[Federal Register Volume 70, Number 176 (Tuesday, September 13, 2005)]
[Rules and Regulations]
[Pages 54200-54212]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18036]



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Part IV





Department of Housing and Urban Development





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24 CFR Part 891



Mixed-Finance Development for Supportive Housing for the Elderly or 
Persons With Disabilities and Other Changes to 24 CFR Part 891; Final 
Rule

  Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / 
Rules and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 891

[Docket No. FR-4725-F-02]
RIN 2502-AH83


Mixed-Finance Development for Supportive Housing for the Elderly 
or Persons With Disabilities and Other Changes to 24 CFR Part 891

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

ACTION: Final rule.

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SUMMARY: This final rule implements statutory changes that enable the 
use of mixed-finance and for-profit participation in the Section 202 
Supportive Housing program for the elderly and the Section 811 
Supportive Housing program for persons with disabilities, as well as 
makes other changes to those programs. The rule uses the mixed-finance 
development model to leverage the capital and expertise of the private 
developer community to create attractive and affordable supportive 
housing developments for the elderly and for persons with disabilities. 
In addition, the rule provides for the leveraging of low-income housing 
tax credits as well as other sources of funding. The rule sets 
standards for the participation of limited partner investors (who may 
be for-profit entities) in partnership with a sole-purpose nonprofit 
general partner; describes eligible fees and expenses; lays out the use 
of capital advances in the mixed-finance context; and covers other 
matters relevant to mixed-finance development of these projects. This 
final rule follows an interim rule published on December 1, 2003, and 
takes into consideration public comments on the interim rule.

DATES: Effective Date: October 13, 2005.

FOR FURTHER INFORMATION CONTACT: Willie Spearmon, Director, Office of 
Housing Assistance and Grant Administration, Department of Housing and 
Urban Development, 451 Seventh Street, SW., Washington, DC 20410-8000; 
telephone (202) 708-3000 (this is not a toll-free number). Hearing- or 
speech-impaired individuals may access this number through TTY by 
calling the toll-free Federal Information Relay Service at (800) 877-
8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    The American Homeownership and Economic Opportunity Act of 2000, 
Public Law 106-569 (AHEO Act), amended both the Section 202 Supportive 
Housing program (Section 202 program) for the elderly and the Section 
811 Supportive Housing program (Section 811 program) for persons with 
disabilities. These amendments allow the participation of for-profit 
limited partnerships and the use of mixed-finance development methods. 
Section 831 of the AHEO Act further amended section 202(k)(4) of the 
Housing Act of 1959 (12 U.S.C 1701q(k)(4)), to add a for-profit limited 
partnership to the existing statutory definition of ``private nonprofit 
organization,'' by stipulating that the sole general partner of one is 
a nonprofit organization meeting the requirements under 12 U.S.C. 
1701q(k)(4)(A)-(C). Section 841 of the AHEO Act amended section 
811(k)(6) of the National Affordable Housing Act (42 U.S.C. 8013(k)(6)) 
to add a for-profit limited partnership to the definition of 
``nonprofit organization,'' by stipulating that the sole general 
partner of one is a nonprofit organization meeting the requirements of 
42 U.S.C. 8013(k)(6)(A)-(D). The statutory and/or regulatory 
requirements for the nonprofit organization include a nonprofit 
organizational structure, a governing board that includes the 
representation of the views of the community and is responsible for 
operating the development, and approval as to financial responsibility 
by HUD (see 12 U.S.C. 1701q(k)(4) and 42 U.S.C. 8013(k)(6), as 
amended). Sections 832 and 842 of the AHEO Act (12 U.S.C. 1701q(h)(6) 
and 42 U.S.C. 8011(h)(5), respectively) broadened the funding sources 
that may be used for amenities for, and the design and construction 
suitable for supportive housing for the elderly or persons with 
disabilities. Excess amenities may not be funded with the capital 
advance under either program, and, if other funds are used, the cost of 
such amenities is not taken into account in determining the amount of 
Federal assistance or the rent contribution of tenants.
    These sections also added language stating that ``[N]otwithstanding 
any other provision of law, assistance amounts provided under this 
section may be treated as amounts not derived from a Federal grant.'' 
(12 U.S.C. 1701q(h)(6) and 42 U.S.C. 8013(h)(5)). ``Assistance amounts 
provided under this section'' include capital advances. HUD does not 
consider capital advance funds to be grant funds. Significantly, 24 CFR 
part 84 of HUD's regulations codifies HUD's uniform rules for grants to 
institutions of higher education, hospitals, and other nonprofit 
organizations. Section 84.2 of these regulations, in accordance with 
Office of Management and Budget's (OMB's) governmentwide circular A-
110, ``Uniform Administrative Requirements for Grants and Agreements 
with Institutions of Higher Education, Hospitals, and Other Non-Profit 
Organizations'' on which 24 CFR part 84 is based (59 FR 47010, 47012), 
defines ``award'' as ``financial assistance that provides support or 
stimulation to accomplish a public purpose. Awards include grants and 
other agreements in the form of money or property in lieu of money, by 
HUD to an eligible recipient * * * the term does not include * * * 
capital advances under the Sections 202 and 811 programs.'' 
Additionally, ``recipient'' is defined as ``an organization receiving 
financial assistance directly from HUD to carry out a project or 
program,'' also in accordance with OMB's circular (see 59 FR 47013). 
However, consistent with HUD's treatment of capital advances, the term 
``recipient'' in 24 CFR 84.2 is specifically defined to exclude project 
owners that receive capital advances under the Section 202 and 811 
programs. Therefore, in its part 84 rule governing grants, HUD has 
distinguished capital advances from the grants covered by that part, 
and has treated capital advances in the same manner as mortgages 
insured or held by HUD. The added statutory language supports HUD's 
treatment of capital advances.
    Sections 834 and 844 of the AHEO Act, 114 Stat. 3021-22 and 3023 
amended, respectively, 12 U.S.C. 1701q(j) and 42 U.S.C. 8013(j), by 
adding a new paragraph to each statute relating to the use of project 
reserve accounts under the existing supportive housing for the elderly 
and persons with disabilities programs. Under these new sections, 
project reserves may be used to reduce the number of units by combining 
and retrofitting units that are obsolete or unmarketable, subject to 
HUD approval.
    Sections 835 and 845 of the AHEO Act amended section 202(h)(1) of 
the Housing Act of 1959 (12 U.S.C. 1701q(h)(1)), and section 811(h)(1) 
of the National Affordable Housing Act (42 U.S.C. 8031(h)(1)), 
respectively, by clarifying that commercial facilities for the benefit 
of residents of the project and the community in which the project is 
located, may be located and operated in a supportive housing project 
for the elderly or persons with disabilities. Such commercial 
facilities cannot be subsidized with Section 202 or Section 811 funds.

[[Page 54201]]

    Section 833 of the AHEO Act amended sections 202(b) and 202(h)(2) 
of the Housing Act of 1959 (12 U.S.C. 1701q(b) and 1701q(h)(2)), by 
removing the limitation in the Section 202 program that existing 
housing be acquired only from the Resolution Trust Corporation (RTC). 
Section 202 owners may now acquire property from other sources without 
the need for rehabilitation for use in supportive housing. In the case 
of Section 811, the statute does not limit acquisition to RTC 
properties (see 42 U.S.C. 8013(b)(2)).

II. Changes Made at the Final Rule Stage

    In response to public comments, HUD has made some substantive 
changes to the December 1, 2003, interim rule (68 FR 67316) in this 
final rule.
    A number of commenters opined that the interim rule was overly 
specific in its provisions in Sec.  891.808 regarding the loan of the 
capital advance from the nonprofit organization to the partnership that 
functions as the mixed-finance owner, and that these requirements could 
interfere with the ability of mixed-finance developments to qualify for 
favorable treatment for Low Income Housing Tax Credit (LIHTC) purposes. 
In response, HUD has revised this section to merely provide that the 
sponsor may transfer the fund reservation directly to the mixed-finance 
owner. The parties are free, subject to compliance with legal 
requirements and HUD review, to structure this transaction in the way 
most appropriate for the development. In accordance with this less 
specific, more flexible approach, this final rule also removes Sec.  
891.828 of the interim rule, entitled ``loan of capital advance funds 
to mixed-finance owner.'' In addition, in accordance with the goal of 
offering participants increased flexibility, the definition of ``mixed-
finance owner'' in Sec.  891.805 is revised to state that the sponsor 
may also, as long as it meets the statutory and regulatory criteria, be 
the general partner of the owner, and Sec.  891.808 is revised to take 
this possibility into account.
    A number of commenters stated that the cap on the amount of the 
developer's fee in the interim rule (a maximum of nine percent of the 
total project replacement cost, with no more than eight percent of the 
capital advance payable toward the fee) was too strict, and that the 
interim rule was overly specific as to the costs that could be paid 
from the developer's fee. In response, HUD is revising Sec.  891.815 in 
this final rule to allow for developer's fees up to the percentage of 
total project replacement costs allowed by the tax credit allocating 
agency in the state where the development is sited, up to a ceiling of 
15 percent. The final rule removes the list of approved uses of the 
fee. The fee may be paid upfront or on a deferred basis, and may not be 
paid from capital advances or project rental assistance under the 
Section 202 or Section 811 program or tenant rents.
    A major change from the interim rule is that detailed firm 
commitment application, mixed-finance proposal, and evidentiary 
material submission requirements are being removed from the rule in 
response to comments that these sections were overly detailed and 
restrictive. Instead, HUD will provide separate program guidance on 
these requirements. Specifically, Sec.  891.818 is simplified to a 
single sentence stating that the sponsor will submit the firm 
commitment application in a form required by HUD. Interim Sec.  891.820 
on the mixed-finance proposal is deleted from the rule in its entirety 
(elements of the mixed-finance proposal will be included along with the 
firm commitment application process in forthcoming program guidance). 
Interim Sec.  891.823 on HUD review and approval of the firm commitment 
application is simplified to state that HUD will review and may approve 
or disapprove the firm commitment application and the mixed-finance 
proposal. The provisions of Sec.  891.825 on submission of evidentiary 
materials are replaced by the more specific term ``mixed-finance 
closing documents,'' and the details in the interim rule will be moved 
to forthcoming program guidance. The final rule will specify that the 
mixed-finance closing documents must be submitted before the capital 
advance.
    In response to comments that the conflict and identity-of-interest 
provisions in the interim rule could cause problems for mixed-finance 
development, this final rule modifies those provisions. Where there is 
no FHA-insured or risk-sharing project, the conflict and identity-of-
interest provisions in 24 CFR 891.130 will apply. However, where an 
FHA-insured or risk-sharing project is provided, the conflict and 
identity-of-interest policies that are used in the FHA program involved 
will instead apply, with the exception that the nonprofit general 
partner must continue to adhere to the provisions of Sec.  891.130. The 
conflict-of-interest provision is at Sec.  891.832 of the final rule, 
along with a new cross-reference that has been added in a new Sec.  
891.130(c).
    The interim rule provided for a three-month operating reserve at 
Sec.  891.860. In response to comments, HUD is clarifying that this is 
a minimum, not a ceiling, by adding the words ``at least'' in this 
final rule.
    Discussion of the public comments received on the December 1, 2003, 
interim rule follows.

III. Discussion of Public Comments

    The comment period for the interim rule closed on January 30, 2004. 
Seventeen commenters submitted comments during the comment period on a 
wide variety of issues related to the interim rule. The commenters 
included a variety of entities, including public housing authorities, 
housing finance agencies, and professional associations. A summary of 
the issues raised by the commenters follows, organized by regulatory 
section.

Section-by-Section Summary of Public Comments

Definition of Replacement Reserve Account (24 CFR 891.105)

    Comment: There is a conflict between the definition of replacement 
reserve account, which states that the funds in the account may be used 
for repairs, replacements, or capital improvements to the project, and 
another section, interim rule Sec.  891.855, which limits the use of 
replacement reserves to Section 202 or 811 units. The commenter would 
prefer to be able to use the replacement reserve for the general needs 
of the project, not just the Section 202 or 811 units.
    HUD Response: Section 891.105 of the regulations requires that a 
replacement reserve account be established for the Section 202 or 811 
units. Repairs to the Section 202 and 811 units are to be funded from 
this reserve account. Repairs to non-Section 202 or 811 units would be 
funded with other monies according to the financing and management 
structure for those units. Repairs to common elements would be prorated 
based on the percentage of Section 202 or 811 units. For example, if a 
building needed roof repairs (assuming the roof is a common element), 
and half the units were Section 202 or 811 units, half the repair money 
could be taken from the Section 202 or 811 replacement reserve. The 
owner could then set up a separate repair or reserve for replacement 
account for the non-HUD units; the rule only requires a replacement 
reserve account for the HUD-funded units.

Definitions of Mixed-Finance Owner and Nonprofit Organization (24 CFR 
891.805)

    Comment: A commenter asked whether the statutory inclusion of for-

[[Page 54202]]

profit limited partnerships with a nonprofit general partner (see 12 
U.S.C. 1701q(k)(4) and 42 U.S.C. 8013(k)(6)) allows for limited 
liability companies (LLCs) in which the sole managing member is an 
eligible nonprofit corporation. This commenter states that in the HOPE 
VI program, LLCs and partnerships are treated equally. This commenter 
states that the statutory provision would appear to allow for an 
interpretation that an LLC is an eligible for-profit organization in 
its use of the phrase ``or a corporation wholly owned and controlled 
by'' an eligible nonprofit organization as part of the definition of 
``private nonprofit organization.'' Another commenter stated that an 
LLC should be included as a possible mixed-finance owner, and that more 
than one nonprofit general partner should be allowed within the 
definition of private nonprofit organization. Another commenter stated 
that the rule should allow LLCs as ownership entities, as the statute 
already permits LLCs, and that depending on state law and the 
preference of investors, LLCs are becoming more popular as the 
ownership entity in LIHTC projects. Another commenter stated that LLCs 
are often preferable for reasons of state law.
    Some commenters stated that the definition of ``mixed-finance 
owner'' should be expanded to include a for-profit limited partnership 
in which a for-profit affiliate of a private nonprofit organization is 
the sole general partner. These commenters stated that this is the 
preferred structure to comply with some states' corporation laws and 
may be necessary to comply with local law and meet Internal Revenue 
Service (IRS) rules for LIHTC projects.
    HUD Response: The regulatory definition of ``mixed-finance owner'' 
follows the statutory requirements of the AHEO Act of 2001, including 
that there be a sole general partner meeting specified requirements, 
specifically, requirements related to being a nonprofit organization, 
and that the mixed-finance owner be a limited partnership. HUD believes 
that the statutory definition precludes the use of LLCs as the 
ownership entity or the general partner or the use of more than one 
general partner (see 12 U.S.C. 1701q(k)(3) and (4) and 42 U.S.C. 
8013(k)(5) and (6)) .
    Comment: A commenter stated that the definition of ``nonprofit 
organization'' stated in the rule creates difficulties for regional and 
national nonprofit Section 202 and Section 811 developers. The 
definitions require that the nonprofit have a governing board selected 
in a manner to ensure that there is significant representation of the 
views of the community in which the housing is located. The commenter 
stated that it is not practical to meet this test at the level of the 
parent organization or sponsor. HUD should clarify that the community 
representation requirements can be satisfied by the general partner of 
the project owner.
    HUD Response: As the preamble of the rule states, and the 
definition of eligible nonprofit and nonprofit organizations reference, 
the statutorily required requirement of representation of the views of 
the community in the Section 202 program (12 U.S.C. 1701q(k)(4)(B)) can 
be fulfilled by the general partner. No further clarification is 
required. (See Sec.  891.805 of this final rule, and Sec. Sec.  891.205 
and 891.305 of the 202/811 program rules.) The governing body of the 
general partner must be selected in such a manner as to assure that 
there is significant representation of the community in which the 
housing is located, as required by Sec. Sec.  891.205 and 891.305.
    This commenter also stated that in its experience, the IRS has on 
policy grounds refused to confer tax-exempt status under section 
501(c)(3) of the Internal Revenue Code for any entity serving as the 
general partner in a tax credit limited partnership. As a result, it 
will not be possible for the general partner entity to obtain its own 
section 501(c)(3) tax exemption.
    HUD Response: The nature of the partnership structure is determined 
by the governing statute. HUD suggests that partnerships work with the 
IRS to determine how to structure their partnerships, within the 
statute and regulations, to obtain the maximum tax benefits available.

Recipient of Fund Reservation (Preamble at 68 FR 67317 and 24 CFR 
891.808(a))

    Comment: The requirement that the nonprofit general partner be 
created by a sponsor that has received a Section 202 or 811 fund 
reservation is not based on the statute. As long as the nonprofit 
general partner meets the statutory criteria for a private nonprofit 
organization, or nonprofit organization, as applicable, that should be 
sufficient assurance that the mixed-finance owner is eligible.
    HUD Response: In accordance with this comment, HUD is revising this 
final rule to include the possibility that a sponsor that meets the 
statutory and regulatory requirements may either form an entity to act 
as the general partner of the single-purpose mixed finance owner, or 
itself be the general partner.

Mixed-Finance Loan Terms (24 CFR 891.808)

    Comment: The rule is overly specific in its direction with respect 
to loan terms for the capital advance, and should be more flexible. A 
commenter stated that the parties to the mixed-finance transaction 
should define the loan terms for the capital advance rather than the 
rule, and recommended that the rule be redrafted to permit each 
transaction to be structured to meet tax credit requirements as well as 
the requirements of that transaction, with HUD retaining the right to 
review, approve, or disapprove the financial structure. Another 
commenter stated that the requirement that the general partner be the 
party that loans the funds to the mixed-finance owner could adversely 
impact the allocation of LIHTCs to the investors. The rule should 
provide that the funds can be provided to the mixed-finance owner in 
accordance with the terms of the HUD-approved mixed-finance proposal. 
Another commenter stated that the rule should permit the funds to go 
directly to the sponsor, which would then lend them to the mixed-
finance owner.
    HUD Response: HUD has revised this section to provide that the 
sponsor may transfer the fund reservation directly to the mixed-finance 
owner. The parties are free, subject to compliance with legal 
requirements and HUD review, to structure this transaction in the way 
most appropriate for the development.
    Comment: A number of commenters stated that the loan to the mixed-
finance owner should be at the applicable federal rate (AFR), 
consistent with IRS tax credit law, rather than the Section 202/811 
rate.
    HUD Response: HUD has removed the specific interest rate provisions 
from this final rule. The parties are free, subject to compliance with 
legal requirements and HUD review, to structure this transaction in a 
way most appropriate for the development.
    Comment: The interim rule's characterization of the loan from the 
general partner to the mixed-finance owner as non-repayable will 
jeopardize the treatment of the loan in an LIHTC transaction because it 
may not be considered a true debt. HUD should clarify whether the loan 
must be forgiven after 40 years of operation in compliance with HUD's 
rules, and whether it must be non-amortizing. A possible solution might 
be interest-only payments for 40 years with a balloon payment of 
principal at the end. For similar reasons, two commenters stated that 
any ``pass through'' of HUD funds runs the risk of negative 
consequences

[[Page 54203]]

in an LIHTC transaction. A commenter stated that the repayment 
requirement in Sec.  891.808(a) appears to be in conflict with preamble 
language stating that repayment is not required so long as the project 
remains available in accordance with the use restrictions (68 FR 
67318).
    HUD Response: The interim rule stated that the loan from the 
general partner to the mixed-finance owner is a non-amortizing loan to 
be repaid within 40 years. The non-repayment provision is a statutory 
provision that applies to the capital advance from HUD and repayment to 
HUD, and applies only so long as the use restrictions remain in effect 
for the entire period required.
    Comment: A commenter stated that the sentence reading ``however, 
the number of section 202 or 811 units in the development funded with 
the capital advance must be not less than the number of units that 
could have been developed with the capital advance without the use of 
mixed funding sources.'' The commenter stated that it is unlikely that 
capital advance funds will be ``diluted'' when combined with other 
financing.
    HUD Response: This language ensures that the capital advance is 
used for the number of units upon which the award was based. While, in 
most cases, HUD funds are used appropriately, HUD believes that this 
regulatory control is necessary to ensure the appropriate use of 
limited federal funds in all cases.

Project Rental Assistance (891.810)

    Comment: Four commenters stated that project rental assistance 
should be characterized as rental assistance payments rather than as a 
federal grant. One commenter stated that few or no financings will be 
feasible unless and until the IRS makes a specific ruling that project 
rental assistance payments related to the Section 202 program are not 
federal grants with respect to a building or its operation, and asked 
that the IRS expedite such a ruling. One commenter stated that HUD 
should work with the IRS to clarify that project rental assistance will 
not be treated as federal grants to mixed-finance Section 202 projects 
for tax credit purposes. This commenter stated that in the absence of 
such a clarification, rental assistance payments may cause a dollar-
for-dollar reduction in the projects eligible basis for LIHTC purposes, 
with a resulting reduction in the amount of available tax credits. 
Also, without this clarification, project rental assistance payments 
may cause the rent due on the unit to exceed the IRS limitation on 
gross rent so that the unit will fail to qualify as a rent-restricted 
unit. This commenter also stated that such a ruling regarding project 
rental assistance is ``critical to prevent reductions in LIHTC eligible 
basis with respect to such assistance.''
    HUD Response: HUD believes that project rental assistance should 
not be treated as a Federal grant. Whether or not project rental 
assistance is to be treated as a Federal grant for LIHTC purposes is a 
determination that the IRS must make. HUD is in the process of 
discussing this matter with the IRS.

Developer's Fee (24 CFR 891.815)

    Comment: Some commenters objected to the limitation on the 
developer's fee of nine percent of the total project replacement cost. 
A number of commenters suggested that the rule adopt HUD's public 
housing mixed-finance cost control and safe harbor standards, which the 
commenter states provide for a safe harbor developer's fee of nine 
percent of the project costs subject to a maximum developer's fee up to 
12 percent of the project costs. A commenter also stated: ``We think 
that HUD should establish a maximum developer fee that can be paid from 
the Section 202/811 capital advance to be used for developer overhead 
and profit, but also provide for some flexibility and deference to 
state housing finance agencies in LIHTC transactions with respect to 
the amount of the developer fee and the uses to which such fees can be 
put when paid from other sources such as LIHTC equity.''
    Four commenters objected to limiting profit and overhead to six 
percent of construction cost. Two commenters stated that HUD could 
limit the amount of the fee paid from HUD funds, but should not limit 
the portion of the fee paid from other sources. Three commenters stated 
that because a mixed-finance developer will have to invest more equity 
and other guarantees to make projects feasible, ``this arbitrary 
limitation on the amount of developer fees that are ordinarily 
available from other financing programs * * * should be removed from 
the rule.''
    Three commenters agreed, suggesting that the developer's fee be in 
any amount allowed by the state tax credit allocating agency (which can 
be up to approximately 15 percent of the project cost), provided that 
no more than eight percent of the capital advance funds be used toward 
the fee. A commenter stated that the fee should be able to exceed 12 
percent with the approval of the state housing finance agency, provided 
that the increased fee is justified by increased developer's risk. 
These commenters also stated that there should be no limitations on the 
use of cash flow from the non-Section 202 or 811 units so that it can 
be used to pay the deferred portion of the developer's fee. Some 
commenters stated that any portion of the developer's fee not required 
to cover the eligible uses of the fee should be made available to the 
nonprofit developer once the project has been completed, reasoning that 
the developer should not be penalized for any cost savings it achieves 
and that reserve accounts can still be adequately funded. Another 
commenter stated that, in order to maximize eligible basis and 
resulting LIHTC equity, there should be a developer's fee higher than 
the interim rule allows, but within the higher limit of the LIHTC 
program.
    HUD Response: After consideration of these comments, HUD is 
amending the final rule to lift the cap on developer's fees in Section 
202 and 811 mixed-finance projects to the amount allowed by the state 
tax credit allocating agency of the state in which the project is 
sited, up to a ceiling of 15 percent of the total project replacement 
cost, payable from project sources other than capital advances, project 
rental assistance, or tenant rents.
    Comment: A commenter stated that the rule should explicitly allow 
the project sponsor to receive the developer's fee.
    HUD Response: The developer's fee would usually be paid to the 
project owner, and HUD plans to follow this practice in the mixed-
finance program.

Eligible Uses of Developer's Fee (24 CFR 891.815(c))

    Comment: A commenter stated that the limitation on eligible uses of 
the developer's fee may not work well in situations where there are 
LIHTCs and other sources of funding. Another commenter stated that the 
eligible uses of the developer's fee differ from the definition of 
developer's fee in the LIHTC program, and stated that the rule ``should 
acknowledge the validity of a fee for development efforts and also 
allow flexibility in use of other funding sources for these items.'' 
Another commenter stated that ``we are unclear as to why the 
description of eligible uses are considered to be part of the 
developer's fee.'' This commenter stated that most of these uses would 
be funded with the capital advance as part of the development budget. 
This is problematic for two reasons. First, the ability of the sponsor 
to recoup its overhead and costs is essential to its financial 
viability. Second, a developer's fee is generally includable in the 
eligible basis of the project for LIHTC purposes, generating additional 
tax credit equity. To the extent that the fee be used for expenses 
already

[[Page 54204]]

included in the budget, and further requiring that any portion of the 
fee not so spent be placed in the replacement reserve account, the 
interim rule decreases the eligible tax basis. Two commenters stated 
that the local tax credit agency's rules should apply to the uses of 
the fee. One commenter stated that the prescribed uses of the 
developer's fee are ``not realistic for mixed finance transactions.'' 
Another commenter stated that more flexibility is needed on the allowed 
uses of the developer's fee. Another commenter stated that the 
following items under Sec.  891.815(c)(1) of the interim rule are 
common development costs that should be paid out of the capital advance 
rather than the developer's fee: Sec.  891.815(c)(1)(B), (F), (H), (I), 
(J), (K), (L), (M), and (N).
    A commenter questioned the prohibition on using the developer's fee 
to pay attorney's and architect's fees ``above those contractually 
agreed to,'' and stated that limits on these fees from the Section 202 
program are quite restrictive and should be reviewed and potentially 
increased to reflect the greater complexity involved in a mixed-finance 
transaction, which may involve re-capitalization and reconfiguration of 
residential and commercial spaces.
    HUD Response: In accordance with the comments and to increase 
program flexibility, HUD is removing the specific list of eligible uses 
from this final rule.

General Comments on the Firm Commitment Application (24 CFR 891.818)

    Comment: Commenters stated that the regulation is not the best 
place for a long list of submission requirements and suggested that 
these requirements be placed in a handbook or other program guidance. 
Two commenters stated generally that HUD should develop streamlined 
submission requirements for mixed-finance transactions.
    HUD Response: In accordance with the comment, HUD is removing the 
detailed submission requirements and will provide separate program 
guidance on the particulars of these requirements. Although the 
language of Sec.  891.818(a)(8) is being removed from the rule, owners 
are still obligated to comply with the design and construction 
requirements of the Fair Housing Act, and the accessibility 
requirements of section 504 of the Rehabilitation Act of 1973. The 
architecture and engineering review includes an analysis of the project 
design to determine if it meets the design and construction standards 
of the Fair Housing Act and the accessibility requirements of section 
504, as well as relevant design standards stated in 24 CFR 891.120, 
891.210, and 891.310.

Specific Comments on the Firm Commitment Application (Sec.  891.818)

    Comment: A commenter stated that Sec.  891.818(a)(2), requiring 
submission of the organizational documents of the nonprofit 
organization and the mixed-finance owner, should be part of the 
evidentiary submission, since the investor limited partner, which is 
usually highly involved in the organizational documents of the mixed-
finance owner, will probably not be selected until after there is a 
firm commitment. Two other commenters similarly stated that the details 
of the partnership might not be finished before there is a firm 
commitment. Another commenter stated that the rule should make clear 
that it is the initial partnership agreement that is required, not the 
agreement that is subject to negotiation with the investor. 
Alternatively, these documents could be submitted with the mixed-
finance closing documents.
    One commenter stated, as to Sec.  891.818(a)(4), requiring a 
balance sheet showing that the mixed finance owner is adequately 
capitalized, that HUD should provide some guidance on how it will 
determine that the owner is adequately capitalized. Another commenter 
stated that HUD should accept a demand note as a means of establishing 
adequate capitalization. A commenter stated that, since most tax credit 
investors will not disburse tax credit equity until HUD has approved a 
drawdown of capital advance funds, the paragraph should be modified, 
perhaps to require a pro forma balance sheet as of the day of closing. 
One commenter stated that the capitalization requirement of Sec.  
891.818(a)(4) should be deleted because prior to outside investment, it 
is unlikely that the mixed-finance owner will be capitalized to any 
significant extent.
    A commenter stated that Sec.  891.818(a)(8) should state the form 
that the evidence of compliance with fair housing and accessibility 
standards should take.
    A commenter stated that the requirement for obtaining zoning 
approvals at the time of the firm commitment application (Sec.  
891.818(a)(7)) may not be feasible in all cases.
    A commenter stated that a life cycle cost analysis (Sec.  
891.818(a)(15)) is no longer required for HOPE VI projects, and stated 
that HUD should reconsider its utility for Section 202/811 projects.
    A commenter stated that because of the requirement to have a final 
contractor's cost breakdown and analysis (Sec.  891.818(a)(18)), and 
the fact that it is impossible to secure a contractor's bid for an 
unlimited period of time, there should be a time limit on HUD's review 
of the firm commitment application, from submission to initial closing, 
such as 60 days.
    HUD Response: Pursuant to comments, HUD is removing from the final 
rule the various elements that commenters cited. HUD will be issuing 
program guidance that will deal with these issues, and will consider 
these comments in issuing this guidance. Regarding the issue of a time 
limit on HUD's review of the firm commitment application, HUD will 
endeavor to process these applications in a timely manner but, because 
of the likely complexity and uniqueness of mixed-finance projects, HUD 
declines to adopt a time limit on its review.

Mixed-Finance Proposal (Sec.  891.820)

    Comment: A commenter stated generally that the requirement of a 
full mixed-finance proposal is not necessary, and the firm commitment 
application should serve in lieu of a mixed-finance proposal. More 
thorough review of documents should be handled at the evidentiary 
stage.
    A commenter stated that experience in the public housing mixed-
finance program shows that submission of all financing documents at the 
proposal stage (Sec.  891.820(b)) is not really practical. HUD should 
be provided with enough information about the financing to determine 
that the proposal is practical; however, the actual documentation of 
the financing should be part of the evidentiary package submission and 
not part of the proposal. Another commenter stated that such financing 
documents are duplicative of evidentiary requirements and also may not 
be available at the time of submission of the proposal.
    A commenter stated that the certifications and assurances of legal 
authority to enter into the mixed-finance arrangement required by Sec.  
891.820(n) are not necessary with respect to the mixed-finance owner. 
The commenter stated that ``it is unlikely that at the proposal stage, 
the mixed-finance owner will be formed and there is no need for a 
certification that the mixed-finance owner has authority under state 
and local law to develop the housing.'' Another commenter stated that 
these certifications and assurances should be part of a streamlined 
process.
    A commenter stated that in Sec.  891.820(b), the next-to-last 
sentence, which requires official confirmation of the award of tax 
credits from the state

[[Page 54205]]

allocating agency if tax credits are being used, should be modified. 
The commenter stated that, with respect to a nine percent tax credit 
project, the rule should clarify that a copy of the allocating agency's 
executed credit reservation contract will meet this requirement. For a 
four percent tax credit project using tax-exempt bonds, a credit 
reservation contract is not used. This commenter and one other stated 
that for these projects, the rule should clarify that a copy of the 
allocating agency's executed IRC Section 42(m) letter will meet this 
requirement.
    A commenter stated that, because four percent credits can be 
derived from an issuance of tax-exempt bonds, rather than an award of 
tax credits, the rule be revised to add language reflecting that 
possibility, adding at the end of the current sentence the following:

    ``* * * or evidence of the issuance or intention to issue bonds 
on behalf of the project by the agency which will issue such bonds 
accompanied by a schedule illustrating the amount of credits that 
the project is expected to yield as a result of such bonds.''

    A commenter stated that the rule should clarify what constitutes a 
``firm and irrevocable financing commitment,'' as most financing 
commitments have some contingencies, such as final review of due 
diligence, appraisal, and environmental studies, and final approval by 
the lender's loan committee. Another commenter stated that HUD should 
accept funding commitments that are conditioned upon the actual 
certification of basis eligible costs per accepted four percent tax 
credit procedure. Another commenter similarly stated that conditions on 
financing commitments, including review of final plan specifications, 
review of environmental testing, and other typical due diligence items, 
typically are not satisfied at the stage when a firm commitment package 
is submitted to HUD.
    HUD Response: The rule is being streamlined so that these elements 
are being removed in favor of forthcoming program guidance that will 
combine elements of the firm commitment application and the mixed-
finance proposal. HUD will consider the comments received in response 
to the interim rule in formulating its program guidance.

HUD Review and Approval (Sec.  891.823)

    Comment: One commenter stated as to Sec.  891.823(b)(1) that there 
is no reason for HUD to make a determination that the mixed-finance 
owner has the legal capacity to enter into all necessary contracts and 
agreements. While HUD may need to determine that the nonprofit 
organization has the legal capacity to participate in the transaction, 
there is no reason for this determination with respect to the mixed-
finance owner. There are numerous checks in the closing process, 
including owner counsel opinions, that should provide sufficient 
assurance to HUD.
    This commenter also stated as to Sec.  891.823(b)(6) and (7) that 
these items (covenants and use restrictions, and state, local, and 
federal approvals and zoning changes or variances) should be submitted 
as part of the evidentiary review process and not the proposal process. 
Another commenter stated that the covenants and use restrictions are 
more appropriately part of the mixed-finance closing documents.
    HUD Response: Rather than attempting to provide every detail about 
HUD review and approval, the final rule states that HUD has the 
authority to review and approve or disapprove firm commitment 
applications.

Mixed-Finance Closing Documents (Sec.  891.825) (``Evidentiary 
Materials'' in the Interim Rule)

    Comment: One commenter recommended streamlined evidentiary material 
requirements. Three commenters objected to the conflict-of-interest 
provisions in Sec.  891.825(a)(1)(ii), particularly the provision that 
the mixed-finance owner not be under the control of the persons or 
firms seeking to derive profit or gain from the mixed-finance owner. 
One of the commenters stated that this provision is at odds with the 
basic purpose of the mixed-finance rule, to bring for-profit entities 
into the Section 202/811 program to expand the affordable housing 
choices of the elderly and persons with disabilities. This broad 
prohibition on profit or gain by participants and investors is not a 
realistic position. This provision relates back to when the Section 
202/811 program was limited to nonprofit entities. HUD will have 
sufficient opportunity to review financing proposals and evidentiary 
documents to assure itself that the financing structure is reasonable. 
As to the same provision, another of these commenters stated that the 
rule should clarify that the limited partner will not be deemed to be 
controlling or directing the mixed-finance owner so long as the general 
partner has day-to-day decision-making authority and the limited 
partner's control is limited to approval rights over major decisions. 
Another of these commenters stated that ``the investor intends to 
derive profit from the transaction, and whether the investor controls 
or directs the partnership in the manner intended by the regulation 
would be impossible to determine * * *. In addition, to the extent the 
developer is permitted a profit, and the developer is the general 
partner, this requirement would also not be satisfied.'' This commenter 
states that there is no similar requirement in the HOPE VI program, and 
HUD's review of the proposal and mixed-finance closing documents should 
give sufficient assurance.
    A commenter stated as to Sec.  891.825(a)(3), requiring a deed or 
ground lease, that in some cases the mixed-finance owner may have 
already obtained a fee or leasehold interest in the property. This 
commenter stated that ``it may be more helpful to delete any reference 
to a conveyance document.''
    Five commenters stated as to Sec.  891.825(a)(12), requiring a 
legal opinion that counsel has examined the financing and that such 
financing has been irrevocably committed for use in carrying out the 
project, that the rule should not require such a legal opinion. Three 
of these commenters stated that attorneys would not be able to opine 
that funds are ``irrevocably committed'' to the project. Another 
commenter similarly stated that the legal opinion should only address 
customary legal issues such as the legal existence of entities, 
execution of documents, and the enforceability of agreements, rather 
than financing and irrevocability of commitments. Another commenter 
agreed and further stated that ``* * * many law firms do not permit 
their attorneys to give opinions regarding the priority of recorded 
documents. HUD should rely on the title policy to confirm the priority 
of the * * * Restrictive Covenants.''
    Two commenters stated that the no-assignment clause in Sec.  
891.825(a)(13) could cause problems with the project, such as in the 
areas of enforceability of contract provisions and assurance of 
continued funding in the event of a default by the mixed-finance owner.
    A commenter objected to Sec.  891.825(a)(15)(ii), which requires 
the owner to comply with all deed restrictions, including an agreement 
not to dispose of the development without HUD's prior written approval 
during the entire period that the assisted housing use restrictions 
remain in effect. The commenter states that this will preclude a lender 
from foreclosing on the project and thus effectively eliminate the 
ability to obtain private financing. The commenter suggests that the 
rule be clarified so that this restriction does not apply to lenders 
whose loans are

[[Page 54206]]

secured by the property and the ability to transfer the property upon 
foreclosure, as long as the property remains subject to the use 
restrictions. The regulations should also permit transfer of the 
property to a single-asset nonprofit entity upon expiration of the 
initial 15-year tax credit compliance period.
    Another commenter stated that the lender's deed of trust securing 
bond financing (for a four percent LIHTC project) must be in a superior 
position to all other monetary liens on the property's title. A 
commenter stated that the length of the use restrictions could cause 
serious underwriting issues for potential tax credit investors because 
it restricts the tenants to whom the units can be rented even if the 
necessary subsidies are not secured. This severely limits the 
investors' ability to underwrite alternate scenarios. This commenter 
asked that HUD consider language that at least allows an owner out of 
this requirement if the rental assistance is not renewed.
    HUD Response: HUD plans to address the details of the mixed-finance 
closing documents (referred to as ``evidentiary materials'' in the 
interim rule) in separate program guidance. HUD will consider these 
comments in formulating that guidance.
    Regarding the comments on the use restrictions, use restrictions 
are required by statute (12 U.S.C. 1701q(d)) and cannot be eliminated. 
Regarding the comment on control by the limited partners, HUD is adding 
modified conflict and identity-of-interest provisions in Sec.  891.832 
of the final rule. Where a mixed-finance project has an FHA-insured or 
risk-sharing mortgage, rather than following the conflict and identity-
of-interest provisions of Sec.  891.130, the conflict and identity-of-
interest provisions of the insured or risk-sharing housing program 
shall apply, except that the provisions of Sec.  891.130 shall continue 
to apply to the nonprofit general partner. A new Sec.  891.130(c) has 
been added to contain a clarifying cross-reference to Sec.  891.832.

Loan of Capital Advance Funds to Mixed-Finance Owner (Sec.  891.828)

    Comment: One commenter stated that the language from Sec.  891.808 
regarding the loan or pass-through of capital advance funds from the 
general partner to the mixed-finance owner should be repeated in this 
section. In addition, the loan on a mixed-finance project using nine 
percent LIHTC should be ``allowed as a true debt obligation.''
    One commenter stated that rather than the nonprofit organization, 
the sponsor should execute the capital advance agreement and loan the 
capital advance funds to the mixed-finance owner. This commenter also 
stated that the Project Rental Assistance Contract (PRAC) should be 
executed by the mixed-finance owner, rather than the nonprofit 
organization, because the nonprofit organization is not technically the 
owner of the project.
    HUD Response: HUD has determined that the fund reservation may be 
transferred directly from the sponsor to the mixed-finance owner, and 
that the detailed loan or pass-through language should no longer be 
part of this rule. Regarding whether the loan is a ``true debt 
obligation,'' the rule leaves the parties free to structure the 
transaction in a manner that is beneficial to the project subject to 
HUD review and approval of the firm commitment application. HUD agrees 
that the mixed-finance owner will execute the capital advance agreement 
and the PRAC. However, the particulars of these elements will be 
outlined in separate program guidance rather than this rule in 
accordance with other comments, and so Sec.  891.828 is being removed 
in this final rule.
    Comment: A commenter commented on the requirement in this section 
that the mixed-finance owner provide a note evidencing a non-amortizing 
loan of the capital advance funds for a period of not less than 40 
years. The commenter stated that the loan should not be from the 
nonprofit organization serving as general partner to the mixed-finance 
owner, or from any party that is related to the nonprofit organization 
under IRS rules. This commenter also suggested that there be a 
definition for the term ``note.''
    HUD Response: The final rule is amended to be more flexible 
regarding the transfer of the capital advance funds to the mixed-
finance owner and no longer contains the language to which the 
commenter is referring. As to the relationship between the general 
partner and the owner, HUD recommends that program participants work 
within the regulations to obtain the maximum tax benefits available, 
including favorable treatment for LIHTC purposes. HUD suggests that 
program participants consult with their attorneys and the IRS regarding 
how best to maximize these benefits.
    The term ``note'' is no longer being used in this context in this 
final rule, so a definition is not necessary.

Drawdown (Sec.  891.830)

    Comment: This section requires that the capital advance be drawn 
down in an approved ratio to other funds, in accordance with a drawdown 
schedule. One commenter states that HUD should provide more flexibility 
in drawing down funds. For example, in some cases, it may be 
advantageous to draw down ``soft'' money first to minimize costs. Also, 
if faster drawdown of the capital advance allows deferral of some 
portion of the equity pay-in until 50 percent completion, the 
transaction may benefit from increased equity. HUD has shown some 
flexibility in early pay-in of HOPE VI funds and should do the same 
here. Another commenter stated that HUD should permit delaying, into 
the calendar year following substantial completion, the drawdown of the 
HUD funds required to take out that portion of tax-exempt bonds used 
only for construction financing as required to meet the (IRS) 50 
percent test (for four percent tax credit projects).
    HUD Response: The rule requires capital advance funds to be used 
for eligible costs actually incurred. Eligible costs are generally 
those referenced in the statutory sections on development cost 
limitations (12 U.S.C. 1701q(h) and 42 U.S.C. 8013(h)). Capital advance 
funds may not be used to pay for a portion of bond funding, bridge 
financing, or as debt service for financing. While HUD generally 
expects the capital advance funds to be drawn down in a one-to-one 
ratio for eligible costs actually incurred, HUD may permit, on a case-
by-case basis, some variance from the drawdown requirement as needed 
for the success of the project. Further clarification of the uses of 
the capital advance funds will be provided in forthcoming program 
guidance.
    Comment: A commenter stated that in certain bond-financed four 
percent LIHTC projects, bond proceeds are expended prior to other 
financing so that bond proceeds can be spent on the capitalized costs 
for the purpose of meeting certain legal requirements. There exists 
nothing in the interim rule that would preclude the use of the capital 
advance funds from being held and drawn down following the project's 
completion to pay off a portion of the bonds. This commenter suggested 
clarification that capital advance funds may be used to pay bridge or 
construction financing. Another commenter stated that the rule should 
allow capital advance funds to be used to collateralize tax-exempt 
bonds.
    HUD Response: Capital advance funds may be used only for eligible 
expenses actually incurred. Eligible expenses are expenses of the types 
stated in 12 U.S.C. 1701q(h) and 42 U.S.C. 8013(h), and do not include 
paying off bridge or construction financing, or repaying or 
collateralizing bonds.

[[Page 54207]]

    Comment: Capital advances should be usable to pay construction debt 
used to finance costs actually incurred, and that the rule should add a 
clause to that effect at the end of Sec.  891.830(c)(4).
    HUD Response: Capital advance funds must be used for eligible costs 
actually incurred, and may not be used to pay debt financing for costs 
actually incurred. The types of expenses that are eligible are the 
costs enumerated in 12 U.S.C. 1701q(h) and 42 U.S.C. 8013(h).
    Comment: Construction lenders should have the right to exercise 
remedies to complete the project and to force the sponsor to use 
capital advances to repay loan advances made by the lender. The rule 
should also address the lien priority which may be required by housing 
finance agencies or private lenders that advance funds in excess of the 
capital advance. HOPE VI may provide some examples.
    HUD Response: It would not be legally permissible to permit the 
construction lender to advance funds that would be repayable from the 
capital advance or PRAC funds. Capital advance funds may be used for 
eligible expenses actually incurred. Furthermore, the use of capital 
advance or PRAC funds in the event of default is subject to statutory 
and regulatory limitations on the use of such funds and compliance with 
the capital advance agreement.

Eligible Uses of Project Rental Assistance (Sec.  891.835)

    Comment: Interim Sec.  891.835(b)(1) would prohibit project rental 
assistance from being used to pay debt service. One commenter stated 
that it would be beneficial if Section 202 rental assistance could be 
used to support debt.
    HUD Response: The statute requires project rental assistance to be 
used to pay the costs of units occupied by eligible families that are 
not met from project income (12 U.S.C. 1701q(c)(2)). The limitations on 
project rental assistance in the rule are consistent with the statutory 
requirements.

Replacement Reserves (Sec. Sec.  891.855, 891.405(d))

    Comment: One commenter stated that uses of the replacement reserves 
cannot be limited to the Section 202/811 units. There are many costs 
that will need to be incurred on a pro rata basis, such as roof 
repairs. Another commenter stated that income from the HUD units should 
be used to meet the replacement reserve requirement.
    HUD Response: In the case of repairs to common elements, the 
Section 202/811 replacement reserve can be used on a pro rata basis 
based on the percentage of Section 202 or 811 units in the building 
whose common elements are being repaired.
    Comment: HUD should provide additional guidance to field offices so 
that the authority to retrofit obsolete units can be implemented.
    HUD Response: HUD does not believe additional formal guidance for 
field offices on using replacement reserves for retrofitting is needed 
at this time. HUD will address issues that arise in this regard on a 
case-by-case basis. If it should appear in the future that such 
guidance may be advisable, HUD may consider it at that time.
    Comment: Interim Sec.  891.405(d) should recognize that in some 
cases retrofitting an obsolete unit may not be possible, and that 
conversion of an unmarketable unit to some other form of amenity would 
also be permitted.
    HUD Response: The idea behind this requirement is to use 
retrofitting to increase the supply of marketable units, such as by 
combining two unmarketable efficiencies into one, one-bedroom unit. 
Removing units entirely from the housing stock for other uses is not 
contemplated by this provision.

Operating Reserve (Sec.  891.860)

    Comment: The proposed three-month operating reserve should be a 
minimum and that if the parties agree to establish a larger reserve out 
of tax credit equity or other sources they are free to do so. The 
mixed-finance owner should have the discretion to increase the 
operating reserve beyond three months.
    HUD Response: If there are funds available, the operating reserve 
may be larger than a three-month reserve. This provision has been 
revised in this final rule to provide in Sec.  891.860 that the 
operating reserve must be sufficient for ``at least'' three months.
    Comment: Income from the HUD units should be used to meet the 
operating reserve requirement.
    HUD Response: 24 CFR 891.860(b) states that project income can be 
used to fund the operating reserve account. However, as Sec.  
891.860(c) states, income derived from Section 202 or 811 units may be 
used only for operating expenses of those units.
    Comment: One commenter requested clarification as to why the rule 
limits funding the reserve to profits and tax credit equity. Although 
these are the most common sources of reserve funding, sponsors might 
find other sources of funding. Another commenter questioned the 
requirement of an operating reserve, stating that one is not required 
in the regular Section 202/811 program; however, given the fact that 
this rule requires an operating reserve, the commenter stated that it 
wants clarification that project income usable for this purpose 
includes income from the Section 202 or 811 units. This commenter 
stated that such operating reserves should be available for the entire 
development, and Sec.  891.835(b)(3), disallowing the use of project 
rental assistance for the creation of reserves for non-Section 202 or 
811 units, should be removed.
    HUD Response: The rule permits the operating reserve to be funded 
with project income and tax credit equity, but imposes no limitation on 
other funds that may be used for the reserve. As to the issue of the 
usage of operating reserve, the Section 202 or 811 reserve account may 
be used only for the 202 or 811 units. Project rental assistance is 
limited to payment for the costs of the Section 202 or 811 units.

Maintenance as Supportive Housing Units for Elderly Persons or Persons 
With Disabilities (Sec.  891.863)

    Comment: One commenter stated that the requirement that the use 
restrictions for Section 202 and 811 projects be superior to any 
foreclosure will reduce the likelihood that conventional lenders will 
provide financing. This commenter states that, upon foreclosure, the 
use restriction should allow for higher income levels, such as moderate 
income. Another commenter stated that the nonprofit organization or 
other qualified nonprofit approved by HUD and others providing funding 
to the project should have the right of first refusal and option to 
purchase the property from the partnership, so long as the use 
restrictions remain in effect as required by this section.
    HUD Response: The use limitations are statutory, and hence required 
(12 U.S.C. 1701q(d)(1) and 42 U.S.C. 8013(e)(1)). According to statute, 
if the use restrictions do not remain in place for the full statutory 
period of 40 years, the capital advance becomes repayable to HUD. The 
final rule is revised to take into account the possibility of ownership 
changes or transfers during the 40-year use period.

General and Miscellaneous Comments

    Comment: HUD should remain faithful to the congressional intent of 
the AHEO Act, which is to provide additional development options to 
increase the supply of affordable housing for elderly and disabled 
families.
    HUD Response: HUD believes that this final rule fulfills these 
objectives.
    Comment: The rule should have sufficient flexibility to accommodate 
the

[[Page 54208]]

real-world complexities of layered-subsidy development deals. Because 
these transactions are likely to be extremely complicated, this 
commenter stated that HUD should appoint a contact person at 
Headquarters who would be responsible for providing field staff and the 
general public ``clear, consistent, and timely guidance'' on HUD's 
mixed-finance development requirements.
    HUD Response: As explained elsewhere in this preamble, HUD has 
provided additional flexibility in this final rule. As to the issue of 
an agency contact, participants in the mixed-finance program, as in the 
regular Section 202 or Section 811 program, should work with their 
local HUD office staff. Local HUD offices can forward inquiries to 
Headquarters if necessary.
    Comment: HUD should eliminate the ``stand-alone bias'' in the 
Section 202 program. The commenter stated that under the interim rule, 
HUD funds can be combined with other funds only if the other funds are 
non-amortizing, and there is a condominium structure that provides a 
``firewall'' for HUD funds. The commentator said this creates serious 
problems with developing mixed-use projects. Eliminating this bias 
would affect two kinds of projects: ones where the capital advance has 
not kept pace with the cost of development; and ones which are too 
small to be viable, or which propose to meet a greater need than the 
HUD subsidy allows. This commenter suggests that the rule allow HUD 
financing to be blended with other financing, and that HUD permit its 
capital advance funding to be subordinate to a bank or housing finance 
agency mortgage on the property. Similarly, three commenters stated 
that the rule assumes ``that the funding sources for mixed-finance 
projects will be neatly divided between dwelling units funded by the 
Section 202 Capital Advance and those dwelling units funded through 
other sources.* * *'' However, according to the commenters, it is 
likely that the underwriting structure of certain projects will require 
the combining of several sources. This should be acceptable to HUD as 
long as the units in such a project are subject to the regulatory 
agreement for the entire 40-year period, and therefore regulations 
should make this explicit.
    HUD Response: HUD financing comes with statutory restrictions and 
hence regulatory ones designed to ensure the appropriate use of the 
funds according to statute and conflict of interest. The mixed-finance 
program allows the use of mixed funding sources; however, the federal 
funds still have to be treated in accordance with Federal requirements.
    Comment: One commenter states that there have been historic 
problems with combining other funding sources with Section 202 projects 
because of the long history of the Section 202 program being a stand-
alone program and the small staff at HUD field offices. This commenter 
states that the underwriting for this program should be delegated to 
the state agency that is underwriting the project for the tax credit 
program. This is similar to the HOME program. If this is done, there 
should be agreement that the LIHTC regulations should prevail in the 
case of conflict with the Section 202 regulations.
    HUD Response: HUD intends to retain the underwriting 
responsibilities for the program at this time. HUD will be 
competitively selecting proposals for this program in accordance with 
the Department of Housing and Urban Development Reform Act of 1989 
(Pub.L. 101-235, approved December 15, 1989) (HUD Reform Act). Each 
year a notice of funding availability (NOFA) is published in the 
Federal Register specifying in detail all of the requirements that must 
be met by applicants for funding, in order to be selected for funding. 
These requirements include statutory and regulatory and program 
requirements that must be satisfied by all applicants, if selected for 
funding. Failure on HUD's part to require compliance with all of these 
requirements would be a violation of the HUD Reform Act. Since 
requiring such compliance is HUD's responsibility and within HUD's 
expertise, HUD will retain the underwriting functions.
    In any case of conflict between LIHTC regulations and Section 202 
regulations, the Section 202 regulations would prevail. Applicants 
desiring to develop Section 202 or 811 mixed finance projects must 
describe in their applications in general terms that they plan to 
develop a mixed finance project. It is the sole responsibility of the 
applicants to develop mixed finance projects that will be consistent 
both with their obligations under the 202 or 811 NOFAs and the LIHTC 
regulations and requirements. Prior to developing their mixed finance 
proposals, applicants will have been competitively selected for 202 or 
811 funding and will have accepted a letter obligating these funds and 
specifying conditions that must be satisfied. Under a prior year's 
NOFAs, applicants unable to develop a mixed finance project were able 
to proceed with the 202 or 811 project, since no rating points were 
affected. In the FY 2004 and 2005 NOFAs, since points are awarded for 
the number of additional units to be provided through mixed finance, 
failure to proceed with the mixed finance proposal will result in loss 
of the 202 or 811 funds reservation. Any deviation from the Section 202 
or 811 NOFA requirements in order to meet the LIHTC requirements would 
result in a violation of the HUD Reform Act.
    Comment: One commenter states that designation of the capital 
advance as a Federal grant is ``likely,'' which will cause it to be 
excluded from the eligible basis for LIHTC purposes. This commenter 
states that the capital advance should be specifically excluded from 
the definition of ``Federal grant'' under Section 42. Another commenter 
states that the ability of a capital grant to be forgiven by compliance 
with the use restrictions may result in it being treated as a grant for 
tax credit purposes.
    HUD Response: Both Sections 202 and 811, as amended by the AHEO 
Act, contain a clause stating that amounts provided under these 
sections may be treated as amounts not derived from a Federal grant.
    Comment: The Section 202 program currently requires the sponsor to 
receive a property tax exemption from the local jurisdiction where the 
property is located. For mixed finance projects, the owners are for-
profit entities in a legal sense, and therefore, in most cases, will 
not qualify for an exemption. In addition, contributions to local taxes 
may help combat negative perceptions of affordable housing. HUD should 
eliminate this requirement.
    HUD Response: If available, the sponsor should seek such an 
exemption; however, HUD will not refuse to enter into a firm commitment 
if the exemption cannot be obtained.
    Comment: Two-bedroom units should be allowed in elderly projects to 
expand the marketability and community feeling of elderly projects.
    HUD Response: Two-bedroom units will be permitted in mixed finance 
projects that propose additional units as long as the number of two-
bedroom units comprise no more than 10 percent of the total units in 
the project and are limited to the additional units. Under 24 CFR 
891.210, the Section 202 units for the residents are required to be no 
larger than one-bedroom units.
    Comment: Section 202 units and tax credit units should target 
different income groups. This commenter states that the rule should 
limit Section 202 units to those with incomes under 30 percent of the 
area median income, and tax credit units to those earning 30 to 60 
percent of the area median income. However, this commenter stated that

[[Page 54209]]

this distinction is not necessary for the Section 811 program because 
the market is different.
    HUD Response: All statutorily eligible applicants are legally 
entitled to apply and participate equally in the program.
    Comment: One commenter stated that the interim rule allows LIHTCs 
to be used only for additional units and not to provide gap financing. 
``This ruling clearly does not aid in the development of more housing 
for the elderly, the sole purpose of the ruling when 202 program funds 
are not adequate to bring a development to completion. Why would a 
developer choose to build more units when the fund reservation for the 
initial units is not adequate?'' This commenter stated that due to 
shortfalls in the existing programs, it is necessary to use LIHTCs for 
gap financing to complete projects.
    Another commenter read the interim rule as allowing LIHTCs to be 
used for gap financing and wrote in support of that approach.
    HUD Response: As long as the number of assisted units is consistent 
with the capital advance, equity from tax credits in a mixed-finance 
project may be used to provide additional units, gap financing, or a 
mix of additional units and financing.

IV. Findings and Certifications

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (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 mandate on any state, local, or tribal government or the 
private sector within the meaning of UMRA.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made at the interim rule stage in accordance with HUD regulations 
at 24 CFR part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332). That Finding of No 
Significant Impact remains applicable to this rule and is available for 
public inspection between the hours of 8 a.m. and 5 p.m. weekdays in 
the Regulations Division, Office of General Counsel, Room 10276, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, please schedule an appointment to review the 
docket file by calling the Regulations Division at (202) 708-3055 (this 
is not a toll-free number).

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this rule and in so doing 
certifies that this rule would not have a significant economic impact 
on a substantial number of small entities. The program will provide 
capital advances to private nonprofit organizations and nonprofit 
consumer cooperatives to expand the supply of supportive housing for 
the elderly and to nonprofit organizations to expand the supply of 
supportive housing for persons with disabilities. Private for-profit 
entities may also participate in the mixed-finance aspect of producing 
such housing. Although small and private entities may participate in 
the program, the rule does not impose any legal requirement or mandate 
upon them and, accordingly, will not have a significant impact on them.

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of section 6 of the Executive Order are met. This rule 
does not have federalism implications and does not impose substantial 
direct compliance costs on state and local governments or preempt state 
law within the meaning of the Executive Order.

Executive Order 12866, 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 economically 
significant, as provided in section 3(f)(1) of the Order). Any changes 
made to the rule subsequent to its submission to OMB are identified in 
the docket file, which is available for public inspection in the 
Regulations Division, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410-0500. Due to 
security measures at the HUD Headquarters building, please schedule an 
appointment to review the docket file by calling the Regulations 
Division at (202) 708-3055 (this is not a toll-free number).

List of Subjects in 24 CFR Part 891

    Aged, Civil rights, Grant programs--housing and community 
development, Individuals with disabilities, Loan programs--housing and 
community development, Low and moderate income housing, Mental health 
programs, Rent subsidies, Reporting and recordkeeping requirements.

    The catalogue of Federal domestic assistance numbers for the 
programs in this rule are: 14.157 and 14.181.


0
For the reasons discussed in this preamble, HUD amends 24 CFR part 891 
as follows:

PART 891--SUPPORTIVE HOUSING FOR THE ELDERLY AND PERSONS WITH 
DISABILITIES

0
1. The authority citation for part 891 continues to read as follows:

    Authority: 12 U.S.C. 1701q; 42 U.S.C. 1437f, 3535(d), and 8013.

Subpart A--General Program Requirements

0
2. Amend 24 CFR 891.105 by revising the definition of ``Replacement 
reserve account'' to read as follows:


Sec.  891.105  Definitions.

* * * * *
    Replacement reserve account means a project account into which 
funds are deposited, which may be used only with the approval of the 
Secretary for repairs, replacement, capital improvements to the section 
202 or section 811 units, and retrofitting to reduce the number of 
units as provided by 24 CFR 891.405(d).
* * * * *

0
3. Amend 24 CFR 891.130 to add a new paragraph (c) to read as follows:


Sec.  891.130  Prohibited relationships.

* * * * *
    (c) Mixed-finance projects. Section 891.832 of this part applies to 
mixed-finance projects for the elderly and for persons with 
disabilities.

0
4. Amend 24 CFR 891.170 by revising paragraph (b) to read as follows:


Sec.  891.170  Repayment of capital advance.

* * * * *
    (b) The transfer of physical and financial assets of any project 
under this part is prohibited, unless HUD gives prior written approval. 
Approval for transfer will not be granted unless HUD determines that 
the transfer to a private nonprofit corporation, consumer

[[Page 54210]]

cooperative (under the Section 202 Program), a nonprofit organization 
(under the Section 811 Program), or an organization meeting the 
definition of ``mixed-finance owner'' in Sec.  891.805 of this part, is 
part of a transaction that will ensure the continued operation of the 
project for not less than 40 years (from the date of original closing) 
in a manner that will provide rental housing for very low-income 
elderly persons or persons with disabilities, as applicable, on terms 
at least as advantageous to existing and future tenants as the terms 
required by the original capital advance.

Subpart B--202 Supportive Housing for the Elderly

0
5. Amend 24 CFR 891.205 by revising the definition of ``acquisition'' 
to read as follows:


Sec.  891.205  Definitions.

* * * * *
    Acquisition means the purchase of (or otherwise obtaining title to) 
existing housing and related facilities to be used as supportive 
housing for the elderly.

Subpart C--Section 811 Supportive Housing for Persons with 
Disabilities

0
6. Amend 24 CFR 891.305 by revising the definition of ``acquisition'' 
to read as follows:


Sec.  891.305  Definitions.

* * * * *
    Acquisition means the purchase of (or otherwise obtaining title to) 
existing housing and related facilities to be used as supportive 
housing for persons with disabilities.
* * * * *

0
7. Revise subpart F to read as follows:
Subpart F--For-Profit Limited Partnerships and Mixed-Finance 
Development for Supportive Housing for the Elderly or Persons with 
Disabilities
Sec.
891.800 Purpose.
891.802 Applicability of other provisions.
891.805 Definitions.
891.808 Capital advance funds.
891.809 Limitations on capital advance funds.
891.810 Project rental assistance.
891.813 Eligible uses for assistance provided under this subpart.
891.815 Mixed-finance developer's fee.
891.818 Firm commitment application.
891.820 Civil rights requirements.
891.823 HUD review and approval.
891.825 Mixed-finance closing documents.
891.830 Drawdown.
891.832 Prohibited relationships.
891.833 Monitoring and review.
891.835 Eligible uses of project rental assistance.
891.840 Site and neighborhood standards.
891.848 Project design and cost standards.
891.853 Development cost limits.
891.855 Replacement reserves.
891.860 Operating reserves.
891.863 Maintenance as supportive housing units for elderly persons 
and persons with disabilities.
891.865 Sanctions.

Subpart F--For-Profit Limited Partnerships and Mixed-Finance 
Development for Supportive Housing for the Elderly or Persons with 
Disabilities


Sec.  891.800  Purpose.

    The purpose of this subpart is to establish rules allowing for, and 
regulating the participation of, for-profit limited partnerships, of 
which the sole general partner is a Nonprofit Organization meeting the 
requirements of 12 U.S.C. 1701q(k)(4) or 42 U.S.C. 8032(k)(6), in the 
development of housing for the elderly and persons with disabilities 
using mixed-finance development methods. These rules are intended to 
develop more supportive housing for the elderly and persons with 
disabilities by allowing the use of federal assistance, private capital 
and expertise, and low-income housing tax credits.


Sec.  891.802  Applicability of other provisions.

    The provisions of 24 CFR part 891, subparts A through D, apply to 
this subpart F unless otherwise stated.


Sec.  891.805  Definitions.

    In addition to the definitions at Sec.  891.105, the following 
definitions apply to this subpart:
    Mixed-finance owner, for the purpose of the mixed-finance 
development of housing under this subpart, means a single-purpose, for-
profit limited partnership of which a Private Nonprofit Organization 
with a 501(c)(3) or 501(c)(4) tax exemption (in the case of supportive 
housing for the elderly), or a Nonprofit Organization with a 501(c)(3) 
tax exemption (in the case of supportive housing for the disabled) is 
the sole general partner. The purpose of the mixed-finance owner must 
include the promotion of the welfare of the elderly or persons with 
disabilities, as appropriate.
    Private Nonprofit Organization (in the case of supportive housing 
for the elderly) or Nonprofit Organization (in the case of supportive 
housing for persons with disabilities) (for the purposes of this 
subpart, both types of organizations are referred to as ``Nonprofit 
Organization''), for the purpose of this subpart, means any institution 
or foundation (and includes a corporation wholly owned and controlled 
by an organization meeting the requirements of this section):
    (1) In the case of supportive housing for the elderly, that meets 
the requirements of the definition of ``private nonprofit 
organization'' found in Sec.  891.205 of this title; or
    (2) In the case of supportive housing for persons with 
disabilities, that meets the requirements of the definition of 
``nonprofit organization'' in Sec.  891.305 of this title; and that
    (3) Is the general partner of a for-profit limited partnership, if 
the Nonprofit Organization meets the requirements of this definition 
and owns at least one-hundredth of one percent of the partnership 
assets. If the project will include units financed with the use of 
federal Low-Income Housing Tax Credits and the organization is a 
limited partnership, the limited partnership must meet the requirements 
of section 42 of the IRS code, including the requirements of section 
42(h)(5). The general partner may also be the sponsor so long as it 
meets the requirements of this rule for sponsors and general partners.


Sec.  891.808  Capital advance funds.

    (a) HUD is authorized to provide capital advance funds to expand 
the supply of supportive housing for the elderly and persons with 
disabilities in accordance with the rules and regulations of the 
Section 202 and Section 811 supportive housing programs. For mixed-
finance projects, HUD provides a capital advance funds reservation to 
the sponsor, which transfers the fund reservation to the mixed-finance 
owner meeting the requirements of this subpart. The sponsor may 
transfer the fund reservation directly to the owner or to the general 
partner of the owner, or the sponsor may be the general partner of the 
mixed-finance owner if the sponsor meets the applicable statutory and 
regulatory requirements.
    (b) Developments built with mixed-finance funds may combine Section 
202 or Section 811 units with other units, which may or may not benefit 
from federal assistance. The number of Section 202 or Section 811 
supportive housing units must not be less than the number specified in 
the agreement letter for a capital advance. In the case of a Section 
811 mixed-finance project, the additional units cannot cause the 
project to exceed the applicable Section 811 project size limit if they 
will also house persons with disabilities.

[[Page 54211]]

Sec.  891.809  Limitations on capital advance funds.

    Capital advances are not available in connection with:
    (a) Acquisition of facilities currently owned and operated by the 
sponsor as housing for the elderly, except with rehabilitation as 
defined in 24 CFR 891.105;
    (b) The financing or refinancing of federally assisted or insured 
projects;
    (c) Facilities currently owned and operated by the sponsor as 
housing for persons with disabilities, except with rehabilitation as 
defined in 24 CFR 891.105; or
    (d) Units in Section 202 direct loan projects previously refinanced 
under the provisions of section 811 of the American Homeownership and 
Economic Opportunity Act of 2000, 12 U.S.C. 1701q note.


Sec.  891.810  Project rental assistance.

    Project Rental Assistance is defined in Sec.  891.105. Project 
Rental Assistance is provided for operating costs, not covered by 
tenant contributions, attributable to the number of units funded by 
capital advances under the Section 202 and Section 811 supportive 
housing programs, subject to the provisions of 24 CFR 891.445. The 
sponsor of a mixed-finance development must obtain the necessary funds 
from a source other than project rental assistance funds for operating 
costs related to non-202 or -811 units.


Sec.  891.813  Eligible uses for assistance provided under this 
subpart.

    (a) Assistance under this subpart may be used to finance the 
construction, reconstruction, or rehabilitation of a structure or a 
portion of a structure; or the acquisition of a structure to be used as 
supportive housing for the elderly; or the acquisition of housing to be 
used as supportive housing for persons with disabilities. Such 
assistance may also cover the cost of real property acquisition, site 
improvement, conversion, demolition, relocation, and other expenses 
that the Secretary determines are necessary to expand the supply of 
supportive housing for the elderly and persons with disabilities.
    (b) Assistance under this subpart may not be used for excess 
amenities, as stated in 24 CFR 891.120(c). Such amenities may be 
included in a mixed-finance development only if:
    (1) The amenities are not financed with funds provided under the 
Section 202 or Section 811 program;
    (2) The amenities are not maintained and operated with Section 202 
or 811 funds;
    (3) The amenities are designed with appropriate safeguards for the 
residents' health and safety; and
    (4) The assisted residents are not required to use, participate in, 
or pay a fee for the use or maintenance of the amenities, although they 
are permitted to do so voluntarily. Any fee charged for the use, 
maintenance, or access to amenities by residents must be reasonable and 
affordable for all residents of the development.
    (c) Notwithstanding any other provision of this section, Sec. Sec.  
891.220 and 891.315 on ``prohibited facilities'' apply to mixed-finance 
projects containing units assisted under section 202 or 811.


Sec.  891.815  Mixed-finance developer's fee.

    (a) Mixed-finance developer's fee. A mixed-finance developer may 
include, on an up-front or deferral basis, or a combination of both, a 
fee to cover reasonable profit and overhead costs.
    (b) Mixed-finance developer's fee cap. No mixed-finance developer's 
fee may be a greater percentage of the total project replacement costs 
than the percentage allowed by the state housing finance agency or 
other tax credit allocating agency in the state in which the mixed-
finance development is sited. In no event may the mixed-finance 
developer's fee exceed 15 percent of the total project replacement 
cost.
    (c) Sources of mixed-finance developer's fee. The mixed-finance 
developer's fee may be paid from project income or project sources of 
funding other than Section 202 or 811 capital advances, project rental 
assistance, or tenant rents.


Sec.  891.818  Firm commitment application.

    The sponsor will submit the firm commitment application including 
the mixed-finance proposal in a form described by HUD.


Sec.  891.820  Civil rights requirements.

    The mixed-finance development must comply with the following: all 
fair housing and accessibility requirements, including the design and 
construction requirements of the Fair Housing Act; the requirements of 
section 504 of the Rehabilitation Act of 1973; accessibility 
requirements, project standards, and site and neighborhood standards 
under 24 CFR 891.120, 891.125, 891.210, 891.310, and 891.320, as 
applicable; and 24 CFR 8.4(b)(5), which prohibits the selection of a 
site or location which has the purpose or effect of excluding persons 
with disabilities from federally assisted programs or activities.


Sec.  891.823  HUD review and approval.

    HUD will review and may approve or disapprove the firm commitment 
application and mixed finance proposal.


Sec.  891.825  Mixed-finance closing documents.

    The mixed-finance owner must submit the mixed-finance closing 
documents in the form prescribed by HUD. The materials shall be 
submitted after the firm commitment has been issued and prior to 
capital advance closing.


Sec.  891.830  Drawdown.

    (a) Upon its approval of the executed mixed-finance closing 
documents and other documents submitted and upon determining that such 
documents are satisfactory, and after the capital advance closing, HUD 
may approve the drawdown of capital advance funds in accordance with 
the HUD-approved drawdown schedule.
    (b) The capital advance funds may be drawn down only in an approved 
ratio to other funds, in accordance with a drawdown schedule approved 
by HUD. The mixed-finance owner shall certify, in a form prescribed by 
HUD, prior to the initial drawdown of capital advance funds, that they 
will not draw down more capital advance funds than necessary to meet 
the pro rata share of the development costs for the 202 or 811 
supportive housing units. The mixed-finance owner shall draw down 
capital advance funds only when payment is due and after inspection and 
acceptance of work covered by the drawdown.
    (c) Each drawdown of funds constitutes a certification by the 
mixed-finance owner that:
    (1) All the representations and warranties submitted in accordance 
with this subpart continue to be valid, true, and in full force and 
effect;
    (2) All parties are in compliance with their obligations pursuant 
to this subpart, which, by their terms, are applicable at the time of 
the drawdown of funds;
    (3) All conditions precedent to the drawdown of the funds by the 
mixed-finance owner have been satisfied;
    (4) The capital advance funds drawn down will be used only for 
eligible costs actually incurred in accordance with the provisions of 
this subpart and the approved mixed-finance project, which include the 
types of costs stated in 12 U.S.C. 1701q(h), and 42 U.S.C. 8013(h), and 
do not include paying off bridge or construction financing, or repaying 
or collateralizing bonds; and
    (5) The amount of the drawdown is consistent with the ratio of 202 
or 811 supportive housing units to other units.

[[Page 54212]]

Sec.  891.832  Prohibited relationships.

    Section 891.130 applies, except that in the mixed-finance program 
only, in FHA-insured or risk-sharing projects under this rule, the 
conflict-of-interest and identity-of-interest rules applicable to the 
FHA program apply. In the case of FHA insured or risk-sharing projects, 
the nonprofit general partner must continue to adhere to the provisions 
of Sec.  891.130.


Sec.  891.833  Monitoring and review.

    HUD shall monitor and review the development during the 
construction and operational phases in accordance with the requirements 
that HUD prescribes. In order for units assisted under the 202 and 811 
programs to continue to receive project rental assistance, they must be 
operated in accordance with all contractual agreements among the 
parties and other HUD regulations and requirements. It is the 
responsibility of the mixed-finance owner and Nonprofit Organization to 
ensure compliance with the preceding sentence.


Sec.  891.835  Eligible uses of project rental assistance.

    (a) Section 202 or 811 project rental assistance may be used to pay 
the necessary and reasonable operating costs, as defined in 24 CFR 
891.105 and approved by HUD, not met from project income and attributed 
to Section 202 or 811 supportive housing units. Operating cost 
standards under 24 CFR 891.150 apply to developments under this part.
    (b) Section 202 or 811 project rental assistance may not be used to 
pay for:
    (1) Debt service on construction or permanent financing, or any 
refinancing thereof, for any units in the development, including the 
202 or 811 supportive housing units;
    (2) Cash flow distributions to owners; or
    (3) Creation of reserves for non-202 or -811 units.
    (c) HUD-approved operating costs attributable to common areas or to 
the development as a whole, such as groundskeeping costs and general 
administrative costs, may be paid from project rental assistance on a 
pro-rata basis according to the percentage of 202 or 811 supportive 
housing units as compared to the total number of units.


Sec.  891.840  Site and neighborhood standards.

    For section 202 or 811 mixed-finance developments, the site and 
neighborhood standards described at Sec.  891.125 and Sec.  891.320 
apply to the entire mixed-finance development.


Sec.  891.848  Project design and cost standards.

    The project design and cost standards at Sec.  891.120 apply to 
mixed-finance developments under this subpart. Sections 891.220 and 
891.315 on prohibited facilities shall apply to mixed-finance 
developments under this subpart.


Sec.  891.853  Development cost limits.

    The Development Cost Limits for development activities, as 
established at Sec.  891.140, apply to Section 202 or 811 supportive 
housing units in mixed-finance developments under this subpart.


Sec.  891.855  Replacement reserves.

    (a) The mixed-finance owner shall establish and maintain a 
replacement reserve account for Section 202 or 811 supportive housing 
units. This account must meet all the requirements of 24 CFR 891.405.
    (b) The mixed-finance owner may obtain a disbursement from the 
reserve only if the funds will be used to pay for capital replacement 
costs for the Section 202 or 811 supportive housing units in the mixed-
finance development and in accordance with the terms of the regulatory 
and operating agreement. In the case of repairs to common elements, the 
Section 202/811 replacement reserve can be used on a pro rata basis 
based on the percentage of Section 202 or 811 units in the building 
whose common elements are being repaired. In the event of a disposition 
of the mixed-finance development, or the dissolution of the owner, any 
Section 202 or 811 funds remaining in the replacement reserve account 
must remain dedicated to the Section 202 or 811 supportive housing 
units to ensure their long-term viability, or as otherwise agreed by 
HUD.
    (c) Subject to HUD's approval, reserves may be used to reduce the 
number of Section 202 or 811 dwelling units in the development for the 
purpose of retrofitting units that are obsolete or unmarketable.


Sec.  891.860  Operating reserves.

    (a) The mixed-finance owner shall maintain an operating reserve 
account in an amount sufficient to cover the operating expenses of the 
development for at least a three-month period.
    (b) Project income, project rental assistance, tenant rents, and 
tax credit equity may be used to fund the operating reserve account.
    (c) Amounts derived from Section 202 or 811 (e.g., project income, 
project rental assistance, and tenant rents) in operating reserve 
accounts may only be used for the operating expenses of the 202 or 811 
units.


Sec.  891.863  Maintenance as supportive housing units for elderly 
persons and persons with disabilities.

    (a) The mixed-finance owner must develop and continue to operate 
the same number of supportive housing units for elderly persons or 
persons with disabilities, as stated in the use agreement or other 
document establishing the number of assisted units, for a 40-year 
period.
    (b) If a mixed-finance development proposal provides that the 
Section 202 or 811 supportive housing units will be floating units, the 
mixed-finance owner must operate the HUD-approved percentage of Section 
202 or 811 supportive housing units, and maintain the percentage 
distribution of bedroom sizes of Section 202 or 811 supportive housing 
units for the entire term of the very low-income use restrictions on 
the development. Any foreclosure, sale, or other transfer of the 
development must be subject to a covenant running with the land 
requiring the continued adherence to the very low-income use 
restrictions for the Section 202 or 811 supportive housing units.
    (c) The owner must ensure that Section 202 or 811 supportive 
housing units in the development are and continue to be comparable to 
unassisted units in terms of location, size, appearance, and amenities. 
If due to a change in the partnership structure it becomes necessary to 
establish a new owner partnership or to transfer the supportive housing 
project, the new or revised owner must be a single-purpose entity and 
the use restrictions must remain in effect as provided above.


Sec.  891.865  Sanctions.

    In the event that Section 202 or 811 supportive housing units are 
not developed and operated in accordance with all applicable federal 
requirements, HUD may impose sanctions on the participating parties and 
seek legal or equitable relief in enforcing all requirements under 
Section 202, the Housing Act of 1959, or Section 811 of the National 
Affordable Housing Act, all implementing regulations and requirements 
and contractual obligations under the mixed-finance documents.

    Dated: August 22, 2005.
Brian D. Montgomery,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 05-18036 Filed 9-12-05; 8:45 am]
BILLING CODE 4210-27-P