualified purchasers 
might be able to partner up with tenant groups, and limited equity 
partners, to take ownership of projects.

Section 290.27(d)

    Comment: The rule should contain an exception to the limit on the 
amount of the up-front grant in cases where the property anchors a 
struggling neighborhood that would suffer if the project were not 
maintained as affordable housing.
    HUD response: The Department is concerned that exceptions would 
soon become the rule and, therefore, intends to hold fast to the 
spending limits established in the rule.

III. Changes in the Final Rule

    Consistent with the discussion in sections I. and II. of this 
preamble, above, and as discussed in this section, below, this final 
rule makes the following changes to the July 15, 1999 proposed rule:
    To clarify the applicability of the flexible authority conferred 
under section 204 of the FY 1997 Appropriations Act, Sec. 290.1 is 
revised to state that HUD may follow any other method of disposition, 
as determined by the Secretary, and the U.S. Code citation (12 U.S.C. 
1715z-11a) is added to the authority line for part 290.
    Section 290.27(a) is revised to clarify that both an up-front grant 
and project-based assistance may be provided in combination, as long as 
the result would be more cost-efficient than the use of the maximum 
permissible project-based assistance alone.
    Section 290.27(b)(1) is revised to include a HUD finding that a 
project is essential, as affordable housing, to the revitalization of 
its community as an alternative to the requirement that 50% of the 
units in the project must be occupied by very low-income residents at 
the time a disposition plan is approved.
    Section 290.27(c)(1) is revised to clarify that in a negotiated 
sale with an up-front grant or loan to a governmental entity, the 
governmental entity must take title to the project.
    Section 290.27(d) is revised to clarify that demolition and 
environmental hazard remediation are included in the eligible total 
development costs.

IV. Findings and Certifications

Paperwork Reduction Act Statement

    The information collection requirements under 24 CFR part 290 for 
the disposition of multifamily housing projects have been approved by 
the Office of Management and Budget in accordance with the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501-3520), and assigned OMB control 
number 2502-0204. This rule does not contain additional information 
collection requirements. An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless the collection displays a valid control number.

Environmental Impact

    At the time of publication of the proposed rule, 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. 4332). The proposed rule is adopted by this final rule without 
significant change. Accordingly, the initial finding of no significant 
impact remains applicable, and is available for

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public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the 
office of the Rules Docket Clerk at the above address.

Regulatory Planning and Review

    The Office of Management and Budget has reviewed this rule under 
Executive Order 12866 (captioned ``Regulatory Planning and Review'') 
and determined that this rule is a ``significant regulatory action'' as 
defined in section 3(f) of the Order (although not an economically 
significant regulatory action under the Order). Any changes made to 
this rule as a result of that review are identified in the docket file, 
which is available for public inspection during regular business hours 
(7:30 a.m. to 5:30 p.m.) at the Office of the General Counsel, Rules 
Docket Clerk, Room 10276, U.S. Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Secretary, in accordance with provisions of the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), has reviewed this rule before 
publication and by approving it certifies that it will not have a 
significant economic impact on a substantial number of small entities. 
These requirements address only one aspect (up-front grants) of the 
requirements governing the management and disposition of HUD-owned 
multifamily housing projects, and should not affect the ability of 
small entities, relative to larger entities, to bid for and acquire 
projects that HUD determines to sell. In the proposed rule, HUD 
specifically solicited comment to elicit issues of importance to small 
entities. No comments were received on this issue.

Executive Order 13132, Federalism

    This rule does not have Federalism implications and does not impose 
substantial direct compliance costs on State and local governments or 
preempt State law within the meaning of Executive Order 13132.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Program number and title 
is 14.156, Lower Income Housing Assistance Program (Section 8).

List of Subjects in 24 CFR Part 290

    Low- and moderate-income housing, Mortgage insurance, Reporting and 
recordkeeping requirements.

    Accordingly, for the reasons stated in the preamble, part 290 of 
title 24 of the Code of Federal Regulations is amended as follows:

PART 290--DISPOSITION OF MULTIFAMILY PROJECTS AND SALE OF HUD-HELD 
MULTIFAMILY MORTGAGES

    1. The part heading for 290 is revised as set forth above.
    2. The authority citation for 24 CFR part 290 is revised to read as 
follows:

    Authority: 12 U.S.C. 1701z-11, 1701z-12, 1713, 1715b, 1715z-1b, 
1715z-11a; 42 U.S.C. 3535(d) and 3535(i).

    3. Section 290.1 is revised to read as follows:


Sec. 290.1  Applicability.

    The requirements of this part supplement the requirements of 12 
U.S.C. 1701z-11 for the management and disposition of multifamily 
housing projects and the sale of HUD-held multifamily mortgages. The 
goals and objectives of this part are the same as the goals and 
objectives of 12 U.S.C. 1701z-11, which shall be referred to in this 
part as ``the Statute.'' With respect to the disposition of multifamily 
projects under subpart A, HUD may follow any other method of 
disposition, as determined by the Secretary.
    4. A new section 290.27 is added to subpart A to read as follows:


Sec. 290.27  Up-front grants and loans.

    (a) General. HUD may provide up-front grants and loans for 
rehabilitation, demolition, rebuilding and other related development 
costs as part of the disposition of a multifamily housing project that 
is HUD-owned, upon making a determination that such a grant or loan, 
plus any additional project-based assistance made available, would be 
more cost-effective than the use of the maximum permissible project-
based rental assistance alone.
    (b) Eligible projects. An up-front grant or loan can be made 
available in the sale of a HUD-owned multifamily housing project that 
meets all of the following requirements:
    (1) Has more than 50% of the units in the project occupied by very 
low-income residents at the time a disposition plan is approved by HUD, 
or that HUD determines is essential, as affordable housing, to the 
revitalization of its community;
    (2) Is located in a housing market or submarket in which there is 
not sufficient habitable, affordable, rental housing, as defined in 
Sec. 290.3;
    (3) Will generate, after rehabilitation or rebuilding, sufficient 
rental income in a competitive market to cover all operating expenses, 
meet after sale debt service requirements, fund required reserves and 
throw off positive cash flow;
    (4) Will provide affordable housing for at least 20 years or the 
term of the loan, whichever is shorter, after the rehabilitation and/or 
rebuilding is completed; and
    (5) Meets such other requirements, including deed restrictions, 
loan provisions, and monetary penalties for non-performance, as HUD may 
determine are appropriate on a case-by-case basis.
    (c) Eligible sales and purchasers. (1) Negotiated sales to 
governmental entities. A negotiated sale of a project with an up-front 
grant or loan can only be made to the unit of general local government, 
which includes public housing agencies, in the area in which the 
project is located; or a State agency designated by the chief executive 
officer of the State in which the project is located; or an agency of 
the Federal government. The governmental entity in such a sale must 
take title to the project.
    (2) Other sales and purchasers. All sales which provide up-front 
grants or loans to entities other than those described in paragraph 
(c)(1) of this section must be conducted through a competitive 
selection process. All general and limited partnerships or their 
nominees, joint ventures or other entities assembled for purposes of 
purchasing the project and which have a governmental entity as a 
partner or other participant are considered profit motivated purchasers 
and not governmental entities, whether or not there is a non-profit, 
public, corporate or individual general partner.
    (d) Up-front grant or loan amount. The maximum that HUD will fund 
per project in an up-front grant or loan is 50 percent of total 
development cost (TDC), or $40,000 per affordable, finished unit, 
whichever amount is less. TDC covers demolition, environmental hazard 
remediation, construction materials, artisan services, professional 
services, developers services, and overhead, relocation and operating 
losses that are incurred to plan, perform and complete repairs or 
rebuilding.

    Dated: December 17, 1999.
William Apgar,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 99-33360 Filed 12-23-99; 8:45 am]
BILLING CODE 4210-29-P