[Federal Register Volume 71, Number 8 (Thursday, January 12, 2006)]
[Rules and Regulations]
[Pages 2112-2123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-288]



[[Page 2111]]

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

Part II





Department of Housing and Urban Development





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



24 CFR Parts 401 and 402



Renewal of Expiring Section 8 Project-Based Assistance Contracts; Final 
Rule

  Federal Register / Vol. 71, No. 8 / Thursday, January 12, 2006 / 
Rules and Regulations  

[[Page 2112]]


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

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 401 and 402

[Docket No. FR-4551-F-01]
RIN 2502-AH47


Renewal of Expiring Section 8 Project-Based Assistance Contracts

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

ACTION: Final rule.

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

SUMMARY: This final rule governs renewal of Section 8 project-based 
assistance contracts, except renewal as part of a restructuring plan 
(Restructuring Plan) in the Mark-to-Market program. Currently, 
contracts are being renewed under the authority of an interim rule that 
became effective October 11, 1998, and later statutory changes.

EFFECTIVE DATE: February 13, 2006.

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.) For 
hearing- and speech-impaired persons, this number may be accessed 
through TTY by calling the toll-free Federal Information Relay Service 
at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Mark-to-Market

    HUD issued an interim rule on September 11, 1998 (63 FR 48926), to 
implement subtitles A and D of the Multifamily Assisted Housing Reform 
and Affordability Act of 1997, 42 U.S.C. 1437f note (MAHRA). Except for 
section 524, these subtitles apply to the Mark-to-Market program for 
restructuring debt and rental assistance. The interim rule implemented 
section 524 of MAHRA in a new 24 CFR part 402. Other sections of MAHRA 
were implemented in a new 24 CFR part 401. HUD issued part 401 as a 
final rule on March 22, 2000 (65 FR 15452). Some related changes to 
Sec. Sec.  402.1, 402.4, and 402.6 were included in that 2000 final 
rule, but those sections are updated further in this final rule. The 
preamble to the 2000 final rule stated that further changes would be 
made to Sec.  402.4(a)(2) based on the comments received in response to 
the interim rule (see 65 FR 15476). This final rule includes those 
further changes. HUD issued corrections to the part 401 final rule on 
September 6, 2000 (65 FR 53899).

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

    Section 524 of MAHRA and the regulations in 24 CFR part 402 
authorize renewal of expiring or terminating Section 8 project-based 
assistance contracts for projects without Restructuring Plans under the 
Mark-to-Market program, including (1) projects that are not eligible 
for Restructuring Plans or are otherwise exempt, and (2) eligible 
projects for which the owners request contract renewals without 
Restructuring Plans. Part 402 does not apply to the project-based 
certificate or voucher program, which operates under different 
statutory authority.
    HUD's Office of Housing has provided guidance for contract renewals 
under section 524, other than for moderate rehabilitation contracts. 
This guidance was originally provided through various notices including 
Office of Housing Notices H 98-34, H 99-15, H 99-36, and H 2000-12, 
issued on May 27, June 16, and December 29, 1999, and June 29, 2000, 
respectively, and currently through the Section 8 Renewal Policy 
Guidebook (Office of Multifamily Housing, 2001), which supersedes these 
prior Housing notices. The interim rule made HUD's Office of Public and 
Indian Housing responsible for issuing separate guidance on contract 
renewals under part 402 of the interim rule for non-Single-Room 
Occupancy (SRO) moderate rehabilitation projects. That guidance was 
issued on December 15, 1998, as Office of Public and Indian Housing 
(PIH) Notice PIH 98-62, which was clarified and extended by Notice PIH 
99-22, issued May 20, 1999, and Notice PIH 2001-13, issued April 6, 
2001. Notice PIH 2000-9 was issued on March 7, 2000, on the related 
subject of enhanced vouchers and was superseded by Notice PIH 2001-41, 
issued November 14, 2001.
    After the interim rule was issued, Congress enacted two laws that 
amended certain MAHRA provisions that had been implemented in the part 
402 interim rule. These laws are the Departments of Veterans Affairs 
and Housing and Urban Development, and Independent Agencies 
Appropriations Act, 1999 (Pub. L. 105-276, approved October 21, 1998), 
and the Departments of Veterans Affairs and Housing and Urban 
Development, and Independent Agencies Appropriations Act, 2000 (Pub. L. 
106-74, approved October 20, 1999). One change to part 402 that 
implemented a provision of Public Law 105-276 was made by a technical 
correction rule published December 28, 1998 (63 FR 71372). Other 
changes needed to implement Public Law 105-276, and the changes needed 
to implement Public Law 106-74, are now included, to the extent 
possible, in this final rule. These changes are discussed in section V 
of this preamble. In deciding what statutory changes can and should be 
reflected in this final rule, HUD considered its general rulemaking 
procedures in 24 CFR part 10, the provisions of section 502 and section 
503 of Public Law 106-74, and the provisions of section 522 of MAHRA. A 
detailed discussion of how HUD has reconciled these requirements was 
published in the preamble to the final part 402 rule published on March 
22, 2000 (65 FR 15453).
    On January 12, 2002, Congress enacted the Mark-to-Market Extension 
Act of 2001, Public Law 107-116. Most of the provisions of that act 
will be implemented in a separate rulemaking. However, this rule 
modifies the definition of ``eligible project'' in 24 CFR 401.100 to 
include the statutory provision for look-back projects in section 
612(f) of the Mark-to-Market Extension Act of 2001. In addition, 
because that law provided that the Office of Multifamily Housing 
Assistance Restructuring (OMHAR) and the position of Director of OMHAR 
were terminated ``at the end of September 30, 2004,'' and their 
functions transferred to the Secretary of HUD, this rule removes the 
terms ``OMHAR'' and references to the Director of OMHAR.
    This final rule is based on HUD's consideration of public comments 
received on the interim rule of September 11, 1998, HUD's experience to 
date with renewals of contracts, and certain provisions in Public Law 
105-276, Public Law 106-74, and Public Law 107-116, as noted above. In 
addition to this final rule, a related proposed rule is being published 
in today's Federal Register.

II. Comments Received on Part 402

    The interim rule of September 11, 1998, added two new parts to 
title 24 of the Code of Federal Regulations. HUD received 61 comments, 
but five comments were not pertinent to the interim rule. The majority 
of the other comments related solely to part 401 and were discussed in 
the preamble to the 2000 final rule. The discussion in this section of 
the preamble summarizes comments related to part 402 and HUD's 
responses to the comments. In this section of the preamble, the 
regulatory sections of part 402 are grouped into major areas of related 
subject matter as shown in the outline below. The

[[Page 2113]]

discussion of the comments is presented in the order in which the areas 
are first covered in part 402. Regulatory sections that received no 
public comments are not included.

A. Section 402.1 What Is the Purpose of Part 402?

    1. Projects previously restructured under MAHRA and under prior 
restructuring authority.
    2. Section 405(a) of the Balanced Budget Downpayment Act.

B. Section 402.3 Contract Provisions

C. Section 402.4 Contract Renewals at or Below Comparable Market Rents 
Without Restructuring (Former Section 524(a)(1) of MAHRA, Now Section 
524(a))

    1. Marking up to market.
    2. Other comments on renewals for below-market projects.
    3. Using budget-basing for determining or adjusting rents.
    4. Preservation projects.
    5. Extent of HUD discretion to renew.
    6. Bond funding.
    7. Determination of Operating Cost Adjustment Factor (OCAF).
    8. Negative OCAF.
    9. Appeals of OCAF.
    10. Tenant participation.

D. Section 402.5 Contract Renewals for Projects Eligible for Exception 
Rents

    1. Expenses to be considered in budget-basing.
    2. Preservation projects.
    3. Adjust through budget-basing or OCAF?
    4. Who confirms owner's rent determination?

E. Section 402.6 What Actions Must an Owner Take To Request Contract 
Renewal Under Part 402?

F. Section 402.7 Rejection of Owner

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

G. Section 402.8 Tenant Protection if a Contract Is Not Renewed

    1. Is tenant-based assistance mandatory?
    2. When is notice required?
    3. Rent levels for tenant-based assistance.
    4. Timing of tenant-based assistance.

III. Discussion of Comments

A. Section 402.1 What Is the Purpose of Part 402?

    Summary of section: This regulatory section sets out the terms and 
conditions for part 402 under which HUD will renew project-based 
Section 8 contracts under section 524 of MAHRA without a Restructuring 
Plan under the Mark-to-Market program under part 401.
    Summary of comments:
    1. Projects previously restructured under MAHRA and under prior 
restructuring authority.
    Comment: Three commenters wanted HUD to clarify that part 402 does 
not cover contract renewals for projects that have been through 
restructuring (either as a part of a demonstration or under part 401).
    HUD response: As indicated in Sec.  402.1 and in the preamble to 
both the implementing 1998 rule and the 2000 final rule, section 524 of 
MAHRA (and the corresponding regulations in part 402) applies only to 
the renewal of project-based Section 8 contracts without Restructuring 
Plans under the Mark-to-Market program. HUD therefore agrees that part 
402 does not apply to contract renewals for projects that have been 
restructured under MAHRA. While Sec.  402.5(d)(2) applies to 
demonstration projects for which HUD made a determination that debt 
restructuring is inappropriate and the owner of the project executed a 
Portfolio Reengineering Demonstration Program Use Agreement, nothing 
else in part 402 applies to projects that completed the Portfolio 
Reengineering Demonstration Program and executed a recorded Portfolio 
Reengineering Demonstration Program Use Agreement.
    2. Section 405(a) of the Balanced Budget Downpayment Act.
    Comment: Part 402 should address HUD's continuing authority to 
renew Section 8 contracts under section 405(a) of the Balanced Budget 
Downpayment Act (Pub. L. 104-99). Section 405(a) was suggested as a 
solution for contract renewals for section 236 budget-based projects.
    HUD response: Part 402 is concerned only with renewals authorized 
by MAHRA.

B. Section 402.3 Contract Provisions

    Summary of section: This regulatory section provides that contracts 
renewed under part 402 will be administered in accordance with all HUD 
regulations and requirements, including changes in HUD's regulations 
and requirements during the term of the renewal contract.
    Summary of comments:
    Comment. One commenter wanted an explanation of the provision which 
the commenter thought was unclear. The commenter asked whether the rule 
referred only to regulations not required by Section 8, and whether HUD 
intended the contract to substitute for regulations governing 
management and operations of projects under renewed project-based 
assistance contracts.
    HUD response: HUD has revised this regulatory section in order to 
provide clarification. The section now reads that HUD's regulations 
apply to the Housing Assistance Payment (HAP) contract, unless the 
contract specifies otherwise.

C. Section 402.4 Contract Renewals Under Section 524(a) of MAHRA 
(Renewal at or Below Comparable Market Rents)

    Summary of section: This regulatory section implements section 
524(a) of MAHRA for projects other than projects eligible for exception 
rents. It achieves this by authorizing contract renewal without 
restructuring at rents that do not exceed comparable market rents. If 
the project is eligible for the Mark-to-Market program under the 
authority of section 512(2) of MAHRA and 24 CFR part 401, the owner's 
request for contract renewal will be processed under Sec.  402.4(a)(2) 
(Sec.  401.601 of the interim rule) to determine whether a 
Restructuring Plan is needed.
    Summary of comments:
    1. Marking up to market.
    Comment: The interim rule did not specifically address the 
possibility of ``marking up to market,'' i.e., renewing a contract for 
which existing rents are below comparable market rents at higher rents 
(up to comparable market rents). Many commenters thought the final rule 
should specifically permit marking up to market, at least in some 
situations, in order to preserve affordable housing stock that could 
not be operated or maintained in a satisfactory condition at existing 
rents.
    HUD response: HUD's policy on ``marking up'' for 1999 was stated 
originally in Office of Housing Notice H 99-15 issued on June 16, 1999. 
That policy permitted ``marking up'' for some projects with comparable 
market rents at least equal to 110 percent of the Fair Market Rent 
(FMR) under procedures and requirements stated in the Guidebook. 
Renewal rents were limited to the lesser of comparable market rent or 
150 percent of the FMR. The policy on ``marking up'' is now contained 
in Chapter 3 of the Section 8 Renewal Policy Guidebook.
    Public Law 106-74 amended section 524 to mandate marking up of 
below-market rents in some cases, while permitting it at HUD's 
discretion in other cases. The amended section 524 applies to renewal 
of contracts expiring on October 1, 1999, or later. HUD issued Office 
of Housing Notice H 99-36 (also superseded by the Section 8 Renewal 
Policy Guidebook) on December 29, 1999, to implement its ``marking up''

[[Page 2114]]

policy carrying out the amended law for Fiscal Year (FY) 2000.
    2. Other comments on renewals of below-market projects.
    Comment. Two commenters stated that the initial renewal under Sec.  
402.4 for projects at existing below-market rents should be at existing 
rents plus an operating cost adjustment factor (OCAF), as with projects 
eligible for exception rents (other than non-Single Room Occupancy 
(SRO) moderate rehabilitation projects) under Sec.  402.5. Two 
commenters stated that it was necessary to clarify in the final rule 
that renewal rents would be no less than existing below-market rents 
with no downward adjustment.
    HUD response: For projects that are not eligible for exception 
rents, renewal rents under Sec.  402.4 will be in accordance with the 
specific statutory directions of section 524(a)(4) of MAHRA. In some 
cases, HUD does not have discretion to set the rent level; in others, 
there is a permitted range.
    Specific instructions are provided in the statute for setting 
renewal rents for contracts for projects eligible for exception rents 
renewed pursuant to Sec.  402.5. Renewal rents for these projects will 
be the lesser of the existing project rent adjusted by an OCAF or a 
level that provides income sufficient to support a budget-based rent 
that is justified by reasonable and expected operating expenses, except 
for non-SRO moderate rehabilitation contracts that are subject to other 
requirements, as stated in Sec.  402.5(b)(3).
    3. Using budget-basing for determining or adjusting rents.
    Comment: Some commenters expressed concern over the possibility of 
budget-based adjustments to reduce rents instead of using OCAF. One 
commenter said that if HUD has doubts about the accuracy of rents based 
on OCAF, then HUD should conduct a new market analysis. Five commenters 
did not want HUD to use OCAF if budget-basing resulted in higher rents 
needed to operate viable projects. Some other commenters encouraged the 
use of budget-based adjustments. Five commenters argued that projects 
that historically received budget-based rents (section 202 and section 
236 projects) should continue to get them if they are below comparable 
market rents.
    HUD response: Rents under contracts initially renewed pursuant to 
section 524(a) of MAHRA (Sec.  402.4) will be adjusted by OCAF or a 
budget-based method. Owners that request contract renewal for projects 
eligible for exception rents under section 524(b)(1) of MAHRA (other 
than non-SRO moderate rehabilitation projects) under Sec.  402.5 will 
have their contracts renewed at rents that are the lesser of the 
current rent adjusted by an OCAF or the budget-based rent, as required 
by the statute. The Department has no flexibility with rents for 
contracts for projects renewed pursuant to section 524(b)(1) of the 
amended law.
    4. Preservation projects.
    Comment: Four commenters said HUD should clarify in the final rule 
that rents for preservation projects under the Low-Income Housing 
Preservation and Resident Homeownership Act (LIHPRHA) and the Emergency 
Low-Income Housing Preservation Act (ELIHPA) will be set as needed 
(including marking up to market and using either budget-based 
adjustments or OCAF) to honor HUD commitments in Plans of Action. (See 
also section II.D.2. of this preamble).
    HUD response: Although the statutory provisions in effect when the 
interim rule was issued did not authorize HUD to treat every 
preservation project with an approved plan of action as an exception, 
such treatment is now required by statute, and HUD must provide 
benefits comparable to those in the plan of action to the extent 
amounts are specifically made available in appropriations acts (as they 
have been for FY 2000, FY 2001, and FY 2002).
    5. HUD discretion to renew.
    Comment: Two commenters wanted renewal requested by owners of 
eligible projects to be mandatory rather than discretionary with HUD. 
If renewal will not be mandatory, two commenters wanted the final rule 
to indicate HUD's basis for decisions not to renew, with one commenter 
requesting an express preference for projects to be sold to priority 
purchasers. One commenter wanted the final rule to clarify that an 
owner may request renewal for less than all units covered by an 
expiring contract in order to pursue a mixed-income project option, 
with tenant-based assistance available for tenants of units not covered 
by project-based assistance.
    HUD response: As amended by Public Law 106-74, section 531 and 
sections 524(a)(1) and (a)(2) of MAHRA require HUD, at the request of 
the owner, to renew an expiring Section 8 contract, with two 
exceptions. Section 524(a)(1) does not require contract renewal for an 
eligible project without a Restructuring Plan if HUD determines that a 
plan is necessary. Section 524(a)(2) does not require contract renewal 
for ``bad'' owners or projects under section 516(a) of MAHRA. 
Therefore, renewal in these particular cases would not be mandatory. In 
cases where renewal is required, the statute does not afford an option 
not to renew certain units because a mixed-income project is pending. 
As to the comments that the rule should require HUD to provide a reason 
for a non-renewal, the existing due process protections in the rule 
(see Sec.  402.7(b)) are sufficient. Therefore, no change has been made 
as a result of these comments.
    6. Bond funding.
    Comment: A commenter asserted that the interim rule would cause 
bond defaults for projects renewed under Sec.  402.4 or Sec.  402.5, 
because the rents allowed will not permit a project to meet the debt 
service coverage required by bond documents.
    HUD response: HUD disagrees with this comment. Projects eligible 
for exception rents under Sec.  402.5 in the final rule continue to 
include projects with primary financing provided by a unit of state or 
general local government, if Mark-to-Market restructuring would 
conflict with applicable law or agreements governing such financing. 
Some bond-funded projects are therefore still eligible for renewal 
under Sec.  402.5 (limited by the lesser of existing rents adjusted by 
OCAF or a budget-based rent). Thus, unless the project is unable to 
meet debt service at existing rents and is already in default, there is 
no circumstance in which the Section 8 renewal policies reflected in 
the regulations would result in default for bond-funded projects that 
continue to qualify as exception rent projects under Sec.  402.5.
    As a result of Public Law 106-74, many projects financed with bond 
funding that previously would have received contract renewal under 
Sec.  402.5(b) are now eligible for renewal either under Sec.  402.4 or 
through Mark-to-Market restructuring if the project has an insured 
mortgage and above-market rent levels. A bond-funded project (or a 
project that otherwise has state or local government financing) will be 
reviewed initially by HUD to determine whether the project is eligible 
or ineligible for Mark-to-Market restructuring and ensure that renewals 
for such projects are not improperly processed under Sec.  402.5. If 
the requirements for processing under Sec.  402.5(b) are not met (e.g., 
because restructuring would not conflict with any law or financing 
agreement), HUD would then proceed under Sec.  402.4(a)(2) to determine 
whether renewal under Sec.  402.4 would provide sufficient rental 
income for a viable project. That determination would include 
consideration of bond requirements concerning debt service coverage. If 
renewal under Sec.  402.4 would force violation of those requirements, 
HUD could require restructuring under the Mark-to-Market

[[Page 2115]]

program (reducing current debt service charges) as a condition of 
contract renewal.
    7. Determination of OCAF.
    Comment: Three commenters said that HUD should base OCAF on 
inflation indicators published outside of HUD, while another commenter 
``applauded'' HUD for restricting increases to documented operating 
cost increases. Two others noticed that the geographical area 
considered when determining OCAF is left undefined in the rule. They 
remarked that it should not be too large to pick up local fluctuations 
in taxes, utilities, etc.
    HUD response: A HUD analysis of operating cost data for projects 
insured by the Federal Housing Administration (FHA) showed that their 
expenses could be grouped into nine categories--wages, employee 
benefits, property taxes, insurance, supplies and equipment, fuel oil, 
electricity, natural gas, and water and sewer. States are the lowest 
level of geographical aggregation at which there are enough projects to 
permit statistical analysis. Operating expense-related data on a more 
localized basis are not available on a current or consistent basis. 
HUD's OCAF calculations use data series prepared by the U.S. Bureau of 
Labor Statistics, the Bureau of the Census, and the Department of 
Energy. Projects may apply for a budget-based rent review in the 
presumably unusual case in which the application of the OCAF does not 
address unexpected project specific fluctuations.
    Comment: Excluding debt service. Two commenters objected to 
excluding debt service from the expenses to be adjusted by OCAF. One 
said the exclusion will make projects increasingly vulnerable to 
periods of low occupancy and less likely to support a second mortgage, 
thereby requiring some other means to boost rents. Another said the 
exclusion will decrease attractiveness of the project to investors who 
want to increase their debt service coverage over time.
    HUD response: Congress' use of the term OCAF (which has 
historically been applied only to operating expenses), rather than the 
term Annual Adjustment Factor (AAF), suggests that Congress expected 
the Department to not apply the increase to the entire rent. Since the 
interest rate is expected to remain constant, it is not appropriate to 
apply an inflation factor to the debt service. The debt service 
component of the effective gross income is the only portion that will 
not be inflated by the OCAF; the reserve for replacement deposits and 
the portion of the debt service coverage estimates for owner return 
will increase and presumably remain constant with inflation.
    8. Negative OCAF.
    Comment: Three other commenters objected to the reduction of rents 
by using negative OCAF. Two of them questioned the legality of rent 
reductions in light of Section 8(c)(2) of the United States Housing Act 
of 1937.
    HUD response: HUD will comply with statutory changes to MAHRA made 
by Public Law 106-74 that prohibit using negative OCAF when determining 
rent levels.
    9. Appeals of OCAF.
    Comment: One commenter wanted an owner right to appeal OCAF 
determinations.
    HUD response: OCAF is not determined on a case-by-case basis and 
adjustment of OCAF through appeal for a particular project is not 
appropriate. However, the commenter probably was interested in the 
ability to appeal the rent adjustment that resulted from use of OCAF. 
OCAF is generally used for rent adjustments, but HUD retains the 
discretion to use a budget-based rent adjustment instead. An owner may 
request a budget-based rent adjustment if the owner can demonstrate 
that available operating revenues are insufficient to maintain a 
project. The published OCAF factors are based on independently produced 
estimates of changes in major cost items and should prove adequate in 
most projects. If rent adjustments through use of OCAF are inadequate, 
however, budget-based review would provide the most relevant basis for 
reviewing the adequacy of overall project funding.
    10. Tenant participation.
    Comment: Eight commenters wanted the final rule to provide for 
tenant involvement in contract renewal decisions, including 
determinations of owner ineligibility, for projects not undergoing 
restructuring under the Mark-to-Market program.
    HUD response: While tenant involvement is required by statute in 
the Mark-to-Market restructuring process, there is no such requirement 
for tenant involvement in other contract renewal decisions, although 
HUD strongly recommends such tenant involvement. For projects eligible 
for restructuring, see Sec.  401.502 of part 401, which guarantees 
notice and an opportunity to comment for tenants whenever an owner 
requests contract renewal without restructuring.

D. Section 402.5 Contract Renewals for Projects Eligible for Exception 
Rents

    Summary of section: This section concerns renewals under section 
524(b)(1) and (3) of MAHRA (formerly section 524(a)(2)) for projects 
that are entitled to exception rents and are ineligible for, or 
otherwise exempt from, restructuring under part 401. These include 
certain projects financed by state or local governments, certain 
elderly projects, SRO projects, and projects ineligible because they do 
not have rents exceeding comparable market rents or because there is no 
FHA-insured or HUD-held mortgage. The owner of a project that is 
ineligible solely because rents are not above market may renew under 
Sec.  402.5 only if HUD confirms the fact that the rents are at or 
below market. Contract renewals for projects under section 524(b)(1) of 
MAHRA are at the lesser of existing rents adjusted by an OCAF or a 
budget-based rent determined according to instructions issued by HUD's 
Office of Housing. In the case of a contract for a non-SRO moderate 
rehabilitation project, section 524(b)(3) of MAHRA provides for rents 
at the least of existing rents adjusted by an OCAF, fair market rents 
(less any amounts for tenant-purchased utilities), or comparable market 
rents. For such a project, future rent adjustments are also governed by 
section 524(b)(3).
    Summary of comments:
    1. Expenses to be considered in budget-basing.
    Comment: Commenters asked that the budget include:
     An owner's rate of return regardless of whether it is 
separately included in budget-basing under part 401 (one commenter).
     Health and social services for elderly/handicapped 
projects (one commenter).
     Actual current interest rates on debt rather than rates 
adjusted to reflect the current market (two commenters).
    HUD response: The rule does not dictate the specific components of 
a budget. It should be noted, however, that HAP payments may be used to 
cover rent, as defined, but not additional costs, such as food, health, 
and social services costs.
    2. Preservation projects.
    Comment: Three commenters wanted all preservation projects with 
expiring contracts treated as ``exception projects,'' with rents 
determined to permit commitments in the Plan of Action to be honored.
    HUD response: Please see the HUD response in Section III.C.4 of 
this preamble.
    3. Adjust through budget-basing or OCAF?
    Comment: Three commenters said that budget-basing should be used to 
raise rents for projects under section 524(b)(1) of MAHRA whenever OCAF

[[Page 2116]]

results in income inadequate to operate a project. Another commenter 
wanted the final rule to clarify that a contract initially renewed 
under budget-based rents will continue to be renewed in that manner. 
Another commenter questioned the mention of a comparability analysis in 
Sec.  402.5(d) of the September 11, 1998, interim rule and objected if 
it meant that HUD will hold rents to market for projects eligible for 
exception rents.
    HUD response: The commenter expressed concern that the current rent 
adjusted by the OCAF would be inadequate to continue operating the 
project. Renewal contracts for projects under section 524(b)(1) of 
MAHRA will have their rents established under the final rule at the 
lesser of the OCAF-adjusted current rent or the budget-based rent in 
accordance with statutory requirements. If current rent adjusted by the 
OCAF is insufficient to cover the project's operating costs in the 
future, HUD will consider a budget-based increase at the request of an 
owner.
    The Department does not agree with the commenter's request that any 
contract initially renewed under budget-based rents must continue to be 
adjusted in that manner. As amended by Public Law 106-74, section 
524(c) of MAHRA clearly requires budget-basing for rent adjustments 
after the initial renewal to be ``subject to the approval of the 
Secretary.'' In addition, at the expiration of each 5-year period of 
the renewal contract term, HUD conducts a comparability study by 
comparing existing rents with comparable market rents in the area and 
may make adjustments as necessary, either to maintain the contract 
rents at a level no greater than comparable rents, or to increase the 
contract rents to comparable market rents. This comparability 
requirement is stated at 24 CFR 402.4(b)(2) of the separate proposed 
rule being published in today's Federal Register. The OCAF adjustments 
that are available in subsequent years require considerably less 
paperwork by the project owner and by HUD. The rule does not preclude 
the use of a special budget-based rent increase, where warranted.
    4. Who confirms owner's rent determination?
    Comment: One commenter wanted the final rule to clarify that the 
Participating Administrative Entity (PAE), and not HUD, confirms an 
owner's determination that a project qualifies as a project entitled to 
exception rents under Sec.  402.5 due to below-market rents.
    HUD response: HUD's Office of Housing or its contract 
administrator, rather than the PAE, will make the determination.

E. Section 402.6 What Actions Must an Owner Take To Request Contract 
Renewal Under This Part?

    Summary of section: Section 402.6 provides a procedure for 
requesting contract renewal under part 402. The owner submits to HUD 
(or the contract administrator) required information, which includes: 
(1) A certification that the owner is not suspended or debarred; (2) a 
rent comparability study (not required for most projects entitled to 
exception rents); and (3) if the owner of a project eligible for Mark-
to-Market restructuring under part 401 is instead seeking renewal under 
Sec.  402.4, the most recent annual audited financial statement for the 
project, and the owner's evaluation of physical needs complying with 
Sec.  401.450. (The final rule generally provides for submission of 
documents and information prescribed by HUD, but no longer lists these 
specific items.) Separate instructions are issued for renewal of 
moderate rehabilitation contracts.
    Summary of comments:
    Comment: One commenter asked HUD to clarify any differences in 
submission requirements between above- and below-market projects. 
Another commenter questioned the need to require financial statements 
and owners' evaluation of physical condition from an owner of a project 
eligible for exception rents (and thus entitled to renew under Sec.  
402.5) who chooses to renew under Sec.  402.4 instead. This commenter 
noted that financial statements for a fiscal year often are not 
available until 60 days after year-end and thus may be unavailable when 
the renewal request is submitted.
    HUD response: The most recently required financial statement should 
be provided. If the renewal request and expiration is within the 90-day 
period following the end of the project's fiscal year, the previous 
year's statement will be accepted. Financial statements and owners' 
evaluations of physical condition are not required if a project 
entitled to exception rents under section 524(b)(1) of MAHRA renews 
under Sec.  402.4. These documents should be submitted only for 
projects that are eligible for a Restructuring Plan, and for which the 
owners have instead requested renewal under Sec.  402.4. It is not 
appropriate to include in the final rule additional information for the 
submission requirements for above- and below-market properties. The 
Department has published this information in numerous Housing Notices 
and, more recently, the Section 8 Renewal Policy Guidebook.

F. Section 402.7 Rejection of Owner

    Summary of section: This section implements section 516(a) of 
MAHRA, which permits HUD to elect not to consider a request for 
contract renewal on the basis of certain actions or omissions by an 
owner or purchaser of the project or an affiliate. (That MAHRA 
provision is also implemented through several sections in part 401.) 
HUD may elect not to consider a renewal request if, among other things, 
(1) the owner or an affiliate is debarred or suspended by HUD, or (2) 
the owner or an affiliate has engaged in material adverse financial or 
managerial actions or omissions as described in section 516(a) of MAHRA 
(these may include actions that have resulted in imposition of a 
limited denial of participation (LDP) or a proposed debarment under 24 
CFR part 25), or outstanding violations of civil rights laws. A 
rejection under this section is subject to administrative review as 
provided in part 401, subpart F.
    Summary of comments:
    1. Designation as ``bad'' owner.
    Comment: Two commenters argued that HUD should not reject an owner 
for a suspension/debarment if the owner's appeal is not yet 
adjudicated. One of these commenters also objected to basing a ``bad 
owner'' rejection on an LDP or proposed debarment alone because such 
actions might not be ``material'' within the meaning of section 516(a) 
of MAHRA.
    HUD response: The rule is consistent with these comments. ``Bad 
owner'' determinations are made on the basis of ``material adverse 
financial or managerial actions or omissions'' identified in section 
516(a)(2) of MAHRA. HUD or PHAs are required to make a determination of 
materiality if a debarment or suspension decision has not already been 
made by the Department.
    2. Treatment of civil rights violations.
    Comment: Two commenters wanted civil rights violations to be 
considered in a ``bad owner'' determination only if they have been 
finally adjudicated and have not been substantially cured. One of these 
commenters commented on a need to clarify which violations are 
disqualifying civil rights violations.
    HUD response: Civil rights violations will be addressed by the 
appropriate HUD Assistant Secretary after consultation with HUD's 
Office of Fair Housing and Equal Opportunity. Under this final rule, 
HUD requires owners requesting restructuring and/or contract renewal to 
certify compliance with

[[Page 2117]]

HUD's non-discrimination requirements at 24 CFR 5.105(a).
    3. Project transfers to ``good'' owners.
    Comment: Four commenters thought that the rule was deficient in its 
treatment of project transfers after ``bad owner'' determinations. One 
labeled the interim rule's provisions providing for rejection of 
certain owners a ``misguided policy of forced voucherization'' and 
wanted the final rule to reiterate that contract termination is a last 
resort and that transfers to priority purchasers are preferable to 
conversion. Two others cited a Senate floor statement regarding the 
need for HUD to develop alternative solutions for projects when an 
owner is disqualified.
    HUD response: The Department is committed to protecting tenants 
living in assisted units. The determination not to renew the project-
based assistance will be made on a case-by-case basis. HUD will 
consider the best interests of the tenants, the potential to transfer 
the project to priority purchasers, and other remedies.
    4. ``Uncooperative'' owners.
    Comment: One commenter asked HUD to clarify that an owner who is 
viewed as insufficiently ``cooperative'' in helping a PAE develop a 
restructuring plan that differs from the approach suggested by the 
owner and who thereby is found ineligible for a restructuring plan 
under 24 CFR 401.402 will not become ineligible under Sec.  402.7 for 
contract renewal without restructuring.
    HUD response: HUD will make a case-by-case determination of whether 
or not to renew a Section 8 contract with rents reduced to market 
should the owner of an eligible project be unwilling to cooperate with 
debt restructuring under part 401.

G. Section 402.8 Tenant Protection if a Contract Is Not Renewed

    Summary of section:
    The owner is not required to renew a contract, but the owner must 
give one-year advance notice of contract termination as required by 
Section 8(c)(8)(A) of the United States Housing Act of 1937 (42 U.S.C. 
1437f(c)(8)(A)). (Note that the underlying statutory provision has 
changed since the interim rule took effect.) This section of the final 
rule provides that an owner who does not give the timely notice must 
continue to permit tenants to stay in their units without increasing 
the tenant portion of the rent for one year after notice is given.
    Summary of comments:
    1. Is tenant-based assistance mandatory?
    Comment: Interim part 402 did not address the availability of 
tenant-based assistance if an owner of a project ineligible for 
restructuring under part 401 chose not to renew under part 402 (i.e., 
the owner ``opts out''). Many commenters wanted the matter addressed. 
Two commenters argued that tenant-based assistance should be guaranteed 
if the owner is rejected. One commenter wanted tenant-based assistance 
to be guaranteed in all termination situations, while another felt that 
HUD needed to give reasons if this was not done. Finally, one commenter 
asked HUD to make clear in the rule that HUD expects appropriations for 
tenant-based assistance to protect displaced tenants.
    HUD response: Section 524(d) of MAHRA provides for enhanced 
vouchers to eligible tenants of assisted units in projects if the 
Section 8 project-based assistance is not renewed under sections 524(a) 
or (b), or ``any other authority,'' to the extent that appropriated 
funds are available for that purpose.
    2. When is notice required?
    Comment: Three commenters said that a failure to renew because HUD 
found the owner ineligible for contract renewal should not require a 
notice to tenants. Two others wanted tenant notice in all opt-out or 
other termination situations, including owner ineligibility.
    HUD response: There is no statutory exception for ineligible owners 
to the one-year termination notice requirement, so HUD cannot provide 
one in this rule.
    3. Rent levels for tenant-based assistance.
    Comment: One commenter questioned the lack of guidance on rent 
levels for enhanced vouchers for opt-outs. Two commenters also wanted 
vouchers to be enhanced whenever an owner is rejected for renewal and 
where an owner opts out.
    HUD response: The final rule reflects the provisions of section 538 
of Public Law 106-74 on this point.
    4. Timing of tenant-based assistance.
    Comment: Two commenters said that tenant-based assistance should be 
available sufficiently early prior to termination/expiration so that 
tenants can relocate or have assistance in place in time; one suggested 
four months. Another commenter wanted HUD to provide a short-term 
renewal of project-based assistance to provide necessary time for 
tenants to prepare when an owner is rejected only a short time before 
the project-based assistance expires.
    HUD response: These comments are generally consistent with existing 
HUD policy to provide adequate time for tenants to find alternative 
housing.

IV. Changes Made to Part 401

    References are to the section number of the rule.

Section 401.2 What special definitions apply to this part?

    There have been no substantive changes from the March 22, 2000, 
final rule Sec.  401.2. However, this final rule reorganizes the 
definition of ``eligible project,'' moving it from Sec.  401.2 to a new 
Sec.  401.100(a), and replacing the Sec.  401.2 definitions with a 
cross-reference.

Section 401.100 Which projects are eligible for a Restructuring Plan 
under this part?

    Paragraph (a) of this section states the projects that are eligible 
for a restructuring plan. The list of eligible projects includes 
certain projects that receive project-based assistance and were renewed 
under section 524 of MAHRA.
    Paragraph (b) of this section, entitled ``When is eligibility 
determined?'', addresses additional related statutory interpretation 
questions that arose after the public comment period closed for the 
proposed rule. While the Department considers it of benefit to the 
public to have these related interpretation questions addressed in 
published regulations, there is no requirement for additional public 
comment. Paragraph (b) constitutes an interpretative rule not subject 
to notice and comment rulemaking requirements.
    This paragraph states that statutory eligibility for a 
Restructuring Plan under MAHRA is determined by the status of a project 
on the earlier of the expiration or termination date of the project-
based assistance contract, which includes a contract renewed under 
section 524(a) of MAHRA, or the date of the owner's request for a 
Restructuring Plan. In order to determine whether project rents exceed 
comparable market rents for eligibility purposes, rent levels under a 
contract renewed under section 524(a) of MAHRA will be considered.
    As a practical matter, no Restructuring Plan will be developed 
after prepayment, since debt restructuring is a required element of 
each Restructuring Plan. After an owner has submitted a request for 
debt restructuring, an owner's voluntary decision to prepay, however, 
will not convert the project to one entitled to exception rents. The 
situation is similar to any other decision of an owner of an eligible 
project to forgo the opportunity for a Restructuring Plan. HUD or a PAE

[[Page 2118]]

will review the contract renewal request under the procedure in Sec.  
402.4(a)(2) of the final rule to ensure that comparable market rents 
will be sufficient for project operations before project-based 
assistance is renewed.

Section 401.600 Will a Section 8 contract be renewed if it would expire 
while an owner's request for a Restructuring Plan is pending?

    This regulatory section has been revised to make a nonsubstantive 
procedural revision that will make it less time-consuming for an owner 
to request an extension of Section 8 contracts at current rents, or, if 
such an extension has been granted, a further extension in cases where, 
through no fault of the owner, the restructuring plan has not been 
implemented within the regulatory deadlines. HUD has the statutory 
authority under section 514 of MAHRA (42 U.S.C. 1437f note) to extend a 
Section 8 contract for any period sufficient to implement the 
Restructuring Plan. However, under the current regulation, the only 
procedural means to do so is on an ad hoc basis. HUD's experience shows 
that a large number of projects seeking restructuring require 
extensions at current rents pending the implementation of a 
Restructuring Plan. To date, such extensions have been granted through 
a regulatory waiver process, which is relatively cumbersome. To address 
these issues, the rule is being amended to simplify the process and 
make it broadly available by allowing HUD to approve such extensions 
without a regulatory waiver. Since this change is a matter of internal 
agency procedure, public notice and comment is not required under the 
Administrative Procedure Act (5 U.S.C. 553(b)) and HUD's regulations on 
rulemaking at 24 CFR 10.1. The only other change is a nonsubstantive, 
editorial clarification in Sec.  401.600(b).

V. Changes Made to Part 402 of Interim Rule

    References are to the section number of the rule.

Section 402.1 What is the purpose of part 402?

    The final sentence that appeared in Sec.  402.1 of the interim rule 
regarding ``bad owners,'' was moved to Sec.  402.7 to more clearly 
reflect new section 524(b) of MAHRA. Some other changes to this section 
as it appeared in the interim rule have already been made in connection 
with final part 401. However, as a statement of policy, separate public 
notice on this final minor amendment is not required.

Section 402.2 Definitions

    Language is added to this regulatory section to specify which 
definitions in MAHRA and part 401 apply to part 402. The rule adds 
definitions of ``SRO contract'' and ``SRO project'' (referring to 
single-room occupancy under section 441 of the Stewart B. McKinney 
Homeless Assistance Act), a definition for the purposes of this rule of 
``project eligible for exception rents'' (referring to section 524(b) 
of MAHRA), and a definition of ``portfolio reengineering demonstration 
authority'' (referring to authority described in new section 
524(e)(2)(B) of MAHRA). The rule also adds a definition of ``large 
family'' for use in connection with Sec.  402.4(ii)(A), that follows 
HUD's existing definition used for ``Consolidated Plans'' (see 24 CFR 
91.5) by defining a family of five or more persons as a large family.
    Finally, the rule adds a definition of OCAF (operating cost 
adjustment factor) that incorporates a new statutory prohibition 
against negative OCAF. The term ``OCAF'' was used in interim part 402 
in several places, generally without definition or explanation, 
although interim Sec.  402.5(d) referred to ``operating cost adjustment 
factor as provided in Sec.  401.412.'' Section 401.412 is a provision 
of the Mark-to-Market rule that explains that OCAF is not applied to 
the debt service portion of rent. HUD has incorporated that explanation 
into the new part 402 definition to make it clearer that a single 
concept of OCAF is intended throughout parts 401 and 402.
    Interim Sec.  402.2 incorporated the Mark-to-Market program 
definition of ``comparable market rents'' from Sec.  401.410(b). This 
final rule instead uses a revised definition to recognize that 
additional statutory language directly affecting part 402 (but not part 
401) was added later to MAHRA by Public Law 106-74. Part 401 governs 
the question of whether a project is eligible for the Mark-to-Market 
program due to rents exceeding comparable market rents. For all other 
purposes under final part 402, determination of comparable market rent 
is now governed by new section 524(a)(5) of MAHRA added by Public Law 
106-74 and referenced in Sec.  402.2(c). In addition, the Assistant 
Secretary for Housing has provided relevant guidance on matters such as 
preparation and use of the rent comparability study (RCS) required from 
an owner for renewals of contracts not covered by section 524(b)(3) of 
MAHRA (most recently, in Chapter 9 of the Section 8 Renewal Policy 
Guidebook). Similarly, the Assistant Secretary for Public and Indian 
Housing uses administrative notices to state the procedures that PHAs 
must use for determining comparability under section 524(b)(3) of 
MAHRA. HUD expects to continue this practice until any further 
rulemaking, if any, on this issue. Thus, the replacement definition of 
comparable market rents in this section simply references new section 
524(a)(5) of MAHRA and HUD instructions in lieu of the prior 
incorporation of Sec.  401.410(b).

Section 402.3 Contract provisions

    The language regarding the contract term was moved from Sec.  
402.5(a) of the interim rule to Sec.  402.3 of this final rule, and 
amended to recognize that HUD's discretion to set the contract term 
will be subject to any applicable statutory requirements concerning 
terms (e.g., new section 524(a)(3) of MAHRA requires at least 5-year 
terms when ``marking up'' rents, and the FY 2000 HUD Appropriations 
Act, Public Law 106-74, and subsequent HUD appropriations acts for FY 
2001, Public Law 106-377, and FY 2002, Public Law 107-73, require one-
year terms for FY 2000 preservation project renewals).

Section 402.4 Contract renewals under section 524(a) of MAHRA

    Section 402.4 was included in a final rule published on March 22, 
2000 (see 65 FR 15498). The preamble to that final rule explained that 
HUD would make additional changes to Sec.  402.4(a)(2) after further 
consideration of the comments received on the interim rule (see 65 FR 
15476). This final rule contains changes to Sec.  402.4(a)(2) to 
clarify that the analysis regarding whether renewal of a HAP contract 
would be ``sufficient''--that is, would maintain adequate debt service 
coverage and replacement reserve--is triggered upon the request of the 
owner, pursuant to recent statutory changes to section 524 of MAHRA. 
See Sec.  402.4(a)(2)(i) of this final rule. This rule also reorganizes 
the section into a more logical format. Other changes to Sec.  402.4 
that require public comment are addressed in the accompanying proposed 
rule published in today's Federal Register.

Section 402.5 Contract renewals under section 524(b) or (e) of MAHRA

    Language that linked budget-basing to the statutory procedure 
applicable to part 401, but not 402, was replaced by a general 
reference to HUD instructions to allow the greater flexibility for part 
402 that Congress intended. A provision that permitted a rent 
comparability analysis as part of a budget-based adjustment was 
removed. This rule combines paragraphs (a) and (b), and simplifies 
former paragraph (d) on rent

[[Page 2119]]

adjustments (now paragraph (c)), by referencing proposed Sec.  
402.4(b), which is being published in today's Federal Register. 
Statutory references are revised in this section to reflect the revised 
description in the statute for projects entitled to exception rents, 
and clarify that renewal requests from owners of moderate 
rehabilitation projects eligible for exception rents will always be 
governed by Sec.  402.5(c)(ii).
    New paragraph (d) corresponds to new section 524(e) of MAHRA on 
preservation and demonstration projects. That section authorizes 
certain renewals, notwithstanding other statutory restrictions, in 
order to provide benefits comparable to those in preservation plans of 
action or contracts previously renewed under demonstration authority. 
Paragraph (d) applies only to the extent amounts are ``specifically'' 
made available in appropriations acts for preservation projects. The 
appropriations acts for FY 2000-2002 made amounts available, but for 
preservation projects the language of each of these appropriations 
limited renewals to one year. (See Pub. L. 106-74, 106-377, and 107-
73).

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

    A renewal contract issued under section 524 of MAHRA is not 
expressly cited among the list of assistance contracts identified under 
section 512(2)(B) of MAHRA for a project to be eligible for debt-
restructuring. However, upon consideration of the issue of whether a 
contract already renewed under section 524 may be eligible for debt 
restructuring, HUD has determined that, as a matter of law, a section 
524 renewal contract retains the essential Section 8 character of the 
underlying Section 8 contract and is thus to be treated as eligible for 
debt-restructuring. (Sections 512(2)(A) and 512(2)(C), however, impose 
additional requirements for a project to be eligible for debt-
restructuring.) HUD bases this interpretation on language in the last 
sentence of section 512(2)(C) that explicitly reflects a dual source of 
authority, Section 8 of the United States Housing Act of 1937 and 
section 524 of MAHRA, for a section 524 renewal contract. The other 
bases for this determination are MAHRA's definition of ``renewal,'' 
section 512(12), ``the replacement of an expiring Federal rental 
contract with a new contract under Section 8 of the United States 
Housing Act of 1937,'' and the identification in section 524(a)(1) of 
amounts available ``under Section 8'' as the funding for renewal 
assistance under section 524. In accordance with this position, HUD is 
removing: (1) References to the statutory term ``expiring contract,'' 
the definition of which uses another statutory term; ``project-based 
assistance,'' that refers to the list of assistance contracts in 
section 512(2)(B); (2) the term ``initial,'' as opposed to other 
renewals, throughout this rule; and (3) ``project-based assistance'' 
from the list of statutory definitions that the rule is adopting in 
Sec.  402.2(b).
    The introductory language in this regulatory section that applied 
paragraph (a) only to contracts with expiration dates after October 1, 
1998, was considered unnecessary and removed. Paragraph (a) of this 
section was simplified by removing the specific listing of information 
required from an owner requesting contract renewal. The specific 
listing was never intended as an exclusive listing. In the final rule 
of March 22, 2000, HUD published a revised paragraph (a)(3) of this 
section, requiring the most recent audited financial statement and 
evaluation of physical condition of the property (see 65 FR 15498). 
This section, in accordance with regulatory simplification, has been 
removed in this final rule. Since this change is one of agency 
procedure, additional public comment is not required under the 
Administrative Procedure Act and HUD's rulemaking regulations at 24 CFR 
10.1. The following clarifies certain points about the specific 
mandatory information items that were previously in the interim rule, 
but are omitted from the final rule:
     A financial statement and owner's evaluation of physical 
condition (OEPC) are not required for a project that is not eligible 
for restructuring. When an OEPC is required, a recent comprehensive 
needs assessment may be used in lieu of an OEPC to conform to the final 
Sec.  401.450.
     A rent comparability study must meet HUD's requirements. 
HUD may require a less detailed analysis when project rents are below a 
certain threshold level or when nearly identical units, located in the 
Section 8 project and not receiving tenant rental assistance, are used 
to set the market rent ceiling.
     The rule now provides that once a project has been renewed 
under section 524 of MAHRA, it will be renewed at the owner's request 
under any renewal option for which the project is eligible, except that 
if it is eligible for a Restructuring Plan under Sec.  401.100, HUD or 
a PAE will determine whether a renewal with or without a Restructuring 
Plan is necessary.
     The owner is no longer required to certify that no 
affiliate is suspended or debarred. This change corresponds to a change 
previously made in the final version of part 401 and recognizes that 
renewal decisions when an owner's affiliate is debarred or suspended 
may require case-by-case review. However, the requirement for a civil 
rights certification pursuant to 24 CFR 5.105(a) continues to apply to 
all affiliates, subcontractors, and associates of the owner.
    Paragraph 402.6(b) was updated to reflect HUD's interpretation of 
MAHRA that a contract that was initially renewed under the renewal 
provisions of MAHRA is eligible for renewal at the owner's request 
under any renewal option for which the project is eligible. However, in 
the case of a project that is eligible for a Restructuring Plan under 
Sec.  401.100, HUD or a PAE will determine whether renewal with a 
Restructuring Plan under part 401, or without a Restructuring Plan 
under this part, is necessary.

Section 402.7 Refusal to consider an owner's request for a Section 8 
contract renewal because of actions or omissions of owner or affiliate

    The provision that permitted an owner to submit a request for 
contract renewal less than 90 days before the contract expiration date 
if that date was before January 13, 1999, was determined obsolete and 
removed. Paragraph (c) concerning the availability of tenant-based 
assistance after certain rejections of requests for renewal of project-
based assistance was also removed because the subject is covered in a 
broader new Sec.  402.8(c) in the final rule. Language in Sec.  402.1 
was moved as explained in the discussion of that section.
    Section 524(a)(2) of MAHRA, as amended by section 531(a) of Public 
Law 106-74, states that determinations of ineligibility under section 
516(a) of MAHRA are to be made by the Secretary only, without the 
participation of the PAE. Prior law included the PAE in that decision. 
Section 402.7 of the rule reflects this statutory change.

Section 402.8 Tenant protection if a contract is not renewed

    This rule updates this section to reflect HUD policy and statutory 
changes to section 8(c)(8) of the United States Housing Act of 1937 (42 
U.S.C. 1437f(c)(8)) (1937 Act). The rule adds language in paragraph (a) 
specifying that required notice to HUD should be sent to HUD and the 
contract administrator, if there is one, and to the tenants. A new 
paragraph (c) recognizes that HUD must, to the extent Congress provides

[[Page 2120]]

appropriations in advance for this purpose, provide tenant-based 
assistance whenever project-based assistance is not renewed. This will 
permit HUD to continue current policies. In paragraph (b), language is 
added to clarify the continued applicability of the owner's obligation 
to permit tenants to remain in assisted units with no increase in the 
tenant rent (i.e., rent no higher than the last month's assisted tenant 
rent under the terminated HAP contract) until one year after the owner 
gives the termination notice, even if HUD does not continue to provide 
housing assistance payments for such units during the notice period. 
This is consistent with section 8(c)(8)(B) of the 1937 Act, as amended 
by section 535 of Public Law 106-74 (42 U.S.C. 1437f(c)(8)(B)). 
Ordinarily, HUD will continue to make section 8 assistance available 
for units during the one-year period. Section 8(c)(8)(A) of the 1937 
Act now requires the owner's termination notice to state, among other 
things, that HUD ``will'' provide tenant-based assistance (vouchers) to 
all eligible residents of the project to enable them to choose the 
place they wish to rent, which is ``likely'' to include their current 
dwelling unit. Congress has thereby recognized that the continued 
availability of section 8 assistance for specific units after 
termination notice may be inappropriate. For example, a voucher HAP 
contract cannot be executed for a unit that has been determined to 
violate the Housing Quality Standards (HQS) for the voucher program. 
Tenants of such substandard units may use vouchers under the Housing 
Choice Voucher program to move to other units in better condition, but 
any tenants who choose to remain in substandard units without 
assistance during the remainder of the one-year termination notice 
period are still protected from rent increases by section 8(c)(8)(B) of 
the 1937 Act, which does not condition this protection on the continued 
availability of assistance under section 8 for the unit.
    Finally, the final rule removes the sentence in Sec.  402.8(b) of 
the interim rule that stated that the period during which rents may not 
be raised begins on the earlier of the date of actual notice to tenants 
or the date of contract expiration. (Under the rule as written, the 
period begins on the date of actual notice to the tenants.) This change 
conforms to a change previously made to Sec.  401.602 of the Mark-to-
Market final rule. HUD's intent in including this language in the 
interim rule was to provide an express regulatory basis for language 
restricting rent increases that had previously been included in 
contracts to implement statutory notification requirements. However, 
the sentence being deleted went beyond what has been stated in actual 
contract language and thus was not necessary to accomplish HUD's 
intent.

VI. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in this final 
rule are currently approved by the Office of Management and Budget 
(OMB) under section 3504(h) of the Paperwork Reduction Act of 1980 (44 
U.S.C. 3501-3520) and assigned OMB control number 2502-0533. An agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless the collection displays a currently 
valid control number.

Environmental Impact

    On September 6, 2000, a finding of no significant impact with 
respect to the environment was made regarding this rule in accordance 
with HUD regulations in 24 CFR part 50 that implement section 102(2)(C) 
of the National Environmental Policy Act of 1969 (42 U.S.C. 4332). That 
finding of no significant impact remains applicable, and is available 
for public inspection between 8:00 a.m. and 5 p.m. weekdays in the 
office of the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Room 10276, Washington, DC 20410-0500.

Executive Order 12866

    OMB reviewed this final rule under Executive Order 12866, 
Regulatory Planning and Review. OMB determined that this rule is a 
``significant regulatory action'' (but not economically significant) as 
defined in section 3(f) of the Order. Any changes made in this final 
rule subsequent to its submission to OMB are identified in the docket 
file. The docket file is available for public inspection between 8 a.m. 
and 5 p.m. weekdays in the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Room 10276, Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this final rule before publication and by 
approving it certifies that this rule does not have a significant 
economic impact on a substantial number of small entities. This rule 
affects only multifamily section 8 owners. There are very few 
multifamily section 8 owners that are small businesses. Therefore, this 
rule will not affect a substantial number of small entities.

Executive Order 13132, Federalism

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

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4, approved March 22, 1995) (UMRA) establishes requirements for federal 
agencies to assess the effects of their regulatory actions on state, 
local, and tribal governments, and the private sector. This rule does 
not impose any federal mandates on any state, local, or tribal 
government, or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 401

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

24 CFR Part 402

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

    The Catalogue of Federal Domestic Assistance number for the 
programs affected by this rule is 14.871.

0
For the reasons set forth in the preamble, HUD amends 24 CFR parts 401 
and 402 as follows:

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

0
1. The authority citation is revised to read as follows:

    Authority: 12 U.S.C. 1715z-1 and 1735f-19(b); 42 U.S.C. 
1437(c)(8), 1437f(t), 1437f note, and 3535(d).


0
2. Section 401.2(c) is amended by revising the definition of ``eligible 
project'' to read as follows:


Sec.  401.2  What special definitions apply to this part?

* * * * *

[[Page 2121]]

    Eligible project means a project that meets the requirements for 
eligibility for a Restructuring Plan in Sec.  401.100.
* * * * *

0
3. Add a new Sec.  401.100 to read as follows:


Sec.  401.100  Which projects are eligible for a Restructuring Plan 
under this part?

    (a) What are the requirements for eligibility? To be eligible for a 
Restructuring Plan under this part, a project must:
    (1) Have a mortgage insured or held by HUD;
    (2) Be covered in whole or in part by a contract for project-based 
assistance under--
    (i) The new construction or substantial rehabilitation program 
under section 8(b)(2) of the U.S. Housing Act of 1937 as in effect 
before October 1, 1983;
    (ii) The property disposition program under section 8(b) of the 
U.S. Housing Act of 1937;
    (iii) The moderate rehabilitation program under section 8(e)(2) of 
the United States Housing Act of 1937;
    (iv) The loan management assistance program under section 8 of the 
United States Housing Act of 1937;
    (v) Section 23 of the United States Housing Act of 1937 as in 
effect before January 1, 1975;
    (vi) The rent supplement program under section 101 of the Housing 
and Urban Development Act of 1965;
    (vii) Section 8 of the United States Housing Act of 1937, following 
conversion from assistance under Section 101 of the Housing and Urban 
Development Act of 1965; or
    (viii) Section 8 of the U.S. Housing Act of 1937 as renewed under 
section 524 of MAHRA;
    (3) Have current gross potential rent for the project-based 
assisted units that exceeds the gross potential rent for the project-
based assisted units using comparable market rents;
    (4) Have a first mortgage that has not previously been restructured 
under this part or under HUD's Portfolio Reengineering demonstration 
authority as defined in Sec.  402.2(c) of this chapter;
    (5) Not be a project that is described in section 514(h) of MAHRA; 
and
    (6) Otherwise meet the definition of ``eligible multifamily housing 
project'' in section 512(2) of MAHRA or meet the following three 
criteria:
    (i) The project is assisted pursuant to a contract for Section 8 
assistance renewed under section 524 of MAHRA;
    (ii) It has an owner that consents for the project to be treated as 
eligible; and
    (iii) At the time of its initial renewal under section 524, it met 
the requirements of section 512(2)(A), (B), and (C) of MAHRA.
    (b) When is eligibility determined? Eligibility for a Restructuring 
Plan under paragraph (a) of this section is determined by the status of 
a project on the earlier of the termination or expiration date of the 
project-based assistance contract, which includes a contract renewed 
under section 524 of MAHRA, or the date of the owner's request to HUD 
for a Restructuring Plan. Eligibility is not affected by a subsequent 
change in status, such as contract extension under Sec.  401.600 or 
part 402 of this chapter.

0
4. Revise 24 CFR 401.600 to read as follows:


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

    (a) If a section 8 contract for an eligible project would expire 
before a Restructuring Plan is implemented, the contract may be 
extended at rents not exceeding current rents:
    (1) For up to the earlier of one year or closing on the 
Restructuring Plan under Sec.  401.407; or
    (2) For such period of time beyond one year as HUD may approve, up 
to the closing of the Restructuring Plan.
    (b) Any extension of the contract beyond one year for a pending 
Restructuring Plan, other than an extension approved under this 
section, must be at comparable market rents or exception rents. An 
extension at comparable market rents will not affect a project's 
eligibility for the Mark-to-Market program once it has been established 
under this part.
    (c) HUD may terminate the contract earlier if the PAE or HUD 
determines that an owner is not cooperative under Sec.  401.402 or if 
the owner's request is rejected under Sec.  401.403 or Sec.  401.405.

PART 402--SECTION 8 PROJECT-BASED CONTRACT RENEWAL UNDER SECTION 
524 OF MAHRA

0
5. The heading to part 402 is revised to read as set forth above.
0
6-7. The authority citation for part 402 is revised to read as follows:

    Authority: 42 U.S.C. 1437(c)(8), 1437f note, and 3535(d).

0
8. Revise Sec.  402.1 to read as follows:


Sec.  402.1  What is the purpose of part 402?

    This part sets out the terms and conditions under which HUD will 
renew project-based assistance contracts under the authority provided 
in section 524 of MAHRA.

0
9. Revise Sec.  402.2 to read as follows:


Sec.  402.2  Definitions.

    (a) Terms defined in part 401. In this part, the following terms 
have the meanings given in Sec.  401.2 of this chapter: affiliate, 
disabled family, elderly family, eligible project, HUD, MAHRA, owner, 
PAE, Restructuring Plan, and section 8.
    (b) Terms defined in MAHRA. In this part, the following terms have 
the meanings given in section 512 of MAHRA: expiration date, fair 
market rent, renewal, and tenant-based assistance.
    (c) Other defined terms. In this part, the term--
    Comparable market rents means rents determined in accordance with 
section 524(a)(5) of MAHRA and HUD's instructions.
    Large family means a family of five or more persons.
    OCAF means an operating cost adjustment factor established by HUD, 
which may not be negative, that is applied to the existing contract 
rent (less the portion of that rent paid for debt service).
    Portfolio Reengineering demonstration authority means the authority 
specified in section 524(e)(2)(B) of MAHRA.
    Project-based assistance means the types of assistance listed in 
section 512(2)(B) of MAHRA, or a project-based assistance contract 
under the Section 8 program renewed under section 524 of MAHRA.
    Project eligible for exception rents means a project described in 
section 524(b) of MAHRA.
    SRO contract and SRO project mean, respectively, a project-based 
assistance contract for single-room occupancy dwellings under section 
441 of the Stewart B. McKinney Homeless Assistance Act (42 U.S.C. 
11401), and a project with units covered by such a contract.

0
10. Revise Sec.  402.3 to read as follows:


Sec.  402.3  Contract provisions.

    The renewal HAP contract shall be construed and administered in 
accordance with all statutory requirements, and with all HUD 
regulations and other requirements, including changes in HUD 
regulations and other requirements during the term of the renewal HAP 
contract, unless the contract provides otherwise.

0
11. Amend Sec.  402.4 by revising paragraph (a)(2) to read as follows:


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

    (a) * * *
    (2) Procedure for projects eligible for Restructuring Plan. (i) If 
an owner

[[Page 2122]]

requests renewal of a contract under this section for a project that is 
eligible for a Restructuring Plan under the Mark-to-Market program 
under part 401 and that has not been rejected under that part, HUD or a 
PAE will determine whether renewal under this section, instead of 
through a Restructuring Plan under part 401 of this chapter, would be 
sufficient. Renewal without a Restructuring Plan will be considered 
sufficient if the rents after renewal would be sufficient to maintain 
both adequate debt service coverage on the HUD-insured or HUD-held 
mortgage and necessary replacement reserves to ensure the long-term 
physical integrity of the project, taking into account any comments 
received under Sec.  401.502(c) of this chapter.
    (ii) If HUD or the PAE determines that renewal under this section 
would be sufficient, HUD will not require a Restructuring Plan.
    (iii) If HUD or the PAE determines that renewal under this section 
would not be sufficient, HUD or the PAE may require a Restructuring 
Plan before the owner's request for contract renewal will be given 
further consideration. If the owner does not cooperate in the 
development of an acceptable Restructuring Plan, HUD will pursue 
whatever administrative actions it considers necessary.
* * * * *

0
12. Revise Sec.  402.5 to read as follows:


Sec.  402.5  Contract renewals under section 524(b) or (e) of MAHRA.

    (a) Renewal of projects eligible for exception rents at owner's 
request. HUD will offer to renew project-based assistance for a project 
eligible for exception rents under section 524(b) of MAHRA at rent 
levels determined under this section instead of Sec.  402.4, except as 
provided in Sec.  402.7, but the owner of a project other than a 
project with assistance under the Section 8 moderate rehabilitation 
program may request renewal under Sec.  402.4.
    (b) Rent levels for projects eligible for exception rents. HUD will 
renew the contract with rent levels at the least of:
    (1) Existing rents adjusted by an OCAF;
    (2) A budget-based rent determined in accordance with instructions 
issued by HUD, subject to a determination by HUD that such a rent level 
is appropriate; or
    (3) In the case of a contract under the Section 8 moderate 
rehabilitation program (other than an SRO contract), the lesser of 
existing rents adjusted by an OCAF, fair market rents (less any amounts 
for tenant-purchased utilities), or comparable market rents, as 
provided in section 524(b)(3) of MAHRA.
    (c) Rent adjustments. (1) After rents have been established under 
this section, rent adjustments will comply with section 524(c) of MAHRA 
except as otherwise required by paragraph (d)(1) of this section for 
preservation projects.
    (2) Rent adjustments for projects assisted under the Section 8 
moderate rehabilitation program, other than projects assisted under the 
moderate rehabilitation single-room occupancy program, shall be 
determined in accordance with section 524(b)(3) of MAHRA.
    (d) Preservation projects and demonstration projects. (1) 
Notwithstanding any other provision of this part except Sec.  402.7, 
upon expiration of a section 8 contract for a project subject to an 
approved plan of action under the Emergency Low-Income Housing 
Preservation Act of 1987 (ELIHPA) or the Low-Income Housing 
Preservation and Resident Homeownership Act of 1990 (LIHPRHA), the 
Secretary will provide benefits that are comparable to those provided 
under such plan of action. This paragraph (d)(1) applies only to the 
extent amounts are specifically made available in appropriations acts.
    (2) Notwithstanding any other provision of this part except Sec.  
402.7, upon expiration of a Section 8 contract entered into pursuant to 
a Portfolio Reengineering demonstration authority for which HUD made a 
determination that debt restructuring is inappropriate, and the owner 
of the project executed a Portfolio Reengineering Demonstration Program 
Use Agreement, the Secretary will provide the owner, at the request of 
the owner, with benefits comparable to those provided under the 
contract that is expiring. This paragraph (d)(2) applies only to the 
extent amounts are made available in appropriations acts.

0
13. Revise Sec.  402.6 to read as follows:


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

    (a) In general. An owner requesting contract renewal under this 
part must submit to HUD or HUD's designee, at least 120 days before the 
termination or expiration date of any project-based assistance 
contract, all documents or information prescribed by HUD.
    (b) Subsequent renewals. A contract that was initially renewed 
under MAHRA will be renewed at the owner's request under any renewal 
option for which the project is eligible. However, in the case of a 
project that is eligible for a Restructuring Plan under Sec.  401.100, 
HUD or a PAE will determine whether renewal with a Restructuring Plan 
under part 401, or without a Restructuring Plan under this part, is 
necessary.

0
14. Revise Sec.  402.7 to read as follows:


Sec.  402.7  Refusal to consider an owner's request for a Section 8 
contract renewal because of actions or omissions of owner or affiliate.

    (a) Determination of eligibility. Notwithstanding part 24 of this 
title, HUD may elect not to consider a request for renewal of project-
based assistance if at any time before contract renewal:
    (1) The owner or an affiliate is debarred or suspended under part 
24 of this title;
    (2) HUD determines that the owner or an affiliate has engaged in 
material adverse financial or managerial actions or omissions as 
described in section 516 of MAHRA, including any outstanding violations 
of civil rights laws, or has failed to certify to compliance with the 
nondiscrimination requirements of 24 CFR 5.105(a), in connection with 
any project of the owner or an affiliate; or
    (3) The project does not meet the physical condition standards in 
24 CFR 5.703 of this title, unless HUD determines that the project will 
meet the standards within a reasonable time after renewal.
    (b) Dispute and appeal. An owner may dispute a rejection under this 
section and seek administrative review under the procedures in subpart 
F of part 401 of this chapter.

0
15. Revise Sec.  402.8 to read as follows:


Sec.  402.8  Tenant protections if a contract is not renewed.

    (a) Notice of termination. An owner who is not eligible for a 
Restructuring Plan under part 401 of this chapter, or who is eligible 
but does not request restructuring, and who does not renew a contract, 
must provide one year's notice to tenants, to HUD, and to the contract 
administrator as provided in section 8(c)(8)(A) of the United States 
Housing Act of 1937.
    (b) If an owner does not give timely notice. If an owner does not 
give one year's notice of termination as described in paragraph (a) of 
this section, the owner must permit the tenants in assisted units to 
remain in their units at a rental rate no higher than the tenant rent 
payable for the tenants' last month of assisted occupancy under the 
terminated HAP contract until one year after notice is given, even if 
HUD does not continue to make housing assistance payments with respect 
to such units.
    (c) If an owner opts out or fails to renew. In the case where a 
contract for Section 8 rental assistance for a project

[[Page 2123]]

is terminated or expires, an assisted family may elect to remain in the 
project and, if eligible, receive tenant-based Section 8 assistance 
under Section 8(t) of the United States Housing Act of 1937.

0
16. Add 24 CFR 402.9 to read as follows:


Sec.  402.9  Waivers and delegations of waiver authority.

    All waivers of provisions of this part, and delegations of the 
authority to waive provisions of this part, are governed by Sec.  5.110 
of this title.

    Dated: December 16, 2005.
Brian D. Montgomery,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 06-288 Filed 1-11-06; 8:45 am]
BILLING CODE 4210-27-P