[Federal Register Volume 65, Number 56 (Wednesday, March 22, 2000)]
[Rules and Regulations]
[Pages 15452-15498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6728]



[[Page 15451]]

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

Part III





Department of Housing and Urban Development





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



24 CFR Parts 401 and 402



Multifamily Housing Mortgage and Housing Assistance Restructuring 
Program (Mark-to-Market); Final Rule

  Federal Register / Vol. 65, No. 56 / Wednesday, March 22, 2000 / 
Rules and Regulations  

[[Page 15452]]


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

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 401 and 402

[Docket No. FR-4298-F-07]
RIN 2502-AH09


Multifamily Housing Mortgage and Housing Assistance Restructuring 
Program (Mark-to-Market)

AGENCY: Office of Multifamily Housing Assistance Restructuring, HUD.

ACTION: Final rule.

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

SUMMARY: This final rule implements the Mark-to-Market Program through 
which section 8 rents for multifamily projects with HUD-insured or HUD-
held mortgages will be reduced. Currently, the Program is operating 
under the authority of an interim rule that took effect on October 11, 
1998. The purpose of the Program is to preserve low-income rental 
housing affordability while reducing the long-term costs of Federal 
rental assistance, including project-based assistance, and minimizing 
the adverse effect on the FHA insurance funds. A separate final rule 
will be published for those sections of the interim rule that govern 
renewal of section 8 project-based assistance contracts for projects 
outside of the Mark-to-Market Program.

EFFECTIVE DATE: April 21, 2000.

FOR FURTHER INFORMATION CONTACT: Dan Sullivan, Public Policy Analyst, 
Office of Multifamily Assistance Restructuring, Department of Housing 
and Urban Development, 1280 Maryland Ave., Suite 4000, Washington DC 
20024, 202-708-0001. (This is not a toll-free number.) For hearing-and 
speech-impaired persons, this number may be accessed via TTY by calling 
the Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background
II. Comments Received on Part 401
III. Changes Made to Part 401 in Final Rule
IV. Findings and Certifications

I. Background

A. Mark-to-Market

    HUD issued an interim rule on September 11, 1998 (63 FR 48926) to 
implement subtitles A and D of MAHRA (the Multifamily Assisted Housing 
Reform and Affordability Act of 1997, title V of Pub. L. 105-65 
(approved October 27, 1997), 42 U.S.C. 1437f note.
    MAHRA authorized a new Mark-to-Market Program designed to preserve 
low-income rental housing affordability while reducing the long-term 
costs of Federal rental assistance, including project-based assistance 
from HUD, for certain multifamily rental projects. The projects 
involved are projects with: (1) HUD-insured or HUD-held mortgages; and 
(2) contracts for project-based rental assistance from HUD, primarily 
through the section 8 program, for which the average rents for assisted 
units exceed the rent of comparable properties. The program objectives 
will be accomplished by (1) reducing project rents to no more than 
comparable market rents (with certain exceptions discussed below), (2) 
restructuring the HUD-insured or HUD-held financing so that the monthly 
payments on the first mortgage can be paid from the reduced rental 
levels, (3) performing any needed rehabilitation of the project, and 
(4) ensuring competent management of the project. The restructured 
project will be subject to long-term use and affordability 
restrictions.
    MAHRA is intended to provide a long-term solution to the rapidly 
growing cost to the Federal Government of assisting affordable rental 
housing. Over 900,000 housing units in approximately 10,000 multifamily 
projects have been financed with FHA-insured mortgages and supported by 
project-based section 8 housing assistance payment (HAP) contracts. In 
many cases, these HAP contracts currently provide for rents for 
assisted units that substantially exceed the rents for comparable 
unassisted units in the local market. Starting in Fiscal Year 1996, 
those contracts began to expire, and Congress and the Administration 
began providing 1-year extensions of expiring contracts. While annual 
HAP contract extensions for these projects maintained an important 
affordable housing resource, they came at great expense. Every year 
more contracts expired, compounding the cost of annual extensions.
    To begin to address this growing problem, Congress authorized 
demonstration programs beginning with section 210 of the Departments of 
Veterans Affairs and Housing and Urban Development, and Independent 
Agencies Appropriations Act, 1996 (see HUD notices regarding the 
demonstrations published at 61 FR 34664 (July 2, 1996), 61 FR 28757 
(July 25, 1996), 62 FR 3566, (January 23, 1997) and 63 FR 36130, (July 
1, 1998)). MAHRA builds on the demonstration programs with similar 
objectives and many similar provisions, but also some significant 
differences.
    Organizationally, MAHRA established within HUD a new Office of 
Multifamily Housing Assistance Restructuring (OMHAR) to develop and 
actively manage, administer, and oversee the Mark-to-Market Program 
through a decentralized structure of Participating Administrative 
Entities (PAEs). OMHAR has established the framework of the Program 
through an interim rule, this final rule, and an Operating Procedures 
Guide, and is managing the program by selecting and monitoring 
Participating Administrative Entities (PAEs). In recognition of limited 
HUD resources, MAHRA gives PAEs the role of negotiating with the owners 
of individual projects and developing the Mortgage Restructuring and 
Rental Sufficiency Plans (Restructuring Plans) that will establish the 
future responsibilities of the owner, the PAE and HUD for projects that 
are marked-to-market. MAHRA also contains substantive differences from 
the previous demonstrations. For example, it includes projects with 
HUD-held mortgages in addition to HUD-insured mortgages and requires a 
second mortgage with deferred payment from net cash flow after 
accounting for all project expenses.
    The preamble to the interim rule outlined implementation steps 
taken through September 11, 1998. Since then, the Senate confirmed 
President Clinton's appointment of Ira G. Peppercorn as the Director of 
OMHAR. OMHAR is currently hiring staff, and has established its 
Headquarters at 1280 Maryland Avenue SW, Suite 4000, Washington D.C. 
20024. OMHAR Regional Offices have been established in New York, 
Chicago, and San Francisco. A Regional Office co-located in OMHAR 
Headquarters has full responsibility for the Southeast.
    Before publication of this final rule, HUD was required to conduct 
at least three public forums at which organizations representing 
various groups may express views concerning HUD's proposed disposition 
of recommendations from those groups (specifically, the recommendations 
for certain provisions of MAHRA that were implemented in Secs. 401.200, 
401.201, and 401.420 of the interim rule.) The Department conducted 
these forums in New York, Chicago, and San Francisco on October 1, 
1998. Forum participants representing a variety of interests made 
presentations that expanded and clarified written comments on both the 
matters covered in the section identified above, and other topics 
related to the Department's implementation of the Mark-to-Market 
Program. The vast majority of the issues discussed at the forums have 
been raised in one or more written public comments and will be 
addressed in the context of the written submissions. Thus, the issues 
raised at

[[Page 15453]]

the public forums will not be independently addressed in the preamble 
to this final rule. Written public comments in response to the Interim 
Rule were due October 26, 1998. In addition to the public forums, OMHAR 
convened a focus group on November 18, 1998, in Washington D.C. This 
meeting was helpful to OMHAR in hearing discussion and debate between 
commenters concerning several controversial policy issues contained in 
the regulations.
    HUD issued a Request for Qualifications (RFQ) for eligible entities 
interested in being Participating Administrative Entities, 63 FR 44102, 
August 17, 1998. A bidders conference was held August 27, 1998, and 
submissions were due September 16, 1998. OMHAR identified 52 Public 
Entity applicants and 11 Non-Public applicants as meeting the PAE 
technical qualifications. All Public Entity applicants were informed by 
January 19, 1999, and all Non-Public applicants were informed by July 
2, 1999. OMHAR provided an initial technical assistance briefing for 
potential PAEs on January 12, and 13, 1999. OMHAR has conducted an 
orientation session for each PAE after its Portfolio Restructuring 
Agreement (PRA) was signed. Each PAE also participated in one of five 
2-day technical assistance sessions addressing underwriting issues. 
OMHAR will conduct additional training for PAEs in the upcoming months. 
OMHAR is continuing to negotiate PRAs with the public PAEs that have 
not yet executed a PRA. OMHAR expects each asset submitted by an owner 
for restructuring to be allocated to a PAE by the end of 1999.
    MAHRA authorizes $10 million per year of technical assistance 
funding to tenant and non-profit groups, and public entities. These 
funds will be used to build tenant capacity to participate meaningfully 
in the Mark-to-Market program by organizing and training (OTAG grants), 
and to provide technical assistance to tenants of specific Mark to 
Market properties (ITAG grants). The initial funding for FY 1999 was 
awarded through the Department's SuperNOFA process, and grant 
agreements were executed in January 1999. OMHAR conducted training for 
the ITAG and OTAG grantees on November 30, December 1, and 2, 1998.
    A general brochure explaining the basic program features is being 
prepared and will be distributed to tenant groups and other interested 
stakeholders. Once published, copies may be obtained by calling the 
Multifamily Housing Clearinghouse at 1-800-685-8470, or downloaded from 
OMHAR's Webpage at http://www.hud.gov/omhar. OMHAR and the Office of 
Housing conducted a distance learning seesion on September 21, 1999. In 
addition to the training already conducted, OMHAR will be conducting 
distance learning and on-site training for PAEs, HUD Field Offices, and 
other interested parties in the upcoming months.
    The Mark-to-Market Program Operating Procedures Guide has been 
completed and made available to the public. OMHAR will make additional 
information on the Mark-to-Market Program available on its Webpage. 
Among other information, OMHAR has provided a list of addresses of 
OMHAR Regional Offices with jurisdiction over the Program, a list of 
PAEs that have been selected, the list of assets assigned to PAEs, and 
a list of Intermediary Technical Assistance Grant (ITAG) and Outreach 
and Training Grant (OTAG) providers and contact persons for technical 
assistance grants related to Mark-to-Market Program restructuring.

B. Renewing Section 8 Project-Based Assistance Without Mark-to-Market 
Restructuring

    Section 524 of MAHRA and part 402 of the interim rule authorize 
renewal of expiring section 8 project-based assistance contracts for 
projects without Restructuring Plans under the Mark-to-Market Program, 
including projects that are not eligible for Plans and eligible 
projects for which the owners request contract renewals without Plans. 
At this final rule stage, we are separating parts 401 and 402. Minor 
changes are made in this final rule to Secs. 402.1, 402.4, and 402.6. 
The rest of interim part 402 continues in effect until other changes to 
part 402 are published later as a separate final rule.

C. Changes in Legislation

    After MAHRA became law, Congress enacted the Departments of 
Veterans Affairs and Housing and Urban Development, and Independent 
Agencies Appropriations Act, 1999 (Pub. L. 105-276, approved October 
21, 1998) and the Departments of Veterans Affairs and Housing and Urban 
Development, and Independent Agencies Appropriations Act 2000 (Pub. L. 
106-74, approved October 20, 1999). The first law amended the 
underlying statutory authorization for some provisions in the interim 
rule. HUD issued two corrections to the interim rule, on October 15, 
1998 (63 FR 55333) and December 28, 1998 (63 FR 71372). The second 
correction included one change to part 402 to incorporate a provision 
of Pub. L. 105-276. Other changes needed to reflect Pub. L. 105-276 are 
included in this final rule and discussed in Section III of this 
preamble.
    Pub. L. 106-74 also changed the underlying statutory authorization 
for some provisions in the interim rule. The most extensive changes 
affect provisions in part 402 and will be dealt with in separate 
rulemaking. Statutory changes related to part 401 are included in this 
final rule, as discussed in part III of this preamble, to the extent 
possible in a final rule.
    In deciding what statutory changes can and should be reflected in 
this final rule, HUD considered its general rulemaking procedures in 24 
CFR part 10, the provisions of section 502 and section 503 of Pub. L. 
106-74, and the provisions of section 522 of MAHRA. Section 503 makes 
the new changes to section 524 of MAHRA effective immediately upon 
enactment (October 20, 1999) and states that the authority to issue 
regulations (e.g., in section 502) may not be construed to affect the 
effectiveness or applicability of provisions such as section 524. The 
newly-effective section 524(g) of MAHRA applies the amended section 524 
to all contract expirations or terminations on October 1, 1999 or 
afterwards. Thus, HUD must promptly take appropriate action that 
recognizes that some of the matters covered in interim part 402 have 
changed.
    Section 502, however, requires that any implementing regulations 
that the Secretary determines ``may or will affect tenants of federally 
assisted housing'' may be issued only after notice and comment 
rulemaking. Ordinarily, HUD has the discretion under 24 CFR part 10 to 
issue substantive changes to regulations for effect, without notice and 
comment rulemaking (i.e., through an interim or final rule), if HUD 
determines that a public comment period before effectiveness is 
unnecessary, impracticable, or contrary to the public interest. Section 
502 limits this discretion.
    Finally, section 522 of MAHRA (enacted in 1997), which directed HUD 
to implement section 524 of MAHRA by interim and then final rule, was 
not expressly amended. HUD is already overdue in issuing the final rule 
required by that section. But HUD cannot now proceed to replace the 
interim rule with a final rule without recognizing the intervening 
changes to section 524 that are now in effect but are inconsistent with 
various provisions of the interim rule.
    There is no clear guidance in the statutes on how to reconcile the 
later instructions on rulemaking procedure in section 502--which apply 
not only to

[[Page 15454]]

MAHRA changes, but to many unrelated programs such as the section 202 
and section 811 assisted housing programs--with earlier instructions on 
rulemaking procedure that apply to specific provisions of MAHRA. In 
this final rule, HUD has reconciled those sections by applying the 
following five principles:
    1. HUD should continue to honor Congressional intent for rapid 
final implementation of the Mark-to-Market Program, in accordance with 
section 522 of MAHRA, by publishing part 401 in final form as soon as 
feasible.
    2. Provisions in the interim part 401 that conflict with later 
amendments to MAHRA should not be published in final form without 
making conforming changes, to avoid confusion and facial conflict with 
current statutory provisions.
    3. Conforming changes that simply reproduce or paraphrase new 
statutory language do not ``affect'' tenants within the meaning of 
section 502, since any effect derives from the statute rather HUD's 
rulemaking. Thus, section 502 does not require a new proposed rule for 
such changes.
    4. Conforming changes that simply reproduce or paraphrase new 
statutory language also do not have substantive effect on tenants, 
owners or others that would require prior notice and comment rulemaking 
under 24 CFR part 10. Such procedure is properly regarded as both 
unnecessary and contrary to the public interest.
    5. Any changes to the interim rule that are made in response to new 
statutory language but that make substantive additions to the statutory 
provisions should be made only through a separate notice and comment 
rulemaking procedure commencing with a proposed rule--in accord with 24 
CFR part 10 and (to the extent the substantive additions may affect 
tenants) section 502. Thus, no such changes should be included in this 
final rule.

D. Other Background Information

    This final part 401 is based on HUD's consideration of: (1) Public 
comments received on the September 11, 1998, interim rule; (2) 
discussions at the public forums; (3) the initial development of 
working relationships with PAEs; and (4) certain provisions in Pub. L. 
105-276 and Pub. L. 106-74 as mentioned above. HUD has also refined 
certain policies due to further consideration when preparing and 
revising the Mark-to-Market Program Operating Procedures Guide (called 
the ``Operating Procedures Guide'' in this preamble.)
    The interim rule was signed by Secretary Andrew Cuomo in the 
absence of an OMHAR Director. OMHAR has now begun operations, and OMHAR 
Director Ira Peppercorn has statutory authority to sign this final rule 
because it is limited to part 401 and projects eligible for the Mark-
to-Market program. As required by section 573(b) of MAHRA, this rule is 
issued with the approval of Secretary Cuomo.

II. Comments Received on Part 401

    We received 61 comments that are included in the docket file for 
the interim rule. We disregarded five comments as not pertinent to the 
interim rule. The discussion in this section of this preamble 
summarizes the other comments and HUD's responses to them, except that 
a comment that pertained solely to part 402 of the interim rule, and 
HUD's response, will appear when part 402 is published as a separate 
final rule. In this section, we have grouped the sections of interim 
part 401 into major areas of related subject matter, as shown in the 
outline set forth below. Discussion is generally in the order in which 
the areas are first covered in interim part 401. We have not listed the 
sections that received no public comments.

A. Secs. 401.2, 401.99 and 401.100, General provisions and 
eligibility.

1. Definitions (Sec. 401.2).
    a. Eligible project.
    b. Eligible project costs.
    c. Priority purchaser.
    d. Tenant organization.
2. Actions needed to request a renewal of project-based assistance 
(Sec. 401.99).
3. Projects eligible for a Restructuring Plan (Sec. 401.100).
    a. 236/202 projects.
    b. Preservation projects.

B. Secs. 401.101 and 401.403, Rejection of project or owner.

1. Designation as ``bad'' project.
2. Designation as ``bad'' owner.
3. Treatment of civil rights violations.
4. Project transfers to ``good'' owners.

C. Secs. 401.200, 401.200 and 401.304, PAE selection and 
compensation.

1. Civil rights violations.
2. PAE compensation.
    a. Incentives.
    b. Timing of HUD payments.
    c. Same fee schedule for public and private PAEs.
    d. Environmental review responsibilities.

D. Secs. 401.303, 401.309, 401.310, and 401.314, Other provisions 
of PRA.

1. Indemnification of non-public PAEs (Sec. 401.303).
2. PRA term and termination provisions (Sec. 401.309).
    a. Term should be longer than 1 year.
    b. PRA terminations.
3. Conflicts of interest (Sec. 401.310).
    a. General.
    b. Contested matters.
4. Environmental review responsibilities (Sec. 401.314).

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

F. Secs. 401.405-.406, Restructuring Commitment.

G. Sec. 401.408, Affordability and use restrictions required.

1. Use restrictions and partially-assisted projects.
2. Use Agreements should last ``exactly'' 30 years--not ``at least'' 
30 years.
3. If no section 8 funds are available, owners should be required to 
charge restructured rents or below-market LIHTC rents.
4. There should be no below-market rents.
5. Enforceability of Use Agreements and notice.
6. Pre-existing Use Agreements should be preserved.
7. Use Agreement should be subordinate to conventional loan.
8. Renewal contract terms must remain materially the same.

H. Secs. 401.410-.412, Determining and adjusting rents under 
restructuring with project-based assistance.

1. Difficulties in determining comparable market rents.
2. ``Blended'' rents considering unassisted but restricted units.
3. Objections to ``NOI project'' and ``positive social asset'' 
requirements for exception rents.
4. Exception rents should be alternative to FMR.
5. Limitation of exception rents to 120 percent of FMR.
6. Need to define ``community''.
7. Other factors to be included in expenses.
8. Determination of OCAF.
    a. General.
    b. Excluding debt service.
9. Negative OCAF.
10. Appeals of OCAF.

I. Secs. 401.420-.421, Project-based assistance or tenant-based 
assistance.

1. What vacancies should be considered in determining the presence 
of a tight market?
2. Effect of sale to cooperative.
3. Limit conversion approvals to public body PAEs.
4. Requirement for semi-annual reporting in Sec. 401.421(d).
5. How should the final rule handle/present factors to be considered 
in the Rental Assistance Assessment Plan?
6. Must all units be assisted under a Restructuring Plan?

J. Sec. 401.450-.453, Physical condition of project.

1. Use of FNMA PNA Guidelines should not be eliminated.
2. The final rule should make clear that third party expenses for 
physical condition evaluation are eligible expenses.
3. Lead hazards.

[[Page 15455]]

4. Reserve account deposit.
5. Concern about cost-effectiveness determination in 
Sec. 401.451(c).
6. PAE certification.
7. Property standards for rehabilitation.
8. HQS should not apply to non-assisted market rent units.

K. Secs. 401.460-.471, Mortgage restructuring and payment of 
claims.

1. How should net operating income available to pay the first 
mortgage be determined?
    a. Expenses.
    b. Sizing the first mortgage.
2. First mortgage terms and conditions.
3. Refinancing.
4. Second mortgage terms and conditions.
    a. Interest rate.
    b. Other terms and conditions.
5. Forgiveness/modification of second mortgage.
6. Return to owner.
7. Third mortgage.
8. Claims.

L. Secs. 401.472-.473, Funding of rehabilitation.

1. Opposition to 20 percent owner contribution requirement.
2. Opposition to limit on funding from governmental resources.
3. Other comments regarding 20 percent requirement.
4. Comments regarding use of project accounts for rehabilitation.
5. Section 236(s) rehabilitation grants.
6. Funding of rehabilitation through claim amount.

M. Sec. 401.480, Sale or transfer of project.

1. HUD should be responsible for sale of projects.
2. Preference for priority purchasers.
3. Priority purchasers and competitive sales.

N. Secs. 401.481-.484, Other requirements of Restructuring Plan.

1. Subsidy layering limitations on HUD funds (Sec. 401.481).
2. Leasing units to voucher holders (Sec. 401.483).
3. Property management standards (Sec. 401.484).
    a. General comments on changes needed.
     b. Suggestions for language changes.
4. Management fees.

O. Secs. 401.500-.501, Participation by tenants, community and 
local government.

1. General.
2. Involve others in Rental Assistance Assessment Plan.
3. Intermediaries administering technical assistance grants should 
receive notice.
4. Notices in other languages.
5. Notice to all tenants and posted in project.
6. Right to organize.
7. Tenant role in PAE selection.
8. Rent levels.
9. Use Agreement changes.
10. Monitoring and compliance activities.
11. Transfer of properties and tenant participation.
12. Tenant involvement for projects not restructured.
13. Access to information.

P. Secs. 401.550-.554, Implementation of the Restructuring Plan 
after closing.

1. Inspections.
2. PAE matters.
3. Role of lender.
4. Servicing of second mortgage.
5. Section 8 contract administration.
6. Enforcement.

Q. Sec. 401.595, Contract provisions.

R. Sec. 401.601 of interim rule and Sec. 402.4(a)(2) of final rule, 
Consideration of an owner's request to renew an expiring contract 
without a Restructuring Plan.

1. Determination/verification of rent comparability.
2. Determining adequacy of DSC at market comparable rents.

S. Sec. 401.602, Tenant protection if an expiring contract is not 
renewed.

1. Is tenant-based assistance mandatory?
2. Notice issues.
    a. 6-month notice of non-renewal.
    b. When is notice required?
3. Rent levels for tenant-based assistance.
4. Timing of tenant-based assistance.

T. Sec. 401.606, Tenant-based assistance provisions for displaced 
tenants.

U. Secs. 401.645 and 401.651, Owner dispute of rejection and 
administrative appeals.

1. Tenant appeals.
2. PAE appeals of rejections under Sec. 401.405.
3. Time for owner to dispute approved plan.
4. Owner appeals.

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

W. Miscellaneous comments.

A. Sections 401.2, 401.99 and 401.100, General Provisions and 
Eligibility

Summary of Sections
    Section 401.2 identifies the terms that are defined in MAHRA and 
used in the rule, and defines additional terms that are used in the 
rule. Section 401.99 explains three procedures to be followed by owners 
who request renewals of section 8 project-based assistance contracts. 
First, an owner of an eligible project who requests a Restructuring 
Plan must, at least 3 months before the project-based assistance 
contract expires, certify to HUD that, to the best of the owner's 
knowledge, project rents exceed comparable market rents and neither the 
owner nor any affiliate is suspended or debarred (or that the owner 
proposes a voluntary sale of the project). Second, an owner of an 
eligible project who does not request a Restructuring Plan must submit 
to HUD the certification described above in the same time frame, with 
the additional items that will permit the PAE to consider the request 
in accordance with Sec. 401.601 of the interim rule (Sec. 402.4(a)(2) 
in this final rule) to determine whether the contract should be renewed 
under Sec. 402.4. Finally, because part 401 is limited to projects 
eligible for a Restructuring Plan, this section of the interim rule 
refers the owner to Sec. 402.5 if the project is not eligible for 
restructuring but the owner wants project-based assistance renewed.
    Section 401.100 of the interim rule (merged with the definition of 
``eligible project'' in the final rule) incorporates the statutory 
requirements in section 512(2) of MAHRA for an eligible project by 
providing that project rent exceeds the rent of comparable properties, 
as required by section 512(2)(A), if the gross potential rent revenue 
(i.e., at 100 percent occupancy) for the project-based assisted units 
in the project at current gross rents exceeds the gross potential rent 
for those units (at 100 percent occupancy) using comparable market 
rents.
Summary of Comments
    1. Definitions (Sec. 401.2).
    a. Eligible project. Two commenters felt that the definition of 
``eligible project'' in the interim rule would require restructuring 
for projects whose aggregate rents might not exceed comparable market 
rents, contrary to Congressional intent, because rent levels for non-
assisted units would not be considered in preservation projects or 
similar projects with unassisted below-market units and above-market 
section 8 units.
    HUD response: Preservation projects are discussed in the response 
under Section II.A.3.b. They are no longer eligible for the Mark-to-
Market Program.
    b. Eligible project costs. One commenter felt that eligible project 
costs should include the costs to owners of hiring advisors such as 
accountants, appraisers, attorneys, real estate specialists, or tax 
advisors. The commenter argued that many owners are confused and 
uninformed about the details and impact of MAHRA and that they have 
limited funds to seek advice.
    HUD response: Such transaction costs can be included in the 
mortgage restructuring to the extent reasonable and necessary and 
supportable within a refinancing first mortgage (though not in a 
modification of the existing first mortgage). If the refinancing 
mortgage is insured by FHA, normal FHA criteria would be applied. 
Generally, OMHAR will recognize 50 percent of such costs to the extent 
they are customary, reasonably necessary, and to the extent they are 
otherwise acceptable under the terms of the new restructured first 
mortgage. The owner's share of such costs could only be recognized as

[[Page 15456]]

project operating expenses to the extent there was sufficient cash flow 
in the fiscal year during which the restructuring took place and then 
only with written approval from the HUD Multifamily Hub or Program 
Center.
    c. Priority purchaser. Three commenters were concerned about the 
definition of ``priority purchaser''. One felt that the definition 
should include non-tenant based nonprofit organizations and non-
community based nonprofit organizations because many of these groups 
possessed considerable experience with low-income housing and would be 
important resources in preserving low-income housing. Two commenters 
suggested that the final rule clarify that a tenant organization or 
tenant-endorsed community-based nonprofit or public agency can, as a 
controlling general partner in a limited partnership formed to raise 
tax credit equity, retain its priority purchaser status through the 
partnership, as well as the related ability to qualify for second 
mortgage forgiveness.
    HUD response: HUD agrees that a limited partnership with a sole 
general partner that is a tenant organization or tenant-endorsed 
community-based non-profit organization or public body may be viewed as 
a priority purchaser for purposes of Sec. 401.461(b)(5) (possible 
forgiveness or modification of HUD-held second mortgage upon sale of 
project to priority purchaser) and Sec. 401.480 (preference for sale to 
priority purchaser when current owner found ineligible for 
restructuring). HUD does not agree with the suggestion that priority 
purchasers should include national non-profit organizations without a 
local community base. There are national groups that can bring 
experience, but they should either partner with a local group, or else 
need to compete with other potential purchasers after the period 
reserved for marketing exclusively to priority purchasers, which will 
initially be set at 4 months. The applicable statutory provisions 
(sections 516(e) and 517(a)(5) of MAHRA) clearly show a Congressional 
desire for community-basing in this context.
    d. Tenant organization. One commenter suggested that the definition 
of ``tenant organization'' in the final rule should clarify the details 
of the election of tenant organization officers to avoid future 
disputes as to whether an organization is a tenant organization 
entitled to recognition.
    HUD response: This level of detail is inappropriate and unnecessary 
for a rule. HUD will address organizational details as needed in the 
Operating Procedures Guide or subsequent guidance.
    2. Actions needed to request a renewal of project-based assistance 
(Sec. 401.99).
    One commenter pointed out that ordinarily a project has 60 days to 
complete the annual financial statement and that requiring the 
statement during this period may cause difficulties for owners. The 
commenter suggested that, in such instances, the preceding year's 
financial statement should be acceptable. The same commenter suggested 
that the reference in Sec. 401.99(c) to Sec. 402.5 should be expanded 
to include Sec. 402.4 because a project can have its contract extended 
under Sec. 402.4 if the owner desires. One commenter said that notice 
of intent to restructure should be given to mortgagees.
    HUD response: The most recently required financial statement must 
be provided. If the renewal request and expiration is within the 60 day 
period following the end of the project's fiscal year, the previous 
year's statement will be accepted. We have added the suggested 
reference to Sec. 402.5. A project owner must give notice to mortgagees 
of intent to restructure. This is stated in the interim rule's preamble 
discussion of Sec. 401.99, and is clearly required in the Operating 
Procedures Guide. We consider such notice part of the owner cooperation 
required by Sec. 401.402.
    3. Projects eligible for a Restructuring Plan (Sec. 401.100).
    a. 236/202 projects. One commenter requested clarification of 
whether the class of ``236/202'' projects are eligible under MAHRA. 
(These projects were originally processed under the section 202 program 
but converted to the section 236 program after its creation in 1968.)
    HUD response: Section 236/202 projects are eligible in the same 
manner as other section 236 projects.
    b. Preservation projects. One commenter argued that MAHRA should be 
interpreted to exclude from eligibility preservation projects with 
plans of action (under ELIHPA or LIHPRHA). The commenter pointed out 
difficulties in reconciling MAHRA's requirements for restructuring with 
promises made to owners in ELIHPA/LIHPRHA plans of action, such as the 
short term use agreements and the unrestricted return to owner approved 
by HUD under ELIHPA. (Other comments related to preservation projects 
are mentioned in the summaries in Sections II.A.1.a., II.H.2., II.H.7., 
and II.K.1 of this preamble, and the response below applies to those 
comments as well).
    HUD response: Section 531(b) of Pub. L. 106-74 amended MAHRA to 
make preservation projects with plans of action ineligible for the 
Mark-to-Market program. This statutory change automatically excludes 
these projects from the ``eligible projects'' definition in the interim 
rule. No change in rule language is needed to make the final rule 
comply with the statutory change.

B. Sections 401.101 and 401.403, Rejection of Owner or Project

Summary of Sections
    These sections implement section 516(a) of MAHRA, which permits HUD 
to elect to not consider a restructuring plan or a request for contract 
renewal on the basis of certain actions or omissions by an owner or 
purchaser of the project or an affiliate, or if the PAE determines that 
the poor condition of the project cannot be remedied in a cost-
effective manner. Under Sec. 401.101, HUD and PAEs will not consider 
the request of an owner of an eligible project for a Restructuring Plan 
if the owner or an affiliate is debarred or suspended by HUD unless a 
sale or transfer of the property is proposed in accordance with 
Sec. 401.480. The final rule makes a change to Sec. 401.101 regarding 
affiliates, consistent with the Sec. 401.403 change discussed below.
    Under Sec. 401.403 of the interim rule, the PAE is responsible for 
a further more complete and ongoing assessment of owner and project 
eligibility while a Restructuring Plan is developed. The PAE must 
inform OMHAR if: (1) The owner or an affiliate is debarred or 
suspended; (2) the owner or an affiliate has engaged in material 
adverse financial or managerial actions or omissions as described in 
section 516(a) of MAHRA, which may include actions that have resulted 
in imposition of a Limited Denial of Participation (LDP) or a proposed 
debarment under 24 CFR part 25, or outstanding violations of civil 
rights laws; or (3) the PAE determines that the project does not meet 
the physical condition standards in Sec. 401.453 and cannot be 
rehabilitated to meet such standards in a cost-effective manner. Under 
the interim rule, HUD may reject an owner's request for a Restructuring 
Plan for any of these reasons. In the final rule, debarment or 
suspension of an owner are automatic grounds for rejection under 
Sec. 401.403 unless an acceptable sale is proposed. We revised the rule 
to give HUD discretion whether to accept or reject an owner request for 
restructuring if an affiliate of the owner is suspended or debarred. 
When rejection is discretionary, HUD may advise the PAE

[[Page 15457]]

to continue processing (under part 401) or decide to continue 
processing itself (under part 402).
Summary of Comments
    1. Designation as ``bad'' project.
    One commenter suggested that the rejection of a ``bad project'' 
because of poor condition that cannot be remedied in cost-effective 
manner needs to be guided by an objective standard of cost-
effectiveness (the commenter suggested a standard).
    HUD response: HUD does not agree with this commenter that an 
objective elaboration on the cost-effectiveness requirement is feasible 
for inclusion in the final rule. The specific facts and circumstances 
must be considered by the PAE and OMHAR. The appeal process provided in 
subpart F is available if there is a dispute.
    2. Designation as ``bad'' owner. 
    HUD should not reject an owner for a suspension/debarment if the 
owner's appeal is not yet adjudicated, argued two commenters. One of 
these commenters also objected to basing a ``bad owner'' rejection on a 
limited denial of participation (LDP) or proposed debarment alone 
because such actions might not be ``material'' within the meaning of 
section 516(a) of MAHRA). The commenter suggested that a PAE should 
examine the facts behind a LDP/proposed debarment and reach its own 
conclusion regarding materiality.
    HUD response: The rule is consistent with these comments. ``Bad 
owner'' determinations are made on the basis of ``material adverse 
financial or managerial actions or omissions'' identified in section 
516(a)(2) of MAHRA. In the final rule, the Department has decided that 
an actual suspension or debarment will always be material for purposes 
of eligibility for a Restructuring Plan. HUD and PAEs are required to 
make a determination of materiality before rejecting an owner if a 
debarment or suspension decision has not already been made by HUD.
    3. Treatment of civil rights violations.
    Two commenters wanted civil rights violations to be considered in a 
``bad owner'' determination only if they have been finally adjudicated 
and have not been substantially cured. One of these commenters 
commented on a need to clarify which violations are disqualifying civil 
rights violations.
    HUD response: Civil rights violations will be addressed by OMHAR 
after consultation with HUD's Office of Fair Housing and Equal 
Opportunity. The Operating Procedures Guide details the decision-making 
process regarding owner eligibility for a Restructuring Plan, including 
the point at which an apparent outstanding civil rights violation will 
constitute a bar to further consideration of a Restructuring Plan for 
the owner. The Operating Procedures Guide provides further information 
on the civil rights legal authorities that will be considered when 
making a determination of owner eligibility.
    4. Project transfers to ``good'' owners.
    Four commenters thought that the rule was deficient in its 
treatment of project transfers after ``bad owner'' determinations. One 
labelled the interim rule's provisions providing for rejection of 
certain owners a ``misguided policy of forced voucherization'' and 
wanted the final rule to reiterate that contract termination is a last 
resort and that transfer to a priority purchaser is preferable to 
conversion. Two others cited a statement by Senator Bond regarding the 
need for alternative solutions for projects when an owner is 
disqualified.
    HUD response: The commenters who thought that the rule was 
deficient did not suggest specific improvements to the rule. The 
determination to deny a restructuring or to not renew the project-based 
assistance will be made on a case-by-case basis. The PAE and HUD will 
consider the impact on tenants, the potential to transfer the project 
to priority purchasers, and other remedies. The PAE will invite tenant 
and local community participation and solicit comments in accordance 
with Secs. 401.500 and .501 of the final rule.

C. Sections 401.200, 401.201 and 401.304, PAE Selection and 
Compensation

Summary of Sections
    Section 512(10) of MAHRA, referenced in Sec. 401.200, permits a 
public agency, a nonprofit organization, or a for-profit entity, to be 
a PAE. Under Sec. 401.200, the PAE may not have any outstanding 
violations of civil rights laws, determined in accordance with criteria 
in use by HUD. Section 401.201 explains that HUD will select PAEs in 
accordance with the statutory selection criteria and additional 
selection criteria established by HUD. The selection method will be 
determined by HUD and may be through a request for qualifications 
(RFQ). Section 401.304 provides that the PRA will contain provisions on 
compensation to the PAE regarding a base fee and reimbursement of 
expenses, and may provide for incentive fees.
Summary of Comments
    1. Civil Rights violations.
    One commenter had due process concerns with requiring that a 
potential PAE have no outstanding violations of civil rights laws. This 
commenter recommended that potential PAEs should not be disqualified 
unless the civil rights violations are material and the result of a 
final adjudication. In addition, this commenter felt that violations 
that have been substantially cured should not become grounds for 
disqualification.
    HUD response: Please see HUD's response under Section II.B.3. on a 
similar point.
    2. PAE compensation.
    a. Incentives. One commenter felt that it was important to have 
full and early public disclosure of incentives to PAEs in order to 
ensure public confidence in the fairness and objectivity of the 
restructuring process. Three commenters felt that PAE incentives should 
reflect the statutory intent that economic and non-economic objectives 
be balanced. One of these commenters suggested incentives similar to 
those offered PAEs in the Portfolio Reengineering demonstration 
programs.
    HUD response: The specific details of PAE compensation will be 
included in the PRA. They are not appropriate for inclusion in 
regulations since compensation will be subject to revision from time to 
time. The details of the PAE compensation package will be fully 
disclosed when the ongoing negotiations with the remaining PAEs without 
PRAs are concluded. The compensation for private PAEs is determined 
through a competitive bidding process. The incentive section of the 
compensation package has been set up to balance the preservation and 
cost savings goals of the Mark-to-Market Program. The compensation 
package of the demonstration program is being carefully considered as 
OMHAR finalizes the PAE compensation package for the permanent program.
    b. Timing of HUD payments. One commenter urged HUD to provide PAEs 
with a significant portion of their fees early in the restructuring 
process.
    HUD response: We do not agree that this would be necessary or 
appropriate. Funds for fees and reimbursable expenses will be released 
commensurate with completion of work.
    c. Same fee schedule for public and private PAEs. One commenter was 
concerned about differing fee schedules for public and private PAEs. 
This commenter felt that a differing fee schedule might lead HUD to 
choose private PAEs in order to save money, thus contradicting the 
Congressional mandate to utilize public agencies whenever possible to 
protect the public interest.

[[Page 15458]]

    HUD response: The statute, the regulations, and HUD's 
implementation of the program have all been consistent with expressed 
Congressional intent that public entities have a priority in OMHAR's 
selection process for a PAE within a geographic jurisdiction.
    d. Environmental review expenses. Two commenters noted that the 
interim rule indicated that the PAE may be expected to assist HUD in 
complying with HUD's environmental review responsibilities by 
completing certain forms or checklists. Both commenters suggested that 
HUD should clarify that any outside expense incurred by PAEs in 
completing these forms should be considered a reimbursable expense.
    HUD response: Such expenses will be reimbursable subject to the 
terms of the PRA.

D. Sections 401.303, 401.309, 401.310 and 401.314, Other Provisions of 
PRA

Summary of Sections
    Section 401.303 implements section 513(a)(2)(G) of MAHRA, which 
requires HUD to provide a PAE indemnity against lawsuits and penalties 
for action taken by a PAE pursuant to the PRA (except for willful 
misconduct or negligence) if the PAE is a State housing finance agency 
or a local housing agency. Under Sec. 401.309, the PRA will have a term 
of 1 year, to be renewed for successive terms of 1 year with the mutual 
agreement of both parties. A PRA will be subject to termination by HUD 
at any time.
    Section 401.310 addresses conflicts of interest for a PAE and 
related persons defined in the section as ``restricted persons''. A 
conflict of interest exists when a PAE or restricted person either: (1) 
Has personal, business, or financial interests or relationships that 
would lead a reasonable and knowledgeable person to question the 
integrity or impartiality of those acting for the PAE; or (2) in a 
lawsuit, is an adverse party either to HUD or to the owner of a project 
under the PAE's PRA. In general, HUD will avoid dealing with a PAE with 
a conflict of interest.
    Section 401.314 states that HUD is legally required to retain any 
environmental review responsibilities under 24 CFR part 50, and that 
any required environmental review will occur before HUD executes a 
Restructuring Commitment (see Sec. 401.405). Without delegating any 
decision-making authority to the PAE, OMHAR has included in the PRA a 
provision for PAE completion of forms and/or checklists to assist HUD 
in complying with its requirements under environmental regulations.
Summary of Comments
    1. Indemnification of non-public PAEs (Sec. 401.303).
    One commenter felt that HUD should indemnify non-public PAEs. The 
commenter argued that while section 513(a)(2)(G) of MAHRA specifically 
requires HUD to indemnify public PAEs, section 517(b)(5) gives HUD 
broad authority to provide indemnification to non-public PAEs as well. 
This commenter asserted that the same policy reasons that justify 
indemnification of public PAEs argued in favor of indemnifying non-
public PAEs. Finally, the commenter thought that HUD should make clear 
in the final regulation that a PAE may indemnify a non-public team 
partner, if it so chooses.
    HUD response: HUD will indemnify only public entity PAEs. Although 
PAEs may choose to indemnify teaming partners, such indemnification 
will not be a reimbursable expense and PAEs may not pass on this cost 
to OMHAR or HUD. There is no prohibition in MAHRA against PAEs 
indemnifying teaming partners or subcontractors and, accordingly, this 
will not be addressed in the final rule.
    2. PRA term and termination provisions (Sec. 401.309).
    a. Terms should be longer than 1 year. One commenter pointed out 
that preparing an application to become a PAE takes considerable time 
and effort, and that learning and becoming expert at fulfilling the 
requirements of the PRA requires significant additional effort. The 
commenter felt that 1 year would not provide an adequate opportunity 
for HUD to determine the PAE's capacity. Another commenter felt that 
the short term would interfere with owner ability to develop long-term 
relationships with a PAE. The commenter suggested that the terms should 
be indefinite after the first year. A third commenter had two concerns 
about the PAE renewal process: that yearly PRA renewals would lead to 
another burdensome and unnecessary PAE selection process, and that HUD 
might use the annual review process to replace HFAs with non-public 
entities because the one-time priority for public entities would not 
apply after the initial selection. The commenter argued that Congress 
did not intend for HUD to use public agencies as PAEs only for the 
first year, and discouraged HUD from trying to circumvent Congress' 
intent by creating a new PAE selection process in the later years of 
the program.
    HUD response: If 1 year is not adequate to determine a PAE's 
capacity, HUD will extend the contract for an additional year. Except 
in the presumably unusual cases where a PRA was terminated and the 
assets reassigned to another PAE or to OMHAR itself, the PAE will 
continue to process the particular projects agreed upon by HUD and the 
PAE. A 1-year contract term is appropriate both in order to revise 
provisions as necessary based on experience, and as an administrative 
convenience for the Department. OMHAR's intent is to renew PRAs with 
PAEs unless there are performance or capacity problems or there is 
mutual agreement not to continue.
    b. PRA terminations. One commenter felt that the rule appeared to 
allow termination with or without cause, and that terminations without 
cause would cause PAEs to adopt a short-term perspective detrimental to 
restructuring. This commenter suggested only allowing termination for 
cause and providing appropriate due process protection. Another 
commenter agreed that termination should only be for cause and ``only 
in extraordinary circumstances''. One commenter was concerned that HUD 
could terminate a PRA at any time for cause but that a PAE could not, 
and that rights to termination for cause should be mutual because 
Congress intended HUD and PAEs to be partners.
    HUD response: The PRA includes a bilateral right to termination for 
convenience and is therefore in keeping with the partnership goal. Were 
OMHAR to exercise this right the PAE would be paid, at a minimum, for 
services rendered to the point of the termination. We do not believe 
that the termination for convenience provision of the rule will 
reasonably affect the PAE's perspective on the PRA or restructuring 
work.
    3. Conflicts of interest (Sec. 401.310).
    a. General. A number of commenters expressed concerns about the 
conflict of interest rules. One commenter felt that HUD should be able 
to waive a conflict involving a potential PAE who is taking an adverse 
position to an owner, if the owner consents, because it is the owner 
who is at risk of being damaged. One commenter felt that the conflicts 
of interest rule was overbroad. This commenter argued that HFAs often 
work with the same principals in different roles and that an HFA should 
not be penalized for having legitimate business contacts that do not 
interfere with their objectivity as a PAE. This commenter suggested 
that HUD narrow the scope of the conflict of interest provisions so 
that they apply only to specific properties undergoing restructuring. 
This commenter also felt that the conflict of interest provisions

[[Page 15459]]

would make it difficult for a PAE to provide an owner with other 
available resources, such as Low Income Housing Tax Credits, HOME 
funds, and risk-sharing loans, which is unnecessary because HFAs 
utilize strict, objective allocation plans for these resources.
    HUD response: The conflict of interest provisions are drafted to 
protect OMHAR and the public interest while allowing flexibility to 
accommodate varying factual situations. In order to prevent unfairness 
in particular cases and to allow PAEs to provide owners with other 
available resources, all waiver requests will be considered carefully. 
As deemed appropriate on a case-by-case basis, OMHAR will seek 
information from outside sources when considering conflict of interest 
determinations and waiver requests.
    b. Contested matters. Two commenters felt that any lawsuit in which 
a PAE and an owner were adversaries should automatically be considered 
a conflict of interest and the PAE should automatically be disqualified 
from exercising any responsibilities under the regulations with regard 
to that owner. One of these commenters also felt that the final rule 
should allow owners and other interested parties to seek HUD review of 
potential conflicts of interest, in addition to the PAE. One commenter 
asked whether and why a disqualifying conflict of interest would apply, 
not only to a party to a lawsuit or contested matter, but also to any 
legal counsel representing such a party. This commenter also felt that 
the final rule should more fully define the scope of the terms 
``administrative proceeding or other contested matter'' and ``adverse 
to HUD.''
    HUD response: Any lawsuit in which a PAE and an owner are 
adversaries will be considered a conflict of interest. It will trigger 
scrutiny and will necessitate a waiver prior to the PAE beginning or 
continuing work on a Restructuring Plan. OMHAR will carefully 
investigate conflict of interest allegations or disclosures that are 
raised by any source. The Operating Procedures Guide and OMHAR's 
Internet Website provide more information on the specifics of OMHAR's 
conflict of interest requirements, including affected parties and 
definitions of terms.
    4. Environmental review responsibilities (Sec. 401.314).
    One commenter felt that, if the restructured first mortgage is 
refinanced with a conventional loan, then HUD should delegate all 
required environmental reviews to the conventional lender.
    HUD response: Current law does not permit HUD to delegate 
environmental review responsibilities to a lender.

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

Summary of Section
    This section provides guidance for implementation of the 
requirement in section 514(a)(2) of MAHRA for cooperation among the 
PAE, project owner and mortgage servicer. The owner must actively work 
with the PAE and other necessary third parties, including the mortgage 
servicer, to develop a Restructuring Plan. If the owner fails to 
cooperate to the satisfaction of the PAE, and HUD agrees, the PAE will 
not continue with development of a Restructuring Plan.
Summary of Comments
    One commenter asked HUD to clarify that an owner who is viewed as 
insufficiently ``cooperative'' in helping a PAE develop a restructuring 
plan that differs from the approach suggested by the owner will not 
become ineligible under Sec. 402.7 for section 8 contract renewal 
without restructuring. Another commenter said that HUD should make it 
easier for servicers to ``cooperate'' with respect to first mortgages 
that are too small (before or after a partial claim) to attract 
servicers. This commenter mentioned such matters as difficulty in 
getting the consent of securitizers (including Ginnie Mae) or whole-
loan investors, a need for an increased FHA servicing fee, reducing the 
costs of servicing (specifically, not requiring a mortgagee inspection 
if the PAE inspects), allowing financing costs to include reasonable 
administrative fees, considering an additional escrow account for 
servicing fees, and considering rebate of part of FHA premium such as 
the section 221(g)(4) put for Interest Enhancement Payment.
    HUD Response: We will address the comment on eligibiity under 
Sec. 402.7 when part 402 is published in final form. Inability of a 
mortgagee or servicer to obtain investor consent to modify, or their 
determination that the size of the restructured loan was not 
financially feasible to originate and/or service, is not considered a 
lack of cooperation for purposes of Sec. 401.402. As noted in section 
III of this preamble under Sec. 401.550, the final rule clarifies that 
HUD will accept an inspection by a PAE in lieu of an inspection by the 
mortgagee or servicer.

F. Sections 401.405-.406, Restructuring Commitment

Summary of Sections
    These sections provide for HUD to approve a Restructuring Plan as 
submitted by a PAE, require changes as a condition for approval, or 
reject the Plan. HUD will inform the PAE of the reasons for rejection 
and the subpart F dispute and appeal procedure will apply. The PAE will 
deliver to the owner, for execution, a proposed Restructuring 
Commitment as the final element of a HUD-approved Restructuring Plan.
Summary of Comments
    Two commenters said that HUD should be required to approve/
disapprove a proposed Restructuring Commitment within a specified 
period after PAE submission; one of them suggested 10 days.
    HUD response: OMHAR anticipates a standard processing time of 15 
days for review of conforming transactions. Conforming transactions are 
those in which there is limited financial impact or risk to the Federal 
Government. Specific criteria will be defined in the Operating 
Procedures Guide and the PRA. The standard processing time for review 
of non-conforming transactions is anticipated to be 30 days.

G. Section 401.408, Affordability and Use Restrictions Required

Summary of Section
    Section 401.408 of the interim rule implements section 514(e)(6) of 
MAHRA, which requires the Restructuring Plan to provide for 
affordability and use restrictions on the project for a term of at 
least 30 years, consistent with the long-term physical and financial 
viability and character of the project as affordable housing. During a 
period when at least 20 percent of the units in a project receive 
project-based assistance, this section provides that the affordability 
restrictions applicable to such assistance will apply in lieu of other 
restrictions required to be in the recorded Use Agreement. Otherwise, 
the Use Agreement will require conformance to the rent and tenant 
income profile used in the Low Income Housing Tax Credit Program 
(LIHTC) for any project that is restructured (i.e., either rents set 
for 20 percent of the units at 30 percent of 50 percent of median 
income or for 40 percent of the units at 30 percent of 60 percent of 
median income.) The Use Agreement will specify which interested 
parties, in addition to HUD and the PAE, will have rights of 
enforcement.

[[Page 15460]]

Summary of Comments
    1. Use restrictions and partially-assisted projects. 
    Two commenters expressed concern that Sec. 401.408 makes use 
restrictions applicable to an entire project even when that project is 
only partially-assisted. Both commenters suggested that use restriction 
agreements should apply only to formerly-assisted units within a 
partially-assisted project. One commenter thought that a failure to 
make this exception would cause owners of partially-assisted projects 
to opt out of the section 8 program, which in turn would decrease the 
stock of affordable housing.
    HUD response: HUD does not share the concerns of these commenters. 
Use restrictions run with the land because the entire project benefits 
from a debt restructuring. To the extent owners can opt out from 
further project-based assistance, they do not need the restructuring 
(and would not be subject to the Use Agreement).
    2. Use Agreements should last ``exactly'' 30 years--not ``at 
least'' 30 years. 
    Four commenters were concerned about the requirement that the Use 
Agreement be in effect for ``at least'' 30 years. These commenters 
recommended that the final rule require the Use Agreement to be in 
effect for ``exactly'' 30 years because the interim rule language might 
allow PAEs to specify terms greater than 30 years indiscriminately. One 
commenter thought all Use Agreements should last for 30 years except 
where unusual conditions specified in the Operating Procedures Guide 
are present and the PAE decides that a longer term is consistent with 
statutory intent. Another commenter felt that a PAE's discretion to use 
terms longer than 30 years should be tightly overseen by HUD.
    HUD response: MAHRA requires a Use Agreement term of at least 30 
years. The decision to require a longer term should be left to the PAE 
as the party most familiar with particular circumstances that may make 
longer restriction periods appropriate.
    3. If no section 8 funds are available, owners should be required 
to charge restructured rents or below-market LIHTC rents.
    Two commenters felt that owners should be required to charge the 
lesser of restructured rents or Low Income Housing Tax Credit (LIHTC) 
rents (which may be below-market) in the event that section 8 funds are 
not available in the future.
    HUD response: The owners of properties subject to Use Agreements 
will be limited to rents at the lesser of market or below-market LIHTC 
rents in the event that section 8 funds are not available in the 
future. Since market conditions will more likely improve or worsen 
rather than stay static, the market rents the units will command at 
that time will probably not be the restructured rents.
    4. There should be no below-market level rents.
    One commenter felt that the rule contemplated establishing below-
market rents when fewer than 20 percent of the units in a project 
receive project-based assistance. This commenter was concerned about 
adverse tax consequences and strongly recommended that no project be 
required to reduce its rents below market level. Another commenter felt 
the final rule should indicate that owners will not be required to 
accept project-based or tenant-based assistance if the final rule does 
not allow for payment to the owner of market rents. This commenter also 
argued that, because LIHTC restrictions are not imposed by MAHRA, 
imposing such restrictions could cause owners to evict tenants with 
higher incomes or hold units vacant for unreasonable time periods. The 
commenter suggested less restrictive affordability requirements. If 
LIHTC requirements are maintained, this commenter felt that owners 
should have the choice of affordability mix options.
    HUD response: When fewer than 20 percent of the units in a project 
receive project-based assistance, the Use Agreement will have the 
practical effect of requiring the lesser of market rents (as a result 
of the operation of the local rental market) or the LIHTC rents (as 
specified in the Use Agreement). Further, the owner has the option of 
selecting the tax credit standard (20 percent of the units with rents 
affordable at 50 percent of median income, or 40 percent of the units 
with rents affordable at 60 percent of median income) which yields the 
highest net operating income. For the inventory of projects with above-
market section 8 rents, the LIHTC rents are often greater than market 
rents. In cases where the LIHTC rents are less than market rents, the 
impact on the supportable secured debt (and thus the tax consequences 
of the restructuring) will typically be nominal. A less restrictive 
affordability requirement is not appropriate.
    5. Enforceability of Use Agreements and notice.
    Two commenters felt that tenants and tenant organizers should 
always be given the right to enforce Use Agreements, which the interim 
rule did not seem to demand. Another commenter felt that third parties 
should not be allowed to challenge matters that both the PAE and the 
owner agree upon, or without prior written permission from the PAE. 
This commenter also felt that the rule should make clear that the owner 
should receive notice of any enforcement actions as well as a 
reasonable opportunity to cure any problems. One commenter felt that 
the right of parties to enforce a Use Agreement should be tightly 
controlled. One commenter felt that HUD should identify the specific 
remedies provided each party that may enforce a Use Agreement. This 
commenter also felt that HUD should, at a minimum, indicate that all 
enforcement actions must be initiated by HUD/PAE and that HUD/PAE will 
have sole responsibility for determining what steps an owner must take 
to cure any violations.
    HUD response: Section 401.408(i) of the final rule makes it clear 
that Use Agreements will include the parties listed in that paragraph 
as third party beneficiaries. Further, a Use Agreement must require the 
party bringing enforcement action to give the owner notice and a 
reasonable opportunity to cure any violations. The PAE or HUD will 
typically be the entity bringing enforcement action, but this provision 
has been specifically crafted to allow other parties to bring action. 
This will ensure that other interested parties such as tenants are able 
to protect their interests in cases where a project is not covered by a 
PRA, or where HUD or the PAE is unable or unwilling to take action. In 
the rare case where HUD perceives clear abuse by a third party that is 
not exercising enforcement rights in good faith, HUD may exercise its 
right to modify a Use Agreement to require the third party to obtain 
prior HUD approval for any enforcement action concerning the Use 
Agreement.
    6. Pre-existing Use Agreements should be preserved. 
    Two commenters suggested that a Mark-to-Market Use Agreement should 
be subject to any pre-existing Use Agreements, which should be 
preserved. One of these commenters felt that the final rule should make 
clear that the restructuring process should not be used to lessen any 
previous affordability restrictions.
    HUD response: Restructuring under the Mark-to-Market Program will 
not automatically relieve a project of any existing Use Agreements and 
affordability restrictions. If an owner considers that existing 
agreements and affordability restrictions are based on section 8 terms 
and policies no longer authorized by Congress, or will interfere

[[Page 15461]]

with achieving the objectives of a proposed Restructuring Plan, the 
owner should bring this concern to the PAE's attention so that the PAE 
can consider proposing appropriate changes for HUD's approval.
    7. Use Agreement should be subordinate to conventional loan. 
    One commenter felt that if the restructured first loan is 
refinanced with a conventional loan, then the Use Agreement should be 
subordinate to this loan (i.e. the Use Agreement should not survive 
foreclosure). This commenter argued that most conventional lenders will 
refuse to refinance mortgages subject to Use Agreements if the 
agreements survive foreclosure.
    HUD response: Section 514(e)(6) of MAHRA requires a Use Agreement 
to apply for at least 30 years and any subordination that could lead to 
termination of the Use Agreement upon foreclosure of a conventional 
loan would conflict with this MAHRA requirement.
    8. Renewal contract terms must remain materially the same. 
    Five commenters said that renewals of project-based contracts 
should be required to contain terms that are materially similar to the 
initial post-restructuring contract. Two commenters argued that unless 
this is done, general partners will have difficulty recommending the 
restructuring transaction to limited partner investors. One commenter 
suggested that the final rule make it ``crystal clear that HUD cannot 
decrease the benefits to the owner upon subsequent renewal offers.'' 
Another commenter felt that Use Agreements should contain conditions 
for automatic expiration of the agreement should there be changes to 
the agreement that are detrimental to the original terms and conditions 
of the restructuring plan. One commenter felt that an owner's 
obligation to renew section 8 assistance should terminate if HUD/PAE 
fails to renew for any year. The same commenter felt that under the 
final rule there should be no circumstances, other than unavailability 
of funds or HQS violations by the owner, under which HUD/PAE may refuse 
to renew project-based section 8 assistance. Another commenter felt 
that HUD should guarantee that section 8 funds would be available in 
the future as long as necessary to assure affordability. This commenter 
felt that imposing use restrictions would be meaningless without a 
guarantee of section 8 funds for the project.
    HUD response: Under section 515(a) of MAHRA, either the Secretary 
or a PAE acting under a contract with the Secretary is required to 
offer to renew or extend an expiring contract, subject to the 
availability of amounts provided in advance in appropriations Acts. In 
addition, Pub. L. 106-74 amended section 524 of MAHRA (which applies to 
contract renewals after a Restructuring Plan is in place) to make 
renewals mandatory upon owner request, also subject to appropriations. 
MAHRA does not expressly require that the offer be in accord with the 
contract renewal terms provided in the approved Restructuring Plan and 
implies that the level of appropriations may not always permit such an 
offer to be made. There is no guarantee of, and the Department does not 
have the authority to obligate, section 8 funds unless Congress 
appropriates the funds. Section 515(a) protects the owner by only 
requiring the owner to accept the renewal offer if the offer in ``in 
accordance with the terms and conditions specified in'' the 
Restructuring Plan. If the section 8 contract terms are offered under 
terms less favorable than those which would result by application of 
the OCAF as provided in the Restructuring Plan (to the extent, if any, 
permitted by MAHRA section 524), the owner will not be required to 
accept the renewal offer, but the project will remain subject to the 
Use Agreement for the remainder of its term.

H. Sections 401.410-.412, Determining and Adjusting Rents Under 
Restructuring With Project-Based Assistance

Summary of Sections
    Section 401.410 provides guidance to the PAE for determining 
comparable market rents, as well as for an owner making a preliminary 
determination of eligibility under Sec. 401.99(a)(1). Comparable market 
rents are rents charged for ``comparable properties'' as defined in 
section 512(1) of MAHRA. The determination of whether rents in a 
project are comparable to market rents considers only the rents for 
units in the project that receive project-based assistance.
    Section 401.411 provides for budget-based ``exception rents'' (not 
to exceed 120 percent of Fair Market Rent without a HUD waiver), 
instead of comparable market rents, if the PAE determines that the 
housing needs of the tenants and the community cannot be adequately 
addressed through a Restructuring Plan that provides for comparable 
market rents, and if the project would be a negative Net Operating 
Income (NOI) project at comparable market rents. The preamble to the 
interim rule--but not the rule itself--stated that in order to receive 
exception rents, projects must meet the following test (which we will 
call the ``positive social assets'' test in the following discussion):

    [The projects] must be determined by the PAE to be positive 
social assets in the community whose operating expense levels and 
lack of debt service capacity are not a function of bad management. 
They should be unique, appropriately situated, and affordable 
housing, with no other comparable housing alternatives available in 
the submarket.

    Exception rents are based on the factors listed in section 
514(g)(3) of MAHRA. They include debt service (allowed in the interim 
rule only on the second mortgage under Sec. 401.461 or to support a 
rehabilitation loan included in the Restructuring Plan), project 
operating expenses, a PAE-determined allowance for a reasonable rate of 
return to the owner, contributions to adequate reserves, and other 
necessary project operating expenses as determined by the PAE.
    Section 401.412 concerns adjustment of restructured rents by an 
operating cost adjustment factor (OCAF) as required by section 
514(e)(2) of MAHRA. A Restructuring Plan will provide for adjustments 
using OCAF under this section, but this section will not prevent HUD 
from offering renewal with rent levels higher than those resulting from 
OCAF adjustments, if legally authorized.
Summary of Comments
    1. Difficulties in determining comparable market rents.
    One commenter noted that there are unlikely to be comparable 
unassisted projects in low-income areas. Another noted that, for 
projects with special needs populations (elderly, disabled), 
comparisons must take special features and services into account.
    HUD response: HUD agrees that determining comparable market rents 
will be problematic in some cases. Section 401.410 (both the final rule 
text and the interim rule preamble explanation) address this issue with 
a methodology consistent with express Congressional intent that 
assisted projects not be used for rent comparables.
    2. ``Blended'' rents considering unassisted but restricted units.
    Three commenters wanted the final rule to clarify the treatment of 
projects for which unassisted units with long-term affordability 
restrictions (such as in ELIHPA/LIHPRHA preservation projects) 
considered together with assisted units with above-market rents would 
result in a ``blended'' average rent not exceeding market comparable 
rents. The commenters argued that such

[[Page 15462]]

projects should qualify as projects with rents not exceeding market 
comparable rents and, therefore, should be eligible for contract 
renewal as exception projects under Sec. 402.5(a)(2). This could enable 
the projects to achieve sufficient net operating income to achieve 
owner returns anticipated in preservation program Plans of Action.
    HUD response: HUD will only consider units assisted under the 
expiring section 8 contract in determining whether the aggregate rents 
are higher or lower than market. Preservation projects with approved 
plans of action under ELIHPA or LIHPHRA are no longer eligible for the 
Mark-to-Market program. Please see the related response under Section 
II.A.3.b. of this preamble.
    3. Objections to ``negative NOI project'' and ``positive social 
asset'' requirements for exception rents.
    Many commenters objected to either Sec. 401.411 concerning when to 
use exception rents, or to preamble discussion supplementing that 
section regarding negative NOI projects and the ``positive social 
assets'' test. One commenter objected to the limitation of exception 
rents to negative NOI projects, stating that Congress included 
exception rents for cases such as rural projects and inner cities or 
special populations needing budget-based rents and that requiring no 
debt service would make the ``rate of return'' factor in section 
514(g)(3) of MAHRA a ``nullity''. One commenter stated that exception 
rents must have a second mortgage debt service component adequate to 
support ``reasonable likelihood of repayment'' requirement to avoid 
adverse tax consequences to the project owner, while another suggested 
that all LIHPRHA projects with Plans of Action should be treated as 
exception rent projects, even without negative NOI, if the statutory 
test is met.
    Eleven commenters objected to the positive social asset test in its 
entirety on grounds that it is unnecessary and not provided for in 
MAHRA. Two of these commenters also objected specifically to the 
statement that exception rents should not derive from bad management. 
Another commenter who objected to the positive social asset test said 
that, if it were to be included, there must be clear guidance and 
objective standards in the Operating Procedures Guide on how it would 
be applied. Another objected to routine application of the test but 
felt it could be appropriate for a determination about waiving the 120 
percent limit.
    HUD response: HUD gave particular consideration to this issue in 
light of the volume of comments received from a broad spectrum of 
interest groups, and convened a focus group on November 18, 1998, in 
part to discuss the matter. We are concerned that there appears to have 
been widespread confusion regarding HUD's intent in including the 
``positive social assets'' test in the interim rule preamble. By 
including the language in the preamble, and not in the rule itself, HUD 
tried to provide additional help to the PAEs that must apply the actual 
statutory test for exception rents (which also appears in the rule 
itself): that ``the housing needs of the tenants and the community 
cannot be adequately addressed'' through comparable market rents. In 
other words, if housing needs can be adequately addressed through a 
Restructuring Plan with comparable market rents, the PAE may not 
consider exception rents.
    But equally important, exception rents also cannot be approved if a 
Restructuring Plan with exception rents would not adequately address 
tenant and community housing needs. The statute demands more than 
simply a negative test regarding use of comparable market rents: the 
PAE must be convinced that (rent issues aside) the project is worthy of 
restructuring in lieu of some other approach to meeting tenant and 
community needs. As we attempted to suggest in the interim rule 
preamble, this necessarily requires that a project have certain 
positive attributes that justify continued approval of rents that 
exceed the market. Since many commenters viewed the interim rule 
preamble as an attempt to graft onto MAHRA new considerations that were 
foreign to the statutory provisions, we consider it advisable not to 
repeat the ``positive social assets'' test as stated in that preamble. 
PAEs must, however, be aware of the need for meeting all aspects of the 
statutory objective that we have discussed above.
    In particular, PAEs must recognize that exception rents should 
never be approved if the project would otherwise be rejected for 
restructuring under section 516 of MAHRA because of serious ownership 
or physical condition problems that cannot be remedied. A PAE's 
recommendation of exception rents for a project presumes that, at a 
minimum, the project and owner have been determined and confirmed 
eligible for restructuring as required by Sec. 401.403. Thus, exception 
rents should not be approved for projects that are determined by the 
PAE to have an irreversible detrimental impact in the community, for 
reasons such as unacceptable management practices that adversely impact 
the community, or are deemed ineligible for a mortgage restructuring 
due to the poor condition of the project. In order to receive exception 
rents, the PAE must make a determination that the housing needs of the 
tenants and the community cannot otherwise be adequately addressed. In 
making this determination, the PAE should ensure there are inadequate 
comparable housing alternatives available in the sub-market, so that 
the outcome without project restructuring at exception rents would be 
displacement of those tenants who would experience difficulty in 
finding comparable housing, such as the elderly, persons with 
disabilities, and large families.
    We agree that rural and inner city projects in certain 
jurisdictions will be more likely to need above-market exception rents, 
due to typically low market rents relative to operating expenses. The 
rule makes provision for PAEs to request a waiver (based on special 
need) of the limitations on the number of units that can receive such 
rents. Restricting exception rents to projects with negative NOI, or 
rehabilitation needs in excess of that which can be supported by new 
financing at market rents, is consistent with MAHRA.
    The final rule provides for exception rents adequate to pay debt 
service on the second mortgage and the other items detailed in section 
514(g)(3) of MAHRA. Because of a recent amendment to MAHRA in Pub. L. 
106-74 that authorizes full payment of claims, there is no longer any 
need for a Restructuring Plan to provide for any nominal restructured 
first mortgages. Also, see Section II.K.6. of this preamble for a 
separate discussion of how return to owner is considered in determining 
exception rents. The Operating Procedures Guide specifies that the 
rents should be set to estimate the owner return that would be realized 
if there were a positive but nominal NOI, and to make payments on the 
new second mortgage. The second mortgage will be sized based on the 
amount that can reasonably be expected to be amortized by 75 percent of 
the anticipated net cash flow (i.e., three times the owner's estimated 
return). A third mortgage may be required to the extent the claim paid 
by HUD under Sec. 401.471 exceeds the amount of the second mortgage.
    4. Exception rents should be alternative to FMR.
    One commenter said that the rule should let a PAE choose exception 
rents under Sec. 401.411 instead of using 90 percent of fair market 
rents (FMRs), which the rule identifies as a last resort under 
Sec. 401.411(d). The commenter felt that FMRs are often not useful.

[[Page 15463]]

    HUD response: To the extent the PAE is unable to develop a 
comparable rent using the methodology outlined in Sec. 401.410, 90 
percent FMR may be used (as a last resort) as a proxy for comparable 
rent as provided by statute. Exception rents for projects undergoing 
Mark-to-Market restructuring are limited by statute to cases where the 
comparable rent (or 90 percent FMR) is inadequate to meet expenses with 
no debt service or where the supportable debt is insufficient to fund 
short term rehabilitation needs.
    5. Limitation of exception rents to 120 percent of FMR.
    A commenter characterized this 120 percent limit as ``arbitrary'' 
and said that ``waivers may become the rule''.
    HUD response: This limit is specified by section 514(g)(2)(A) of 
MAHRA.
    6. Need to define ``community''.
    One commenter focused on the definition of the ``community'' 
impacted by a failure to allow exception rents, and urged HUD to 
consider supply of affordable housing in an entire jurisdiction, not 
just a neighborhood.
    HUD response: HUD will rely on the PAE's judgment to make this 
determination.
    7. Other factors to be included in expenses.
    Commenters had suggestions for expenses to consider when 
determining the budget-based exception rents. In addition to the 
comments noted above regarding mortgage debt and return to owners, two 
commenters stated that the return to an owner anticipated in a LIHPRHA 
Plan of Action should be factored into exception rents, and one 
commenter suggested expenses should include health and social services 
for elderly/handicapped projects.
    HUD response: Project operating expenses may include social 
services (such as for elderly/handicapped service coordinators, or 
other Departmental initiatives such as Neighborhood Networks) to the 
extent they have been approved by the Department, and/or have been 
determined by the PAE to be efficiently managed and unique and 
necessary for the project's continued operation as an affordable 
housing resource. LIHPRHA projects with approved plans of action are no 
longer eligible for the Mark-to-Market Program.
    8. Determination of OCAF.
    a. General. Three commenters said that HUD should base OCAF on 
inflation indicators published outside of HUD; while another commenter 
``applauded'' HUD for restricting increases to documented operating 
cost increases. Two others noticed that the geographical area 
considered when determining OCAF is left undefined in the rule. They 
remarked that it should not be too large to pick up local fluctuations 
in taxes, utilities, etc.
    HUD response: A HUD analysis of operating cost data for FHA-insured 
projects showed that their expenses could be grouped into nine 
categories--wages, employee benefits, property taxes, insurance, 
supplies and equipment, fuel oil, electricity, natural gas, water and 
sewer. States are the lowest level of geographical aggregation at which 
there are enough projects to permit statistical analysis. Operating 
expense-related data on a more localized basis are not available on a 
current or consistent basis. HUD's OCAF calculations use data series 
prepared by the U.S. Bureau of Labor Statistics, the Bureau of the 
Census, and the Department of Energy. Owners may apply for a budget-
based rent review in the presumably unusual case that application of 
the OCAF does not address unexpected project specific fluctuations. We 
expect, however, that such fluctuations and other temporary constraints 
on net operating income will be covered by excess debt service 
coverage.
    b. Excluding debt service. Two commenters objected to excluding 
debt service from the expenses to be adjusted by OCAF. One said the 
exclusion will make projects increasingly vulnerable to periods of low 
occupancy and less likely to support a second mortgage, requiring some 
other means to boost rents; another said the exclusion will decrease 
attractiveness of the project to investors who want increase over time 
in debt service coverage.
    HUD response: Congress' use of the term ``Operating Cost Adjustment 
Factor'' (OCAF), which has historically been applied only to operating 
expenses, rather than the term ``Annual Adjustment Factor'' (AAF) 
suggests that Congress expected the Department to not apply the 
increase to the entire rent. Debt service payments remain constant, so 
it is not appropriate to apply an inflation factor to the debt service. 
The debt service component of the effective gross income is the only 
portion that will not be inflated by the OCAF; the Reserve for 
Replacement deposits and the portion of the debt service coverage 
estimates for owner return will increase and presumably remain constant 
with inflation.
    9. Negative OCAF.
    Three other commenters objected to the reduction of rents by using 
negative OCAF. Two of them questioned the legality of rent reductions 
in light of section 8(c)(2) of the United States Housing Act of 1937.
    HUD response: We have removed the reference to negative OCAF in 
response to section 531(a) of Pub. L. 106-74.
    10. Appeals of OCAF.
    One commenter wanted an owner right to appeal OCAF determinations.
    HUD response: OCAF is not determined on a case-by-case basis and 
adjustment of OCAF through appeal for a particular project is not 
appropriate. However, the commenter probably was interested in the 
ability to appeal the rent adjustment that resulted from use of OCAF. 
OCAF is used for rent adjustments for projects with and without 
Restructuring Plans, but HUD retains the discretion to use a budget-
based rent adjustment instead at the request of the owner. The 
statutory reference to using OCAF in Restructuring Plans, and the 
corresponding regulatory provision in Sec. 401.412, does not preclude 
HUD from approving a larger budget-based increase when appropriate even 
though a project is under a Restructuring Plan.
    An owner may request a budget-based rent adjustment if the owner 
can demonstrate that available operating revenues are insufficient to 
maintain a project. The published OCAF factors are based on 
independently produced estimates of changes in major costs items, and 
should prove adequate in most projects. If rent adjustments through use 
of OCAF are inadequate, however, budget-based review provides the most 
relevant basis for reviewing the adequacy of overall project funding.

I. Sections 401.420-.421, Project-Based Assistance or Tenant-Based 
Assistance?

Summary of Sections
    These sections implement section 515(c) of MAHRA, which: (1) 
Provides for mandatory renewal of project-based assistance in a 
Restructuring Plan for projects in tight rental markets and elderly or 
cooperative housing projects; and (2) requires the PAE to develop a 
Rental Assistance Assessment Plan for any other project to determine 
whether assistance should be renewed as project-based assistance or 
whether some or all of the assisted units should be converted to 
tenant-based assistance. The Plan is developed by assessing the impact 
on eight specific areas described in section 515(c)(2)(B) of MAHRA. 
Section 515(c)(2)(C) of MAHRA requires periodic reporting by the PAE to 
HUD on certain matters concerning the form of assistance; this 
requirement is also included in the rule.
Summary of Comments
    1. What vacancies should be considered in determining the presence 
of a tight market?

[[Page 15464]]

    Six commenters objected to a PAE considering all kinds of vacant 
units when determining the presence of a tight market. These commenters 
felt that a PAE should consider only vacancies in comparable units in 
standard condition (neither luxury nor substandard) with rents not 
exceeding the payment standard for tenant-based assistance. Four 
commenters objected to considering vacant units in the entire market 
only and indicated that a PAE should determine whether the vacancy rate 
in the sub-market or neighborhood is at or below six percent. Another 
commenter said that in determining whether a project was predominantly 
elderly, individual phases should be considered if the project was 
developed in phases.
    HUD response: Consistent with Congressional intent, as indicated in 
the Conference Report accompanying MAHRA, the tight market ``safe 
harbor'' for project-based assistance will be applied to metropolitan 
areas with vacancy rates less than or equal to 6 percent. HUD agrees 
that comparable units in the relevant affordable housing sub-market 
should be considered by the PAE in the context of the Rental Assistance 
Assessment Plan developed under Sec. 401.421. The PAE has flexibility 
in this decision on a project-by-project basis, and is expected to 
apply its knowledge of the local market and use its judgment in 
recommending the type of rental assistance.
    2. Effect of sale to cooperative.
    One commenter inquired whether project-based assistance was 
mandated if a sale of the project to a cooperative is planned.
    HUD response: Yes, project-based assistance is mandated if the 
project is sold to a ``nonprofit cooperative ownership housing 
corporation or nonprofit cooperative housing trust'' (pursuant to 
section 515(c)(1)(C) of MAHRA, referenced in Sec. 401.420(a)).
    3. Limit conversion approvals to public body PAEs.
    A commenter suggested that only PAEs that are public bodies should 
be able to approve Restructuring Plans with conversion to tenant-based 
assistance.
    HUD response: All PAEs are permitted to develop Restructuring Plans 
with conversion, if conversion is consistent with the final rule. OMHAR 
will be required to approve all Restructuring Plans, including the type 
of rental assistance, regardless of the category of PAE. Particular 
attention will be paid during review of project specific transaction, 
and through the reporting requirements of Sec. 401.421(d), to projects 
converting to tenant-based assistance and projects that retain project-
based assistance despite the general support by the tenants to convert 
to tenant-based assistance. Under Sec. 401.200 of the final rule, non-
public PAEs will be required to form a partnership relationship with 
HUD if no other public entity is involved. (Note that the final rule 
omits the requirement in interim rule Sec. 401.200 that the partnership 
relationship meet all legal requirements for a partnership.)
    4. Requirement for semi-annual reporting in Sec. 401.421(d).
    One commenter objected to what the commenter saw as a requirement 
for ``continuous'' reporting rather than ``one-time''. Another asked 
how much data gathering/tracking of tenants is required by the PAE, and 
at what cost?
    HUD response: The reporting requirement is for semi-annual reports 
and is not continuous. The amount of data gathered by the PAE from the 
tenants will be detailed in the Operating Procedures Guide. 
Reimbursement of costs for gathering such information from tenants will 
be addressed in the PRA.
    5. How should the final rule handle/present factors to be 
considered in the Rental Assistance Assessment Plan?
    Four commenters wanted HUD to clarify the weighting of the 
statutory factors and to give more guidance to the PAEs. Three 
commenters said that all statutory factors should be set forth in full 
in the final rule, instead of only stating the factor regarding cost 
comparison. Two commenters felt that the rule should state a 
presumption in favor of project-based assistance in order to recognize 
the cost to tenants of conversion. One commenter indicated that the 
factor regarding ability of tenants to find housing in the local market 
should focus on the ability to use tenant-based assistance effectively 
in the neighborhood. One commenter felt that HUD should specify the 
criteria that will be applied to determine whether a project will 
receive project or tenant-based assistance. One commenter suggested 
that conversion to tenant-based assistance should be approved only if 
rehabilitation needs are so extreme that restructuring is not feasible.
    HUD response: The statute and regulations are both neutral with 
regard to the type of assistance to be provided, assuming the project 
does not meet the criteria of section 515(c)(1) of MAHRA. The interim 
rule's specific mention of the comparative cost of project-based versus 
tenant-based assistance as one of the required considerations was not 
an indication that this criterion should be weighed more heavily than 
the other items detailed in section 515(c)(2)(B) of MAHRA. Consistent 
with the Conference Report for MAHRA, the PAE should apply its 
knowledge of the local market conditions, and consider the various 
factors, with no one factor weighted more heavily than others except to 
the extent appropriate on a project-by-project basis. We agree with the 
commenters that there may be a benefit from full presentation of the 
statutory items to be considered in a Rental Assistance Assessment 
Plan, and we have made this change in the final rule. (See Section 
II.W.5. of this preamble for a general discussion of including 
statutory language in the final rule.)
    6. Must all units be assisted under a Restructuring Plan?
    One commenter said the interim rule was ambiguous on whether a 
Restructuring Plan must commit an owner to putting 100 percent of the 
units in a project under project-based or tenant-based assistance, and 
suggested that 20 percent of the units could be reserved for unassisted 
``market rate'' tenants.
    HUD response: Tenants residing in all previously-assisted units 
will have the opportunity to receive either tenant-based or project-
based assistance. Unassisted market rate tenants may be served to the 
extent a project converts to tenant-based assistance and tenants move 
out, subject to (1) the Use Agreement requirements that the minimum 
number of units be reserved to meet low income housing tax credit rent 
and income requirements and (2) the prohibition in Sec. 401.556 of the 
final rule (Sec. 401.483 of the interim rule) against refusal to lease 
units to prospective tenants solely on the basis of their status as 
section 8 voucher holders.

J. Sections 401.450-401.453, Physical Condition of Project

Summary of Sections
    The Restructuring Plan must provide for rehabilitation of the 
project necessary to achieve the property standards set forth in 
Sec. 401.452. (In this preamble and in the final rule itself, the term 
``rehabilitation'' is being used in a broad sense--comparable to the 
broad use of the term in section 531 of MAHRA--that includes 
nonrecurring maintenance (repairs) and payment into project replacement 
reserves.) The first step is an owner evaluation of the physical 
condition and rehabilitation needs of the project (including 
consideration of appropriate measures to ensure accessibility). The PAE 
is then responsible for an independent

[[Page 15465]]

evaluation of the rehabilitation needs (a Physical Condition Analysis, 
or PCA) of the project, and for reviewing and certifying to the 
accuracy of the owner's evaluation (which may be modified to address 
deficiencies identified by the PAE.) Based on the completed PCA, the 
PAE must consider rejecting a request for a Restructuring Plan if the 
PAE cannot determine that proceeding with restructuring involving 
rehabilitation is more cost-effective in terms of Federal resources 
than rejecting the request and providing tenant-based assistance for 
displaced tenants. Any such consideration must be made in light of the 
need to minimize displacement of tenants and to ensure that there are 
alternative housing options available in the community.
    As provided in section 517(b)(7)(A) of MAHRA and Sec. 401.452, the 
standard for rehabilitation to be performed upon approval of 
restructuring is a non-luxury standard adequate for the rental market 
intended at the original approval of the project-based assistance. The 
physical needs identified should be those necessary for the project to 
retain its original market position as an affordable project in decent, 
safe and sanitary condition (including those improvements the project 
requires to achieve any rentals in the non-subsidized market), 
resulting in a marketable project that competes on rent rather than on 
amenities and that meets accessibility requirements. Over the long 
term, the owner must maintain the project in a decent, safe, and 
sanitary condition based on the housing quality standards identified in 
Sec. 401.558 of the final rule (Sec. 401.453(a) of the interim rule). 
For a project receiving project-based assistance, the applicable 
standards will be HUD's Uniform Physical Condition Standards. 
Otherwise, local codes will serve as the standards as long as local 
codes are as strict as HUD standards and do not severely restrict 
housing choice in the view of the PAE. In addition, any unit in which 
the tenant receives tenant-based assistance must comply with the 
housing quality standards of the section 8 tenant-based programs.
Summary of Comments
    1. Use of FNMA PNA guidelines should not be eliminated.
    One commenter strongly believed that the elimination of an 
assessment presentation format for the owner under Sec. 401.450 would 
lead to unnecessary and costly disputes in processing transactions. 
This commenter's experience in the demonstration program led the 
commenter to conclude that failure to prescribe an assessment 
presentation format would cause a high probability of frequent disputes 
that focus on presentation issues rather than substantive issues.
    HUD response: Based on our experience in the demonstration program, 
we do not believe the format of an owner's assessment of the physical 
condition of the property will result in delays or disputes. The 
information specified in Section 401.450 must be presented in a form 
acceptable to the PAE. The owner may update and submit previously-
prepared physical inspections. The PAE is required to independently 
evaluate the condition of the property. The Operating Procedures Guide 
contains more specific information.
    2. The final rule should make clear that third-party expenses for 
physical condition evaluation are eligible project expenses.
    Two commenters suggested that the final rule should make clear that 
third-party expenses for the owner's physical condition evaluation are 
eligible project expenses. One of these commenters pointed out that a 
customary fee for a physical condition evaluation is in the $5,000 
range.
    HUD response: Third party expenses for physical condition 
assessments are eligible project expenses if cash flow is sufficient to 
support such an expense. If cash flow is not sufficient, the expense is 
not an eligible project expense and will not accrue or carry over.
    3. Lead hazards.
    One commenter felt that the final rule should explicitly require a 
lead hazards analysis as part of the physical conditions evaluation.
    HUD response: Inspection for lead-based paint will be part of both 
the owner's evaluation and the PAE's PCA. This requirement is set out 
more fully in the Operating Procedures Guide. If such paint is found in 
a family project in a peeling condition on chewable surfaces, it must 
be remedied. If found, but not posing immediate risk, the owner will be 
required to submit a ``Maintenance Plan'' to prepare for any future 
risks/remediation. Effective September 15, 2000, all projects with 
section 8 project-based assistance will be subject to HUD's revised 
lead-based paint regulations published on September 15, 1999 (64 FR 
50140).
    4. Reserve account deposit.
    One commenter felt that owners should be permitted to assume that 
their section 8 contract will be renewed for 20 years when calculating 
the amount of deposit to the reserve account.
    HUD response: No assumptions should, or need to, be made regarding 
the continued availability of section 8 assistance in determining the 
reserve for replacement accounts. The regulatory agreement will be 
modified to require the monthly deposit requirement to be adjusted 
annually by the OCAF.
    5. Concern about cost-effectiveness determination in 
Sec. 401.451(c).
    Numerous commenters were concerned about the cost-effectiveness 
determination required by Sec. 401.451(c). Six commenters were 
concerned that the cost-effectiveness determination was not consistent 
with statutory intent. Three of these commenters asserted that it was 
Congress' intent that all properties that met statutory criteria and 
whose owners were willing to restructure should be restructured, and 
expressed concern that the interim rule placed cost-effectiveness above 
all other considerations. At least five commenters said that 
Sec. 401.451(c) should be removed from the rule.
    One commenter felt that the standards and methodologies used to 
disqualify a project based on cost-effectiveness should be published 
for public comment. Another commenter felt that the rule was ambiguous 
and that, without clearly articulated standards in the Operating 
Procedures Guide, PAEs would be faced with a difficult decision 
regarding what represented cost-effective use of Federal resources. 
Another commenter stated that the cost-effectiveness determination 
needed to be guided by an objective standard. One commenter suggested 
that the PAE should be given other factors to consider before 
concluding that a project was cost prohibitive, and that there should 
be a clear presumption in favor of preserving the housing stock and 
maintaining the project-based rental assistance. Another commenter felt 
that ``non-economic objectives should take precedence'' as long as a 
project met tenant and community housing needs. Another commenter felt 
that the rule must make clear that the impact on tenants and the 
community is an integral part of the cost-effectiveness determination 
and not ``some minor, peripheral consideration.''
    HUD response: HUD discussed implementation of the ``cost-
effectiveness'' test with a broad variety of interest groups at the 
focus group meeting on November 18, 1998. While PAEs are required to 
ensure that all repair items are cost-effective, the determination 
required by this section is intended to ensure particular scrutiny by 
the PAE of those projects that have significant rehabilitation needs so 
that other less costly approaches (either in the scope of work or by 
recommending rejection of the Restructuring Plan) are considered. We 
expect the PAE to

[[Page 15466]]

exercise judgment in balancing the competing economic and social 
objectives in every case rather than relying on an ``objective'' 
standard set by HUD.
    6. PAE certification.
    One commenter felt that it would not be possible for a PAE to 
certify the accuracy and completeness of an owner's evaluation of a 
project's physical condition. The commenter was concerned that 
requiring a PAE to certify the owner's evaluation would put the PAE in 
an untenable position because physical condition assessment is often 
complex and ``ultimately not empirical.'' The commenter suggested that 
the PAE merely ``confirm that the owner's plan reasonably reflects 
their own findings and they believe the needs are addressed cost-
effectively.''
    HUD response: The rule and MAHRA both require a PAE to certify an 
owner's evaluation of project physical condition. The PAE should give 
the owner the opportunity to revise the owner's evaluation after 
consultation regarding any disputed work items or costs. Alternatively, 
the PAE must recommend rejecting the Restructuring Plan. OMHAR will be 
responsive to PAE questions concerning rehabilitation standards; 
however, it is a PAE's responsibility to bring its professional 
judgment to bear as it evaluates the owner's proposal, the PAE's 
independent third party report, and tenant and local community input 
when developing the Restructuring Plan.
    7. Property standards for rehabilitation.
    One commenter felt that ``lowering the bar to modest competition'' 
by effectively accepting diminished physical conditions would have a 
negative impact on quality-of-life and public relations because 
eligible projects--while not luxurious--may compare favorably to other 
conventional properties in the area. Another commenter suggested that 
this ``non-luxury'' standard be removed from the final rule because it 
is not effective guidance (amenities affect rent and vice versa and 
what is an amenity in one market is a marketing necessity in another) 
and the standard would be cited to discourage rehabilitation to a level 
that might attract a mixed-income occupancy. Another commenter felt 
that the standard might not be consistent with the legislative goal of 
assuring that projects be able to function in the marketplace without 
assistance.
    One commenter felt that calling for the ``least costly 
rehabilitation plan'' may cause owners to purposefully underestimate 
their physical condition assessments in order to avoid 
disqualification. This commenter suggested that rehabilitation 
standards should be based on actual need determined with tenant 
assistance. One commenter suggested that the final rule reference the 
physical condition standards prescribed in Sec. 401.453 of the interim 
rule if a project's Restructuring Plan is to provide for continued 
project-based assistance. The commenter recommended that rehabilitation 
for these projects should be sufficient to meet the Uniform Physical 
Conditions Standards in 24 CFR Sec. 5.703. One commenter felt that a 
lender who refinanced the first mortgage a conventional loan should be 
able to require whatever rehabilitation the lender considers 
appropriate. In addition, this commenter felt that HUD should indicate 
whether rehabilitation is supposed to address issues raised in the PCA 
or satisfy the physical conditions standards in Sec. 401.453 of the 
interim rule.
    HUD response: The final rule requires restoration suitable for the 
market for which the project was originally approved. Thus, materially 
diminished physical standards would not be acceptable as part of a 
Restructuring Plan. The PAE's inspector must ensure that the project 
meets the applicable physical condition standards, but immediate 
threats to health and safety are not eligible work items that may be 
deferred until completion of the Restructuring Plan. Rather, they must 
be corrected immediately and, since the existence of these matters 
violates the Regulatory Agreement, the PAE must evaluate the project's 
eligibility in accordance with Sec. 401.403(b)(2)(ii). The repair work 
items should address the issues raised in the PCA. The rehabilitation 
standard requires a project that can compete in the marketplace. To the 
extent the market requires a particular amenity, it should be added to 
enable the project to compete on the basis of rent. We expect the PAE 
to exercise professional judgment and to apply their knowledge of local 
conditions in determining if the lack of an amenity would render a 
property unmarketable. The PAE is required to independently evaluate 
the physical condition of the project, including evaluating the 
accessiblity of the project to persons with disabilities, and to 
solicit tenant and local community comments. The PAE can recommend that 
OMHAR approve lender rehabilitation requirements so long as they are 
consistent with the requirements of the Restructuring Plan.
    8. Physical condition standards should not apply to non-assisted 
market rent units.
    One commenter argued that section 8 units (both project-based and 
tenant-based assistance) are already covered by physical condition 
standards by virtue of HAP contracts so that the only effect of 
Sec. 401.453 of the interim rule would be to make the standards 
applicable to non-assisted market rent units. This commenter suggested 
that the final rule should provide that HQS will be applicable to 
assisted units in restructured properties through the terms of 
assistance contracts and that the local housing code should be the 
applicable standard for non-assisted units.
    HUD response: Section 514(e)(5) of MAHRA does not permit non-
assisted units to be excluded from the physical condition standards. 
This is a reasonable result because the entire project benefits from a 
mortgage restructuring. In keeping with 24 CFR parts 5.703 and related 
changes in other regulations, this rule recognizes that the separate 
section 8 HQS has been eliminated for projects with project-based 
assistance.

K. Sections 401.460-401.471, Mortgage Restructuring and Payment of 
Claims

Summary of Sections
    Section 401.460 explains the standards for restructuring with a 
modified or refinanced first mortgage. The first mortgage will be a 
fully amortizing, level payment mortgage with a principal amount 
sustainable at rent levels that do not exceed the lower of section 8 
rents allowed under the Mark-to-Market Program or rents permitted under 
the Use Agreement under Sec. 401.408. The PAE should take into account 
any need for financing needed rehabilitation when sizing the first 
mortgage and determining the appropriate amount of mortgage insurance 
payment by HUD. The monthly payment for the first mortgage under the 
Mark-to-Market Program will not exceed the current first mortgage 
payment. Interest rates and other terms must be competitive in the 
market, with any fees and costs above normal processing fees to be paid 
by the owner from non-project sources. Due to the significant potential 
for conflicts of interest if the PAE provides the first mortgage 
financing, HUD will apply an exceptionally high level of review 
whenever this is proposed as part of the Restructuring Plan, with 
special HUD approval needed for any PAE risk-sharing under 24 CFR part 
266 for a refinanced first mortgage. HUD will approve risk-sharing when 
appropriate in accordance with Pub. L. 106-74.

[[Page 15467]]

    Section 401.461 provides standards for the new HUD-held second 
mortgage which is needed whenever the insured or HUD-held mortgage debt 
is written down through payment of a section 541(b) mortgage insurance 
payment by HUD. The second mortgage is limited to an amount that the 
PAE reasonably expects to be repaid by the owner, and may not exceed 
the difference between the first mortgage before restructuring and the 
modified or refinanced first mortgage after restructuring. HUD may 
require a HUD-held third mortgage if the amount of a partial claim 
under Sec. 401.471 exceeds the principal amount of the second mortgage. 
The second mortgage will bear simple interest of at least 1 percent, 
but no more than the applicable Federal rate determined by the 
Department of the Treasury. The term will be concurrent with the term 
of the modified or refinanced first mortgage or, if the existing first 
mortgage is completely paid off, the term will be set by HUD. The 
mortgage will become due and payable as provided in Sec. 401.461(b)(3). 
At least 75 percent of the project's net cash flow after payment of 
first mortgage debt service and operating expenses must be used to pay 
principal and interest on the second mortgage. The rest of the cash 
flow may be paid to an owner who meets certain property management and 
physical condition standards. HUD will consider modification or 
forgiveness of the second mortgage if: (1) The project has been sold or 
transferred to a priority purchaser under Sec. 401.480; and (2) HUD 
determines that modification or forgiveness is necessary for 
recapitalization to preserve the project as affordable housing.
Summary of Comments
    1. How should net operating income available to pay the first 
mortgage be determined?
    a. Expenses. Commenters offered ideas about the expenses to be paid 
from operating income before determining ``net'' operating income for 
this section. One commenter listed a number of lender-required costs 
that should be allowed in the case of conventional refinancing. Three 
commenters felt that a reasonable rate of return to the owner needed to 
be considered; one of them said it should not be below the return 
already allowed. Three commenters said that the owner compensation 
provided under a plan of action for preservation projects needed to be 
considered.
    HUD response: Reasonable expenses to meet requirements of the 
lender (whether the first mortgage is FHA-insured, HFA-originated with 
risk-sharing, or conventional debt) will be acceptable so long as the 
financing is competitive. See the discussion of return to owner at 
Section II.K.6. Preservation projects are no longer eligible for the 
Mark-to-Market Program.
    b. Sizing the first mortgage. We received other comments relating 
to sizing the first mortgage. Two commenters objected to sizing on the 
basis of LIHTC rent levels if lower than comparable market rents. Two 
others wanted HUD to state a debt service coverage ratio (DSC) in the 
rule: One suggested 1.20, the other suggested at least 1.25 for 
conventional loans. Another said the DSC should be adequate to permit 
sale of the mortgage at or very near ``par''. A commenter said that a 
restructuring plan for a project with an existing insured second should 
write the second mortgage off completely before any restructuring of 
the insured first mortgage.
    HUD response: To the extent the LIHTC rents are lower than 
comparable market rents, the first mortgage should be sized 
accordingly. While the section 8 assistance remains in place, all extra 
net cash flow will be applied to payment of the second mortgage so that 
the owner does not benefit unduly from this sizing of the first 
mortgage based on LIHTC rents. The owner or PAE could (with lender 
approval) request a waiver to allow a compensating decrease in the debt 
service coverage ratio in such cases. A specific DSC is not appropriate 
for the final rule; guidelines are contained in the Mark-to-Market 
Program Operating Procedures Guide. Generally we would expect a DSC of 
1.2 but a higher ratio may be appropriate for smaller loans or to 
facilitate conventional financing.
    2. First mortgage terms and conditions.
    We received the following miscellaneous comments on first mortgage 
terms and conditions:
     The interest rate and DSC should be adequate to permit 
sale at or very near ``par''.
     ``Normal processing costs'' needs to be clarified (with 
examples of costs that should be included).
     The PAE should be able to continue with existing above-
market terms if the lender requires this as a condition of accepting a 
partial claim or if the PAE thinks this is the best approach.
     A PAE certification of ``competitive'' terms should be 
conclusive, or a mortgagee certification should be conclusive absent 
bad faith or manifest error.
     HUD should allow balloon loans as conventional loans and 
base competitiveness of rates, processing fees, etc., for conventional 
loans on the conventional market.
    HUD response:
     The interest rate and other terms of any refinancing are 
expected to be competitive.
     Processing costs must be reasonable and customary as 
determined by the PAE (and the lender of any new financing); examples 
include title and closing costs, and loan origination fees.
     It is unlikely that OMHAR will approve above-market terms 
for any financing. To the extent the existing lender is unable to 
provide competitive terms, the owner should pursue alternative 
financing sources.
     The Operating Procedures Guide requires documentation that 
the terms are competitive within a reasonable range.
     Balloon payments are not acceptable. The modified or 
refinanced first mortgage must be fully amortizing through level 
monthly payment). The PAE may consider shorter amortization periods if 
warranted by the condition of the property and availability of 
financing.
    3. Refinancing.
    One commenter said that the existing lender must be given a 
reasonable opportunity to refinance before another lender is involved. 
Two other commenters urged HUD to support the use of the section 
223(a)(7) program; suggestions included allowing OMHAR rather than FHA 
to handle processing and providing priority or incentives for section 
223(a)(7) refinancing to finance rehabilitation. Two commenters object 
to requiring special HUD approval for PAE risk-sharing as unnecessary 
and leading to delays. Finally, a commenter said that a small (under 
$300 thousand) first mortgage, even if supportable by rents, would be 
difficult to obtain on competitive terms so that a refinancing of a 
small first mortgage should not be required to take out the lender who 
will not accept a partial payment of claim.
    HUD response: The final rule requires the owner to contact the 
mortgagee prior to seeking other sources of funding for the 
Restructuring Plan. This issue is addressed in more depth in the 
Operating Procedures Guide and other guidance from OMHAR. The issues 
raised by the suggestion supporting the use of the section 223(a)(7) 
program involves delegations of authority within HUD and will be 
addressed in the Operating Procedures Guide. We are neutral as to the 
source of new financing so long as the terms are competitive, except to 
the extent that section 219 of Pub. L. 106-74 requires HUD to use risk-
sharing. Questions involving PAE risk-sharing raise conflict of 
interest

[[Page 15468]]

issues to be decided on a case-by-case basis after expeditious but 
thorough technical reviews. We anticipate the market will set the terms 
of new financing, in part dependent on the size of the loan, and 
acknowledge that a good faith effort by the owner to obtain new 
financing on reasonable terms may not succeed. A PAE then may consider 
a Restructuring Plan with full payment by HUD of a section 541(b) claim 
and an increased second mortgage. However, it is not acceptable to 
allow above-market rents to support the existing debt due to a 
perceived difficulty in refinancing.
    4. Second mortgage terms and conditions.
    a. Interest rate. We received the following suggestions regarding 
interest on the second mortgage:
     Clarify in the Operating Procedures Guide that the 
interest rate should be low enough so that an owner is clearly likely 
to repay; the interest rate should be 1 percent unless HUD requests 
otherwise (or 0 percent if the aggregate loan amount exceeds 100 
percent of value).
     Permit a 0 percent rate since it is not ruled out by the 
Revenue Ruling.
     Set standard at 0 percent except when that would lead to 
payoff of the HUD-held second and third mortgage in less than 10 years.
    HUD response: For interrelated legal and policy reasons, we have 
elected to retain the 1 percent minimum interest rate. Our 
interpretation of section 517(a)(2) of MAHRA is that some interest is 
required to be charged on the second mortgage. The minimum rate that we 
have selected is nominal and should not cause undue burden on the 
mortgagor. Additionally, the factual premise of IRS Revenue Ruling 98-
34 includes a statement that the new second mortgage ``provides for 
interest''.
    b. Other second mortgage terms and conditions. We received the 
following miscellaneous comments on second mortgage terms and 
conditions:
     Set the term ``concurrent'' rather than ``concomitant'' 
with the term of the first.
     Acceleration for violation of HUD requirement should be 
only for material violation of a material HUD requirement, and should 
be allowed only after written notice to owner of the violation.
     HUD should ask for a statutory change allowing for longer 
terms.
     Use a standard form.
     HUD should specify conditions to be in second mortgage, 
consistent with first mortgage.
    HUD response:
     We agree that the term ``concurrent'' is preferable.
     There are adequate safeguards in the final rule to guard 
against unfair acceleration of a second mortgage. Safeguards include a 
requirement of materiality for violations (now included expressly), and 
notice and an opportunity to cure prior to acceleration of a second 
mortgage. Additionally, the rule provides an administrative dispute and 
appeal procedure for any acceleration decision (unless acceleration is 
based on payment or termination of the first mortgage, or unauthorized 
sale and assumption, as provided in MAHRA).
     Alteration of the second mortgage term would require an 
amendment of the statute. HUD has no basis for seeking such an 
amendment at this time.
     The Operating Procedures Guide will provide a standard 
form for second mortgages. The terms of the second mortgage are largely 
set by MAHRA and are detailed in the final rule and the Operating 
Procedures Guide. The second mortgage is different in nature from the 
first mortgage and will not be identical to the first mortgage.
    5. Forgiveness/modification of second mortgage.
    Two commenters said that forgiveness/modification should be 
available for a priority purchaser whether or not the property has been 
disqualified for restructuring under existing ownership. One commenter 
argued that forgiveness should also be allowed for a limited 
partnership purchaser controlled by priority purchaser.
    HUD response: Section 401.461(b)(5) of the final rule allows 
modification or forgiveness of the second mortgage if certain 
conditions are met. This availability of modification or forgiveness is 
not dependent on the existing owners being disqualified from 
restructuring. See Section II.A.1.c. of this preamble for a discussion 
of a limited partnership controlled by a public body.
    6. Return to owner.
    One commenter opposed allowing the PAE to set the owner's share of 
net cash flow below 25 percent, arguing that a lower share will 
discourage owners from restructuring. Another commenter said that an 
owner right to 25 percent may be incentive for owners to neglect upkeep 
of project (i.e., in order to reduce expenses and boost net cash flow) 
and that tenants should be involved in determining if a project meets 
the property management standards as a precondition to paying the owner 
share.
    HUD response: HUD is sensitive to the fact that restructured 
projects (particularly those with large decreases in rents) will have 
tighter operating budgets and thus will require larger debt service 
coverage ratios to compensate. Section 517(a)(3) of MAHRA restricts the 
owner's return to a maximum of 25 percent of Net Cash Flow. There is no 
statutory provision for additional return to an owner, even for 
exception rent projects or other projects that may previously had an 
approved rate of return that would permit larger payments to the owner. 
Section 514(g)(3)(D) of MAHRA provides for an allowance for a 
reasonable rate of return to the owner when determining the level of 
exception rents, but we do not consider this an allowance for an 
additional owner return beyond that permitted for non-exception rent 
projects. The setting of rents above market will provide for the return 
permitted by section 517(a)(3) (assuming the owner's operation of the 
project is efficient so that Net Cash Flow meets or exceeds the 
underwriting estimate.)
    While the typical return permitted by a Restructuring Plan will not 
be less than 25 percent of the Net Cash Flow, the PAE will retain 
discretion to negotiate the amount on a case-by-case basis. Further, to 
the extent the potential for LIHTC rents in the absence of project-
based assistance constrains net operating income for underwriting 
purposes, the project will effectively be oversubsidized during the 
time project-based section 8 assistance is provided. The portion of Net 
Cash Flow to pay the second mortgage must be increased accordingly. HUD 
or the PAE will require the project meet management and physical 
condition standards as a condition of distribution of the owner's 
portion of the net cash flow. Tenants (and other interested parties) 
can address their concerns to HUD or the PAE.
    7. Third mortgage.
    Four commenters opposed the possibility of a HUD-held third 
mortgage as provided in the interim rule. One said it would lead to 
``overleveraging'' a project; two others said a third mortgage should 
be limited to an amount reasonably likely to be repaid that was 
excluded from the second only because of statutory limitations on the 
aggregate of the first and second mortgages. Another commenter 
suggested using budget-based exception rents whenever a third mortgage 
would otherwise be needed. Another commenter asked when a HUD-held 
third mortgage would be forgivable.

[[Page 15469]]

    HUD response: A third mortgage, when necessary, would not 
``overleverage'' a project. First, it would require no payments on 
principal or interest until the second mortgage is satisfied. Second, a 
third mortgage would accrue only nominal interest and this interest 
will not compound. Third, the final rule allows a PAE to negotiate a 
reduction of the maximum third mortgage amount that would otherwise be 
required initially under a Restructuring Plan, within limits set by 
HUD, in order to recognize the imputed tax consequences to the owner of 
the restructuring. The Operating Procedures Guide will initially allow 
the PAE to negotiate a reduction of the initial mortgage amount by up 
to 30 percent. Finally, the final rule permits HUD to forgive or modify 
the third mortgage on the same conditions as apply to a second mortgage 
under Sec. 401.461(b)(5). Exception rents are designed to address 
specific housing needs of tenants and communities and may not be used 
solely to prevent a section 541(b) claim. Accordingly, we have rejected 
the suggestion to use budget-based exception rents whenever a third 
mortgage is required.
    8. Claims.
    One commenter said the rule should include in the partial claim 
amount accrued interest on the mortgage amount to be prepaid by the 
claim at the note rate up to the date of prepayment. Another commenter 
concluded that payment only of a partial rather than a full claim would 
mean that exception rents would never be allowed under Sec. 401.411(b) 
because that provision makes no allowance for payment of any first 
mortgage debt remaining after a claim payment. A commenter said that 
HUD should clarify in the final rule that a servicer incurs no 
obligation to Ginnie Mae security holders for accepting a ``compelled'' 
partial payment from HUD, and HUD should indemnify the lender.
    HUD response: When HUD pays an insurance claim for a mortgage that 
is in default, the claim includes an amount for the unpaid interest 
that would have been included in the defaulted payments. There is no 
similar need to compensate the mortgagee through a section 541(b) 
claim, which is made only for a mortgage that is not in default. The 
commenter is correct that HUD will restrict debt service paid from 
exception rents to payments on the second mortgage for negative Net 
Operating Income projects or to payments on a new rehabilitation loan, 
but exception rents will be needed only for projects which also require 
a full payment of claim and which, thus, will not continue the existing 
first mortgage even at a nominal level. We have no legal authority, or 
program interest, in becoming involved in a lender's relationships with 
Ginnie Mae security holders. Moreover, the commenter's concern about 
``compelled'' partial claim payments is unfounded. Under the final 
rule, OMHAR or FHA will not compel a lender to accept a partial claim 
payment. If the lender is not able to obtain approvals from investors, 
such as Ginnie Mae security holders, needed to accept a partial claim 
payment, the owner must refinance the first mortgage with a lender 
willing to make a new loan that will pay off the first mortgage amount 
in excess of the partial claim payment.

L. Sections 401.472-.473, Funding of Rehabilitation

Summary of Sections
    Section 517(b)(7) of MAHRA and Sec. 401.472 identify some potential 
sources for funding needed for rehabilitation of the project. The 
interim rule includes the requirement of section 517(b)(7)(B) of MAHRA 
that an owner contribute from non-project funds at least 20 percent of 
the total cost of rehabilitation. The preamble to the interim rule 
stated that a reasonable proportion of the owner's contribution must 
come from non-governmental resources, which we estimate would be a 
minimum of 3 percent of the total cost of rehabilitation. One of the 
potential Governmental sources of rehabilitation funding is the grants 
authorized by section 236(s) of the National Housing Act. Section 
401.473 addresses the use of these grants in connection with 
restructuring.
Summary of Comments
    1. Opposition to 20 percent owner contribution requirement.
    Three commenters wanted HUD to exempt nonprofit owners from the 
requirement for a contribution of 20 percent of rehabilitation 
expenses. One commenter observed generally that owners of all types are 
unlikely to contribute 20 percent. Four others opposed the requirement 
without an incentive to make the contribution. These commenters 
suggested treating the contribution as a self-amortizing market-rate 
loan to the project that would be repayable as project expense, or 
providing some type of priority return or some set rate of return.
    HUD response: The owner contribution is required by section 
517(b)(7) of MAHRA and the return to the owner is constrained by 
section 517(a)(3) of MAHRA. Other than the exemption permitted by 
statute for housing cooperatives, nonprofit owners cannot be exempted 
from the owner contribution requirement without a statutory change. 
Eighty percent of the rehabilitation costs will come from sources other 
than owner contributions, and the interim rule preamble and Operating 
Procedures Guide both allow the owner to include any available funds 
from other government sources to meet their contribution requirements, 
except as discussed in the following topic.
    2. Opposition to limit on funding from governmental resources.
    One commenter opposed a limitation on funding from nongovernmental 
sources while another said that any such limitation needed to be in the 
rule. Five commenters said that all nonprofit owners should be exempt 
from the limitation, while two others said the PAE should be able to 
waive it for nonprofit owners. Two commenters asked HUD to clarify that 
equity raised by syndicating Low-Income Housing Tax Credits (LIHTC) is 
a non-governmental source of funding.
    HUD response: The preamble to the interim rule contained two points 
of elaboration on the 20 percent owner contribution requirement that 
appears in MAHRA and in the interim rule. The preamble stated that a 
``reasonable proportion'' must come from non-governmental sources, and 
estimated that this proportion would be set at a minimum of 3 percent. 
We continue to believe that it is reasonable to expect each owner to 
contribute towards the cost of rehabilitation from the owner's own 
resources, because the owner will benefit from the resulting increase 
in project value. We recognize that owners of restructured projects may 
have severe limitations on the ability to make additional investment in 
the project, but in cases where other public funds are available, 
owners will cover only a small part of the costs from their own 
resources. The commenters did not provide convincing evidence that 
these preamble requirements would prevent PAEs from developing 
Restructuring Plans with all necessary and cost-effective 
rehabilitation--whether for for-profit or non-profit owners. Because of 
the substantive impact of our decision to require owners to use their 
own resources toward partial implementation of the statutory 
requirement for an owner contribution, we have decided that the matter 
properly belongs in the text of the final rule itself. The precise 
level of required non-governmental resources, however, will continue to 
be set in the Operating Procedures Guide.

[[Page 15470]]

    PAEs will have limited ability to request waivers of this 
regulatory requirement in exceptional cases (e.g. to facilitate the 
transfer of a troubled project to a priority purchaser), but no waiver 
is possible for the statutory 20 percent requirement. As stated above, 
MAHRA permits housing cooperatives to be exempted from the owner 
contribution requirement. Broadening this exemption option would 
require a statutory change. Equity contributions from the syndication 
of LIHTC will be considered a non-governmental source of funding for 
rehabilitation funding purposes, but will trigger a thorough technical 
review of the Restructuring Plan.
    3. Other comments regarding 20 percent requirement.
    One commenter wanted HUD to clarify that non-Federal government 
funding such as State/local grants or loans will be counted in the 20 
percent owner contribution. Three commenters asked about borrowed funds 
as part of the contribution; one of them specifically mentioned insured 
section 223(a)(7) or 223(f) refinancing loans secured by the project 
and another mentioned conventional refinancing of the project. One 
commenter wanted the rule to specify conditions for a PAE requirement 
for a contribution of more than 20 percent.
    HUD response: FHA-insured loans (or conventional secured debt that 
is not subordinate to the Sec. 401.461 second and third mortgages) are 
considered project resources and may not be used to fund the owner's 
contribution. The PAE has discretion to negotiate a larger owner 
contribution. State/local grants or loans can be used to meet most of 
the owner's contribution. OMHAR has provided further guidance in its 
Operating Procedures Guide concerning the source of funds that an owner 
may utilize toward rehabilitation financing.
    4. Comments regarding use of project accounts for rehabilitation.
    One commenter cautioned against violating an owner's contract right 
under the regulatory agreement to distribution of surplus cash. Another 
commenter suggested that the lender for a conventional refinanced first 
mortgage should be able to use funds in project accounts to establish 
escrows and reserves required by the lender's usual underwriting 
standards.
    HUD response: Section 517(a)(3) of MAHRA changes the distribution 
of surplus cash. The first and second mortgages for a project 
restructured under the Mark-to-Market Program will reflect the 
statutory change. As part of a closing, owners will be required to 
execute a Modification of Regulatory Agreement. It will modify the 
terms of an old or new FHA Regulatory Agreement, reference the 
Restructuring Plan documents as controlling the owner's distribution, 
and specifically delete the requirement of a residual receipts account 
as long as the second or third mortgages are in place. In a non-FHA 
refinancing the existing Regulatory Agreement is canceled.
    Section 517(b)(6) of MAHRA authorizes use of project accounts in 
connection with restructuring but does not preclude a PAE (as part of a 
Restructuring Plan involving conventional financing) from recommending 
the use of existing project account balances to fund the initial 
deposit to a new reserve for replacement account or to fund tax and 
insurance escrows.
    5. Section 236(s) rehabilitation grants.
    Three commenters said that HUD should target rehabilitation grants 
to new priority purchasers as well as existing nonprofit owners for 
projects undergoing restructuring; two of them also said that section 
236(s) grants should be available on a preferential basis to nonprofit 
owners or below-market projects renewing under part 402 without 
restructuring. Two commenters pointed out that treating section 236(s) 
grants in a rule only for projects undergoing restructuring (i.e., part 
401) puts exception projects seeking grant money at a disadvantage; one 
of them asked that HUD add a new section to part 402 on section 236(s) 
grants. Finally, one commenter asked whether section 236(s) grants can 
be structured as loans to avoid adverse tax consequences to owners.
    HUD response: As noted in the preamble to the interim rule, HUD is 
pursuing a separate rulemaking procedure regarding use of the section 
236(s) grant authority outside of the Mark-to-Market program. To the 
extent a Mark-to-Market restructuring generates Interest Reduction 
Payment (IRP) recaptures, those funds will be used to assist with 
rehabilitation financing for the restructured property, or for other 
properties through procedures to be defined in the separate rulemaking.
    6. Funding of rehabilitation through claim amount.
    A commenter suggested that HUD's intent behind Sec. 401.472(a)(2) 
regarding facilitating rehabilitation through the claim amount was to 
permit the claim to be large enough to reduce the first mortgage debt 
so the project rents could support a refinanced first mortgage that 
paid off remaining debt and financed rehabilitation. Another commenter 
suggested that it would be simpler to pay rehabilitation costs directly 
from the FHA insurance fund instead of through a larger partial claim/
smaller first mortgage.
    HUD response: The first commenter has correctly interpreted HUD's 
intent in Sec. 401.472(a)(2). Unlike the demonstration program, the 
Mark-to-Market Program does not include HUD authority to directly fund 
rehabilitation through a payment from the FHA insurance fund as 
suggested.

M. Section 401.480 Sale or Transfer of Project

Summary of Section
    This section covers the sale or transfer of a project undergoing 
restructuring at the owner's initiative (i.e., a voluntary sale) or 
following a determination that the current owner is ineligible for 
restructuring (i.e., an involuntary sale). A PAE will develop a 
Restructuring Plan with an involuntary sale only if, within 30 days of 
notice of rejection, the owner notifies HUD or the PAE of the owner's 
intent to transfer the property. The owner must also provide a notice 
to potential purchasers that describes the project and the procedure 
for submitting purchaser offers; the notice is subject to review and 
approval by HUD or the PAE. The owner must distribute and publish an 
approved notice as required by HUD. This section gives a preference to 
certain ``priority purchaser'' groups, defined as tenant organizations, 
tenant-endorsed community-based nonprofit organizations, and tenant-
endorsed public agency purchasers. The owner must inform the PAE of any 
intention to accept a purchase offer. An eligible owner desiring to 
sell or transfer a project through a voluntary sale should provide 
notice as part of its initial request for a Restructuring Plan or at 
any later time when it is still feasible to develop a Restructuring 
Plan involving sale or transfer, but the owner is not otherwise subject 
to the requirements of this section. All project sales are subject to 
PAE approval and HUD approval of the Restructuring Plan.
Summary of Comments
    1. HUD should be responsible for sale of projects.
    Three commenters felt that, in order to better protect the 
interests of tenants, HUD should maintain overall responsibility for 
the sale of projects.
    HUD response: OMHAR will maintain overall responsibility for all 
aspects of the Mark-to-Market program, including approval of the sale 
of projects. We will carefully review PAE recommendations and input 
from tenant and local

[[Page 15471]]

community groups, whenever a project is proposed for sale or transfer.
    2. Preferences for priority purchasers.
    Four commenters were concerned about preferences for priority 
purchasers. One commenter argued that the interim rule improperly 
creates an absolute priority instead of the preference provided in 
MAHRA. The commenter further argued that, in the case of voluntary 
sales unrelated to disqualification, MAHRA does not support even a 
preference for priority purchasers and the owner should have sole 
discretion to choose the project purchaser. Three commenters questioned 
the rationale for granting a preference to priority purchasers because 
tenant and community-based groups are not necessarily better at 
maintaining a project as decent, safe, and affordable housing than 
other nonprofit or for-profit groups. According to the commenters, 
qualified nonprofit or for-profit groups could include organizations 
that would not meet the definition of priority purchaser because of a 
city-wide mandate or a tenant-endorsed non-profit housing group with a 
demonstrated track record.
    HUD response: In the event of an involuntary sale or transfer of a 
project, the Operating Procedures Guide will permit offers to be 
accepted only from priority purchasers during a reasonable period (to 
be determined by HUD, currently 4 months) after notice of sale or 
transfer. After that period there are no restrictions on sale or 
transfer of the project. The rule also states that voluntary sales or 
transfers do not have any priority purchaser requirements. The 
preference for priority purchasers in the event of involuntary sale or 
transfer is based on the requirements of MAHRA and HUD's goal of 
maintaining safe and affordable housing for low income individuals and 
families. Priority purchaser offers will be subject to substantive 
review by both the PAE and OMHAR. Offers will be rejected if not in the 
best interest of the community and HUD. MAHRA requires priority 
purchasers to have a local community or tenant base. Otherwise-capable 
non-profits can partner with such groups to obtain this preference.
    3. Priority purchasers and competitive sales.
    Four commenters were concerned about the effect of the preference 
for priority purchasers on an owner's ability to demand competitive 
offers. Two commenters suggested that the final rule should clarify how 
long an owner must hold a property exclusively for sale to priority 
purchasers and what actions an owner must take to demonstrate a good 
faith effort to sell to a priority purchaser. One of these commenters 
felt that PAEs should not be required to withhold approval of a sale to 
a non-priority purchaser for an unreasonably long period of time. One 
commenter felt that the final rule should give wide discretion to the 
PAE to approve non-priority purchasers and that the PAE should be able 
to waive the requirement for tenant approval if approval is 
unreasonably withheld.
    HUD response: Priority purchasers will have a preference only in 
the event of an involuntary sale or transfer of a project, and then 
only for a limited period of time. This preference should have a 
minimal impact on an owner's ability to demand competitive offers 
because the Operating Procedures Guide requires that priority (and all) 
purchaser offers be reviewed carefully by both the PAE and OMHAR. The 
Operating Procedures Guide also requires that the PAE must attempt to 
mitigate losses to the Government while not placing sole priority on 
purchase price. In the event the PAE believes tenant approval is being 
unreasonably withheld, OMHAR should be consulted on a case-by-case 
basis.

N. Sections 401.481-.484, Other Requirements of Restructuring Plan

Summary of Sections
    Section 401.481 explains the subsidy layering certification that a 
PAE must make under section 514(e)(7) of MAHRA. The purpose of the 
subsidy layering certification procedure is to ensure that any HUD 
assistance provided to the owner of a project under the Restructuring 
Plan is no more than is necessary to permit the project to continue to 
house a tenant mix that is comparable in income to the tenant income 
mix of the project before the Restructuring Plan is implemented--after 
taking into account other Federal, State, or local governmental 
assistance of any kind such as grants, loans, guarantees, or tax 
credits or other tax benefits. HUD may rely on the PAE's certification 
if HUD has already approved the PAE to do subsidy layering 
certifications for other purposes.
    Section 514(e)(9) of MAHRA prohibits refusal to lease a 
``reasonable number'' of units to section 8 voucher holders because of 
their status as voucher holders. Under Sec. 401.483 of the interim rule 
(Sec. 401.556 of the final rule), the Restructuring Plan will not 
permit an owner to reject any prospective tenants solely because of 
their status as voucher holders. (Note that title V of Departments of 
Veterans Affairs and Housing and Urban Development, and Independent 
Agencies Appropriations Act, 1999, merged the voucher and certificate 
programs into a consolidated voucher program. HUD has proposed to 
Congress technical corrective legislation that will conform MAHRA to 
this change. The final rule refers solely to vouchers to carry out 
clear Congressional intent, but the term ``vouchers'' is defined to 
include any tenant-based assistance under the definition in MAHRA, 
which is also the section 8 definition.)
    Section 401.484 of the interim rule (Sec. 401.560 of the final 
rule) implements part of section 518 of MAHRA, which requires a PAE to 
establish management standards for a project pursuant to HUD guidelines 
and consistent with industry standards.
Summary of Comments
    1. Subsidy layering limitations on HUD funds.
    One commenter was ``pleased'' that HUD allows PAEs with delegated 
authority for subsidy layering to serve that function under MAHRA. 
Another commenter questioned the interim rule's reference to limiting 
assistance to that needed to continue housing ``tenants with an income 
mix comparable to the income mix of the project'' before restructuring. 
The commenter asked how this could be reconciled with a possible need 
to reconfigure project (e.g., convert efficiencies to 1-bedroom units).
    HUD response: We do not intend to limit the ability of owners to 
reconfigure projects and we thank this commenter for pointing out this 
potential misunderstanding. We have amended language in Sec. 401.481 to 
address this issue.
    2. Leasing units to voucher holders.
    Among commenters favorable to this section, one generally supported 
it, another wanted the 100 percent requirement to be in a recorded 
instrument as well as in the Restructuring Plan, and the third wanted 
HUD to require an owner to ``seek and accept'' tenant-based assistance 
for units without project-based assistance. Two commenters opposed the 
section, stating that it is unreasonable to require 100 percent of 
units to have tenant-based assistance and that HUD should encourage 
mixed-income projects. One of them specifically objected to requiring 
an owner to accept tenant-based assistance that does not permit the 
owner to realize market rents. One commenter said that the rule needs 
to specify the term during which this section applies. Three commenters 
suggested that owners should not be under an obligation to

[[Page 15472]]

renew tenant-based contracts unless the tenant is lease-compliant. One 
commenter was concerned that this section could establish an 
unconditional renewable lease.
    HUD response: We agree with the comment that the non-discrimination 
provision of Sec. 401.483 of the interim rule (Sec. 401.556 of the 
final rule) should be included in the recorded Use Agreement and we 
have amended Sec. 401.408 accordingly. The final rule does not require 
an owner to renew contracts with non-compliant lease holders and HUD 
will not require owners to ``seek and accept'' tenants with tenant-
based assistance. The final rule merely prohibits the owner from 
discriminating solely on the basis of the tenant's (or potential 
tenant's) status as the holder of a section 8 voucher. The rule does 
not require the owner to rent to tenants who are unable to pay the rent 
or are otherwise not in compliance with the terms of a lease.
    3. Property management standards.
    a. Need uniform standards. One commenter urged HUD to establish 
uniform standards that reflect expected outcomes.
    HUD response: The final rule reflects the statutory requirement 
that the PAE establish management standards consistent with industry 
standards and with minimum general requirements from HUD (section 518 
of MAHRA). More specific guidance on reporting and compliance is in the 
Operating Procedures Guide. Projects with FHA mortgage insurance or a 
HUD-held mortgage after restructuring will be required to comply with 
the Regulatory Agreement and all relevant HUD Handbooks and Directives 
(including the HUD Real Estate Assessment Center's procedures), except 
to the extent specifically modified by the Restructuring Plan, the 
Operating Procedures Guide, the final rule, or MAHRA.
    b. Suggestions for language changes. Two commenters urged HUD to 
make the requirement for a manager to maintain good relations with 
tenants more objective (e.g., it should relate to tenants' opportunity 
to comment and respect for tenants' rights, not the level of tenant 
satisfaction with manager). One of these commenters also said that a 
reference in the preamble to less than ``satisfactory'' HUD review 
should apply only if a PAE agrees with HUD findings and the findings 
are not cured in reasonable period after notice. The same commenter 
suggested the following specific language changes:
     Add to paragraph (b) an express requirement for HUD's 
guidelines to be consistent with industry standards.
     Strike ``through preventative maintenance, repair or 
replacement'' from paragraph (b)(1) to avoid unproductive arguments 
over methods of achieving goal.
     Delete an unclear reference in (b)(2) to routine 
cleaning--which the commenter said duplicates provisions of the 
physical condition standards.
     Add a provision that a management agreement should permit 
the PAE to terminate the manager for cause.
    HUD response: In our opinion, the commenter's suggested language 
regarding tenant relations is less, not more, objective. Adding 
``consistent with industry standards'' to paragraph (b) is redundant 
since it is already specified in paragraph (a). The language regarding 
``preventative maintenance, repair or replacement'' is necessarily more 
specific than just requiring maintenance of the long term physical 
integrity of the property. The requirement for routine cleaning, while 
admittedly duplicative, is appropriate for an explicit statement in 
this context. HUD does not at this time contemplate delegating the 
authority to require new management; the Regulatory Agreement/
Management Certification contains a provision permitting HUD to require 
the owner terminate the management agreement.
    c. Management fees.
    Two commenters wanted HUD to ensure a management fee system that 
provides adequate compensation and removes the link to (possibly 
falling) rent levels or that carries forth current method with higher 
percentage of rent to reflect drop in restructured rents. Another 
commenter asked HUD to clarify that allowable management fees will not 
be reduced as a result of restructuring.
    HUD response: Underwriting standards for management fees (and other 
operating expenses) are detailed in the Operating Procedures Guide. 
While management fees may well be reduced as a result of restructuring, 
the fee should be adequate to competently manage the property as an 
affordable housing resource. To the extent the fee has been based on a 
percentage of the gross rent and will be inadequate after reducing the 
rents as a result of restructuring, the percentage yield will be 
recalculated based on an adjusted comparable market fee and adjusted 
with the OCAF.

O. Sections 401.500-401.501, Participation by Tenants, Community, and 
Local Government

Summary of Sections
    Under Secs. 401.500 and 401.501, a PAE must solicit and document 
the consideration of tenant and local community comments. These 
sections (and the related new Secs. 401.502 and 401.503 in the final 
rule) describe the minimum procedures for ensuring that third parties 
affected by the restructuring of a project through the Mark-to-Market 
Program are kept informed and provided the opportunity to provide 
comments at crucial stages of the process, including required notices 
and public meetings at which the PAE will hear presentations and 
receive comments on the desired contents of a Restructuring Plan and a 
Rental Assistance Assessment Plan (if one is required), and on any 
proposed transfer of the project.
Summary of Comments
    In the following summary we have included all comments relating to 
participation by tenants in the restructuring, implementation and 
contract renewal process, even if the comments were specifically 
directed to a subject covered in a different section of part 401 or 
part 402.
    1. General.
    A significant percentage of commenters (approximately 26 
commenters) were dissatisfied with the level of tenant, community, and 
local government participation guaranteed by Secs. 401.500 and 401.501 
of the interim rule. These commenters all felt that tenants, and the 
community and local government, needed to be given the opportunity for 
broad participation in the entire restructuring process.
    Almost all of the commenters argued that broad tenant and community 
participation was vital for the success of the Mark-to-Market Program. 
A few commenters also argued that the interim rule failed to follow 
both the letter and the intent of MAHRA by not providing tenants with 
the ability to offer ``timely and meaningful'' input at the various 
stages of the restructuring process. Some commenters specifically cited 
section 514(f)(2)(c) of MAHRA as requiring that tenants be consulted on 
the completed rental assistance assessment plan.
    The following table summarizes the general suggestions made by 
commenters (a number of more specific subject areas are discussed 
later):

[[Page 15473]]



----------------------------------------------------------------------------------------------------------------
                                                                                                      Number of
                                            Suggestion                                               commenters
----------------------------------------------------------------------------------------------------------------
Tenants should participate fully in PAE selection.................................................             6
Tenants should participate in decisions to find an owner ineligible for restructuring or section 8             2
 renewals.........................................................................................
Tenants/community should have right to have access to relevant documents and information, before              10
 they are final, in order to be able to give meaningful input to documents and the overall
 process. For example, right to access to draft appraisals, physical condition analyses, rental
 assistance assessment plans, capital needs assessments, management reviews, comparable market
 rent analyses, proposed restructuring plan, data used in making any decisions about the need for
 project versus tenant-based assistance, cost-effectiveness of rehabilitations, or
 disqualification of the owner, and other information necessary for meaningful tenant input.......
Funds should be provided either to PAE or tenant groups to support tenant participation activities             4
Tenants/community should be given notice of and allowed to participate fully in all aspects of                18
 restructuring process. For example, in developing and/or reviewing rehabilitation analysis
 restructuring plan, cost-effectiveness determination under Sec.  401.451(c), any proposed
 transfer of property, eligibility/disqualification decisions, restructuring/renewal decisions,
 development of PRA, negotiation of Restructuring Plans, conversions to tenant-based assistance,
 formulation of rehabilitation and management assessments, Restructuring Commitments..............
Tenant participation and notice in monitoring of PAE's actions under PRA, and further                          7
 participation of tenants in future implementation and enforcement of the Restructuring Plan, is
 needed...........................................................................................
Many more meetings should be required and public comments accepted throughout entire restructuring             6
 process..........................................................................................
----------------------------------------------------------------------------------------------------------------

    HUD response: HUD recognizes the importance of providing 
opportunities for full and informed involvement in all aspects of 
project restructuring. Such opportunities, however, must be provided in 
a manner that permits efficient and timely development of a 
Restructuring Plan that responds not only to tenant needs but also to 
wider community and local government needs, the needs of project 
owners, and the social and financial goals of the Federal Government 
reflected in MAHRA. HUD considers the tenant participation 
opportunities provided in the interim rule as consistent with the 
express minimum demands of MAHRA, but we agree with the commenters that 
the final rule should require more in order to implement the spirit of 
the statute. While it is important to streamline the restructuring 
process and to allow the PAEs flexibility to respond to local 
conditions, we share the commenters' concerns that the interim rule was 
not prescriptive enough to guarantee that the tenants and local 
community groups would be provided adequate opportunity for meaningful 
participation in every case.
    In the interests of providing even greater opportunities, we have 
concluded that a second consultation meeting should be mandated as an 
opportunity for tenants and local community groups to review and 
comment on the PAE's proposed Restructuring Plan (including plans for 
future section 8 assistance) before the PAE submits the Restructuring 
Plan to OMHAR. As a minimum, the PAE will be required to conduct two 
(rather than just one) public meetings. Section 401.500(c) and (d) now 
require public access to the draft Restructuring Plan and a second 
meeting no later than 10 days prior to submission to OMHAR. The PAE 
must document and provide a brief narrative explanation of the 
disposition of all tenant and local community comments.
    This revised procedure will not only ensure appropriate early input 
into the development of the Restructuring Plan, but also will provide a 
safeguard against inadequate consideration or misunderstanding of 
tenant and community concerns by the PAE, without unduly hampering 
timely and efficient completion of the Restructuring Plan. Persons 
given the opportunity to comment on a proposed Restructuring Plan will 
not have appeal rights under subpart F. HUD emphasizes that the tenant 
and community participation procedures mandated by the final rule are 
minimum procedures that may be supplemented by a PAE to the extent 
consistent with the objectives of MAHRA and the local circumstances. 
Other changes intended to strengthen HUD's collaborative efforts with 
tenants and local communities are detailed in the following sections.
    2. Involve others in Rental Assistance Assessment Plan.
    Two commenters said that the PAE needed to consult with tenants, 
the locality, the PHA and the owner before developing this plan, and 
specifically with regard to the tenants' ability to use tenant-based 
assistance. Five commenters said that tenants should have a right to 
comment on the plan after it was developed, with some commenters 
arguing that this is required by section 515(f)(2)(C) of MAHRA. One 
commenter suggested that any conversion to tenant-based assistance 
should require the approval of \2/3\ of the tenants.
    HUD response: The initial consultation meeting required by the 
interim rule provides the opportunity requested by commenters for input 
prior to the development of the Rental Assistance Assessment Plan. HUD 
does not interpret section 515(f)(2)(C) as requiring an additional 
opportunity for tenant comment after that plan is completed, but will 
provide such opportunity as part of the second consultation meeting to 
be held upon completion of the draft Restructuring Plan as described 
above.
    3. Intermediaries administering technical assistance grants should 
receive notice.
    One commenter suggested that Intermediaries administering technical 
assistance grants for the Mark-to-Market Program should be recognized 
as ``affected parties'' for the purpose of receiving notices. This 
commenter felt that this information was required for Intermediaries to 
perform their functions in a timely and efficient manner.
    HUD response: HUD agrees that this requirement is appropriate.
    4. Notices in other languages.
    One commenter suggested that notices be provided in other 
languages.
    HUD response: HUD will publish general information brochures in 
various languages. While the PAE and the owner should make every effort 
to provide notices (or translation services) to reach non-English 
speaking tenants and local community groups, it is impractical to 
require this by regulation.
    5. Notice to all tenants and posted in project.
    A number of commenters felt that all notices should be delivered to 
each tenant and tenant organization, as well as posted in each project.
    HUD response: HUD agrees with this comment.
    6. Right to organize.
    Tenants should be able to organize in projects that have been 
restructured through the Mark-to-Market Program.
    HUD response: As explained in HUD's corrective rule published on

[[Page 15474]]

December 28, 1998 at 63 FR 71373, section 599 of Pub. L. 105-276 
amended section 202 of the Housing and Community Amendments of 1978, 
concerning tenant participation in certain multifamily housing 
projects, to apply that section to all projects with project-based 
assistance or enhanced (``sticky'') vouchers under the Mark-to-Market 
Program. Tenant participation under section 202 (including the right to 
organize) is the subject of 24 CFR part 245. We issued a separate 
proposed rule to amend part 245 to reflect section 599 and to make 
other changes (64 FR 32781, June 17, 1999). A final rule is being 
developed.
    7. Tenant role in PAE selection.
    Three commenters were concerned that tenants were not given any 
role in selecting PAEs. Two commenters also felt that tenants should 
have a role in the negotiation and renewal of PAE agreements. One 
commenter pointed out that since PAEs would be making decisions about 
the future of tenants' homes, it would be vital for tenants to have a 
say in their selection.
    HUD response: We encourage tenants to work with the PAEs. 
Experience working with the tenants has been a threshold criterion in 
selecting the PAEs. OMHAR will take appropriate action if justified 
complaints against a PAE are received from tenants.
    8. Rent levels.
    One commenter said that PAEs will not be able to adequately review 
an owner's initial market rent determination, so that HUD must let 
tenants/community advocates review and comment. Three commenters argued 
that tenants should have the right to comment on or appeal proposed 
rent increases or petition for decreases to match cost decreases.
    HUD response: The PAEs' market knowledge and ability to manage the 
independent third party review appraisal function were threshold 
criteria in selecting the PAEs. The PAE is, however, required to 
solicit tenant and local community comment on this and other issues in 
the context of developing the Restructuring Plan. While tenants and 
other interested parties may comment on rent adjustments, they will not 
have an appeal right.
    9. Use Agreement changes.
    A commenter felt that tenants and tenant organizations should be 
notified of any changes to the Use Agreement.
    HUD response: HUD agrees with this comment.
    10. Monitoring and compliance activities.
    A number of commenters were concerned that tenant participation was 
not sufficient in monitoring and compliance activities. One commenter 
felt that the final rule should give tenants and the community the 
right to enforce the Restructuring Plan to achieve compliance. Another 
commenter felt that tenants and other affected third parties should be 
given notice of all monitoring and compliance visits.
    HUD response: Tenants and other groups are specifically listed as 
third party beneficiaries of the Use Agreement in Sec. 401.408(i) of 
the final rule. Appropriate notice of monitoring and compliance 
inspections will be provided.
    11. Transfer of properties and tenant participation.
    Three commenters emphasized that the final rule should require more 
tenant participation in the transfer process. One of these commenters 
felt that the final rule should require that the PAE work with tenant 
and community groups and local governments to facilitate the transfer 
of properties to priority purchasers. Another commenter was concerned 
that the requirement for an ineligible owner to respond to a notice of 
rejection within 30 days with a notice of intent to sell would lead to 
HUD foreclosures when owners fail to respond within 30 days. In light 
of the adverse impact of foreclosure on tenants, the commenter wanted a 
final rule that requires community and tenant participation and places 
primary responsibility on the regulatory agencies to develop a proper 
solution using all available enforcement tools. Another commenter felt 
that HUD/PAEs should be obligated early in the disqualification process 
to explore transfer options with owners, tenants, and potential 
priority purchasers because reliance on end-stage notices by largely 
unmotivated owners would be neither adequate nor timely.
    HUD response: The final rule requires extensive tenant 
participation in the involuntary sale or transfer process when the sale 
or transfer is to a priority purchaser. The potential priority 
purchaser must show evidence of tenant support and tenant endorsement 
prior to approval of the sale or transfer. If an owner is determined to 
be ineligible, HUD will make all efforts to prevent foreclosure and to 
facilitate sale or transfer of the project to an eligible owner. To the 
extent an owner is not responsive within the 30-day notice period, 
HUD's Office of Housing will make the determination of whether to 
terminate the section 8 contract or to renew at market rents. In all 
cases the impact on the tenants and local community will be carefully 
considered. These efforts will be coordinated with HUD's Enforcement 
Center and other offices within HUD. We agree with the commenter that 
it is vital for the PAE to determine if a transfer is appropriate 
(whether voluntary, or involuntary in the case of rejected owners) 
early in the process.
    12. Tenant involvement for projects not restructured.
    Eight commenters wanted the final rule to provide for tenant 
involvement in contract renewal decisions, including determinations of 
owner ineligibility, for projects not undergoing restructuring under 
the Mark-to-Market Program.
    HUD response: Some of these comments concerned projects that were 
eligible for restructuring but with owners that requested a contract 
renewal without restructuring. As regards those projects, HUD agrees 
with this comment and has provided a new notice requirement and 
opportunity for comment in the new Sec. 401.502. HUD's response 
regarding ineligible projects will be published with the final part 
402.
    13. Access to information.
    Ten commenters thought that tenants and/or the community should 
have a right of access to relevant documents and information, before 
restructuring is final, in order to be able to give meaningful input to 
documents and the overall process. Documents/information mentioned 
included draft appraisals, physical condition analyses, rental 
assistance assessment plans, capital needs assessments, management 
reviews, comparable market rent analyses, proposed restructuring plan, 
data used in making any decisions about the need for project versus 
tenant-based assistance, cost-effectiveness of rehabilitations, or 
disqualification of the owner, and other information necessary for 
meaningful tenant input.
    HUD response: Effective participation by tenants and the community 
depends on access to basic project information. This is recognized in 
MAHRA section 514(f)(1), which requires HUD to establish an opportunity 
for participation that must include ``appropriate access to relevant 
information about restructuring activities''. Many commenters felt that 
the interim rule was not adequately specific in emphasizing the right 
to such access. The interim rule generally requires the PAE to solicit 
tenant and local community comments at an early stage. By expressly 
designating the PAE as the key player under the interim rule, HUD 
expected that the PAE would make available in an appropriate manner the 
types of information that would make such a solicitation meaningful. 
The

[[Page 15475]]

interim rule did not attempt to list the specific types of documents or 
information that would need to be made available, or state precisely 
where and when they would be available, but instead focused on ensuring 
that a formal procedure was available to receive informed input from 
tenants and the community.
    In response to a broadly-felt desire for an explicit statement in 
the final rule regarding access to information, the final rule includes 
both a general statement of the PAE's responsibilities in this regard 
and a specific listing of certain types of information that a PAE 
otherwise might be reluctant to disclose publicly because of potential 
owner assertions of proprietary or confidentiality rights to such 
information. By clearly listing such information in a rule, HUD will 
make clearer HUD's understanding that compliance with the statutory 
mandate for tenant and community participation necessarily means that 
an owner requesting restructuring must give up some rights to 
confidentiality that would ordinarily prevail.
    We are not listing in the final rule all information items for 
which a PAE is expected to, or may find it appropriate to, provide 
public access. For example, business information of a type routinely 
submitted to HUD that would be released in response to a proper 
information request under the Freedom of Information Act is not listed. 
We are not listing items that are a matter of public record. We will 
not expect a PAE to make public information obtained from an owner that 
is clearly confidential, or propriety business information of a type 
that HUD would normally decline to make available, in the absence of a 
specific rule requiring disclosure. OMHAR is considering a separate 
proposed rulemaking procedure that will cover in more detail the issue 
of public access to owner-provided information in the context of 
Restructuring Plan development, and OMHAR welcomes all ideas on that 
subject.

P. Sections 401.550-.554, Implementation of the Restructuring Plan 
After Closing

Summary of Sections
    Section 401.550 implements section 519 of MAHRA by providing for 
periodic PAE monitoring (including on-site inspections) and by 
generally requiring PAEs to ensure that owners comply with approved 
Restructuring Plans, including execution and recording of a Use 
Agreement. As long as there is a PAE for the project that is qualified 
to be a section 8 administrator (i.e., a State or local housing 
agency), the PAE will be responsible for monitoring and enforcement; if 
not, HUD will perform those functions. HUD or its designee will be 
responsible for servicing the second mortgage including the 
determination of the amount of the net cash flow receivable by the 
owner. HUD may designate the PAE as servicer with consent of the PAE. 
Section 401.554 requires HUD to offer to any PAE qualified to be the 
section 8 contract administrator the opportunity to serve as contract 
administrator. The term ``qualified'' is intended to indicate that a 
contract administrator must meet both statutory requirements of the 
United States Housing Act of 1937 (e.g., be a public housing agency) 
and any additional requirements of HUD established under the applicable 
section 8 program by the responsible HUD officials. As contract 
administrator, the PAE must offer to renew section 8 contracts in 
accordance with the Restructuring Plan as provided in section 515(a) of 
MAHRA.
Summary of Comments
    1. Inspections.
    Two commenters were concerned about inspections required under 
Sec. 401.550(b). One commenter pointed out that properties subject to 
FHA-insured mortgages would be subject to two inspections, contrary to 
the HUD 2020 goal of requiring one inspection per property per year. 
Both commenters were concerned about the cost of the required 
inspection and the possibility that the loan servicing fee would not 
cover the servicing lender's costs. One suggested eliminating the 
mortgagee inspection requirement for small loans; the other suggested 
requiring the PAE to submit inspection results to the servicing lender 
in lieu of a mortgagee inspection.
    HUD response: HUD agrees that duplicate inspections are not 
desirable and they are not required under the final rule. All 
inspection requirements for restructured projects will be consistent 
with the HUD Real Estate Assessment Center (REAC) protocols.
    2. PAE matters.
    One commenter recommended that PAEs receive additional compensation 
for conducting loan servicing, compliance monitoring, and section 8 
contract administration. This commenter also recommended that HUD 
clarify all the long-term responsibilities of the PAE in the Operating 
Procedures Guide and the final rule. Another commenter suggested that 
HUD/PAE should identify the specific type of monitoring and inspection 
contemplated.
    HUD response: The PAE's long-term responsibilities will vary 
according to its willingness and ability to perform these functions. 
The possible responsibilities are discussed in Subpart D. These 
matters, and appropriate compensation, will be addressed in the PRA and 
the Operating Procedures Guide. OMHAR is currently drafting a PRA 
amendment to recognize the long-term compliance monitoring functions.
    3. Role of lender.
    One commenter felt that if the first mortgage is refinanced with a 
conventional loan, then the conventional lender should have primary 
project monitoring and inspection authority.
    HUD response: Consistent with section 519 of MAHRA, the PAE (or HUD 
if the project is no longer covered by a PRA with a public PAE) is 
responsible under the final rule for long-term monitoring and 
compliance with the Restructuring Plan and Use Agreement. This does not 
prevent the lender--whether the first mortgage is modified or 
refinanced with FHA-insured or conventional financing--from undertaking 
other monitoring or inspections that it considers appropriate, at its 
own expense.
    4. Servicing of second mortgage.
    Two commenters were concerned about the servicing of second 
mortgages. One of these commenters felt that the Mark-to-Market program 
would operate more efficiently if a servicer of a first mortgage were 
given the opportunity to service the second mortgage. The other 
commenter argued that because Mark-to-Market second mortgages will be 
cash flow mortgages, an important criteria for servicing them will be 
financial statement analysis. The commenter recommended that HUD test 
interest for a national solicitation for contractors who could provide 
the necessary expertise in analyzing financial statements.
    HUD response: HUD agrees that the servicer of the second mortgage 
must have skill in financial statement analysis. As noted in 
Sec. 401.552 of the final rule, HUD or its designee (which could 
include either the PAE or another contracted entity) will service the 
second mortgages.
    5. Section 8 contract administration.
    A commenter urged HUD not to attempt to undermine Congress' intent 
that qualified HFAs, serving as PAEs, be utilized as contract 
administrators for properties that complete restructuring. The 
commenter was concerned about the interim rule adding additional 
requirements for contract administrators

[[Page 15476]]

beyond those contained in the United States Housing Act of 1937.
    HUD response: Section 401.554 implements the requirement in Section 
519 of MAHRA that PAEs who are qualified to be Section 8 contract 
administrators be offered the opportunity to serve in this capacity. 
``Qualified'' is used in the sense of both technically eligibile under 
the 1937 Act, and capable as determined by the responsible HUD 
official. HUD, or a public body PAE designated as contract 
administrator, must offer to renew section 8 contracts, subject to the 
availability of appropriations.
    6. Enforcement.
    A commenter asked: What will be the enforcement mechanism to 
enforce compliance with management standards?
    HUD response: Under section 519(a)(1)(A) of MAHRA, a PAE has 
responsibility for enforcement of the management standards (as well as 
other MAHRA requirements). HUD will not shun an enforcement role, 
however, but will be actively involved in ensuring full compliance with 
program requirements. HUD and/or the PAE will apply a variety of 
enforcement tools in cooperation with HUD's Enforcement Center, when 
appropriate on a case-by-case basis. Notes, mortgages, Regulatory 
Agreements, Use Agreements and section 8 HAP contracts will all provide 
legally binding requirements upon which HUD or (to some extent) a PAE 
can bring enforcement action. Specific circumstances such as status of 
the property's financing, type and level of section 8 assistance and 
past PAE experiences with enforcement under Mark-to-Market and other 
programs will dictate the appropriate enforcement mechanism. 
Additionally, in every case, the recorded Use Agreement will provide 
recourse for the various beneficiaries.

Q. Section 401.595, Contract Provisions

Summary of Section
    This section provides that the provisions of 24 CFR chapter VIII 
(i.e., other section 8 program requirements) will apply to contracts 
renewed under part 401 only to the extent, if any, provided in the 
section 8 contract.
Summary of Comments
    One commenter wanted an explanation of the section which the 
commenter thought was unclear. The commenter asked whether the rule 
referred only to regulations not required by section 8 itself, and 
whether HUD intended the contract to substitute for regulations 
governing management and operations of projects under renewed project-
based assistance contracts.
    HUD response: The intent of this section is to permit HUD to 
identify, through the contract, those section 8 regulations that are 
appropriately applied when renewal is under the authority of part 401. 
This applies only to the initial renewal under part 401. Subsequent 
renewals will be governed by part 402. Some matters (e.g., setting 
initial rent levels for project-based assistance and adjusting them) 
are fully covered in part 401 and other section 8 regulations directly 
pertaining to these matters will not be applied to part 401 renewals. 
For some other matters, other sections of part 401 indicate the 
applicability of usual section 8 requirements--e.g., Sec. 401.558 
indicates when the physical conditions standards in 24 CFR 5.703 (which 
usually apply to section 8 projects pursuant to sections such as 24 CFR 
880.201 and 881.201) will apply to Mark-to-Market properties. In 
general, section 8 regulations on matters that are not in conflict 
with, or otherwise addressed by, part 401 will be made applicable in 
contracts renewed under that part. However, HUD considers it necessary 
to reserve to the contract drafting and revision process the final 
detailed decisions on the applicability of section 8 requirements.

R. Section 401.601 of Interim Rule and Sec. 402.4(a)(2) of Final Rule, 
Consideration of an Owner's Request To Renew an Expiring Contract 
Without a Restructuring Plan

Summary of Section
    This section provides a procedure for considering an eligible 
owner's request for renewal of an expiring contract without requesting 
a Restructuring Plan. Rents would be reduced to comparable market 
rents. HUD or the PAE will determine whether renewal under Sec. 402.4 
at comparable market rents would be sufficient to maintain an adequate 
debt service coverage ratio on the first mortgage and necessary project 
reserves. If so, the contract renewal will be processed under 
Sec. 402.4. If not, a Restructuring Plan must be developed by a PAE 
before further consideration of the owner's request.
    In the final rule, this section is moved without substantive change 
to Sec. 402.4(a)(2), so that part 402 will contain all requirements for 
contract renewals under the authority of section 524 of MAHRA. When the 
complete part 402 is published in final form, HUD will make any further 
changes to Sec. 402.4(a)(2) that are needed to reflect HUD's final 
resolution of the comments on this section. All of the HUD responses 
below relate to HUD's position pending publication of the complete 
final part 402.
Summary of Comments
    1. Determination/verification of rent comparability.
    One commenter wanted the final rule to clarify that verification of 
rent comparison is a responsibility of a PAE and not HUD but another 
said verification must be by HUD and not the PAE (arguing that a PAE 
has a bias to restructure). Another commenter wanted market comparable 
rents for projects with current rents above market to be determined by 
an appraiser on both an ``as-is'' and ``as-repaired'' basis, with ``as-
is'' basis to be used when reserves are determined to be inadequate for 
repairs.
    HUD response: HUD's Office of Housing will retain responsibility 
for renewal of below-market contracts. OMHAR will delegate the rent 
comparability review for above-market projects to PAEs, but will retain 
responsibility for the final decision. The compensation structure and 
assignment of these projects to PAEs for contact administration 
regardless of whether or not the projects are restructured will remove 
the basis for any perceived bias on the part of the PAE. The rents for 
these projects will be analyzed on an ``as is'' basis, unless the 
repairs will be accomplished through full restructuring with a 
rehabilitation escrow fully funded at closing, or as otherwise 
specified in the Operating Procedures Guide.
    2. Determining adequacy of DSC at comparable market rents.
    According to one commenter, this section should only provide for 
verification of the owner's determination of market rents with no 
underwriting (which would encourage owner opt-outs from project-based 
assistance contracts.) Two other commenters, however, asked for an 
independent HUD/PAE assessment of capital and project operating needs. 
Another commenter questioned the statutory basis for reviewing the 
adequacy of debt service coverage at comparable market rents.
    HUD response: OMHAR will make a determination (on the basis of the 
PAE's review) that renewal with rents reduced to market rents with no 
debt restructuring will not jeopardize the long term financial and 
physical integrity of the property. Debt service coverage (at reduced 
rents with expected operating expenses), the adequacy of the reserves 
for replacement, and the physical condition

[[Page 15477]]

of the property will be analyzed prior to the Secretary's discretionary 
renewal pursuant to section 524(a).

S. Section 401.602, Tenant Protection if an Expiring Contract Is Not 
Renewed

Summary of Section
    An owner of an eligible project is not required to request renewal 
of an expiring contract, but the owner must give advance notice of non-
renewal as required by statute. (The underlying statutory provisions 
have changed since the interim rule took effect, as discussed in 
Section I.B. of this preamble.) In determining the application of the 
notice provisions of section 514(d) of MAHRA and section 8(c)(9) of the 
1937 Act, as they existed when the interim rule took effect, 
Sec. 401.602 of the interim rule distinguished between an owner of an 
eligible project who requested restructuring (considered subject to 
section 514(d) notice requirement) and an owner of an eligible project 
who did not request restructuring or who was rejected by HUD or the PAE 
(considered subject to the section 8(c)(9) notice requirement.) The 
interim rule also provided that an owner of an eligible project who 
does not give the proper notice must continue to permit tenants to stay 
in their units without increasing the tenant portion of the rent for a 
specified period beginning on the earlier of the date proper notice was 
given or the date the contract expires.
    Section 401.602 of the interim rule also required HUD to make 
tenant-based assistance available to tenants in two circumstances: (1) 
To all tenants residing in units assisted under the expiring contract 
if the owner of an eligible project chooses not to extend or renew 
project-based assistance (as provided in section 514(d) of MAHRA) and 
(2) to all tenants residing in a project who are low-income families or 
are receiving tenant-based assistance at the time HUD or the PAE reject 
an owner of an eligible project for restructuring (as provided in 
section 516(d) of MAHRA). Section 401.606 of the interim rule required 
tenant-based assistance to be offered to each assisted family residing 
in a project at the time it is restructured with a conversion to 
tenant-based assistance. The interim rule did not address the 
availability of tenant-based assistance in other situations of non-
renewal of project-based assistance.
Summary of Comments
    1. Is tenant-based assistance discretionary or mandatory if 
project-based assistance is not renewed?
    One commenter asked HUD to make clear in the rule that HUD expects 
appropriations for tenant-based assistance to protect displaced.
    HUD response: Owners are required to provide adequate notice to 
tenants and HUD if they intend to discontinue the provision of project-
based assistance, so that tenant-based assistance will be available for 
the tenants when the project-based assistance expires. As recently 
amended by section 535 of Pub. L. 106-74, section 8(o)(8)(A) of the 
United States Housing Act of 1937 requires the owner's notice to state 
that ``in the event of termination [of project-based assistance] the 
Department of Housing and Urban Development will provide tenant-based 
assistance to all eligible residents, enabling them to choose the place 
they wish to rent, which is likely to include the dwelling unit in 
which they currently reside.''
    2. Notice issues.
    a. 6-month notice of non-renewal. Some comments on notice to 
tenants addressed the interim rule provisions providing for 6-month 
notice in some cases and 12-month notice in others, based on HUD's 
interpretation of statutory provisions in effect when the interim rule 
was published. Subsequent legislation has changed the 6-month notice 
provision to a 12-month notice.
    HUD response: HUD has made changes in the final rule corresponding 
to statutory changes and therefore comments on the 6-month notice 
provision are no longer germane.
    b. When is notice required? Three commenters said that a failure to 
renew because HUD found the owner ineligible for contract renewal 
should not require a notice to tenants. Similarly, one commenter felt 
notice was not required if an owner refuses to accept a restructuring 
plan approved by HUD. Two others wanted tenant notice in all opt-out or 
non-renewal situations, including owner ineligibility and conversion to 
tenant-based assistance under a restructuring plan. One commenter felt 
that any notice requirement in connection with an ``interim'' contract 
renewal at existing rents under section 514(c) pending restructuring 
should be satisfied by notice given when the contract is approved.
    HUD response: One-year notice is now required by statute regardless 
of the reason for termination of the contract. Additionally, new 
Sec. 401.602(a)(1)(ii) of the final rule reflects the new statutory 
requirement (section 549(c) of Departments of Veterans Affairs and 
Housing and Urban Development, and Independent Agencies Appropriations 
Act, 1999) that owners of projects eligible for Mark-to-Market 
restructuring must also give a 120 day notice of their intent to opt 
out.
    3. Rent levels for tenant-based assistance.
    One commenter questioned the lack of guidance on rent levels for 
enhanced vouchers for opt-outs. Two commenters said the rule should 
guarantee that the vouchers provided through a Restructuring Plan are 
``enhanced'' or ``sticky'', and another commenter wanted the final rule 
to clarify whether such vouchers are enhanced. Two commenters also 
wanted vouchers to be enhanced whenever an owner is rejected for 
renewal and where an owner opts out. One commenter cited section 405(a) 
of the Balanced Budget Downpayment Act, I and language in 
appropriations Act as authority for permitting rents under some tenant-
based assistance that exceed the levels of ``enhanced'' vouchers under 
section 515(c)(4), and relocation costs.
    HUD response: Section 538 of Pub. L. 106-74 now provides uniform 
guidance for enhanced vouchers. It is reflected in this final rule.
    4. Timing of tenant-based assistance.
    Two commenters said that tenant-based assistance should be 
available sufficiently early prior to termination/expiration so that 
tenants can relocate or have assistance in place in time; one suggested 
4 months. Another commenter wanted HUD to provide a short-term 
extension of project-based assistance to provide necessary time for 
tenants to prepare when an owner is rejected only a short time before 
the project-based assistance expires.
    HUD response: These comments are generally consistent with existing 
HUD policy to provide adequate time for tenants to find alternative 
housing.

T. Section 401.606, Tenant-Based Assistance Provisions for Displaced 
Tenants

Summary of Section
    Section 401.606 complies with section 515(c) of MAHRA by providing 
that, if the Restructuring Plan provides for tenant-based assistance, 
assistance under 24 CFR part 982 will be offered to each eligible 
family assisted under the section 8 project-based assistance contract 
on the date of expiration.
Summary of Comments
    One commenter said the rule should provide that ``reasonable rent'' 
for section 515(c)(4) vouchers is the restructured rent in the 
Restructuring Plan which must be pegged to actual market rents, and 
that the payment

[[Page 15478]]

standard for the vouchers must continue to be the ``reasonable rent'' 
for all renewals of tenant-based assistance as long as the tenant stays 
in the project. Three other commenters said that since section 
515(c)(4) of MAHRA is merely referenced in the interim rule, 
Sec. 401.606 should expressly state that the ``reasonable rent'' shall 
be at comparable market rents (instead of merely not exceeding market, 
as stated in the statute).
    HUD response: Section 538 of Pub. L. 106-74 revised the vouchers 
provisions of MAHRA to provide for enhanced vouchers on the same terms 
as enhanced vouchers authorized by other statutes. The final rule 
reflects this statutory change.

U. Sections 401.645 and 401.651  Owner Dispute of Rejection and 
Administrative Appeals

Summary of Sections
    Section 401.645 provides the owner an opportunity to dispute if any 
of the following occur: (1) A request for a Restructuring Plan is 
rejected; (2) a request for a section 8 contract renewal is rejected; 
(3) a PAE cannot continue with a Restructuring Plan because of lack of 
owner cooperation under Sec. 401.402; or (4) HUD rejects a proposed 
Restructuring Commitment submitted by a PAE. HUD or the PAE will notify 
the owner of the reasons for a rejection and provide a 30-day period to 
submit written objections or cure the problem. If an objection is 
submitted, HUD or the PAE will send the owner a final decision 
affirming, modifying, or reversing the initial rejection with reasons 
for the decision. This final decision may be appealed within 10 days 
through the procedures in Sec. 401.651, which permit an owner to make a 
presentation (written, oral, and/or through a representative) at a 
conference with an official of HUD who was not involved in making the 
decision under appeal. The HUD or PAE official who issued the decision 
under appeal may also participate.
Summary of Comments
    1. Tenant appeals.
    Three commenters felt that the dispute and appeals procedures 
should be extended to tenants.
    HUD response: Tenant input into administrative procedures will be 
welcomed whenever appropriate. Information that may give rise to the 
administrative proceedings referenced above will always be welcomed 
from all interested parties. While tenant and local community input is 
critical to the success of specific Restructuring Plans and to the 
program in general, the statute does not contemplate tenant access to 
the dispute and appeals procedures.
    2. PAE appeals of rejections under Sec. 401.405.
    One commenter suggested that PAEs should have the right to object 
to HUD's rejection of a restructuring plan, given that PAEs have 
statutory responsibility for developing the plan. In addition, the 
commenter suggested that because objection and appeal by a PAE is not 
encompassed by section 516(b) of MAHRA, HUD is without authority to 
extend a final determination on the PAE's objection that is exempt from 
judicial review under MAHRA section 516(c).
    HUD response: There is no statutory requirement to provide the PRA 
with a specific administrative dispute and appeal right independent of 
the owner, nor is the PAE likely to have any standing to pursue a 
judicial challenge (for which the final rule's dispute and appeals 
right serves as a substitute in the case of an owner). HUD feels that 
the legal interests that should be protected by guaranteed access to a 
specific administrative dispute/appeal procedure are those of the 
project owner who may end up in mortgage default if the mortgage is not 
restructured and future section 8 project-based assistance is decreased 
or denied. This is in keeping with MAHRA.
    HUD will, of course, be open to further discussion with a PAE if a 
PAE is convinced that rejection of a particular proposed Restructuring 
Plan is not in the best interests of the project or the public, and 
that the Plan cannot be modified to respond to HUD's objections. The 
Operating Procedures Guide provides a 10-day PAE comment period for 
this purpose, but HUD reserves the right to modify or dispense with 
this procedure in the future without rulemaking.
    3. Time for owner to dispute approved plan.
    One commenter said that an owner needs more than 10 days to decide 
how to respond to an approved Restructuring Plan under Sec. 401.405, 
and suggested 30 days.
    HUD response: Owners will receive a draft of the Restructuring Plan 
at least 10 days before the Plan is given to HUD for review and will 
have the Plan to review throughout HUD's review period. Accordingly, 
the additional 10-day period for owners to review the Plan after HUD 
approval provides ample time for thorough owner review.
    4. Owner appeals.
    One commenter felt that the administrative appeals procedure in the 
interim rule was ``sorely'' lacking in due process and said that it was 
unreasonable to limit review of adverse decisions to an informal 
review, given the possible severe economic consequences of such 
decisions. The commenter suggested using HUD's established procedures 
for dealing with administrative appeals. The other commenter suggested 
requiring that the official conducting the appeal should be 
knowledgeable about the Mark-to-Market program. This commenter also 
suggested that the official conducting the appeal should not be 
involved in any adverse action with the affected owner, in order to 
avoid a conflict of interest.
    HUD response: The appeals procedure strikes a balance between the 
need for expeditious resolution of cases and the need to provide 
substantial notice and opportunity to be heard. The procedures detailed 
in the final rule provide adequate protection for owners. The final 
rule requires notice and an opportunity to be heard, and an appeal 
right in the event of an unfavorable decision. All cases will be 
handled carefully by knowledgeable and responsible OMHAR officials.

V. Section 401.600, Will a Section 8 Contract Be Extended if It Would 
Expire While an Owner's Request for a Restructuring Plan Is Pending?

Summary of Section
    Under Sec. 401.600, an owner who has requested development of a 
Restructuring Plan may receive a section 8 contract extension at 
current rents for the shortest reasonable period needed for the PAE to 
complete a Restructuring Plan for the project. Any extension of the 
contract beyond 1 year pending closing on the Restructuring Plan would 
be at comparable market rents or exception rents.
Summary of Comments
    One commenter said that a delay in restructuring due to reasons 
outside the control of an owner should not lead to rent reduction. 
Another warned about the need to be sensitive to tenant displacement 
difficulties, saying that HUD should extend or renew a contract during 
any administrative appeal period for a determination of ineligibility 
and for long enough for vouchers to be issued.
    HUD response: Delays in the restructuring process (unless clearly 
the result of a lack of cooperation by the owner) will not lead to a 
rent reduction prior to 12 months. Regardless of the cause of delay, 
the rents will in every case be reduced after 12 months, though

[[Page 15479]]

the project will remain eligible to continue with the restructuring. 
(OMHAR will consider a waiver if assignment of a project to a PAE was 
delayed through no fault of the owner.) We note that the restructuring 
process will begin at least 90 days prior to the original expiration 
and we urge owners concerned about this issue to exercise their option 
of entering the program early. HUD is sensitive to tenant displacement 
issues and will provide tenant vouchers in a timely manner.

W. Miscellaneous Comments on Part 401

    The following miscellaneous comments on part 401 were made by at 
least one commenter:
    1. When do contract rents need to be adjusted under a Restructuring 
Plan when an owner applies in advance of the contact expiration date?
    HUD response: The contract rents would be adjusted upon 
restructuring.
    2. Can Mark-to-Market restructuring use a structure from the 
Portfolio Reengineering demonstration programs under which short-term 
tax-exempt bonds were amortized through ``excess'' section 8 rents 
prior to expiration of existing contract?
    HUD response: This will be addressed in a revision to the Operating 
Procedures Guide. The structure is likely to be acceptable for cases in 
which the expiration date is after the termination date of the Mark-to-
Market Program.
    3. Any ``guidance'' that may lead to ineligibility if not followed 
should be in the rule--and to the extent matters are not included in 
the rule, HUD must acknowledge that guidance is non-binding.
    HUD response: The Operating Procedures Guide will be used as a 
vehicle for explaining and elaborating upon the detailed application of 
substantive requirements in the final rule, as well as addressing 
procedural and organizational matters that are not required to be 
included in regulations. The Guide will not be a means of introducing 
new substantive requirements that are properly the subject of a 
regulation.
    4. HUD must give priority to affordable housing built in suburbs 
that expands fair housing choice.
    HUD response: The PAEs are responsible for balancing the competing 
social and financial objectives in the Restructuring Plan for each of 
the projects assigned in their respective PRAs, regardless of location.
    5. HUD needs to repeat more of MAHRA's language instead of cross-
referencing (one commenter specifically mentioned Sec. 401.420, while 
three mentioned Sec. 401.421(b)).
    HUD response: As part of our continuing effort to streamline rules, 
HUD's general approach to drafting rules now concentrates on the 
additional policy guidance needed to fill the gaps in matters expressly 
covered by statutory language, while minimizing repetition of statutory 
language that is already clear and that is not amplified in a rule. In 
response to these concerns of commenters, however, we carefully 
reviewed the places where the interim rule referenced statutory 
language to reconsider whether there would any benefit of added clarity 
or readability that would outweigh the disadvantage of more language 
added to an already long and complex rule. As a result of this review, 
we have added more of the statutory language in Secs. 401.411(b), 
401.420(a) and 401.421(b).
    6. Lenders should be compensated for restructuring expenses and 
time and should be considered compensable third parties under section 
517(b)(5) of MAHRA.
    HUD response: Lenders may charge the owners reasonable fees for 
agreeing to modify existing first mortgages. Reasonable and customary 
loan origination fees may be recognized to the extent they are 
supported in the amount of a new refinancing loan (as opposed to a 
modificiation of the existing first mortgage).
    7. The Paperwork Reduction Act burden-hour estimates are low.
    HUD response: We have reconsidered these estimates and have revised 
them accordingly. We will pursue approval of our revised estimates 
through established procedures.
    8. FHA's allowable servicing fees should be raised because the size 
of first mortgage will go down through restructuring.
    HUD response: FHA servicing fees are not governed by this final 
rule.

III. Changes Made to Part 401 of Interim Rule

    References are to the section number of the interim rule.

401.1  What Is the Purpose of Part 401?

    We removed a sentence that stated that part 401 contains the 
regulations for the renewal of project-based assistance for eligible 
projects without restructuring under the Mark-to-Market Program, to 
recognize that Sec. 401.601 (regarding the ``OMHAR Lite'' procedure) 
has been redesignated as Sec. 402.4(a)(2).

401.2  What Special Definitions Apply to This Part?

     In the definition of eligible project, we added material 
from Sec. 401.100 of the interim rule, which was titled ``Which 
projects are eligible for a Restructuring Plan under this part?'' This 
avoids duplication, and recognizes that the term ``eligible project'' 
is used in parts 401 and 402 in a manner that is intended to include 
the provisions that were in Sec. 401.100 of the interim rule. Section 
401.100 is removed in the final rule. We also added that an eligible 
project must have a first mortgage that has not been restructured under 
part 401 or under a demonstration program to reflect our understanding 
of statutory intent.
    Some projects under demonstration programs received restructuring 
of rents to budget-based levels without debt restructuring. Under HUD's 
interpretation of MAHRA as originlly enacted, all such projects were 
eligible for Mark-to-Market restructuring, while projects with debt 
restructured under the demonstration programs were exeption projects. 
Section 531(b) of Pub. L. 106-74 amended MAHRA to exclude from eligible 
projects all demonstration projects for which HUD ``determines that 
rent restructuring is inappropriate''. No change to the rule language 
is needed to accomplish this result, since the language as drafted 
automatically picks up the relevant statutory change. (The same is true 
of preservation projects described in section 531(b)). Similarly, 
section 531(c) of the new law has the effect under current rule 
language of automatically including some State-financed projects (those 
with FHA insurance and an absence of conflict between debt 
restructuring and applicable State law or financing agreements) as 
intended by Congress.
     In the definition of priority purchaser, we clarified that 
a general partnership with a sole general partner that itself is a 
priority purchaser will be regarded as a priority purchaser.
     We added a definition of OMHAR.
     We defined voucher to mean any tenant-based assistance (as 
defined in section 8(f) of the United States Housing Act of 1937; see 
section 512(15) of MAHRA)). This definition was added to make clear 
that use of the term voucher in the final rule, in contexts where the 
interim rule referred to vouchers and certificates, is a non-
substantive change that reflects the statutory merger of the section 8 
voucher and certificate programs.
     We added a new paragraph (d) referencing other definitions 
in the

[[Page 15480]]

conflict of interest sections of the final rule.

401.3  Who May Waive Provisions in This Part?

    This section, not in the interim rule, clarifies that waivers of 
part 401 are made by the Director of OMHAR subject to the HUD 
regulations implementing section 106 of the HUD Reform Act of 1989. 
Ordinarily the Secretary delegates both the authority to waive and 
issue rules to the Assistant Secretary or equivalent responsible for 
administering a program. Because the OMHAR Director's authority to 
issue part 401 derives directly from statute, rather than from 
authority delegated by the Secretary, this section is advisable to 
clarify that the OMHAR Director's statutory authority to issue rules 
encompasses the power to waive them. The section implements an 
interpretation that OMHAR rules are ``regulations of the Department'' 
within the meaning of section 106, so that a waiver must be in writing, 
state the grounds for the waiver, and be included in the Secretary's 
periodic Federal Register notice of waivers.

401.99  How Does an Owner Request a Section 8 Contract Renewal? 
[Revised Title]

    We removed the interim provision that permitted an owner to submit 
a request for contract renewal less than 90 days before the contract 
expiration date if that date was before January 13, 1999. That 
provision is no longer needed. We added language recognizing that an 
owner eligible to request renewal under Sec. 402.5 may instead request 
renewal under Sec. 402.4. We removed language that duplicated 
Sec. 402.6 for owners of eligible projects seeking renewal without a 
Restructuring Plan, and substituted a cross-reference to Sec. 402.6. We 
removed a reference to affiliates due to a change to Sec. 401.101.
    Finally, the final rule requires the owner to certify that neither 
it nor an affiliate has received notice from HUD of a pending 
suspension, debarment or other enforcement action (unless voluntary 
sale or transfer is proposed). If the owner is unable to make this 
certification but does not consider that the subject of the pending 
suspension or debarment action is grounds for rejection under the 
standards of section 516 of MAHRA, the owner should submit the rest of 
the certification with an explanation of the disagreement. HUD will 
consider this explanation when determining whether to exercise its 
discretion to reject a request under Sec. 401.101 (revised as discussed 
below). The final rule thus does not require HUD to accept a request 
for restructuring if HUD expects to immediately reject the application 
under Sec. 401.403 based on information about the owner or an affiliate 
that HUD has already developed. In many cases it will be more efficient 
to address a problem with an owner or affiliate at the earliest 
possible stage, so that other approaches (such as project sale) can be 
explored promptly. Later rejection under Sec. 401.403 could still be 
possible if review under Sec. 401.101 does not lead to immediate 
rejection. Owners have the same appeal and dispute rights whether 
rejection is under Sec. 401.101 or Sec. 401.403 and thus are not 
adversely affected by this refinement in the final rule.

401.100  Which Projects Are Eligible for a Restructuring Plan Under 
this Part?

    We removed this section and combined it with the definition of 
``eligible project'' in Sec. 401.2(c).

401.101  Which Owners Are Ineligible To Request a Restructuring Plan? 
[Revised Title]

    As explained above, if there is a pending HUD enforcement action 
against the owner or an affiliate that is based on an action that is 
grounds for rejection under section 516 of MAHRA, HUD may decide 
initially not to accept a request for restructuring instead of waiting 
to reject the request under Sec. 401.403. We added a sentence to 
Sec. 401.101 to clarify this point. We also revised this section so 
that rejection of an owner is no longer always required when an 
affiliate of the owner, but not the owner itself, has already been 
debarred or suspended. Rejection in that situation will be 
discretionary with HUD, based on a consideration of the specific facts 
and circumstances. We made the same change to section 401.403.

401.200  Who May Be a PAE?

    Although we have retained the requirement that each non-public PAE 
must form a partnership with a public purpose entity, as required by 
section 513(b)(7)(A) of MAHRA, we have omitted the requirement that 
such a partnership meet all legal requirements for a partnership. This 
will provide some flexibility to accommodate legal limitations that may 
restrict some public purpose entities from entering into an arrangement 
that qualifies as a partnership under applicable State law, if the 
arrangement otherwise meets the purposes of this requirement of MAHRA. 
HUD will assist individual non-public PAEs as needed in determining 
whether their proposed partnership arrangement meets the requirements 
of MAHRA and this section of the final rule.

401.300  What Is a PRA?

    New language recognizes that a PRA may incorporate by reference 
certain required matters that are adequately addressed in other 
documents.

401.301  Partnership Arrangements [Revised Title]

    The revised title describes the subject of this section more 
precisely.

401.304  PRA Provisions on PAE Compensation

    In the preamble to the interim rule, HUD stated its intention to 
include more specific provisions on PAE compensation in the final rule, 
after negotiating arrangements for the initial PAEs and refining the 
precise duties of PAEs in the initial PRA development process. The 
final rule contains some additions to Sec. 401.304 based on experience 
to date. Regarding base fees, HUD will use an annual survey of the 
market price for the work to determine compensation for public PAEs, 
and a competitive bid process to determine fees for private PAEs. HUD 
will set a uniform per-project base fee for each public PAE. The 
individual components of incentive packages may vary, but the total 
per-project incentive payment will be uniform for all PAEs, whether 
public or private. HUD will establish annual limits for reimbursement 
of expenses for each project, with the possibility of waivers for high-
cost areas. The Director of OMHAR must approve all fee schedules. 
OMHAR's Internet website will contain the standard form of PRA and 
compensation package, with annual updating.

401.307  On-Going Responsibility of PAE

    We have deleted this section because it did not add any specific 
substantive requirement. This subject is addressed in an expanded 
subpart D in the final rule.

401.309 PRA Term and Termination Provisions; Other Remedies

    We have added an express provision for termination of the PRA for 
the convenience of the Federal Government similar to the standard 
arrangement used when the Federal Government contracts for procurement 
of services. Although the PRA is not a procurement contract, the 
underlying need of the Federal Government for a termination for 
convenience provision is also present for a PRA. The termination for 
convenience provision was generally authorized by Sec. 401.300 of the 
interim

[[Page 15481]]

rule that provided for a PRA to contain ``other terms and conditions 
required by HUD'' but HUD is choosing to address the matter expressly 
in the final rule.

401.310  Conflicts of Interest

    We narrowed the provision in paragraph (a)(1)(i) on PAE financial 
interests to focus more precisely on likely areas of conflict. We added 
language to paragraph (d)(1)(ii) to clarify that a potential PAE that 
notifies HUD, after a request for selection but before selection, of a 
conflict of interest must provide a detailed description of the 
conflict.

401.312  Confidentiality of Information

    We added language recognizing that the tenant/community 
participation procedures in Secs. 401.500 through 401.503 of the final 
rule require some exceptions to the PAE's general obligation to 
safeguard confidential project and owner information.

401.313  Consequences of PAE Violations; Finality of HUD Determination

    We have simplified the language regarding liability of PAEs to HUD 
for damages resulting from violations of the rules on conflicts of 
interest, standards of conduct and confidentiality of information. We 
made several minor editorial changes.

401.314  Environmental Review Responsibilities

    The interim rule requires HUD to complete any required 
environmental review under 24 CFR part 50 before HUD executes a 
Restructuring Commitment. The final rule clarifies that HUD will 
complete all actions required for compliance with part 50 (including 
consideration of any environmental review and consideration of 
rejection or modification based on any adverse environmental impacts) 
before HUD executes a Restructuring Commitment.

401.402  Cooperation With Owner and Qualified Mortgagee in 
Restructuring Plan Development

    We added language to clarify that owner cooperation will be 
demonstrated by reasonable progress in development of a Restructuring 
Plan.

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

    We added language to clarify that HUD and the PAE will refuse to 
consider restructuring when the current owner is ineligible, because of 
debarment or suspension or for other reasons that result in a 
discretionary determination of ineligibility, unless the owner proposes 
to sell or transfer the property to an eligible purchaser. Also, we 
added language clarifying that rejection under section 516(a)(4) of 
MAHRA and this section due to poor condition of the project may be 
under Sec. 401.451(c) or otherwise. Section 401.451(c) provides an 
early formal step, upon completion of the Physical Condition Analysis 
for the project, at which the PAE must consider whether continuing with 
rehabilitation through a Restructuring Plan will be a cost-effective 
means of ensuring affordable housing for the tenants. HUD and the PAE 
will continue to have the right to reject a project in poor condition 
even if it is not rejected at this early stage. For example, tenant and 
community input might lead HUD or the PAE to consider the matter 
further. Finally, we made a change regarding rejection based on 
suspension or debarment of an affiliate of the owner that is explained 
in the discussion above under section 401.101, where the same change 
was made.

401.404  Proposed Restructuring Commitment

    The final rule adds a reference to the public meeting required by 
Sec. 401.500(c) of the final rule. That meeting must be held at least 
10 days before the Restructuring Plan and proposed Restructuring 
Commitment are submitted to HUD under this section. We also specify in 
the final rule that the Restructuring Commitment must state all 
consideration that the PAE or related parties receives other than from 
HUD, in order to identify for OMHAR an area of potential bias or 
conflict of interest.

401.405  Restructuring Commitment Review and Approval by HUD

    New language in the final rule makes it clear that a PAE must 
inform the owner when HUD rejects a Restructuring Commitment proposed 
by the PRA, so that the owner can decide whether to dispute the 
rejection under the subpart F procedures.

401.408  Affordability and Use Restrictions Required

    Under new paragraph (e) of the final rule, the recorded Use 
Agreement must require that the owner comply with Sec. 401.556 of the 
final rule (Sec. 401.483 of the interim rule) regarding 
nondiscrimination against voucher holders in leasing. Under new 
paragraph (f) of the final rule, the Use Agreement must contain 
remedies for a breach of the Use Agreement. The remedies must include 
monetary damages for non-compliance with the affordability restrictions 
or the physical condition standards in Sec. 401.558 of the final rule. 
Under new paragraph (g) of the final rule, the Use Agreement must 
contain a requirement for maintaining the property in compliance with 
the physical condition standards.
    We made a technical change to paragraph (a) to reflect the movement 
of paragraph (e) of the interim rule (now paragraph (k) of the final 
rule) and the addition of new paragraphs. These changes clarify that an 
owner's obligation to renew project-based assistance is not a matter 
for the recorded Use Agreement, but derives directly from MAHRA and 
this rule and will be implemented by a rider to the section 8 HAP 
contract. In what is now paragraph (i), we clarified that the listed 
interested parties will have rights to enforce the Use Agreement 
(subject to modification as previously discussed) with the possibility 
that a particular Use Agreement could specify additional enforcing 
parties, and added a requirement for the enforcing party to give the 
owner notice and a reasonable opportunity to cure any violations. In 
what is now paragraph (j), the final rule requires the owner to post on 
project property notice of any modifications to the Use Agreement 
approved by HUD. In what is now paragraph (k), we removed a reference 
to owner acceptance of tenant-based assistance because it was 
inaccurate. (Note that new Sec. 401.554 accurately describes the 
availability of tenant-based assistance required by a Restructuring 
Plan, consistent with section 515(a)(2) of MAHRA.)

401.410  Standards for Determining Comparable Market Rents

    In paragraph (a)(1), we clarified that the MAHRA comparable market 
rent standard only applies to project-based assistance. Any tenant-
based assistance provided under a Restructuring Plan will be subject to 
the similar ``rent reasonableness'' standard of section 8(o)(10)(A) of 
the United State Housing Act of 1937, which applies both to enhanced 
and regular vouchers. We clarified that section 202/811 projects are 
not comparable properties for purposes of determining market comparable 
rents.
    We added general language permitting the PAE to make appropriate 
adjustments when needed to ensure comparison of comparable through 
comparison with comparable properties. Examples of appropriate 
adjustments would be adjustments needed due to the non-luxury standard 
for Mark-to-Market projects (as discussed in the interim rule

[[Page 15482]]

preamble) and adjustments needed for utility allowances or to reflect 
the value of any non-section 8 subsidy provided to the project with the 
expiring section 8 contract (as mentioned in new section 524(a)(5) of 
MAHRA). This section is also incorporated into part 402 and applied to 
projects that are not undergoing debt restructuring. For such projects, 
the references to the PAE should be treated as references to HUD.

401.411  Guidelines for Determining Exception Rents

    We have included some statutory text that was cross-referenced in 
the interim rule, clarified that exception rents only apply to project-
based assistance.

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

    We clarified that under this rule OCAF applies only to project-
based assistance. We removed the reference to negative OCAF. We 
redesignated paragraphs (a) and (b) of the interim rule as paragraphs 
(a)(1) and (a)(2) and added a new paragraph (b) explaining the 
availability of budget-based adjustments upon request of the owner, 
subject to the approval of the Secretary, as provided in Pub. L. 106-
74.

401.420  When Must the Restructuring Plan Require Project-Based 
Assistance?

    We have included some statutory text that was cross-referenced in 
the interim rule.

401.421  Rental Assistance Assessment Plan

    We have included some statutory text that was cross-referenced in 
the interim rule.

401.450  Owner Evaluation of Physical Condition

    In paragraph (a)(1), we clarified that the owner's list of work 
items needed to bring the project to the property standard for 
rehabilitation that is stated in the rule and MAHRA (non-luxury 
standard adequate for the rental market for which the project was 
originally approved) should include any work items needed to ensure 
compliance with applicable requirements of 24 CFR part 8 concerning 
accessibility to persons with disabilities. The interim and final rules 
permit rehabilitation to include improvements to meet current standards 
if the non-luxury standard has changed over time. Accessibility 
measures are an example of how standards have evolved since original 
project approval. The addition to paragraph (a)(1) is consistent with 
Sec. 401.452, which makes it clear that there is no exemption from 
applicable part 8 requirements simply because rehabilitation is through 
the Mark-to-Market Program.
    We added a new paragraph (b) permitting the owner to submit an up-
to-date Comprehensive Needs Assessment (CA) in place of a new 
evaluation, if all requirements of paragraph (a) are met. Cans must be 
prepared following procedures outlined in HUD Notice H 97-02 or in 
subsequent administrative guidance from HUD.

401.451  PAE Physical Condition Analysis (PCA)

    We have revised the heading of paragraph (c) to emphasize that it 
permits rejection of projects in such poor condition that restructuring 
with rehabilitation is not a cost-effective way of continuing to ensure 
affordable housing for tenants, as provided in section 516(a)(4) of 
MAHRA. We added language clarifying that a PAE can only recommend 
rejection, with HUD making the final decision.

401.452  Property Standards for Rehabilitation

    We added an express requirement for the PAE to consider 
marketability when planning rehabilitation.

401.453  Reserves [New Title]

    Because paragraph (a) of this section of the interim rule contains 
the standards that must be maintained while the Restructuring Plan is 
in effect, we moved it to subpart D (``Implementation of the 
Restructuring Plan After Closing''). It is Sec. 401.558 in the final 
rule under a revised title. We revised the title of this section to 
reflect its narrowed scope in the final rule.

401.460  Modification or Refinancing of First Mortgage

    We added language to paragraph (e) to require the owner to discuss 
mortgage modification with the existing first mortgagee before 
considering other sources of first mortgage financing under the 
Restructuring Plan. We also added language to paragraph (a) to clarify 
that the size of the first mortgage and monthly payments may not 
increase through mortgage modification but may increase through 
refinancing (e.g., a refinancing mortgage that includes rehabilitation 
financing). Finally, the final rule acknowledges section 219 of Pub.L. 
106-74, which gives priority to risk-sharing financing in a 
Restructuring Plan if it is the best available financing in terms of 
financial savings and will reduce the Federal Government's risk of 
loss.

401.461  HUD-Held Second Mortgage

    We reorganized paragraph (a) and added language on the following 
points:
     To clarify that HUD may allow a PAE to negotiate an 
additional (e.g., third) mortgage for less than the maximum amount 
permitted by the final rule. Additional guidance for PAEs is included 
in the Operating Procedures Guide.
     To clarify the owner's right to appeal acceleration of the 
second mortgage does not apply when acceleration is pursuant to grounds 
for acceleration that are specified in section 517(a)(4)(A) and (B) of 
MAHRA, since they do not involve the type of complex legal or factual 
questions for which an administrative appeals procedure may help to 
avoid unnecessary litigation. (The grounds are termination or payment 
in full of the first mortgage and unauthorized project sale/second 
mortgage assumption.)
     To clarify that, upon payment of the second mortgage in 
full, any additional (i.e., third) mortgage under this section is not 
automatically accelerated but is then payable upon demand by HUD or as 
otherwise agreed by HUD (e.g., under an approved payment schedule).
     To recognize circumstances under which the new HUD-held 
mortgage may be a first mortgage, in response to sec. 213 of Pub.L. 
106-74.

401.472  Rehabilitation Funding

    We have included in the final rule a requirement that appeared only 
in the preamble for the interim rule: That the owner contribution 
include a reasonable proportion of the rehabilitation cost from 
nongovernmental resources. HUD will provide additional guidance in the 
Operating Procedures Guide regarding standards for determining a 
``reasonable proportion''.

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

    The final rule inserts language that was inadvertently omitted 
during printing of the interim rule. As printed, the interim rule 
permitted delegation of grant administration responsibility only if 
grant funding were available to pay for grant administration. Nothing 
in section 236(s)(5)(A) of the National Housing Act prevents a PAE from 
agreeing to accept delegation without reimbursement of costs. HUD did 
not intend to prevent it by regulation.

401.474  Project Accounts

    We added language to paragraph (b) to clarify that it is the actual 
release of funds to the owner under this section that must be delayed 
until after

[[Page 15483]]

completion of rehabilitation, not the determination of the amount of 
funds to be released.

401.480  Sale or Transfer of Project [Revised Title]

    We have removed ``voluntary'' from the title of this section 
because it was potentially misleading. Although all projects sales will 
be voluntary in the sense that owners must agree to them, some project 
sales may be considered involuntary in the sense that no Restructuring 
Plan will be approved under current project ownership. We have also 
revised the section to clarify that purchasers defined in the rule as 
``priority purchasers'' do not have a right to priority consideration 
for involuntary sales indefinitely, but only for a reasonable period 
that OMHAR will determine. By definition, priority purchasers will have 
tenant support. The final rule clarifies that other purchasers will 
also be required to provide evidence of tenant support.

401.481  Subsidy Layering Limitations on HUD Funds

    Additional language clarifies that the subsidy layering 
certification does not preclude a Restructuring Plan that includes 
project reconfiguration needed to meet the needs of the community.

401.483  Leasing Units to Voucher Holders

    Because this section concerns leasing of units while the 
Restructuring Plan is in effect, we moved it to Subpart D 
(``Implementation of the Restructuring Plan After Closing''). It is 
Sec. 401.556 in the final rule.

401.484  Property Management Standards

    Because this section concerns property management standards while 
the Restructuring Plan is in effect, we also moved it to Subpart D. It 
is Sec. 401.560 in the final rule.

401.500  Required Notices to Third Parties and Meetings With Third 
Parties [Revised Title]

    In paragraph (b)(2) of the final rule, notice of the initial public 
meeting is now required no more than 40 days before the meeting, 
instead of 60 days as in the interim rule. New paragraphs (c) and (d) 
cover a new requirement for public notice and comment on a 
substantively completed Restructuring Plan before the PAE submits the 
Plan to OMHAR. A second public meeting is also now required by new 
paragraph (d).
    New paragraph (f) (a revision of paragraph (c) of the interim rule) 
ensures that the PAE will document and provide to HUD all public 
comments on the proposed Restructuring Plan. Paragraph (f) clarifies 
that notice is required whenever the PAE determines that the 
Restructuring Plan will not move forward, for any reason, after the 
owner has requested that a Plan be developed or after a Plan is 
determined to be necessary under Sec. 402.4(a)(2). The interim rule 
language was ambigous on whether notice was required in the absence of 
an OMHAR rejection. As revised, the final rule notice requirement also 
applies whenever an owner does not take the necessary actions to 
complete the restructuring process, including withdrawal of the request 
to restructure or failure to execute an approved Restructuring 
Commitment.

401.501  Delivery of Notices and Recipients of Notices [Revised Title]

    The final rule requires notice to tenants and tenant organizations, 
directly and through posting, instead of permitting notice to a tenant 
organization alone to suffice as tenant notice as under the interim 
rule. Notice also must now be given to the ITAG and OTAG grantees 
serving the jurisdiction in which the property is located.

401.502  Notice Requirement When Debt Restructuring Will Not Occur

    This new section provides that persons who would have received 
notice of a Restructuring Plan request under Secs. 401.500-.501 will 
receive notice if the owner of an eligible project requests section 8 
contract renewals without debt restructuring. HUD or the PAE must make 
publicly available basic project identified in Sec. 401.500(b)(1)(i), 
(ii) and (iv), and the Owner Evaluation of Physical Condition and 
comparative market rent analysis that are required in connection with 
the renewal request (without expense or profit/loss information). The 
PAE must announce a procedure to accept public comments on this 
information. The PAE must consider the comments and document the 
consideration for HUD.

401.503  Access to Information

    This new section explicitly recognizes that a PAE, in fulfilling 
its responsibilities to provide for tenant and community participating 
in developing a Restructuring Plan, will need to make available 
information about the project and the owner. In general, the PAE is not 
expected to make public confidential or proprietary information 
obtained from the owner. This section does require the PAE to make 
public the Owner Evaluation of Physical Condition and the owner-
prepared 1-year project rent analysis (without expense or profit/loss 
information) even if the owner asserts confidentiality/proprietary 
rights. The PAE is never required to disclose expense, property 
valuation, or profit/loss information without owner consent.

401.550  Monitoring and Compliance Agreements

    This section requires PAE inspections of projects that have 
undergone restructuring in accordance with section 519(b)(2) of MAHRA, 
subject to HUD's uniform inspections procedures in 24 CFR part 5, 
subpart G. To avoid duplicative inspections under such procedures (such 
as by the mortgagee if the mortgage continues to be insured, as 
provided in 24 CFR 207.260), the final rule adds a clarification that 
HUD will accept an inspection by a PAE that complies with the uniform 
inspection procedures in lieu of an inspection under those procedures 
required by any other party. We have also added a sentence to make 
explicit what was implicit in the interim rule--that the provisions of 
subpart D apply as long as the Use Agreement is in effect. Finally, we 
added a new paragraph (d) to this section requiring HUD to regulate the 
mortgagor through a regulatory agreement as long the Secretary holds 
the second or additional (third) mortgage under this rule. This would 
be in addition to any regulatory agreement required in connection with 
FHA mortgage insurance.

401.554  Contract Renewal and Administration [Revised Title]

    We added language corresponding to section 515(a) of MAHRA, under 
which HUD or a public body PAE designated as contract administrator 
must offer to renew section 8 contracts as provided in a Restructuring 
Plan, subject to the availability of appropriations and subject to the 
renewal authority available at the time of each contract expiration. 
Section 524 of MAHRA (as amended by Pub. L. 106-74) will be the renewal 
authority.

401.556  Leasing Units to Voucher Holders

    This redesignated section was Sec. 401.483 of the interim rule 
under a slightly different title.

401.558  Physical Condition Standards

    This redesignated section was Sec. 401.453(a) of the interim rule 
under a different title. We removed language regarding duration of the 
requirement in the section because it duplicates new language added to 
Sec. 401.550 in the final rule.

[[Page 15484]]

401.560  Property Management Standards

    This redesignated section was Sec. 401.484 of the interim rule.

Subpart E--Section 8 Requirements for Restructured Projects

401.595  Contract and Regulatory Provisions

    Section 401.607 of the interim rule is combined with this section 
of the final rule. The section is expressly limited to project-based 
assistance because the scope is intended to be identical with 
Sec. 402.3.

401.600  Will a Section 8 Contract Be Extended if It Would Expire While 
an Owner's Request for a Restructuring Plan Is Pending?

    In the preamble to the interim rule, HUD indicated that it would 
typically exercise its discretion under this section to provide a 
contract extension at existing rents for up to 1 year by initially 
providing an extension of no more than 9 months. Upon further 
consideration, HUD currently expects to initially extend a contract at 
existing rents for 1 year, subject to the rule provision permitting 
contract termination for an owner who is uncooperative or who is 
rejected for Mark-to-Market restructuring. We expect to make an 
exception for an owner that executed a Restructuring Commitment under a 
demonstration program but failed to proceed. Although such an owner is 
eligible to request a Restructuring Plan under part 401 and a contract 
extension under this section, the owner will usually be given an 
extension at existing rents for a period that is substantially shorter 
than a full additional year. There is no change in the actual rule 
language for this section.

401.601  Consideration of an Owner's Request To Renew an Expiring 
Contract for an Eligible Project Without a Restructuring Plan

    We redesignated this section as Sec. 402.4(a)(2) but made no 
substantive revisions except as follows. We added language that ensures 
that a HUD or a PAE will take into account tenant and community 
comments received under new Sec. 401.502 about whether contract renewal 
without a Restructuring Plan would be sufficient to maintain both 
adequate debt service coverage and necessary replacement reserves. The 
final rule also makes it clear that HUD, not the PAE, will make the 
final decision to require a Restructuring Plan. A conforming change was 
made to Sec. 402.1 to reflect the section redesignation.

401.602  Tenant Protection if an Expiring Contract Is Not Renewed

    Paragraphs (a) and (b) of this section have been amended to reflect 
changes in the underlying statutory provisions. Specifically, Pub. L. 
105-276 repealed a notice requirement of former section 8(c)(8) of the 
United States Housing Act of 1937, and corresponding provisions of the 
interim rule have therefore been removed. The notice requirement of 
former section 8(c)(9) of the 1937 Act (now redesignated as section 
8(c)(8)) was amended by both Pub. L. 105-276 and Pub. L. 106-74, so 
that corresponding changes have been made in the corresponding interim 
rule provisions of this section. Also, Pub. L. 105-276 added an 
additional 120-day notice requirement for contract terminations by 
owner who chose to pursue restructuring, with restrictions on rent 
increase and evictions during the notice period, and this section of 
the final rule reflects those provisions.
    We also added language in paragraph (a) specifying that required 
notice to HUD is to be sent instead to the contract administrator if 
there is one, reflecting established practice. We made a change to 
clarify that an owner cannot give notice under paragraph (a) while 
simultaneously pursuing a Restructuring Plan and contract renewal.
    We added language to paragraph (c) to clarify two points: (1) HUD's 
statutory obligation to make tenant-based assistance available in 
certain circumstances described in paragraphs (c)(1) and (c)(2) 
(corresponding to sections 514(d) and 516(d) of MAHRA) is subject to 
the usual eligibility requirements in the tenant-based assistance 
program regulations, and (2) tenant-based assistance is available 
pursuant to this section only when project-based assistance is not 
renewed. Pub. L. 106-74 provides for enhanced vouchers to certain 
tenants when project-based assistance is not continued, and this is 
reflected in a revision to paragragh (c).
    We added cross-references to rejection under Sec. 401.451 for poor 
project condition to supplement existing cross-references to rejection 
for that reason under Sec. 401.403. Finally, we deleted a sentence of 
Sec. 401.602(b) of the interim rule that stated that the period during 
which rents may not be raised begins on the earlier of the date of 
actual notice to tenants or the date of contract expiration. HUD's 
intent in including this language in the interim rule was to provide an 
express regulatory basis for language restricting rent increases that 
had previously been included in contracts to implement statutory 
notification requirements. However, the sentence being deleted went 
beyond what has been stated in actual contract language and thus was 
not necessary to accomplish HUD's intent. In addition, the sentence 
being deleted may be inconsistent with the new statutory 120-day notice 
requirement mentioned above. The amendment to section 514(d) of MAHRA 
adding the 120-day notice specifically addresses the rent increase 
question, as follows: If the notice is not provided, ``the owner may 
not evict the tenants or increase the tenants'' rent payment until such 
time as the owner has provided the 120-day notice and such period has 
elapsed.'' This appears to require both actual notice and passage of 
time before an owner may increase rents.

401.605  Project-Based Assistance Provisions

    We added language to clarify that this section applies to the 
initial rents upon restructuring and not to subsequent contract 
renewals.

401.606  Tenant-Based Assistance Provisions

    We added language similar to the addition to Sec. 401.602(c) 
described above regarding eligibility under tenant-based assistance 
program regulations. We also revised the second sentence to conform to 
section 538 of Pub. L. 106-74 of enhanced vouchers.

401.607  Contract Term

    This section of the interim rule is removed and its language is 
added to Sec. 401.595 of the final rule.

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

    We made a conforming change to reflect the change to 
Sec. 401.461(b)(4) regarding appeal of acceleration of the second 
mortgage.

401.651  Appeal Procedures

    We added language to paragraph (c) to clarify that a HUD official 
is disqualified from considering an appeal only of a matter that the 
official (or someone the official reports to) was directly involved in, 
not every matter that falls within the official's general area of 
responsibility.

IV. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget (OMB) in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-

[[Page 15485]]

3520) and assigned OMB approval number 2502-0531. 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

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

Executive Order 12866

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

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this final rule before publication and by 
approving it certifies that this rule does not have a significant 
economic impact on a substantial number of small entities. The rule 
implements legislation that created a Mark-to-Market Program through 
which section 8 rents for multifamily projects with HUD-insured or HUD-
held mortgages will be reduced in order to preserve low-income rental 
housing affordability while reducing the long-term costs of project-
based rental assistance and minimizing the adverse effect on the FHA 
insurance funds. As the preamble to the rule explains, section 8 
assistance is costly to the Federal Government and the cost is rising. 
To preserve affordable housing, Congress determined that reduction of 
section 8 assistance was necessary. Reduction or elimination of section 
8 assistance without some type of transition or conversion process may 
mean that current projects assisted by section 8 may be unable to meet 
their financial obligations including operating expenses, current and 
future capital needs, and debt service payments--particularly payments 
on FHA-insured mortgages. To avoid this situation, the authorizing 
legislation and this final rule provides for a mortgage restructuring 
program.
    In this final rule, the Department strives to provide flexible 
requirements in order to reduce any burden on small entities. Owners of 
eligible projects that are small entities, who might otherwise be 
unable to meet their monthly mortgage payments after HUD reduces 
section 8 rents to comparable market rents as mandated by law, are 
provided an opportunity to receive a reduction in monthly mortgage 
payments if they request a mortgage restructuring under the rule. As 
conditions of the mortgage restructuring the owners will be required to 
rehabilitate the project so that it meets minimum standards of housing 
quality and to provide for competent management. These are not new 
economic burdens on owners, but are project matters which owners 
already have a responsibility to address and should be addressing even 
without mortgage restructuring. The only actions required of the owner 
are those needed to ensure that a project provide decent and safe 
housing to those intended to benefit from the Federal programs involved 
(FHA mortgage insurance and section 8 housing assistance payments.) 
Again, under existing HUD regulations and contracts, owners are now 
subject to a decent, safe, and sanitary standard or a good repair 
standard. Owners choosing to request a mortgage restructuring under 
this final rule will continue to serve the same tenant income mix as 
before and will not be required to provide additional affordable 
housing.
    Some of the Participating Administrative Entities (PAEs) selected 
under the final rule, such as nonprofit organizations and for-profit 
entities, may be small entities. In the final rule HUD has chosen to 
preserve for the PAE substantial discretion, within the limits of the 
statute, to choose the most cost-effective way of undertaking the 
mortgage restructuring of projects assigned to the PAE. No more 
projects will be assigned to a PAE than a PAE is able and willing to 
deal with. Each nonprofit and for-profit PAE will partner with a public 
entity to provide additional resources and reduce the burden of 
undertaking restructuring. Nothing in the final rule imposes a 
disproportionate burden on a small entity.

Executive Order 13132, Federalism

    This final 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 the Executive 
Order.

Unfunded Mandates Reform Act

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

List of Subjects

24 CFR Part 401

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

24 CFR Part 402

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

    For the reasons set forth in the preamble, 24 CFR Chapter IV is 
amended to read as follows:
    1. The chapter heading is revised to read as follows:

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

    2. Part 401 is revised to read as follows:

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

[[Page 15486]]

Subpart A--General Provisions; Eligibility
Sec.
401.1   What is the purpose of part 401?
401.2   What special definitions apply to this part?
401.3   Who may waive provisions in this part?
401.99   How does an owner request a section 8 contract renewal?
401.101   Which owners are ineligible to request Restructuring 
Plans?
Subpart B--Participating Administrative Entity (PAE) and Portfolio 
Restructuring Agreement (PRA)
401.200   Who may be a PAE?
401.201   How does HUD select PAEs?
401.300   What is a PRA?
401.301   Partnership arrangements.
401.302   PRA administrative requirements.
401.303   PRA indemnity provisions for SHFAs and HAs.
401.304   PRA provisions on PAE compensation.
401.309   PRA term and termination provisions; other remedies.
401.310   Conflicts of interest.
401.311   Standards of conduct.
401.312   Confidentiality of information.
401.313   Consequences of PAE violations; finality of HUD 
determination.
401.314   Environmental review responsibilities.
Subpart C--Restructuring Plan
401.400   Required elements of a Restructuring Plan.
401.401   Consolidated Plans.
401.402   Cooperation with owner and qualified mortgagee in 
Restructuring Plan development.
401.403   Rejection of a request for a Restructuring Plan because of 
actions or omissions of owner or affiliate or project condition.
401.404   Proposed Restructuring Commitment.
401.405   Restructuring Commitment review and approval by HUD.
401.406   Execution of Restructuring Commitment.
401.407   Closing conducted by PAE.
401.408   Affordability and use restrictions required.
401.410   Standards for determining comparable market rents.
401.411   Guidelines for determining exception rents.
401.412   Adjustment of rents based on operating cost adjustment 
factor (OCAF) or budget.
401.420   When must the Restructuring Plan require project-based 
assistance?
401.421   Rental Assistance Assessment Plan.
401.450   Owner evaluation of physical condition.
401.451   PAE Physical Condition Analysis (PCA).
401.452   Property standards for rehabilitation.
401.453   Reserves.
401.460   Modification or refinancing of first mortgage.
401.461   HUD-held second mortgage.
401.471   HUD payment of a section 541(b) claim.
401.472   Rehabilitation funding.
401.473   HUD grants for rehabilitation under section 236(s) of NHA.
401.474   Project accounts.
401.480   Sale or transfer of project.
401.481   Subsidy layering limitations on HUD funds.
401.500   Required notices to third parties and meetings with third 
parties.
401.501   Delivery of notices and recipients of notices.
401.502   Notice requirement when debt restructuring will not occur.
401.503   Access to information.
Subpart D--Implementation of the Restructuring Plan after Closing
401.550   Monitoring and compliance agreements.
401.552   Servicing of second mortgage.
401.554   Contract renewal and administration.
401.556   Leasing units to voucher holders.
401.558   Physical condition standards.
401.560   Property management standards.
Subpart E--Section 8 Requirements for Restructured Projects
401.595   Contract and regulatory provisions.
401.600   Will a section 8 contract be extended if it would expire 
while an owner's request for a Restructuring Plan is pending?
401.601   [Reserved]
401.602   Tenant protections if an expiring contract is not renewed.
401.605   Project-based assistance provisions.
401.606   Tenant-based assistance provisions.
Subpart F--Owner Dispute of Rejection and Administrative Appeal
401.645   How does the owner dispute a notice of rejection?
401.650   When may the owner make an administrative appeal of a 
final decision under this subpart?
401.651   Appeal procedures.
401.652   No judicial review.

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

Subpart A--General Provisions; Eligibility


Sec. 401.1  What is the purpose of part 401?

    This part contains the regulations implementing the authority in 
the Multifamily Assisted Housing Reform and Affordability Act of 1997 
(MAHRA) for the Mark-to-Market Program. Section 511(b) of MAHRA details 
the purposes, and section 512(2) details the scope, of the Program.


Sec. 401.2  What special definitions apply to this part?

    (a) MAHRA means the Multifamily Assisted Housing Reform and 
Affordability Act of 1997, title V of Pub. L. 105-65, 42 U.S.C. 1437f 
note.
    (b) Statutory terms. Terms defined in section 512 of MAHRA are used 
in this part in accordance with their statutory meaning. These terms 
are: comparable properties, expiring contract, expiration date, fair 
market rent, mortgage restructuring and rental assistance sufficiency 
plan, nonprofit organization, qualified mortgagee, portfolio 
restructuring agreement, participating administrative entity, project-
based assistance, renewal, State, tenant-based assistance, and unit of 
general local government.
    (c) Other terms. As used in this part, the term--
    Affiliate means an ``affiliate of the owner'' or an ``affiliate of 
the purchaser'', as such terms are defined in section 516(a) of MAHRA.
    Applicable Federal rate has the meaning given in section 1274(d) of 
the Internal Revenue Code of 1986, 26 U.S.C. 1274(d).
    Community-based nonprofit organization means a nonprofit 
organization that maintains at least one-third of its governing board's 
membership for low-income tenants from the local community, or for 
elected representatives of community organizations that represent low-
income tenants.
    Comparable market rents has the meaning given in Sec. 401.410(b).
    Disabled family has the meaning given in Sec. 5.403(b) of this 
title.
    Elderly family has the meaning given in Sec. 5.403(b) of this 
title.
    Eligible project means a project that:
    (1) Has a mortgage insured or held by HUD;
    (2) Receives project-based assistance expiring on or after October 
1, 1998;
    (3) Has current gross potential rent for the project-based assisted 
units that exceeds the gross potential rent for the project based 
assisted units using comparable market rents;
    (4) Has a first mortgage that has not previously been restructured 
under this part or under a Reengineering demonstration program;
    (5) Is not described in section 514(h) of MAHRA; and
    (6) Otherwise meets the definition of ``eligible multifamily 
housing project'' in section 512(2) of MAHRA.
    HUD means the Director of OMHAR or a HUD official authorized to act 
in lieu of the Director, when used in reference to provisions of MAHRA 
that give responsibilities to the Director, and otherwise has the 
meaning given in Sec. 5.100 of this title.
    NA means the National Housing Act, 12 U.S.C. 1702 et seq.
    OMHAR means the Office of Multifamily Housing Assistance 
Restructuring.
    Owner means the owner of a project and any purchaser of the 
project.
    PAE means a participating administrative entity as defined in 
section 512(10) of MAHRA, or HUD

[[Page 15487]]

when appropriate in accordance with section 513(b)(4) of MAHRA.
    PCA means a physical condition assessment of a project prepared by 
a PAE under Sec. 401.451.
    PRA means a portfolio restructuring agreement as defined in section 
512(9) of MAHRA.
    Priority purchaser means a purchaser of a project, meeting 
qualifications established by HUD, that is:
    (1) A tenant organization;
    (2) A tenant-endorsed community-based nonprofit organization or 
public agency; or
    (3) A limited partnership with a sole general partner that itself 
is a priority purchaser under this definition.
    Rental Assistance Assessment Plan means the plan described in 
section 515(c)(2) of MAHRA.
    Restructured rent means the rent determined at the time of 
restructuring in accordance with section 514(g) of MAHRA.
    Restructuring Plan or Plan means the Mortgage Restructuring and 
Rental Assistance Sufficiency Plan described in section 514 of MAHRA.
    Section 8 means section 8 of the United States Housing Act of 1937, 
42 U.S.C. 1437f.
    Section 541(b) claim means a claim paid by HUD under an insurance 
contract under authority of section 541(b) of the National Housing Act, 
12 U.S.C. 1735f-19(b).
    Tenant organization of a project means an organization that meets 
regularly, whose officers are elected by a majority of heads of 
households of occupied units in the project, and whose membership is 
open to all tenants of the project.
    Unit of local government means the smallest unit of general local 
government in which the project is located.
    Voucher means any tenant-based assistance.
    (d) Conflicts of interest. Additional definitions applicable to 
Secs. 401.310 through 401.313 appear in Sec. 401.310.


Sec. 401.3  Who may waive provisions in this part?

    The Director of OMHAR may waive any provision of this part, subject 
to Sec. 5.110 of this title.


Sec. 401.99  How does an owner request a section 8 contract renewal?

    (a) Requesting Restructuring Plan. An owner may request a section 8 
contract renewal as part of a Restructuring Plan by, at least 3 months 
before the expiration date of any project-based assistance, certifying 
to HUD that to the best of the owner's knowledge:
    (1) Project rents are above comparable market rents; and
    (2) The owner is not suspended or debarred or has been notified by 
HUD of any pending suspension or debarment or other enforcement action, 
or, if so, a voluntary sale transfer of the property is proposed in 
accordance with Sec. 401.480.
    (b) Eligible but not requesting Restructuring Plan. If an owner is 
eligible for a Restructuring Plan but requests a renewal of project-
based assistance without a Plan, in accordance with the applicable 
requirements in Sec. 402.6 of this chapter, HUD will consider the 
request in accordance with Sec. 402.4(a)(2) of this chapter.
    (c) Not eligible for Restructuring Plan. Section 402.5 of this 
chapter addresses renewal of project-based assistance for a project not 
eligible for a Restructuring Plan. An owner of such a project may also 
request renewal under Sec. 402.4.


Sec. 401.101  Which owners are ineligible to request Restructuring 
Plans?

    (a) Mandatory rejection. The request of an owner of an eligible 
project will not be considered for a Restructuring Plan if the owner is 
debarred or suspended under part 24 of this title.
    (b) Discretion to reject. HUD may also decide not to accept a 
request for a Restructuring Plan if:
    (1) An affiliate is debarred or suspended under part 24 of this 
title; or
    (2) HUD notifies the owner that HUD is engaged in a pending 
suspension, debarment or other enforcement action against an owner or 
affiliate, and the grounds for the pending action are included in 
Sec. 401.403(b)(2)(ii).
    (c) Exception for sale. This section does not apply if a sale or 
transfer of the property is proposed in accordance with Sec. 401.480.

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


Sec. 401.200  Who may be a PAE?

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


Sec. 401.201  How does HUD select PAEs?

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


Sec. 401.300  What is a PRA?

    A PRA is an agreement between HUD and a PAE that delineates rights 
and responsibilities in connection with development and implementation 
of a Restructuring Plan. The PRA must contain or incorporate by 
reference the matters required by section 513(a)(2) of MAHRA and 
Secs. 401.301 through 401.314, as well as other terms and conditions 
required by HUD.


Sec. 401.301  Partnership arrangements.

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


Sec. 401.302  PRA administrative requirements.

    (a) Inapplicability of certain requirements. Parts 84 and 85 of 
this title and contract procurement requirements do not apply to a PRA.
    (b) Recordkeeping. The PAE must keep complete and accurate records 
of all activities related to the PAE's performance under the PRA. The 
PAE must retain the records for at least 3 years after the PRA 
terminates.
    (c) Inspection of records and audit. Upon reasonable notice, the 
PAE must

[[Page 15488]]

permit the Comptroller General of the United States and HUD (including 
representatives of the HUD Office of Inspector General) to inspect, 
audit, and copy any records required to be retained under this section.


Sec. 401.303  PRA indemnity provisions for SHFAs and HAs.

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


Sec. 401.304  PRA provisions on PAE compensation.

    (a) Base fee. (1) The PRA will provide for base fees to be paid by 
HUD.
    (2) HUD will conduct an annual survey of the market price for the 
scope of work. The results of each survey will be used to establish a 
uniform baseline for public entities. The base fee for a PAE will be 
adjusted if necessary after the first term of the PRA.
    (3) Private PAEs will be compensated based on the results of a 
competitive bid process which evaluates bidders' capability, 
timeliness, ability to work with tenant and community groups, and cost.
    (b) Incentives. The PRA may provide for incentives to be paid by 
HUD. While individual components may vary between PAEs (both public and 
private), the total amount payable under the incentive package will be 
uniform. Objectives will include maximizing savings to the Federal 
Government, timely performance, tenant satisfaction with the PAE's 
performance, the infusion of public funds from non-HUD sources, and 
other benchmarks that HUD considers appropriate.
    (c) Expenses. The PRA will identify expenses incurred by the PAE 
that will qualify for reimbursement by HUD. Limits on these expenses 
will be established annually by HUD, but HUD may waive the limits for 
high-cost areas.
    (d) Other matters. The Director of OMHAR will retain the right of 
final approval of any fee schedule on behalf of HUD. HUD will publish 
the standard form of PRA and the compensation package annually on its 
Internet website.


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

    (a) 1-year term with renewals. The PRA will have a term of 1 year, 
to be renewed for successive terms of 1 year with the mutual agreement 
of both parties. The PRA will provide for HUD to pay final compensation 
to the PAE and to assign responsibility for continuing activities if 
the PRA is not renewed.
    (b) Termination for cause or convenience of Federal Government. (1) 
Termination for cause. HUD may terminate a PRA at any time for cause, 
with payment required by HUD as provided in the PRA only for matters 
authorized by the PRA and performed by the PAE to the date of 
termination. HUD will retain the right of set-off against any payments 
due as well as such other rights afforded at law and in equity.
    (2) Termination for convenience of Federal Government. HUD may 
terminate a PRA at any time in accordance with the PRA or applicable 
law regardless of whether the PAE is in default of any of its 
obligations under the PRA if such termination is in the best interests 
of the Federal Government. The PRA will provide for payment to the PAE 
of a specified percentage of the base fee authorized by Sec. 401.304(a) 
and amounts for reimbursement of third-party vendors to the PAE 
authorized by Sec. 401.304(c).
    (3) Transfer to another PAE; temporary waiver of rights. If a PRA 
is terminated:
    (i) HUD may order an immediate transfer of some or all of the PAE's 
duties to another PAE designated by HUD; and
    (ii) HUD may temporarily waive its right of immediate termination 
in order to allow an orderly transfer of duties and responsibilities 
under a PRA, without waiving the right of termination after the 
transfer has been completed to HUD's satisfaction.
    (c) Liability for damages. During the term of a PRA, or 
notwithstanding any termination of a PRA, HUD may seek its actual, 
direct, and consequential damages from any PAE failure to comply with 
its obligations under the PRA.
    (d) Cumulative remedies. The remedies under this section are 
cumulative and in addition to any other remedies or rights HUD may have 
under the terms of the PRA, at law, or otherwise.


Sec. 401.310  Conflicts of interest.

    (a) Definitions.--(1) Conflict of interest means a situation in 
which a PAE or other restricted person:
    (i) Has a financial interest, direct or indirect, that prevents or 
may prevent the PAE or other restricted person from acting at all times 
in the best interests of HUD;
    (ii) Has one or more personal, business, or financial interests or 
relationships that would cause a reasonable person with knowledge of 
the relevant facts to question the integrity or impartiality of those 
who are or will be acting under the PRA; or
    (iii) Is taking an adverse position to HUD or to an owner whose 
project is covered by a PRA in a lawsuit, administrative proceeding, or 
other contested matter.
    (2) Control means the power to vote, directly or indirectly, 25 
percent or more of any class of the voting stock of a company; the 
ability to direct in any manner the election of a majority of a company 
(or other entity's) directors or trustees; or the ability to exercise a 
controlling influence over the company or entity's management and 
policies. For purposes of this definition, a general partner of a 
limited partnership is presumed to be in control of that partnership.
    (3) Restricted person means a PAE; any management official of the 
PAE; any legal entity that is under the control of the PAE, is in 
control of the PAE, or is under common control with the PAE; or any 
employee, agent or contractor of the PAE, or employee of such agent or 
contractor, who will perform or has performed services under a PRA with 
HUD.
    (b) General prohibitions. (1) The PAE may not permit conflicts of 
interest to exist without obtaining a waiver in accordance with this 
section.
    (2) The PAE must establish procedures to identify conflicts of 
interest and to ensure that conflicts of interest do not arise or 
continue, subject to waiver under paragraph (c) of this section.
    (3) HUD will not enter into PRAs with potential PAEs who have 
conflicts of interest associated with a particular project, or permit 
PAEs to continue performance under existing PRAs when such PAEs have 
conflicts of interest, unless such conflicts have been eliminated to 
HUD's satisfaction by the PAE or potential PAE or are waived by HUD.
    (4) The PAE has a continuing obligation to take all action 
necessary to identify whether it or any other restricted person has a 
conflict of interest.
    (c) Waivers. HUD will waive conflicts of interest only when, in 
light of all relevant circumstances, the interests of HUD in the PAE's 
or another restricted persons's participation outweigh the concern that 
a reasonable person may question the integrity of HUD's operations.
    (d) Conflicts of interest arising prior to PAE selection.--(1) 
Request for review of conflicts of interest. (i) A potential PAE, with 
its request to HUD for consideration for selection as a PAE,

[[Page 15489]]

must identify existing conflicts of interest and may make a written 
request for a determination as to the existence of a conflict of 
interest, may request that the conflict of interest, if any, be waived, 
or may propose how it could eliminate the conflict.
    (ii) If, after submitting a request but prior to selection, a 
potential PAE discovers that it has a conflict, it must notify HUD in 
writing within 10 days of submitting the request or prior to selection, 
whichever is earlier. Such notification must contain a detailed 
description of the conflict. The potential PAE may, with its notices, 
request that the conflict be waived or may propose how it may eliminate 
the conflict. The potential PAE may also request a determination as to 
the existence of the conflict.
    (2) Review by HUD. Subject to the restrictions set forth in this 
section, HUD in its sole discretion may determine whether a conflict of 
interest exists, may waive the conflict of interest, or may approve in 
writing a PAE's proposal to eliminate a conflict of interest.
    (e) Conflicts of interest that arise or are discovered after PAE 
selection. (1) A PAE must notify HUD in writing within 10 days after 
discovering that it or another restricted person has a conflict of 
interest. Such notification must contain a detailed description of the 
conflict of interest and state how the PAE intends to eliminate the 
conflict. The PAE may also request a determination as to the existence 
of a conflict.
    (2) HUD will, after receipt of such notification or other discovery 
of the PAE's conflict or potential conflict of interest, take such 
action as it determines is in its best interests, which may involve 
proceeding under Sec. 401.313 or as provided in the following 
sentences. HUD may notify the PAE in writing of its findings as to 
whether a conflict of interest exists and the basis for such 
determination, whether or not a waiver will be granted, or whether 
corrective actions may be taken in order to eliminate the conflict of 
interest. Corrective action must be completed by the PAE not later than 
30 days after notification is mailed by HUD unless HUD, at its sole 
discretion, determines that it is in its best interests to grant the 
PAE an extension in which to complete the corrective action.
    (f) Reconsideration of decisions. Decisions issued pursuant to this 
section may be reconsidered by HUD upon application by the PAE. Such 
requests must be in writing and must contain the basis for the request. 
HUD may, at its discretion and after determining that it is in its best 
interests, stay any corrective or other actions previously ordered 
pending reconsideration of a decision.


Sec. 401.311  Standards of conduct.

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


Sec. 401.312  Confidentiality of information.

    A PAE and every other restricted person (as defined in 
Sec. 401.310) has a duty to protect confidential information, except as 
provided in Secs. 401.500 through 401.503, and to prevent its use to 
further a private interest other than as contemplated by the PRA. As 
used in this section, confidential information means information that a 
PAE or other restricted person obtains from or on behalf of HUD or a 
third party in connection with a PRA but does not include information 
generally available to the public unless the information becomes 
available to the public as a result of unauthorized disclosure by the 
PAE or another restricted person.


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

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


Sec. 401.314  Environmental review responsibilities.

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

Subpart C--Restructuring Plan


Sec. 401.400  Required elements of a Restructuring Plan.

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


Sec. 401.401  Consolidated Plans.

    A PAE may request HUD to approve a Consolidated Restructuring Plan 
that presents an overall strategy for more than one project included in 
the PRA.

[[Page 15490]]

HUD will consider approval of a Consolidated Restructuring Plan for 
projects having common ownership, geographic proximity, common 
mortgagee or servicer, or other factors that contribute to more 
efficient use of the PAE's resources. Notwithstanding the more 
efficient use of a PAE's resources, HUD will not approve any 
Consolidated Restructuring Plans that have a detrimental effect on 
tenants or the community, or a higher cost to the Federal Government.


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

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


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

    (a) Ongoing determination of owner and project eligibility. 
Notwithstanding an initial determination to accept the owner's request 
for a Restructuring Plan, the PAE is responsible for a further more 
complete and ongoing assessment of the eligibility of the owner and 
project while the Restructuring Plan is developed. The PAE must advise 
HUD if at any time any of the grounds for rejection listed in paragraph 
(b) of this section exist.
    (b) Grounds for rejection.--(1) Suspension or debarment. Neither a 
PAE nor HUD will continue to develop or consider a Restructuring Plan 
if, at any time before a closing under Sec. 401.407, the owner is 
debarred or suspended under part 24 of this title.
    (2) Other grounds. HUD may elect not to permit continued 
consideration of the Restructuring Plan at any time before closing 
under Sec. 401.407, if:
    (i) An affiliate is debarred or suspended under part 24 of this 
title;
    (ii) HUD or the PAE determines that the owner or an affiliate has 
engaged in material adverse financial or managerial actions or 
omissions as described in section 516(a) of MAHRA, including any 
outstanding violations of civil rights laws in connection with any 
project of the owner or affiliate; or
    (iii) HUD or the PAE determines (under Sec. 401.451(c) or 
otherwise) that the project does not meet the housing quality standards 
in Sec. 401.558 and that the poor condition of the project is not 
likely to be remedied in a cost-effective manner through the 
Restructuring Plan.
    (3) Exception for sale. This paragraph does not apply (except 
(2)(iii)) if a sale or transfer is proposed under Sec. 401.480.
    (c) Dispute and appeal. An owner may dispute a rejection under this 
section and seek administrative review under the procedures in subpart 
F of this part.


Sec. 401.404  Proposed Restructuring Commitment.

    A PAE must submit a Restructuring Plan and a proposed Restructuring 
Commitment to HUD for approval, prior to submitting the Commitment to 
the owner for execution. The submission may not occur earlier than 10 
days after the public meeting required by Sec. 401.500(d). The proposed 
Restructuring Commitment must be in a form approved by HUD, incorporate 
the Restructuring Plan, and include the following:
    (a) The lender, loan amount, interest rate, and term of any 
mortgages or unsecured financing for the mortgage restructuring and 
rehabilitation, and any credit enhancement;
    (b) The amount of any payment of a section 541(b) claim;
    (c) The type of section 8 assistance and the section 8 restructured 
rents;
    (d) The rehabilitation required, the source of the owner 
contribution, and escrow arrangements;
    (e) The uses for project accounts;
    (f) The terms of any sale or transfer of the project;
    (g) A schedule setting forth all sources and uses of funds to 
implement the Restructuring Plan, including setting forth the balances 
of project accounts before and after restructuring;
    (h) All consideration, direct or indirect, received or to be 
received by the PAE or a related party, if known, in connection with 
any matter addressed in the Restructuring Commitment, except amounts 
paid or to be paid by HUD; and
    (i) Other terms and conditions prescribed by HUD.


Sec. 401.405  Restructuring Commitment review and approval by HUD.

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


Sec. 401.406  Execution of Restructuring Commitment.

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


Sec. 401.407  Closing conducted by PAE.

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


Sec. 401.408  Affordability and use restrictions required.

    (a) General. The Restructuring Plan must provide that the project 
will be subject to affordability and use restrictions in a Use 
Agreement acceptable to HUD. The Use Agreement must be recorded and in 
effect for at least 30 years. It must include at least the provisions 
required by paragraphs (b) through (j) of this section.
    (b) Use restriction. The project must continue to be used for 
residential use with no reduction in the number of residential units 
without prior HUD approval.
    (c) Affordability restrictions. Except during a period when at 
least 20 percent of the units in a project receive project-based 
assistance:
    (1) At least 20 percent of the units in the project must be leased 
to families whose adjusted income does not exceed 50 percent of the 
area median income as determined by HUD, with adjustments for household 
size, at rents no greater than 30 percent of 50 percent of the area 
median income; or
    (2) At least 40 percent of the units in the project must be leased 
to families whose adjusted income does not exceed 60 percent of the 
area median income as determined by HUD, with adjustments

[[Page 15491]]

for household size, at rents no greater than 30 percent of 60 percent 
of the area median income.
    (d) Comparable configuration. The type and size of the units that 
satisfy the affordability restrictions of paragraph (c) of this section 
must be comparable to the type and size of the units for the project as 
a whole.
    (e) Nondiscrimination against voucher holders. An owner must comply 
with the nondiscrimination provisions of Sec. 401.556.
    (f) Enforcement. The Use Agreement must contain remedies for breach 
of the Use Agreement, including monetary damages for non-compliance 
with paragraphs (c) and (g) of this section.
    (g) Compliance with physical condition standards. The Use Agreement 
must require that the property be maintained in compliance with the 
requirements of Sec. 401.558.
    (h) Reporting. The Use Agreement must contain appropriate financial 
and other reporting requirements for the owner. These reports must 
comply with the Real Estate Assessment Center protocol or subsequent 
standards required by HUD.
    (i) Enforcement and amendment. The Use Agreement will be 
enforceable by interested parties to be specified in the Agreement, 
which will include HUD, the PAE, project tenants, organizations 
representing project tenants, and the unit of local government. The Use 
Agreement must require the party bringing enforcement action to give 
the owner notice and a reasonable opportunity to cure any violations.
    (j) Modifications. HUD will retain the right to approve 
modifications of the Use Agreement agreed to by the owner without the 
consent of any other party, including those having the right of 
enforcement. The owner must post prominently on project property notice 
of any modifications approved by HUD.
    (k) Owner obligation to accept project-based assistance. Subject to 
the availability of appropriated funds, the owner of the project must 
accept any offer of renewal or extension of project-based assistance if 
the offer is in accordance with the terms and conditions specified in 
the Restructuring Plan.


Sec. 401.410  Standards for determining comparable market rents.

    (a) When are comparable market rents required? The Restructuring 
Plan must establish restructured rents for project-based assistance at 
comparable market rents unless the PAE finds that exception rents are 
necessary under Sec. 401.411.
    (b) Comparable market rents defined. Comparable market rents are 
the rents charged for properties that the PAE determines to be 
comparable properties (as defined in section 512(1) of MAHRA, but also 
excluding section 202 or section 811 projects assisted under part 891 
of this title). For purposes of section 512(1), other relevant 
characteristics include any applicable rent control and other 
characteristics determined by the PAE. The PAE may make appropriate 
adjustments when needed to ensure comparability of properties.
    (c) Methodology for determining comparable market rents. If the PAE 
is unable to identify at least three comparable properties within the 
local market, the PAE may:
    (1) Use non-comparable housing stock within that market from which 
adjustments can be made; or
    (2) If necessary to go outside the market, use comparable 
properties as far outside the local market as it finds reasonable, from 
which adjustments can be made.
    (d) Using FMR as last resort. If the PAE is unable to identify 
enough properties under paragraph (c) of this section, comparable 
market rents must be set at 90 percent of the Fair Market Rents for the 
relevant market area.


Sec. 401.411  Guidelines for determining exception rents.

    (a) When do exception rents apply? (1) The Restructuring Plan may 
provide for exception rents established under section 514(g)(2) of 
MAHRA for project-based assistance if the PAE determines that project 
income under the rent levels established under Sec. 401.410 would be 
inadequate to meet the costs of operating the project as described in 
paragraph (b) of this section and that the housing needs of the tenants 
and the community could not be adequately addressed.
    (2) In any fiscal year, the PAE may not request HUD to approve 
Restructuring Plans with exception rents for more than 20 percent of 
all units covered by the PRA, except that HUD may approve a waiver of 
this 20 percent limitation based on the PAE's narrative explanation of 
special need.
    (b) How are exception rents calculated? (1) Exception rents must be 
set at a level sufficient to support the costs of operating the 
project. The PAE must take into account the following cost items:
    (i) Debt service on the second mortgage under Sec. 401.461(a) or a 
rehabilitation loan included in the Restructuring Plan;
    (ii) The operating expenses of the project, as determined by the 
PAE, including:
    (A) Contributions to adequate reserves for replacement;
    (B) The costs of maintenance and necessary rehabilitation;
    (C) Other eligible costs permitted under the section 8 program;
    (iii) An adequate allowance for potential operating losses due to 
vacancies and failure to collect rents, as determined by the PAE;
    (iv) A return to the owner to the extent permitted by 
Sec. 401.461(b)(3)(ii)(A); and
    (v) Other expenses determined by the PAE to be necessary for the 
operation of the project.
    (2) The exception rent must not exceed 120 percent of the Fair 
Market Rent for the market area, except that HUD may approve an 
exception rent greater than 120 percent of Fair Market Rent, based on a 
narrative explanation of special need submitted by the PAE, subject to 
the 5 percent limitation in section 514(g)(2)(A) of MAHRA.


Sec. 401.412  Adjustment of rents based on operating cost adjustment 
factor (OCAF) or budget.

    (a) OCAF. (1) The Restructuring Plan must provide for annual 
adjustment of the restructured rents for project-based assistance by an 
OCAF determined by HUD.
    (2) Application of OCAF. HUD will apply the OCAF to the previous 
year's contract rent less the portion of that rent paid for debt 
service. This paragraph applies to renewals of contracts in subsequent 
years which receive restructured rents under either section 514(g)(1) 
or (2) of MAHRA.
    (b) Budget-based. Rents will be adjusted on a budget basis instead 
of OCAF only upon owner request, subject to HUD approval.


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

    The Restructuring Plan must provide for the section 8 contract to 
be renewed as project-based assistance, subject to the availability of 
funds for this purpose, if:
    (a) The PAE determines there is a market-wide vacancy rate of 6 
percent or less;
    (b) At least 50 percent of the units in the project are occupied by 
elderly families, disabled families, or elderly and disabled families; 
or
    (c) The project is held by a nonprofit cooperative ownership 
housing corporation or nonprofit cooperative housing trust.

[[Page 15492]]

Sec. 401.421  Rental Assistance Assessment Plan.

    (a) Plan required. For any project not subject to mandatory 
project-based assistance under Sec. 401.420, the PAE must develop a 
Rental Assistance Assessment Plan in accordance with section 515(c)(2) 
of MAHRA to determine whether assistance should be renewed as project-
based assistance or whether some or all of the assisted units should be 
converted to tenant-based assistance.
    (b) Matters to be assessed. The PAE must include an assessment of 
the impact of converting to tenant-based assistance and the impact of 
extending project-based assistance on:
    (1) The ability of the tenants to find adequate, available, decent, 
comparable, and affordable housing in the local market;
    (2) The types of tenants residing in the project (such as elderly 
families, disabled families, large families, and cooperative 
homeowners);
    (3) The local housing needs identified in the applicable 
Consolidated Plan developed under part 91 of this title;
    (4) The cost of providing assistance, comparing the applicable 
payment standard to the rent levels permitted by Secs. 401.410 and 
401.411;
    (5) The long-term financial stability of the project;
    (6) The ability of residents to make reasonable choices about their 
individual living situations;
    (7) The quality of the neighborhood in which the tenants would 
reside; and
    (8) The project's ability to compete in the marketplace.
    (c) Conversion may be phased in. Any conversion from project-based 
assistance to tenant-based assistance may occur over a period of not 
more than 5 years if the PAE decides the transition period is needed 
for the financial viability of the project.
    (d) Reports to HUD. The PAE must report to HUD on the matters 
specified in section 515(c)(2)(C) of MAHRA at least semi-annually.


Sec. 401.450  Owner evaluation of physical condition.

    (a) Initial evaluation. The owner must evaluate the physical 
condition of the project and provide the following information to the 
PAE in a form acceptable to the PAE:
    (1) All work items required to bring the project to the standard in 
Sec. 401.452, including any work items needed to ensure compliance with 
applicable requirements of part 8 of this title concerning 
accessibility to persons with disabilities;
    (2) The capital repair or replacement items that will be necessary 
to maintain the long-term physical integrity of the property;
    (3) A plan for funding the rehabilitation work included in 
paragraph (a)(1) of this section, which work must be completed in a 
timely manner after closing the restructuring transaction, that 
identifies the source of the required owner contribution of non-project 
funds; and
    (4) An estimate of the initial deposit, if any, and the estimated 
monthly deposit to the reserve for replacement account for the next 20 
years.
    (b) Use of CA. An owner may comply with paragraph (a) of this 
section by submitting a comprehensive needs assessment in accordance 
with Title IV of the Housing and Community Development Act of 1992 (12 
U.S.C. 1715z-1a note) if the CA:
    (1) Was completed or updated within 1 year; and
    (2) Contains all of the matters required by paragraph (a) of this 
section.
    (c) Reconsideration and modification of evaluation. If the PAE, 
after its independent review under Sec. 401.451, determines that the 
owner's evaluation either fails to address specific necessary work 
items or fails to propose a cost-effective approach to rehabilitation, 
the owner may modify its evaluation to satisfy the concerns of the PAE.


Sec. 401.451  PAE Physical Condition Analysis (PCA).

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


Sec. 401.452  Property standards for rehabilitation.

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


Sec. 401.453  Reserves.

    The Restructuring Plan must provide for reserves for capital 
replacement sufficient to ensure the property's long-term structural 
integrity so that the property can be maintained as affordable housing 
in decent, safe, and sanitary condition meeting the standards of 
Sec. 401.558.


Sec. 401.460  Modification or refinancing of first mortgage.

    (a) Principal amount. As part of the Restructuring Plan, the PAE 
will

[[Page 15493]]

determine the size of the restructured first mortgage that will result 
from the modification or refinancing of the existing FHA-insured or 
HUD-held first mortgage. The restructured first mortgage must be in the 
amount that can be supported by net operating income based on the lower 
of the restructured section 8 rents or the rents allowed by the Use 
Agreement under Sec. 401.408. Neither the outstanding principal balance 
of the existing first mortgage, nor the monthly principal and interest 
payments on that debt, may be increased through modification under the 
Restructuring Plan. The debt service coverage used by the PAE must be 
adequate for purposes of the Restructuring Plan and for the 
requirements of any refinancing.
    (b) Fully amortizing. The modified or refinanced first mortgage 
must be fully amortizing through level monthly payments.
    (c) Rates and other terms. Interest rates and other terms of the 
modified or refinanced first mortgage must be competitive in the 
market.
    (d) Fees. Any fees or costs associated with mortgage modification 
or refinancing determined by the PAE to be above normal processing fees 
must be paid by the owner from non-project funds and must not be 
included in the modified or refinanced first mortgage.
    (e) Refinancing. (1) The owner must contact the mortgagee to 
determine the mortgagee's willingness to consider a modification and 
re-amortization of the existing first mortgage through a Restructuring 
Plan before considering any other source of first mortgage financing. 
If the mortgagee does not agree to modify and re-amortize in accordance 
with the Restructuring Plan, the loan must be refinanced.
    (2) The refinancing may be either without credit enhancement or 
with credit enhancement under one of the following:
    (i) FHA mortgage insurance. If the Restructuring Plan provides for 
FHA mortgage insurance for the refinanced first mortgage, the insurance 
will be provided in accordance with all usually applicable FHA legal 
requirements except that insurance will be documented as provided in 
section 517(b)(2) of MAHRA. HUD will issue the commitment for mortgage 
insurance but may adapt its procedures as necessary to facilitate 
development and implementation of a Restructuring Plan.
    (ii) Other FHA credit enhancement. If FHA credit enhancement, 
including risk-sharing, is provided under part 266 of this title, the 
credit enhancement will be provided in accordance with all usually-
applicable FHA legal requirements under part 266 of this title, except 
that special approval from HUD will be required before the PAE engages 
in risk-sharing with FHA under part 266 of this title. HUD will approve 
risk-sharing financing that complies with part 266 whenever required by 
section 517(b)(3) of MAHRA.
    (iii) Credit enhancement from non-FHA sources. If credit 
enhancement is to be provided by a non-FHA source under section 
517(b)(4) of MAHRA, HUD will consider waiver of any non-statutory 
provision in this part only if the waiver will not materially impair 
achievement of the purposes of MAHRA and if the waiver is essential to 
meet the legitimate business or legal requirements of the provider of 
credit enhancement.


Sec. 401.461  HUD-held second mortgage.

    (a) Amount. (1) The Restructuring Plan must provide for a second 
mortgage to HUD whenever the Plan provides for either payment of a 
section 541(b) claim or the modification or refinancing of a HUD-held 
first mortgage that results in a first mortgage with a lower principal 
amount. The term ``second mortgage'' in this section also includes a 
new HUD-held first mortage (not a refinancing mortgage) if a full 
payment of claim is made under Sec. 401.471, or if Sec. 401.460(a) does 
not permit a restructured first mortgage in any amount.
    (2) The second mortgage must be in a principal amount that does not 
exceed the lesser of:
    (i) The amount the PAE reasonably expects to be repaid based on 
objective criteria such as the amount of anticipated net cash flow, 
trending assumptions, amortization provisions, and expected residual 
value of the property; and
    (ii) The difference between the unpaid balance on the first 
mortgage immediately before and after the restructuring.
    (b) Terms and conditions. (1) The second mortgage must have an 
interest rate of at least 1 percent, but not more than the applicable 
Federal rate. Interest will accrue but not compound.
    (2) The second mortgage must have a term concurrent with the 
modified or refinanced first mortgage, if any. HUD may provide that if 
there is no first mortgage, the second mortgage may continue for a term 
established by HUD.
    (3)(i) Principal and interest on the second mortgage is payable 
only out of net cash flow during its term. ``Net cash flow'' means that 
portion of project income that remains after the payment of all 
required debt service payments on the modified or refinanced first 
mortgage, if any, including payment of any past due principal or 
interest, and payment of all reasonable and necessary operating 
expenses (including deposits to the reserve for replacement account) 
and any other expenditure approved by HUD.
    (ii) The priority and distribution of net cash flow is as follows:
    (A) HUD or the PAE may approve the payment to the owner of up to 25 
percent of net cash flow based on consideration of relevant conditions 
and circumstances including, but not limited to, compliance with the 
management standards prescribed in Sec. 401.560 and the physical 
condition standards prescribed in Sec. 401.558; and
    (B) All remaining net cash flow will be applied to the principal 
and interest on the second mortgage, until paid in full, and then to 
any additional subordinate mortgage under Sec. 401.461(c).
    (4) HUD may cause the second mortgage to be immediately due and 
payable on the grounds provided in section 517(a)(4) of MAHRA, 
including an assumption of the mortgage in violation of HUD standards 
for approval of transfers of physical assets (if applicable), or if the 
owner materially fails to comply with other material HUD requirements 
after a reasonable opportunity for the owner to cure such failure. A 
decision by HUD in this regard is subject to the administrative appeals 
procedure in subpart F of this part, unless HUD acts on the basis of 
the grounds specified in sections 517(a)(4)(A) or (B) of MAHRA.
    (5) HUD will consider modification or forgiveness of all or part of 
the second mortgage only if the project has been sold or transferred to 
a priority purchaser under Sec. 401.480 and HUD determines that 
modification or forgiveness is necessary to recapitalize the project in 
order to preserve it as affordable housing.
    (c) Additional mortgage to HUD. A Restructuring Plan may require 
the owner to give an additional mortgage on the project to HUD in an 
amount that does not exceed the difference between the amount of a 
section 541(b) claim paid under Sec. 401.471 and the principal amount 
of the second mortgage. HUD will provide guidance to PAEs regarding the 
circumstances under which a Plan may be negotiated that provides for 
less than the full difference to be payable under the additional 
mortgage. This additional mortgage must be junior in priority to the 
second mortgage required by paragraph (a) of this section, bear 
interest at the same rate, which will accrue but not compound, and 
require no payment until the second mortgage is satisfied, when it will 
be payable

[[Page 15494]]

upon demand of the Secretary or as otherwise agreed by the Secretary.


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

    HUD will pay a section 541(b) claim from the appropriate insurance 
fund to the insured mortgagee on behalf of the mortgagor. The mortgagee 
must use the claim payment to prepay the principal balance of the 
insured mortgage, in whole or in part, as provided in the Restructuring 
Plan. All section 541(b) claims will be paid in cash. Part 207 of this 
title and sections 207(g) and 541(a) of the NA do not apply to a 
section 541(b) claim.


Sec. 401.472  Rehabilitation funding.

    (a) Sources of funds.--(1) Project accounts. The Restructuring Plan 
for funding rehabilitation must include funds from the project's 
residual receipts account, surplus cash account, replacement reserve 
account, and other project accounts, to the extent the PAE determines 
that those accounts will not be needed for the initial deposit to the 
reserves.
    (2) Debt restructuring. The Restructuring Plan may provide for 
funding of rehabilitation through a new first mortgage in conjunction 
with a payment of a section 541(b) claim. The payment of claim may be 
in an amount necessary to facilitate the funding of the rehabilitation, 
by reducing the existing first mortgage debt to make refinancing 
proceeds available to fund rehabilitation.
    (3) Section 236(s) rehabilitation grant. The Restructuring Plan may 
include a direct grant from HUD under section 236(s) of the NA made in 
accordance with Sec. 401.473, to the extent that HUD has determined 
that funding is available for such a grant.
    (4) Section 8 budget authority increase. The Restructuring Plan may 
include funding of rehabilitation from budget authority provided to HUD 
for increases in section 8 contracts, to the extent that HUD has 
determined that funding from this source is available.
    (b) Statutory restrictions. Any rehabilitation funded from the 
sources described in paragraph (a) of this section is subject to the 
requirements in section 517(b)(7) of MAHRA for an owner contribution. 
The required owner contribution will be calculated as 20 percent of the 
total cost of rehabilitation, unless HUD or the PAE determines that a 
higher percentage is required. The owner contribution must include a 
reasonable proportion (as determined by HUD) of the total cost of 
rehabilitation from non-governmental resources. The PAE may exempt 
housing cooperatives from the owner contribution requirement.
    (c) Escrow agent. The Restructuring Plan must provide for progress 
payments for rehabilitation, which must be disbursed by an acceptable 
escrow agent subject to PAE oversight or as otherwise provided by HUD.


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

    HUD will consider a direct grant for rehabilitation under section 
236(s) of the NA only if the owner provides an acceptable work schedule 
and cost-analysis that is consistent with the owner's evaluation of 
physical condition under Sec. 401.450, as certified by the PAE. The 
owner must execute a grant agreement with terms and conditions 
acceptable to HUD. If the PAE is a State or local government, or an 
agency or instrumentality of such a government, the PAE and HUD may 
agree that the PAE will be delegated the responsibility for the 
administration of any grant made under this section. HUD may make grant 
funding available for the cost of administration if HUD has determined 
that such funding is available.


Sec. 401.474  Project accounts.

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


Sec. 401.480  Sale or transfer of project.

    (a) May the owner request a Restructuring Plan that includes a sale 
or transfer of the property? The owner may request a Restructuring Plan 
that includes a condition that the property be sold or transferred to a 
purchaser acceptable to HUD in a reasonable period needed to consummate 
the transaction. The failure to consummate a sale or transfer of the 
property requested under paragraph (a) of this section will neither 
adversely affect an owner's eligibility for a Restructuring Plan nor 
exempt the owner from the requirements of Sec. 401.600. There are no 
priority purchaser requirements for a voluntary sale or transfer by an 
owner that is eligible for a Restructuring Plan.
    (b) When must the Restructuring Plan include a sale or transfer of 
the property? If the owner is determined ineligible pursuant to 
Sec. 401.101 or Sec. 401.403, the Restructuring Plan must include a 
condition that the owner sell or transfer the property to a purchaser 
acceptable to HUD in accordance with paragraph (c) of this section.
    (c) Owner's notice of intent to sell or transfer. (1) The owner 
must provide notice to the PAE affirming the owner's intent to sell or 
transfer the property. This notice must be received by the PAE no later 
than 30 days after a notice of rejection under Sec. 401.101 or 
Sec. 401.403 has become a final determination under subpart F of this 
part.
    (2) The owner must cooperate in selling or transferring the 
property. Failure to do so will result in the PAE's determination to 
reject the owner's request for a Restructuring Plan. The owner must 
distribute and publish, in an appropriate publication, a notice to 
potential purchasers that describes the property, proposed terms of 
sale, and procedures for submitting an purchase offer. The notice in 
form and substance must be acceptable to HUD, and must inform potential 
offerors of a preference for priority purchasers.
    (3) During a period to be determined by HUD that begins when the 
owner gives notice of intent to sell or transfer, an owner may accept 
an offer only from a priority purchaser.
    (4) No sale or transfer to a non-priority purchaser will be 
approved without evidence of tenant support.
    (d) Informing PAE; approval required. The owner must inform the PAE 
of any offer to purchase the property and the owner must advise the PAE 
of the substance and on-going status of the owner's discussions with 
any prospective purchaser. The owner's acceptance of the offer must be 
subject to PAE approval, and HUD approval of the Restructuring Plan.


Sec. 401.481  Subsidy layering limitations on HUD funds.

    (a) PAE subsidy layering certification required for Restructuring 
Plan. The PAE must certify to HUD that any Restructuring Plan for which 
it submits a proposed Restructuring Commitment meets the requirements 
of either paragraph (d) or (e) of this section.
    (b) Purpose of subsidy layering certification. The purpose of the 
subsidy layering certification is to ensure that any HUD assistance 
provided to the owner of a project pursuant to a Restructuring Plan is 
no more than is necessary to permit the project to continue to house 
tenants with an income mix comparable to the income

[[Page 15495]]

mix of the project before the Restructuring Plan is implemented, after 
taking into account other Government assistance described in section 
102(b)(1) of the Department of Housing and Urban Development Reform Act 
of 1989 (42 U.S.C. 3545(b)(1)). This section does not limit a PAE from 
presenting for approval a Restructuring Plan that includes project 
reconfiguration (e.g., conversion of efficiency units to one-bedroom 
units) where necessary to meet the needs of the community, provided the 
conditions of Sec. 401.452 are also met.
    (c) Relationship to section 102(d) of HUD Reform Act. HUD is not 
required to perform a separate subsidy layering analysis under section 
102(d) of the Department of Housing and Urban Development Reform Act of 
1989 (42 U.S.C. 3545(d)), section 911 of the Housing and Community 
Development Act of 1992 (42 U.S.C. 3545 note), or Sec. 4.13 of this 
title for any HUD assistance that is included in the Restructuring 
Plan. HUD will adopt the PAE certification under this section if a HUD 
certification otherwise would be required under section 102(d).
    (d) Certification under existing HUD guidelines. If the PAE has 
delegated authority from HUD to make section 102(d) subsidy layering 
certifications in accordance with section 911 of the Housing and 
Community Development Act of 1992, the PAE may comply with this section 
by using a procedure substantially similar to the procedure described 
in the Administrative Guidelines published on December 15, 1994 (59 FR 
64748), or any subsequent procedure adopted by HUD to implement section 
911.
    (e) Other procedures. If the PAE does not have the delegated 
authority described in paragraph (d) of this section, the PAE must 
submit to HUD for approval proposed procedures for making the subsidy 
layering certification under this section. Any procedures must conform 
to the procedures described in paragraph (d) of this section to the 
extent feasible and appropriate.


Sec. 401.500  Required notices to third parties and meeting with third 
parties.

    (a) General. The PAE must solicit, and document the consideration 
of, tenant and local community comments. As a minimum, the notices 
described in paragraphs (b), (c) and (f) of this section, in form and 
substance acceptable to HUD, must be provided. The PAE may require the 
owner to give the notices if permitted by HUD.
    (b) Notice of intent to restructure and consultation meeting. (1) 
This notice must include at a minimum:
    (i) The project, including its name and FHA Project Number;
    (ii) The responsible PAE and contact person, including the address 
and telephone number;
    (iii) The owner's notice of intent to restructure through the Mark-
to-Market Program; and
    (iv) The date of expiration of the project-based assistance.
    (2) This notice must state how comments may be provided to the PAE 
regarding any of the following: the physical condition of the property, 
whether the rental assistance should be tenant-based or project-based, 
any proposed sale or transfer of the property, and other matters 
regarding the property and its management. The notice must establish 
the date, time, and place for a public meeting to be held no sooner 
than 20 days and no later than 40 days following the date of this 
notice. The public may provide written comments up to the date of the 
meeting.
    (c) Access to Restructuring Plan. (1) The PAE must make the 
Restructuring Plan available to the parties identified in Sec. 401.501 
at least 20 days before the PAE submits the Restructuring Plan to HUD 
(subject to any Federal, State, or local laws restricting access to any 
information in the Plan or related documents).
    (2) As soon as the PAE determines that the Restructuring Plan is 
substantively complete and ready for submission to HUD, notice of the 
following must be provided:
    (i) The location of the Plan for inspection and copying; and
    (ii) The date, time, and place of a public meeting to be held at 
least 10 days before the PAE submits the Plan to HUD.
    (3) When the PAE gives notice under this section, it must make the 
Plan available during normal business hours at the management office of 
the project, or if there is no such office, at another location 
specified by the PAE that is convenient to the tenants.
    (d) Meeting to discuss the Restructuring Plan. After the PAE has 
given notice under this section and at least 10 days before the PAE 
submits the Plan to HUD, the PAE must conduct a public meeting to 
obtain comments on the substantively completed Plan. The PAE must 
accept written comments through the date of the meeting.
    (e) Disposition of comments. The PAE must document and provide to 
HUD with the Restructuring Plan a summary of the disposition of all 
public comments.
    (f) Notice of completion of Restructuring Plan. (1) Within 10 days 
after the owner executes the Restructuring Commitment, notice must be 
provided that describes the completed Restructuring Plan and 
Restructuring Commitment. The PAE must make the completed Restructuring 
Plan and Restructuring Commitment available during normal business 
hours to the public at a place described in paragraph (c)(3) of this 
section, subject to Federal, State, or local laws restricting access to 
any information in any of these documents.
    (2) Within 10 days after the PAE determines that the Restructuring 
Plan will not move forward for any reason, notice must be provided that 
describes the reasons for the failure to move forward and the 
availability of tenant-based assistance to tenants under 
Sec. 401.602(c) if project-based assistance is not renewed.


Sec. 401.501  Delivery of notices and recipients of notices.

    (a) Whom must the owner or PAE notify? The PAE must notify, or 
ensure that the owner notifies, each tenant and any tenant organization 
for the project, and post a notice in the project, for all notices 
required by Secs. 401.500 and 401.502.
    (b) Whom must the PAE notify? The PAE must notify:
    (1) The Chief Executive Officer of the unit of local government and 
the Executive Director of the Public Housing Authority with 
jurisdiction over the project location;
    (2) The recipient of any Outreach and Training Grant (OTAG); or 
Intermediary Technical Assistance Grant (ITAG) for the project 
location; and
    (3) Other appropriate neighborhood representatives and other 
affected parties.


Sec. 401.502  Notice requirement when debt restructuring will not 
occur.

    (a) PAE responsibility. If an owner of an eligible project requests 
a renewal of a section 8 contract without a Restructuring Plan under 
Sec. 402.4, HUD or the PAE must notify, or ensure that the owner 
notifies, all parties identified in Sec. 401.501 of the request and of:
    (1) The availability (as provided in Sec. 401.500(c)(3) of the 
following information:
    (i) The owner evaluation of physical condition (OEPC) required by 
Sec. 402.6(a)(3);
    (ii) The comparable market rent analysis required by 
Sec. 402.6(a)(2), but without addresses (or other specific information 
indicating location) for comparable properties; and
    (iii) The items identified in Sec. 400.500(b)(1)(i), (ii) and (iv); 
and
    (2) A procedure for submitting public comments regarding this 
information.

[[Page 15496]]

    (b) Expense and profit/loss information. The PAE should remove 
project expense, property valuation, and profit and loss information 
before disclosing any information obtained by the PAE directly from an 
owner or project manager, unless the owner has given written consent to 
disclosure with that information included.
    (c) Consideration of comments. The PAE must consider written public 
comments on the information listed in paragraph (a) of this section, if 
the comments are submitted within 30 days after giving notice under 
paragraph (a), and document the consideration for HUD. No public 
meeting is required.


Sec. 401.503  Access to information.

    (a) PAE responsibilities. The PAE must provide to parties entitled 
to notice under Sec. 401.501 access to information obtained by the PAE 
about the project and its management if the PAE determines that such 
information is reasonably likely to contribute to effective 
participation by those parties in the restructuring process, or if HUD 
requires the PAE to provide access to the information. The PAE is not 
required to make public any information received from the owner or 
manager that the PAE reasonably characterizes as confidential or 
proprietary information that would not ordinarily be made public, 
except:
    (1) Owner evaluation of physical condition (OEPC), or a 
comprehensive needs assessment (CA) if used instead of an OEPC, as 
required by Sec. 401.450;
    (2) Owner-prepared 1-year project rent analysis; and
    (3) As directed by HUD.
    (b) Information on expenses and profit/loss. Before disclosing any 
information, the PAE must remove any information obtained by the PAE 
directly from the owner or project manager that is related to project 
expenses, property valuation, or profit and loss, unless the owner 
gives written consent to disclosure with that information.

Subpart D--Implementation of the Restructuring Plan After Closing


Sec. 401.550  Monitoring and compliance agreements.

    (a) Compliance agreements. The PAE must ensure long-term compliance 
by the owner with MAHRA, this part, and the Restructuring Plan. As part 
of this responsibility, the PAE must require each owner with an 
approved Restructuring Plan to execute and record a Use Agreement that 
satisfies the requirements of Sec. 401.408. All provisions of this 
subpart apply as long as the Use Agreement is in effect.
    (b) Periodic monitoring and inspection. At least once a year, a PAE 
must review the status of each project for which it developed an 
approved Restructuring Plan. Monitoring must include on-site 
inspections. HUD will accept an inspection by a PAE that complies with 
subpart G of part 5 of this title in lieu of an inspection required by 
any other party under that subpart.
    (c) HUD acting instead of PAE. HUD will perform, or contract with 
other parties to perform, the PAE's functions under this section if:
    (1) The project is subject to a PRA with a PAE that is not 
qualified to be a section 8 contract administrator; or
    (2) The project is not currently subject to a PRA.
    (d) Regulatory agreement. As long as the Secretary is the holder of 
a second mortgage or an additional mortgage under Sec. 401.461, HUD 
will regulate the operations of the mortgagor through a regulatory 
agreement providing terms, conditions, and standards established by 
HUD, which may be in addition to any regulatory agreement otherwise 
required in connection with mortgage insurance programs. The regulatory 
agreement must contain remedies for breach, including monetary damages 
in the event of non-compliance.


Sec. 401.552  Servicing of second mortgage.

    HUD or its designee will be responsible for servicing the second 
mortgage, including determining the amounts receivable by the owner 
under Sec. 401.461(b)(3)(ii)(A). HUD may designate the PAE, with the 
PAE's consent, as servicer for the second mortgage.


Sec. 401.554  Contract renewal and administration.

    HUD will offer to renew or extend section 8 contracts as provided 
in each Restructuring Plan, subject to the availability of 
appropriations and subject to the renewal authority available at the 
time of each contract expiration (Sec. 402.5 of this chapter or another 
appropriate renewal authority). The offer will be made by HUD directly 
or through a PAE that has contracted with HUD to be a contract 
administrator for such contracts. HUD will offer to any PAE that is 
qualified to be the section 8 contract administrator the opportunity to 
serve as the section 8 contract administrator for a project 
restructured under a Restructuring Plan developed by the PAE under the 
Mark-to-Market Program. Qualifications will be determined under both 
statutory requirements and requirements issued by the appropriate 
office within HUD, depending on the type of section 8 assistance that 
is provided.


Sec. 401.556  Leasing units to voucher holders.

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


Sec. 401.558  Physical condition standards.

    The Restructuring Plan must require the owner to maintain the 
project, in a decent and safe condition that meets the applicable 
standards under this section. As long as project-based assistance is 
provided, the applicable standards are the physical conditions 
standards for HUD housing in Sec. 5.703 of this title. At any other 
time, the applicable standards are the local housing codes or codes 
adopted by the public housing agency if such codes meet or exceed the 
standards in Sec. 5.703 of this title and do not severely restrict 
housing choice or, if there are no such local housing codes or codes 
adopted by the public housing agency, the standards in Sec. 5.703 of 
this title will apply. In addition, any unit in which the tenant 
receives tenant-based assistance must comply with the housing quality 
standards of the section 8 tenant-based programs.


Sec. 401.560  Property management standards.

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

[[Page 15497]]

by HUD, and industry standards, governing conflicts of interest between 
owners, managers, and contractors.

Subpart E--Section 8 Requirements for Restructured Projects


Sec. 401.595  Contract and regulatory provisions.

    The provisions of chapter VIII of this title will apply to a 
renewal of section 8 project-based assistance contract under this part 
only to the extent, if any, provided in the contract. Part 983 of this 
title will not apply. The term of the initial and subsequent contract 
renewals under this part will be determined by the appropriate HUD 
official.


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

    If a section 8 contract for an eligible project would expire before 
a Restructuring Plan is implemented, the contract may be extended at 
rents not exceeding current rents for up to the earlier of 1 year or 
closing on the Restructuring Plan under Sec. 401.407. HUD may terminate 
the contract earlier if the PAE or HUD determines that an owner is not 
cooperative under Sec. 401.402 or if an owner's request is rejected 
under Sec. 401.403 or Sec. 401.405. Any extension of the contract 
beyond 1 year for a pending Plan must be at comparable market rents or 
exception rents. An extension at comparable market rents or exception 
rents under this section will not affect a project's eligibility for 
the Mark-to-Market Program once it has been initially established under 
this part.


Sec. 401.601  [Reserved]


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

    (a) Required notices. (1)(i) The owner of an eligible project who 
has requested a Restructuring Plan and contract renewal must provide a 
12-month notice as provided in section 514(d) of MAHRA if the owner 
later decides not to extend or renew an expiring contract (except due 
to a rejection under Secs. 401.101. 401.403, 401.405, or 401.451. If 
the owner gives such 12-month notice, the owner is not required to give 
a separate notice under section 8(c)(8) of the United States Housing 
Act of 1937.
    (ii) An owner who gives the 12-month notice required by paragraph 
(a)(1)(i) of this section and who determines not to renew a contract 
must give additional notice not less than 120 days before the contract 
expiration.
    (2) The owner of an eligible project who has not requested a 
Restructuring Plan, or an owner who requested a Restructuring Plan but 
who has been rejected under Secs. 401.101, 401.403, 401.405, or 
401.451, must provide 12 month's advance notice under section 
8(c)(8)(A) of the United States Housing Act of 1937 (or notice as 
otherwise provided in section 8(c)(8)(C) of such Act), unless project-
based assistance is renewed under Sec. 402.4.
    (3) Notices required by this paragraph must be provided to tenants 
and to HUD or the contract administrator. HUD will prescribe the form 
of notices under this paragraph, to the extent that the form is not 
prescribed by section 8(c)(8) of the United States Housing Act of 1937.
    (b) If owner does not give notice. If an owner described in 
paragraph (a)(1) or (a)(2) of this section does not give timely notice 
of non-renewal or termination, the owner must permit the tenants in 
assisted units to remain in their units for the required notice period 
with no increase in the tenant portion of their rent, and with no 
eviction due to inability to collect an increased tenant portion of 
rent.
    (c) Availability of tenant-based assistance. (1) Subject to the 
availability of amounts provided in advance in appropriations and the 
eligibility requirements of the tenant-based assistance program 
regulations, HUD will make tenant-based assistance available under the 
following circumstances:
    (i) If the owner of an eligible project does not extend or renew 
the project-based assistance, any eligible tenant residing in a unit 
assisted under the expiring contract on the date of expiration will be 
eligible to receive assistance on the later of the date of expiration 
or the date the owner's obligations under paragraph (b) of this section 
expire; and
    (ii) If a request for a Restructuring Plan is rejected under 
Sec. 401.101, Sec. 401.403, Sec. 401.405, or 401.451, and project-based 
assistance is not otherwise renewed, any eligible tenant who is a low-
income family or who resides in a project-based assisted unit on the 
date of Plan rejection will be eligible to receive assistance on the 
later of the date the Restructuring Plan is rejected, or the date the 
owner's obligations under paragraph (b) of this section expire.
    (2) If the tenant was assisted under the expiring contract, 
assistance under this paragraph will be in the form of enhanced 
vouchers as provided in section 8(t) of the United States Housing Act 
of 1937.


Sec. 401.605  Project-based assistance provisions.

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


Sec. 401.606  Tenant-based assistance provisions.

    If the Restructuring Plan provides for tenant-based assistance, 
each assisted family residing in a unit assisted under the expiring 
project-based assistance contract when the contract terminates will be 
offered tenant-based assistance if the family meets the eligibility 
requirements under part 982. Whenever permitted by section 515(c)(4) of 
MAHRA, the tenant-based assistance will be in the form of enhanced 
vouchers as provided in section 8(t) of the United States Housing Act 
of 1937.

Subpart F--Owner Dispute of Rejection and Administrative Appeal


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

    (a) Notice of rejection. HUD will notify the owner of the reasons 
for a rejection under Secs. 401.101, 401.402, 401.403, 401.405, 
401.451, or Sec. 402.7 of this chapter. An owner will have 30 days from 
receipt of this notice to provide written objections or to cure the 
underlying basis for the objections. If the owner does not submit 
written objections or cure the underlying basis for the objections 
during that period, the decision will become a final determination 
under section 516(c) of MAHRA and is not subject to judicial review.
    (b) Final decision after objection; right to administrative review. 
If an owner submits written objections or asserts that the underlying 
basis for the objections is cured, after consideration of the matter 
HUD will send the owner a final decision affirming, modifying, or 
reversing the rejection and setting forth the rationale for the final 
decision.


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

    The owner has a right to make an administrative appeal of the 
following:
    (a) A final decision by HUD under Sec. 401.645(b);
    (b) A decision by HUD and the PAE to offer a proposed Restructuring 
Commitment that the owner does not execute; and
    (c) A decision by HUD to accelerate the second mortgage under 
Sec. 401.461(b)(4), to the extent provided that section.

[[Page 15498]]

Sec. 401.651  Appeal procedures.

    (a) How to appeal. An owner may submit a written appeal to HUD, 
within 10 days of receipt of written notice of the decision described 
in Sec. 401.650, contesting the decision and requesting a conference 
with HUD. At the conference, the owner may submit (in person, in 
writing, or through a representative) its reasons for appealing the 
decision. The HUD or PAE official who issued the decision under appeal 
may participate in the conference and submit (in person, in writing, or 
through a representative) the basis for the decision.
    (b) Written decision. Within 20 days after the conference, or 20 
days after any agreed-upon extension of time for submission of 
additional materials by or on behalf of the owner, HUD will advise the 
owner in writing of the decision to terminate, modify, or affirm the 
original decision.
    (c) Who is responsible for reviewing appeals? HUD will designate an 
official to review any appeal, conduct the conference, and issue the 
written decision. The official designated must be one who was neither 
directly involved in, nor reports to another directly involved in, 
making the decision being appealed.


Sec. 401.652  No judicial review.

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

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

    3. The authority citation for part 402 continues to read as 
follows:

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

    4. Section 402.1 is revised to read as follows:


Sec. 402.1  What is the purpose of part 402?

    This part sets out the terms and conditions under which HUD will 
renew project-based section 8 contracts under the authority provided in 
section 524(a)(1) or (2) of MAHRA. This part permits renewal 
notwithstanding part 24 of this title, but subject to section 516 of 
MAHRA (see Sec. 402.7).

    5. Section 402.4 is revised to read as follows:


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

    (a) Initial renewal. (1) HUD may renew any expiring section 8 
project-based assistance contract at initial rents that do not exceed 
comparable market rents.
    (2)(i) If HUD or a Participating Administrative Entity (PAE) 
determines that renewal of an expiring contract under this section for 
an eligible project would be sufficient to maintain both adequate debt 
service coverage on the HUD-insured or HUD-held mortgage and necessary 
replacement reserves to ensure the long-term physical integrity of the 
project, taking into account any comments received under 
Sec. 401.502(c) of this chapter, HUD will renew the contract under this 
section without developing a Restructuring Plan, subject to Sec. 402.7.
    (ii) If HUD or the PAE determines that paragraph (a)(2)(i) of this 
section does not apply for an eligible project, HUD or the PAE may 
require a Restructuring Plan before the owner's request for renewal of 
an expiring section 8 contract will be given further consideration. If 
HUD or the PAE determines that the project's continued operation 
without a Restructuring Plan is not feasible and the owner does not 
cooperate in the development of an acceptable Restructuring Plan, HUD 
will pursue whatever administrative actions it considers necessary.
    (b) [Reserved].
    6. Section 402.6 is amended by revising paragraph (a)(3) to read as 
follows:


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

    (a) * * *
    (3) If an owner of a project eligible for restructuring under part 
401 is seeking contract renewal under Sec. 402.4, the most recent 
required fiscal year audited financial statement for the project and an 
owner's evaluation of physical condition as provided in Sec. 401.450 of 
this chapter, and such other documents as HUD or the PAE may require.
* * * * *

    Dated: March 13, 2000.
Ira Peppercorn,
Director, Office of Multifamily Housing Assistance Restructuring.
[FR Doc. 00-6728 Filed 3-21-00; 8:45 am]
BILLING CODE 4210-01-P