[Federal Register Volume 68, Number 180 (Wednesday, September 17, 2003)]
[Proposed Rules]
[Pages 54624-54642]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23025]



  Federal Register / Vol. 68, No. 180 / Wednesday, September 17, 2003 / 
Proposed Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 972

[Docket No. FR-4718-P-01]
RIN 2577-AC33


Conversion of Developments From Public Housing Stock; Methodology 
for Comparing Costs of Public Housing and Tenant-Based Assistance

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would establish the cost methodology that 
Public Housing Agencies (PHAs) must use under HUD's programs for the 
required and voluntary conversion of public housing developments to 
tenant-based assistance. Both programs require that PHAs, before 
undertaking any conversion activity, compare the cost of providing 
tenant-based assistance with the cost of continuing to operate the 
development as public housing. The cost methodology was originally 
contained in HUD's July 23, 1999, proposed rule on voluntary 
conversions (although the methodology also applies to required 
conversions). HUD has decided to significantly revise the proposed 
methodology, based both on public comments received on the proposed 
rule and upon further consideration of the cost factors that should be 
assessed by PHAs in making conversion determinations. Accordingly, HUD 
is issuing this new proposed rule, which will provide the public with 
an additional opportunity to comment on the methodology that will be 
used for the required cost comparisons.

DATES: Comments Due Date: November 17, 2003.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410-0500. Communications should 
refer to the above docket number and title. Facsimile (FAX) comments 
are not acceptable. A copy of each communication submitted will be 
available for public inspection and copying between 7:30 a.m. and 5:30 
p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Bessy Kong, Acting Deputy Assistant 
Secretary for Policy, Program, and Legislative Initiatives, Department 
of Housing and Urban Development, Office of Public and Indian Housing, 
451 Seventh Street, SW., Room 4116, Washington, DC 20410-5000; 
telephone (202) 708-0713 (this is not a toll-free telephone number). 
Persons with hearing or speech impairments may access this number via 
TTY by calling the toll-free Federal Information Relay Service at 1-
800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--HUD's Rules on Required and Voluntary Conversion of 
Public Housing to Tenant-Based Assistance

    On July 23, 1999, HUD published for public comment two proposed 
rules to implement the required and voluntary conversion programs 
authorized by the Quality Housing and Work Responsibility Act of 1998 
(Title V of the Fiscal Year 1999 HUD Appropriations Act; Pub. L. 105-
276, approved October 21, 1998) (QHWRA) (see 64 FR 40232 for HUD's 
proposed rule on required conversion; 64 FR 40240 for the proposed rule 
on voluntary conversion).
    The required conversion program is authorized under section 537 of 
QHWRA, which added a new section 33 to the United States Housing Act of 
1937 (42 U.S.C. 1437 et seq.) (1937 Act). Section 33 requires Public 
Housing Agencies (PHAs) to annually review their public housing 
inventory and identify distressed developments that must be removed 
from the public housing inventory. If it would be more expensive to 
modernize and operate a distressed development for its remaining useful 
life than to provide tenant-based assistance to all residents, or the 
PHA cannot assure the long-term viability of a distressed development, 
then it must develop and carry out a plan to remove the development 
from its public housing inventory, and convert it to tenant-based 
assistance.
    The voluntary conversion program is authorized under section 533 of 
QHWRA, which amended section 22 of the 1937 Act. As amended, section 22 
authorizes PHAs to voluntarily convert a development to tenant-based 
assistance by removing the development or a portion of a development 
from its public housing inventory and providing for relocation of the 
residents or provision of tenant-based assistance to them. This action 
is permitted only when that change would be cost effective, principally 
benefits residents of the development and the surrounding area, and not 
have an adverse impact on the availability of affordable housing.
    HUD's final rules on required and voluntary conversions are 
published elsewhere in today's Federal Register. The regulations for 
the conversion programs will be located in a new 24 CFR part 972 
(entitled ``Conversion of Public Housing to Tenant-Based Assistance''). 
The regulations for required conversions will be located in subpart A 
of new part 972. The voluntary conversion regulations will be codified 
in subpart B of part 972. Interested readers should consult those final 
rules for additional information regarding required and voluntary 
conversion of public housing stock to tenant-based assistance.

II. This Proposed Rule--Cost Methodology for Conversions

    This proposed rule would establish the cost methodology that PHAs 
must use for the required and voluntary conversion of public housing 
developments to tenant-based assistance. Both conversion programs 
require that PHAs, before undertaking any conversion activity, compare 
the cost of providing tenant-based assistance with the cost of 
continuing to operate the development as public housing. The 
methodology would be codified as an appendix to new 24 CFR part 972.
    The cost methodology was originally contained in HUD's July 23, 
1999, proposed rule on voluntary conversions (although the methodology 
also applies to required conversions). However, HUD has decided to 
significantly revise the proposed methodology, based both on public 
comments received on the proposed rule and upon further consideration 
of the cost factors that should be assessed by PHAs in making 
conversion determinations. Accordingly, HUD is issuing this new 
proposed rule, which will provide the public with an additional 
opportunity to comment on the methodology that will be used for the 
required cost comparisons. HUD plans to publish this rule as final 
prior to the effective date for the required and voluntary conversion 
rules, published in final elsewhere in this Federal Register.

III. Significant Changes to Proposed Cost Methodology

    The most significant differences between the cost methodology 
contained in the July 23, 1999, proposed rule on voluntary conversions 
and this proposed rule are as follows:
    1. Use of OMB Circular A-94. This proposed rule provides for use of 
OMB Circular A-94 (Guidelines and Discount Rates for Benefit-Cost 
Analysis of Federal Programs) in performing the

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discounting required for the cost comparisons. The OMB circular 
provides guidance on the discount rates to be used in evaluating 
federal programs whose benefits and costs are distributed over time. 
HUD believes that adoption of the policies and procedures outlined in 
OMB Circular A-94 will result in more accurate comparisons of the cost 
of tenant-based assistance with the costs of continuing to operate 
developments as public housing. Application of these procedures will 
also ensure that the approach used for the cost comparison is 
consistent with the way other federal programs and policies are 
evaluated. A copy of OMB Circular A-94 may be downloaded from the 
following Internet Web site: http://www.whitehouse.gov/omb/circular/a094/a094.html.
    2. Discounting of public housing operating subsidy and Section 8 
voucher costs. Consistent with OMB Circular A-94, the proposed cost 
methodology compares the net present value of the stream of costs 
associated with continued use as public housing with the net present 
value of the stream of costs associated with vouchers. The period over 
which costs, both initial and ongoing, are recognized is generally 20 
years, but may be a longer period (30 years for new construction) or a 
shorter period (15 years) under voluntary conversion. Costs are 
discounted using the real discount rate provided on the OMB Web site at 
http://www.whitehouse.gov/OMB/Budget.
    The methodology contained in this proposed rule replaces the 
approach used in the July 23, 1999, proposed rule on voluntary and 
required conversions in which public housing and voucher costs were 
converted to a single-period cost (per unit per month average) by 
amortizing initial and ongoing modernization costs.
    3. Use of revitalization plan in conduct of cost test. This 
proposed rule revises the proposed cost methodology to clarify that, 
particularly for voluntary conversion, the required cost comparison 
will not always be based on a revitalization plan.
    4. Calculation of accrual. The proposed cost methodology has been 
revised to provide that accrual will be calculated using the portion of 
the latest published HUD unit Total Development Cost (TDC) limits for 
the area that HUD attributes to the costs of housing construction. In 
addition, the amortization period has been changed so that the amounts 
used for accrual are consistent with the amounts estimated in the HUD-
sponsored comprehensive study of public housing capital needs released 
in 2000.
    5. Additional costs of providing tenant-based assistance. HUD has 
clarified the proposed cost methodology to provide that a PHA must 
consider the following expenses as part of the cost of providing 
Section 8 tenant-based assistance:
    [sbull] The cost of addressing environmental concerns related to 
demolition; and
    [sbull] An amount equal to $1,000 (or a higher amount allowed by 
HUD) for relocation assistance costs (including counseling).
    6. Use of payment standard in calculating cost of providing tenant-
based assistance. HUD has revised the proposed cost methodology to 
provide that, for purposes of the required cost comparison, the PHA 
should use the higher of the average cost for voucher units occupied by 
recent movers, or the applicable Section 8 payment standard for the 
jurisdiction or designated part of the Fair Market Rent (FMR) area. The 
term cost as used here means the gross rent of the units (contract rent 
plus any utility allowance). PHAs have discretion in defining a 
reasonable time period for measuring recent mover costs.

IV. Discussion of Public Comments on Proposed Cost Methodology

    As noted above in this preamble, the cost methodology was 
originally contained in HUD's July 23, 1999, proposed rule on voluntary 
conversions. The comment period on the proposed rule closed on 
September 21, 1999. By close of business on this date, HUD had received 
six public comments. Comments were submitted by a private citizen, one 
PHA, two of the three main organizations representing PHAs, and two 
legal aid organizations. Several of the commenters raised issues 
concerning the proposed cost methodology. This section of the preamble 
presents a summary of the significant issues raised by the public 
commenters on the proposed methodology, and HUD's responses to these 
comments.
    Comment: The proposed cost methodology incorrectly applies cost 
methodologies developed to deal with distressed housing to non-
distressed housing. Two commenters recommended that the cost test not 
be based on the preparation of a revitalization plan. One of the 
commenters wrote that PHAs wishing to convert may not always have a 
completed revitalization plan to serve as the basis for the required 
cost analysis. The other commenter wrote that the proposed cost 
methodology incorrectly assumes that the projects to be converted are 
distressed projects that need to be revitalized. This commenter wrote 
that ``any project, including viable projects and projects in good 
condition, are subject to voluntary conversion.'' The commenter worried 
that requiring the inclusion of revitalization expenses in the cost 
methodology would drive up the cost of operating public housing and, 
thus, increase the likelihood that a development will fail the cost 
test.
    HUD response. HUD has revised the language of the July 23, 1999, 
proposed rule to be more sensitive to the concerns expressed by the 
commenters, and to the reality that the renovations needed so that 
public housing will be usable over its remaining useful life, as 
contemplated by section 22 of the 1937 Act, will sometimes be less 
extensive than a revitalization plan.
    Comment: Additional costs of providing tenant-based assistance. 
Section III of the proposed methodology describes the procedures for 
determining the cost of providing Section 8 tenant-based assistance. 
One commenter suggested that this section be revised to include the 
following expenses:
    1. Any costs related to dealing with the environmental aspects of 
demolition;
    2. The costs of the various studies required to establish grounds 
for conversion; and
    3. The costs of a strong mobility project. According to the 
commenter this is necessary to affirmatively further fair housing.
    HUD Response. HUD agrees that the cost of providing tenant-based 
assistance must include expenses incurred to address environmental 
concerns related to demolition, and has clarified the cost methodology 
accordingly. HUD has also revised the cost methodology to require the 
inclusion of $1,000 (or a higher amount allowed by HUD) for relocation 
assistance, including counseling.
    HUD does not agree that the costs of the required studies should be 
included in the cost of providing tenant-based assistance. These 
studies are conducted to determine whether conversion is permissible. 
Accordingly, the costs of the studies are incurred before the 
commencement of the conversion process and cannot appropriately be 
considered as expenses related to the provision of tenant-based 
assistance.
    Comment: Section 8 cost calculation should require PHAs to consider 
alternatives to the FMR. One commenter wrote that Section III of the 
proposed cost methodology incorrectly requires PHAs to focus on FMRs in 
determining the cost of providing tenant-based assistance. The 
commenter wrote that

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the ``FMRs may not be fair.'' The commenter suggested that PHAs be 
required to consider ``submarket rents,'' exception rents, waivers of 
the FMRs, and payment standards above the FMRs, which would increase 
the cost of providing Section 8 tenant-based assistance.
    HUD Response. In response to this comment, HUD has revised the cost 
methodology to provide that, for purposes of the required cost 
comparison, the PHA should use the higher of the average cost (gross 
rent) for voucher units occupied by recent movers, or the applicable 
Section 8 payment standard for the jurisdiction or designated part of 
the FMR area.
    Comments regarding PHA capital costs as part of the cost-comparison 
between public housing and vouchers. One commenter wrote that a revised 
method of calculating accrual costs would be appropriate. Specifically, 
the commenter wrote that it would be more appropriate and customary to 
calculate accrual based on the hard costs of construction, or 
revitalization, rather than the total project cost.
    HUD Response. HUD has amended the proposed methodology to address 
the concerns raised by the commenter. Specifically, the cost 
methodology has been revised to provide that accrual will be calculated 
using the portion of the latest published HUD unit TDC limits for the 
area that HUD attributes to the costs of housing construction. In 
addition, the amortization period has been changed so that the amounts 
used for accrual are consistent with the amounts estimated in the HUD-
sponsored comprehensive study of public housing capital needs released 
in 2000.
    Comment: Comments regarding internet cost calculator. The preamble 
to the July 23, 1999, proposed rules stated that HUD is considering 
establishing a web-based cost comparison calculator on HUD's internet 
homepage to assist PHAs in conducting the cost comparisons required by 
the proposed rule. (See 64 FR 40232, third column; and 64 FR 40241, 
first column.) Three commenters supported the idea of a web-based cost 
calculator, writing that it would reduce the workload on PHAs and 
provide consistency. Another commenter, however, wrote that it is not 
possible to comment on the web-based calculator until additional 
details are provided. The commenter also suggested that the methodology 
used by the web-based calculator should be subject to notice and 
comment rulemaking procedures.
    HUD Response. HUD agrees that an internet cost calculator will 
reduce PHA administrative burden. HUD also agrees that such a 
calculator will help to ensure the accuracy and consistency of the 
required cost comparisons. To assist PHAs in completing the required 
calculations, HUD has developed a spreadsheet calculator that will be 
available for PHAs to download from the HUD Homepage (http://www.hud.gov). The spreadsheet calculator is designed to walk housing 
agencies through the calculations and comparisons laid out in this 
proposed rule and allows PHAs to enter relevant data for their PHA and 
the development being assessed. Results, including net present values, 
are generated based on these PHA data. Sample pages from the 
spreadsheet calculator are provided as a part of this proposed rule, 
showing data for the example used here to illustrate the cost 
comparison methodology.

V. Issue Highlighted For Public Comment

    HUD is seeking comment on whether net proceeds from the sale or 
lease of a property should be included in the cost test calculation for 
conversion in cases where a property is determined to have significant 
market value for an alternative use. In the current proposed rule, 
voucher costs include annual voucher and administrative costs and 
demolition and relocation costs. HUD is considering whether to include 
these net proceeds, which would offset the cost of vouchers.

VI. Findings and Certifications

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)) (the RFA), has reviewed and approved this proposed rule, 
and in so doing certifies that this rule would not have a significant 
economic impact on a substantial number of small entities. The reasons 
for HUD's determination are as follows.
    (1) A Substantial Number of Small Entities Will Not be Affected. 
The entities that would be subject to this rule are public housing 
agencies that administer public housing. Under the definition of 
``small governmental jurisdiction'' in section 601(5) of the RFA, the 
provisions of the RFA are applicable only to those public housing 
agencies that are part of a political jurisdiction with a population of 
under 50,000 persons. The number of entities potentially affected by 
this rule is therefore not substantial. Further, HUD anticipates that 
no more than 10 percent of all PHAs will be subject to the requirements 
of required conversion. Most PHAs with developments large enough to be 
subject to required conversion are located in larger political 
jurisdictions. This is a result of the statutory direction to identify 
units subject to the requirements based on the criteria established by 
the National Commission on Severely Distressed Public Housing, which 
focused on larger troubled agencies. For all other PHAs, conversion 
would be undertaken on a voluntary basis.
    (2) No Significant Economic Impact. The conversion plan will 
involve a one-time cost, and this cost can vary from development to 
development, depending on the scope of the assessment, location of the 
property, and other factors. A mitigating factor concerning the cost 
for PHAs whose properties are potentially subject to the requirements 
of required conversion is that they may request assistance from HUD in 
conducting the required analyses in order to offset the costs. HUD has 
provided such assistance in the past and intends to continue to do so, 
if resources are available. Therefore, the cost burden on small 
entities is not likely to be great.

Environmental Impact

    This proposed rule involves external administrative or fiscal 
requirements or procedures that relate to the discretionary 
establishment of cost determinations and do not constitute a 
development decision affecting the physical condition of specific 
project areas or building sites. Accordingly, under 24 CFR 50.19(c)(6), 
this proposed rule is categorically excluded from environmental review 
under the National Environmental Policy Act of 1969 (42 U.S.C. 4332). 
That Finding is available for public inspection between the hours of 
7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules Docket 
Clerk, Office of General Counsel, Room 10276, U.S. Department of 
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC 
20410-0500.

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt

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state law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) establishes requirements for federal agencies to assess the 
effects of their regulatory actions on state, local, and tribal 
governments and the private sector. This proposed rule does not impose 
any federal mandates on any state, local, or tribal governments or the 
private sector within the meaning of the Unfunded Mandates Reform Act 
of 1995.

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, entitled ``Regulatory Planning and Review.'' OMB 
determined that this rule is a ``significant regulatory action'' as 
defined in section 3(f) of the Order (although not an economically 
significant regulatory action under the Order). Any changes made to 
this rule as a result of that review are identified in the docket file, 
which is available for public inspection in the office of the 
Department's Rules Docket Clerk, Room 10276, 451 Seventh Street, SW., 
Washington, DC 20410-0500.

Catalog of Federal Domestic Assistance Number

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

List of Subjects in 24 CFR Part 972

    Grant programs--Housing and community development, Low and moderate 
income housing, Public housing.

    For the reasons discussed in the preamble, HUD proposes to amend 
title 24 of the Code of Federal Regulations as follows:

PART 972--CONVERSION OF PUBLIC HOUSING TO TENANT-BASED ASSISTANCE

    1. The authority citation for 24 CFR part 972 continues to read as 
follows:

    Authority: 42 U.S.C. 1437t, 1437z-5, and 3535(d).

    2. Add an appendix to part 972 to read as follows:

Appendix to Part 972--Methodology of Comparing Cost of Public Housing 
With the Cost of Tenant-Based Assistance

I. Public Housing-Net Present Value

    The costs used for public housing shall be those necessary to 
produce a viable development for its projected useful life. The 
estimated cost for the continued operation of the development as 
public housing shall be calculated as the sum of total operating 
cost, modernization cost, and costs to address accrual needs. Costs 
will be calculated at the property level on an annual basis covering 
a period of 20 years (or an alternative period as discussed in 
paragraphs I.B. and I.E. below). All costs expected to occur in 
future years will be discounted, using an OMB-specified real 
discount rate provided on the OMB Web site at http://www.whitehouse.gov/OMB/Budget, for each year after the initial year. 
The sum of the discounted values for each year (net present value) 
for public housing will then be compared to the net present value of 
the stream of costs associated with housing vouchers.
    Applicable information on discount rates may be found in 
Appendix C of OMB Circular A-94, ``Guidelines and Discount Rates for 
Benefit Cost Analysis of Federal Programs'' which is updated 
annually, and may be found on OMB's Web site at http://www.whitehouse.gov/OMB. All cost adjustments conducted pursuant to 
this cost methodology must be performed using the real discount 
rates provided on the OMB Web site at http://www.whitehouse.gov/OMB/Budget. HUD will also provide information on current rates, along 
with guidance and instructions for completing the cost comparisons 
on the HUD Homepage (http://www.hud.gov). The Homepage will also 
include a downloadable spreadsheet calculator that HUD has developed 
to assist PHAs in completing the assessments. The spreadsheet 
calculator is designed to walk housing agencies through the 
calculations and comparisons laid out in this proposed rule and 
allows housing agencies to enter relevant data for their PHA and the 
development being assessed. Results, including net present values, 
are generated based on these housing agency data. (Note that sample 
pages from the spreadsheet calculator are provided as a part of this 
proposed rule, showing data for the example used here to illustrate 
the cost comparison methodology.

A. Operating Costs

    1. Any proposed revitalization or modernization plan must 
indicate how unusually high current operating expenses (e.g, 
security, supportive services, maintenance, tenant and PHA-paid 
utilities) will be reduced as a result of post-revitalization 
changes in occupancy, density and building configuration, income 
mix, and management. The plan must make a realistic projection of 
overall operating costs per occupied unit in the revitalized or 
modernized development, by relating those operating costs to the 
expected occupancy rate, tenant composition, physical configuration, 
and management structure of the revitalized or modernized 
development. The projected costs should also address the comparable 
costs of buildings or developments whose siting, configuration, and 
tenant mix is similar to that of the revitalized or modernized 
public housing development.
    2. The development's operating cost (including all overhead 
costs pro-rated to the development--including a Payment in Lieu of 
Taxes (P.I.L.O.T.) or some other comparable payment, and including 
utilities and utility allowances) shall be expressed as total 
operating costs per year. For example, if a development will have 
375 units occupied by households and will have $112,500 monthly non-
utility costs (including pro-rated overhead costs and appropriate 
P.I.L.O.T.) and $37,500 monthly utility costs paid by the PHA, and 
$18,750 in monthly utility allowances that are deducted from tenant 
rental payments to the PHA because tenants paid some utility bills 
directly to the utility company, then the development's monthly 
operating cost is $168,750 (or $450 per unit per month) and its 
annual operating cost would be $2,025,000 ($450 times 12 months 
times 375 units). Operating costs are assumed to begin in the 
initial year of the 20-year (or alternative period) calculation and 
will be incurred in each year thereafter.
    3. In justifying the operating cost estimates as realistic, the 
plan should link the cost estimates to its assumptions about the 
level and rate of occupancy, the per-unit funding of modernization, 
any physical reconfiguration that will result from modernization, 
any planned changes in the surrounding neighborhood, and security 
costs. The plan should also show whether developments or buildings 
in viable condition in similar neighborhoods have achieved the 
income mix and occupancy rate projected for the revitalized or 
modernized development. The plan should also show how the operating 
costs of the similar developments or buildings compare to the 
operating costs projected for the development.
    4. In addition to presenting evidence that the operating costs 
of the revitalized or modernized development are plausible, when the 
projected initial year per-unit operating cost of the renovated 
development is lower than the current per unit cost by more than 10 
percent, then the plan should detail how the revitalized development 
will achieve this reduction in costs. To determine the extent to 
which projected operating costs are lower than current operating 
costs, the current per-unit operating costs of the development will 
be estimated as follows:
    a. If the development has reliable operating costs and if the 
overall vacancy rate is less than 20 percent, then the development-
based method will be used to determine projected costs. The current 
costs will be divided by the sum of all occupied units and vacant 
units fully funded under the Performance Funding System (PFS) plus 
50 percent of all units not fully funded under PFS. For instance, if 
the total monthly operating costs of the current development are 
$2,250,000 and it has 325 occupied units and 50 vacant units not 
fully funded under PFS (or a 13 percent overall vacancy rate), then 
the $2,250,000 is divided by 350--325 plus 50 percent of 50--to give 
a per unit figure of $536 per unit month. By this example, the 
current costs of $536 per occupied unit are at least 10 percent 
higher (19 percent in this example) than the projected costs per 
occupied unit of $450 for the revitalized development, and the 
reduction in costs would have to be detailed.

[[Page 54628]]

    b. If the development currently lacks reliable cost data or has 
a vacancy rate of 20 percent or higher, then the PHA-wide method 
will be used to determine projected costs. First, the current per 
unit cost of the entire PHA will be computed, with total costs 
divided by the sum of all occupied units and vacant units fully 
funded under PFS plus 50 percent of all vacant units not fully 
funded under PFS. For example, if the PHA's operating cost is $18 
million, and the PHA has 4,000 units, of which 3,800 are occupied 
and 200 are vacant and not fully funded under PFS, then the PHA's 
vacancy adjusted operating cost is $385 per unit per month--
$18,000,000 divided by the 3,900 (the sum of 3,800 occupied units 
and 50 percent of 200 vacant units) divided by 12 months. Second, 
this amount will be multiplied by the ratio of the bedroom 
adjustment factor of the development to the bedroom adjustment 
factor of the PHA. The bedroom adjustment factor, which is based on 
national rent averages for units grouped by the number of bedrooms 
and which has been used by HUD to adjust for costs of units when the 
number of bedrooms vary, assigns to each unit the following factors: 
.70 for 0-bedroom units, .85 for 1-bedroom units, 1.0 for 2-bedroom 
units, 1.25 for 3-bedroom units, 1.40 for 4-bedroom units, 1.61 for 
5-bedroom units, and 1.82 for 6 or more bedroom units. The bedroom 
adjustment factor is the unit-weighted average of the distribution. 
For instance, if the development with 375 occupied units had in 
occupancy 200 two-bedroom units, 150 three-bedroom units, and 25 
four-bedroom units, then its bedroom adjustment factor would be 
1.127--200 times 1.0, plus 150 times 1.25, plus 25 times 1.4 with 
the sum divided by 375. Where necessary, HUD field offices will 
arrange for assistance in the calculation of the bedroom adjustment 
factors of the PHA and its affected developments.
    c. As an example of estimating development operating costs from 
PHA operating costs, suppose that the PHA had a total monthly 
operating cost per unit of $385 and a bedroom adjustment factor of 
.928, and suppose that the development had a bedroom adjustment 
factor of 1.127. Then, the development's estimated current monthly 
operating cost per occupied unit would be $467--or $385 times 1.214 
(the ratio of 1.127 to .928). By this example, the development's 
current operating costs of $467 per unit per month are not more than 
10 percent higher (3.8 percent in this example) than the projected 
costs of $450 per unit per month and no additional justification of 
the cost reduction would be required.

B. Modernization

    Except for some voluntary conversion situations as explained in 
paragraph E. below, the cost of modernization is the initial 
revitalization cost to meet viability standards. (For purposes of 
this cost methodology, the term ``viability standards'' refers to 
new housing construction or rehabilitation that meets local housing 
codes. In the absence of a local code, PHAs shall refer to the 
Public Housing Modernization Standards Handbook (Handbook 7485.2) or 
the International Existing Building Code (ICC) 2003 Edition.) Costs 
may include costs for demolition and modernization (where the latter 
also includes the costs, if any, of relocating tenants during the 
modernization period). Any proposed demolition should be assumed to 
occur during the initial year of the 20-year (or alternative) 
period. Modernization costs may be assumed to occur during years 1 
through 4, consistent with the level of work proposed and the PHA's 
proposed modernization schedule. For example, if the initial 
modernization outlay to meet viability standards is $21,000,000 for 
375 units, and there is no demolition involved, a PHA might incur 
costs in three equal increments of $7,000,000 in years two, three, 
and four (based on the PHA's phased modernization plan). In 
comparing the net present value of public housing to voucher costs 
for required conversion, a 20-year period will normally be used. 
However, when revitalization would be equivalent to new 
construction, the PHA must compare costs over a 30-year period.

C. Accrual

    The cost of accrual (i.e., replacement needs) will be estimated 
by using the portion of the latest published HUD unit total 
development cost limits for the area that HUD attributes to housing 
construction costs (HCC), and applying it to the development's 
structure type and bedroom distribution after modernization, then 
subtracting from that figure half the per unit cost of 
modernization, then multiplying that figure by .025 (representing a 
40-year replacement cycle). For example, if the development will 
remain a walkup structure containing 200 two-bedroom, 150 three-
bedroom, and 25 four-bedroom occupied units, and if HUD's HCC limit 
for the area is $50,000 for two-bedroom walkup structures, $70,000 
for three-bedroom walkup structures, and $80,000 for four-bedroom 
walkup structures, and if the per unit cost of the modernization is 
$56,000, then the estimated annual cost of accrual per occupied unit 
is $800. This is the result of multiplying the value of $32,000 (the 
cost guideline value of $60,000 minus half the modernization value 
of $56,000) by .025. The first year of accrual for the development 
is $300,000 ($800 times 375 units) and should be assumed to begin in 
the year after modernization is complete. Accrual--like operating 
cost--is an annual expense and will occur in each year over the 20-
year (or alternate) period.

D. Overall Cost

    1. The overall cost for continuing to operate the development as 
public housing is the net present value of the stream of 20-year 
projected costs, including annual post-revitalization operating 
costs, modernization costs in the years these costs are assumed to 
occur, and estimated annual accrual costs. In calculating net 
present value, the sum of all costs in each future year is 
discounted back to the current year using the OMB-specified real 
discount rate. The real discount rate is already adjusted to take 
into account the effects of inflation.
    2. For example, if the sum of costs in year 20 is $2,325,000, 
and the real discount rate is 2.8 percent per year, the discounted 
cost is $1,363,143. This is obtained by multiplying the year 20 
costs by the discount factor for year 20. The discount factor for 
year 20 is derived by dividing 1 by (1 + 0.0285) raised to the 19th 
power, i.e., 1/(1+ 0.0285 ) \19\. The discount factor for year 19 
would be 1/(1 + 0.0285) \18\ and so on. The sum of the discounted 
costs for 20 years is the net present value to be compared to the 
net present value of voucher costs. The comparison should be 
expressed on a per unit per month basis.
    3. To assist PHAs in completing the net present value 
comparison, and to ensure consistency in the calculations, HUD has 
developed a spreadsheet calculator (described above) that is 
available for downloading from the HUD Homepage. Sample pages from 
the spreadsheet calculator are provided as a part of this proposed 
rule, showing data for the example used here to illustrate the cost 
comparison methodology. Using PHA data and property specific inputs 
(to be entered by the housing agency), the spreadsheet will discount 
costs as described above and will generate net present values for 
the time period specified by the PHA depending on the scenario being 
tested.

E. Adjustment for Shorter Remaining Useful Life (Used Only for 
Voluntary Conversion--See Subpart B of This Part)

    Where a PHA demonstrates that it is reasonable to use a 
remaining useful life of 15 years rather than 20 or 30 years, the 
PHA will calculate the net present value of public housing costs 
over this shorter period and compare such costs to the net present 
value of voucher costs over the same number of years. The use of a 
shorter time period is limited to those developments being assessed 
for voluntary conversion. Under required conversion, a longer period 
(20 or 30 years, depending on the extent of revitalization) is 
applied because the focus is on the developments' long-term 
viability and the public housing phase-out period itself may extend 
up to five years (or ten years, by exception).

II. Public Housing--New Budget Authority (Used Only for Voluntary 
Conversion--See Subpart B of This Part)

    This cost analysis shall be conducted in a manner similar to the 
net present value analysis, except that costs will not be 
discounted. In this case, costs will be inflated for each future 
year, and the sum of the undiscounted costs will be compared. This 
second comparison carries out the language of the statute and 
reflects the appropriation of funding needed to carry out the 
proposed actions.

III. Tenant-Based Assistance

    A. The estimated cost of providing tenant-based assistance under 
Section 8 for all households in occupancy shall be calculated as the 
unit-weighted averaging of the monthly costs based on the higher of 
the average gross rent for voucher units occupied by recent movers, 
or the applicable Section 8 payment standard for the jurisdiction or 
designated part of the FMR area; plus the most recent administrative 
fee applicable to the units (depending on housing choice voucher 
program size) as published by HUD for the year used for calculating 
public

[[Page 54629]]

housing operating costs; plus the cost of demolishing the occupied 
public housing units (including the cost of any necessary 
environmental remediation); plus $1,000 per unit (or a higher amount 
allowed by HUD) for relocation assistance costs, including 
counseling. However, if the sum of the estimated per unit cost of 
demolition, remediation, and relocation exceeds 10 percent of the 
average Total Development Cost (TDC) for the units, the lower of the 
PHA estimate or a figure based on 10 percent of TDC must be used.
    B. For example, if the development has 200 occupied two-bedroom 
units, 150 occupied three-bedroom units, and 25 occupied four-
bedroom units, and if the cost (gross rent) for voucher units 
occupied by recent movers is $550 for two-bedroom units, $650 for 
three-bedroom units, and $750 for four-bedroom units, and if the 
administrative fee comes to $46 per unit, then annual voucher and 
administrative costs are $2,922,000--the unit weighted average of 
the costs of $603.33 (the sum of 200 times $550, plus 150 times 
$650, plus 25 times $750, divided by 375 units) plus $46 in monthly 
per unit administrative fee, times 375 units times 12 months. To 
this the PHA adds the costs of demolition, remediation, and $1,000 
per unit for relocation, including counseling (unless a higher 
amount is approved by HUD). For example, assume that the cost of 
demolishing 375 occupied units is $1,875,000 ($5,000 per unit), 
remediation is $375,000 ($1,000 per unit), and relocation costs are 
$375,000 (based on $1,000 per unit) for a total of $7,000 per unit. 
This figure is then compared to 10 percent of the average per unit 
TDC for the development. For example if the TDC limits are $88,000 
for a two-bedroom unit, $123,000 for a three-bedroom unit, and 
$140,000 for a four-bedroom unit, the average TDC is $105,470 (200 
times $88,000, plus 150 times $123,000, plus 25 times $140,000, 
divided by 375) and 10 percent of TDC is $10,547. In this example, 
the estimated cost of the items (per unit) is less than 10 percent 
of TDC for the development, and the PHA estimate of $7,000 is used. 
If estimated expenses had exceeded 10 percent of TDC ($10,547 in 
this example), expenses must be capped at the lower amount.
    C. Voucher and administrative costs occur annually. Costs 
associated with demolition, remediation, and relocation are assumed 
to occur in year 1. The net present value of the stream of costs is 
obtained by applying the OMB-specified real discount rate to the sum 
of the costs in each year for the 20-year (or alternative) period. 
For example, if the costs in year 20 are $2,922,000 and the discount 
factor is 2.85 percent per year, the discounted cost in year 20 
would be $1,713,163 ($2,922,000 times the discount factor in the 
twentieth year). The discount factor for year 20 is derived by 
dividing 1 by (1 + 0.0285) \19\. The discount factor for year 19 
would be 1/(1 + 0.0285) \18\ and so on. (As noted above, HUD has 
developed a spreadsheet calculator--available for download from the 
HUD Homepage--that will perform these computations based on PHA-
provided inputs.)

IV. Results

    A. In voluntary conversion, this Section 8 cost would then be 
compared to the cost of the public housing development, both in 
terms of net present value and new budget authority. In the example 
of this section, the public housing cost (net present value) of $609 
monthly per occupied unit exceeds the Section 8 cost of $533 monthly 
per occupied unit. In addition, the monthly per unit cost of public 
housing based on New Budget Authority ($840) exceeds the cost of 
vouchers based on New Budget Authority ($799). Therefore, the PHA 
would have the option of preparing a conversion plan for the 
development under subpart B of this part.
    B. In required conversion, the Section 8 cost would be compared 
with the cost of the revitalized public housing development on a net 
present value basis. In the example in this section, the revitalized 
public housing cost on a net present value basis of $609 per unit 
month would exceed the Section 8 cost of $533 monthly per occupied 
unit. Therefore, the PHA would be required to convert the 
development under the requirements of subpart A of this part.

V. Detailing the Public Housing and Section-8 Cost Comparison: A 
Summary Table

    This section summarizes the Section 8 cost comparison methods 
using the example provided. Sample pages from HUD's spreadsheet 
calculator are also reproduced, showing inputs and results for the 
example.

A. Key Data, Development

    The revitalized development has 375 occupied units. All of the 
units are in walkup buildings. The 375 occupied units will consist 
of 200 two-bedroom units, 150 three-bedroom units, and 25 four-
bedroom units. The total current operating costs attributable to the 
development are $112,500 per month in non-utility costs, $37,500 in 
utility costs paid by the PHA, and $18,750 in utility allowance 
expenses for utilities paid directly by the tenants to the utility 
company. Also, the modernization cost for revitalization is 
$21,000,000, or $56,000 per occupied unit. This will provide 
standards for viability but not standards for new construction. The 
cost of demolition (including remediation) and relocation of the 375 
occupied units is $2,625,000, or $7,000 per unit, based on recent 
experience.

B. Key Data, Other

    The housing construction cost limit, a component of the TDC, is 
$50,000 for two-bedroom walkups, $70,000 for three-bedroom walkups, 
and $80,000 for four-bedroom walkups. TDC units for the same sized 
units in this area are $88,000, $123,000, and $140,000 respectively. 
The voucher cost for a two-bedroom unit (based on recent movers) is 
$550, the cost of a three-bedroom unit is $650, and the cost of a 
four-bedroom unit is $750. The applicable monthly administrative fee 
amount, in the most recent Federal Register Notice, is $46 per unit 
per month. The real discount rate is 2.85 percent.

C. Calculation of Public Housing Costs (Net Present Value)

    1. Operating Cost--$2,025,000: This is the annual cost of 
operating 375 units based on the information above. Costs are 
assumed to begin in year 1 of the period and occur in each 
subsequent year.
    2. Modernization Cost (Including Any Necessary Relocation)--
$21,000,000: This is the estimated cost of modernization for 375 
units. Costs are assumed to occur in equal amounts in years 2, 3, 
and 4.
    3. Estimated Accrual Cost--$300,000: Accrual is estimated as the 
per-unit average housing construction cost minus half of the 
modernization cost per unit, times .025, times the number of units 
(in this example, $32,000 times .025 times 375). Accrual begins in 
the first year after modernization. Accrual costs are incurred 
annually.
    4. Net Present Value per Unit per Month of Public Housing 
Costs--$609: This figure is obtained by summing the values described 
above in each year and discounting each year to the present using 
the OMB-specified real discount rate assuming a 20-year period. Net 
Present Values should be expressed on a per unit per month basis.

D. Current Costs of Section 8 (Net Present Value)

    1. Annual Voucher and Administrative Costs--$2,922,000--(based 
on the unit-weighted average of the costs for voucher units occupied 
by recent movers): In this example, 200 times $550, plus 150 times 
$650, plus 25 times $750, divided by 375 plus the administrative fee 
of $46 per unit per month times 375 units times 12 months. Costs are 
assumed to start in year 1 and occur in each year thereafter.
    2. Demolition and Relocation Cost--$2,625,000 ($7,000 per unit 
times 375 units): All costs are assumed to occur in year 1.
    3. Net Present Value Per Unit Per Month of Voucher Costs--$533: 
This figure is obtained by summing the values described above in 
each year and discounting each year to the present using the OMB-
specified real discount rate, assuming a 20-year period. Net Present 
Values should be expressed in dollars per unit per month.

E. Monthly Per Unit Costs of Public Housing and Vouchers Based on 
New Budget Authority

    The New Budget Authority method produces a monthly per unit cost 
of $840 for public housing and $799 for vouchers. These figures are 
obtained using the same initial assumptions as for the net present 
value comparison. In this case, however, the comparison is based on 
the sum of the undiscounted (but inflated) costs for public housing 
and vouchers over a period of 20 years.

F. Result

    In this example, public housing costs exceed voucher costs on a 
net present value basis and on the basis of new budget authority. 
Therefore, a conversion plan would be permissible under voluntary 
conversion, subpart B of this part. Under required conversion, 
because revitalized public housing costs on a net present value 
basis exceed section 8 costs, the PHA would be required to convert 
the public housing development under subpart A of this part.


[[Page 54630]]


    Dated: August 11, 2003.
Michael M. Liu,
Assistant Secretary for Public and Indian Housing.

Attachment--Sample Pages From Spreadsheet Calculator

    Note: The following sample pages will not be codified in the 
Code of Federal Regulations.

    As noted above in the preamble to this proposed rule, HUD has 
developed a spreadsheet calculator to assist PHAs in the 
calculations and comparisons required for the conversion analysis. 
The spreadsheet calculator will be available for PHAs to download 
from the HUD Homepage (http://www.hud.gov). The following sample 
pages from the spreadsheet calculator illustrate the cost comparison 
methodology contained in this proposed rule.
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[FR Doc. 03-23025 Filed 9-16-03; 8:45 am]
BILLING CODE 4210-33-C