[Federal Register Volume 71, Number 172 (Wednesday, September 6, 2006)]
[Notices]
[Pages 52710-52713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-7475]



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Part IV





Department of Housing and Urban Development





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 Public Housing Operating Fund Program; Guidance on Implementation of 
Asset Management; Notice

  Federal Register / Vol. 71, No. 172 / Wednesday, September 6, 2006 / 
Notices  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket Number FR-5099-N-01]


Public Housing Operating Fund Program; Guidance on Implementation 
of Asset Management

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

ACTION: Notice.

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SUMMARY: On September 19, 2005, HUD published a final rule entitled, 
``Revisions to the Public Housing Operating Fund Program,'' which 
established a new formula for determining operating subsidies for 
public housing agencies (PHAs) and requiring that PHAs with 250 or more 
units convert to asset management. This notice clarifies and provides 
interim guidance pertaining to various aspects of public housing's 
conversion to asset management. The interim guidance provided in this 
notice is intended to assist all PHAs that operate federal public 
housing. Special provisions are included in the notice to assist small 
PHAs with less than 250 public housing units that are not subject to 
asset management conversion. HUD is soliciting public comment on this 
interim guidance and, based on the comments received, will issue final 
guidance and commence rulemaking, as appropriate, on the asset-based 
management requirements. Until such time as final guidance is issued or 
rulemaking commenced, PHAs should refer to the interim guidance 
provided by this notice to assist in their conversion to asset-based 
management.

DATES: Effective Date: This notice is effective upon publication.
    Comment Due Date: November 6, 2006.

ADDRESSES: Interested persons are invited to submit comments regarding 
this notice to the Office of the General Counsel, Rules Docket Clerk, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Room 10276, Washington, DC 20410-0001. Communications should refer to 
the above docket number and title and should contain the information 
specified in the ``Request for Comments'' section.
    Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
http://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.
    No Facsimile Comments. Facsimile (FAX) comments are not acceptable. 
In all cases, communications must refer to the docket number and title.
    Public Inspection of Public Comments. All comments and 
communications submitted to HUD will be available, without charge, for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at (202) 708-3055 (this 
is not a toll-free number). Individuals with speech or hearing 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at 800-877-8339. Copies of all 
comments submitted are available for inspection and downloading at 
http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Elizabeth Hanson, Deputy Assistant 
Secretary, Departmental Real Estate Assessment Center, Office of Public 
and Indian Housing, Department of Housing and Urban Development, 451 
Seventh Street, SW., Room 2000, Washington, DC 20410; telephone 202-
475-7949 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number through TTY by calling the 
toll-free Federal Information Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    On September 19, 2005, (70 FR 54983), HUD published a final rule 
amending the regulations of the Public Housing Operating Fund Program 
at 24 CFR part 990, to provide a new formula for distributing operating 
subsidy to public housing agencies (PHAs) and to establish requirements 
for PHAs to convert to asset management. On October 24, 2005 (70 FR 
61366), HUD published a correction to the September 19, 2005, final 
rule to clarify that the revised allocation formula will be implemented 
for calendar year 2007, and adjusting the related dates specified in 
the final rule to reflect the corrected implementation date. The final 
rule, developed through negotiated rulemaking conducted in 2004, became 
effective on November 18, 2005.
    Subpart H of the revised part 990 regulations (Sec. Sec.  990.255 
to 990.290) establishes the requirements regarding asset management. 
Under Sec.  990.260(a), PHAs that own and operate 250 or more dwelling 
rental units must operate using an asset management model consistent 
with the subpart H regulations. PHAs with fewer than 250 dwelling 
rental units may elect to transition to asset management, but are not 
required to do so. PHAs are required to implement property-based 
management, property-based budgeting, and property-based accounting, 
which are all defined in the subpart H regulations, which are essential 
components of asset management.
    Additionally, to facilitate and clarify the process of conversion 
to asset management, the office of Public and Indian Housing (PIH) will 
be issuing a notice that contains more detailed financial reporting 
information and guidance to assist PHAs in the near future.

II. This Notice

    This notice clarifies and provides interim guidance pertaining to 
various aspects of public housing's conversion to asset management. The 
interim guidance provided in this notice is intended to assist all PHAs 
that operate public housing. Special provisions are included in the 
notice to assist small PHAs with less than 250 public housing units 
that are not subject to asset management conversion. Specifically, the 
notice provides elaboration on the collection and use of fees in the 
operation and management of properties, the effect of transitioning to 
asset management on the Public Housing Assessment System (PHAS), 
property identification, and the connection between asset management 
and the Capital Fund.
    As part of the requirement to convert to asset management, PHAs of 
250 or more units must charge a property management fee for the 
operation of the central office. In addition, PHAs may charge a ``fee-
for-service'' for certain centralized property management services and 
must prepare property-level financial statements. These and other 
requirements introduce new financial reporting models; affect the 
scoring under the PHAS; and raise issues regarding treatment of such 
fees as ``program income.'' This notice clarifies and provides guidance 
on key

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business decisions related to the implementation of asset management.
    HUD is soliciting comments on this notice. Based upon the comments 
that are received and the experience of PHAs as they begin the 
conversion to asset management, HUD will issue final guidance and may 
initiate rulemaking, as may be necessary, to establish more specific 
requirements. The rulemaking will provide PHAs and the public with an 
opportunity to comment on any proposed requirements prior to their 
issuance for effect. Until such time, this notice serves as interim 
guidance, providing PHAs with an operational framework to assist with 
their conversion to asset management.

III. Treatment of Fee Income as Non-Program Income

    HUD wishes to clarify that reasonable fees charged to properties 
and programs, as part of the fee-for-service approach, are not 
considered federal program income for the purposes of 24 CFR part 85. 
Rather, this fee income is considered local revenue and control over 
its use is subject only to state or local requirements imposed on 
individual PHAs.

IV. Excess Cash

    The Operating Fund program regulations at Sec.  990.280 establish 
certain limitations, as well as certain freedoms, on the use of 
property revenues by PHAs depending on whether a property generates 
``excess cash.'' Section 990.255(a) provides that PHAs must manage 
their properties using an asset management model consistent with 
management norms of the multifamily management industry. As such, 
excess cash should be computed using essentially the same method as 
performed under HUD's multifamily housing programs. The determination 
of excess cash is based on year-end financial statements using a 
balance sheet approach.
    However, solely for the purposes of the provisions affecting 
property fungibility (see Sec.  990.280(b)(5)(i)) and payment of an 
asset management fee (see Sec.  990.280(b)(5)(ii)), a property's excess 
cash should not be less than one month's operating expenses.

V. Restrictions on Use of Excess Cash for Payment of Central Office 
Costs

    The part 990 regulations establish certain parameters around the 
use of a property's excess cash (beyond the minimum levels described 
above). Consistent with Sec.  990.280(c), excess cash may not be used 
to pay for the operations of the central office cost center. To allow 
excess cash to fund the operations of the central office cost center 
would be inconsistent with Sec.  990.280(c), which states that 
``central office cost centers shall be funded from the property-
management fees received from each project, and from the asset 
management fees to the extent that they are available.'' It would also 
contravene a goal of the September 19, 2005, Operating Fund final rule 
that PHAs should only be permitted to charge a reasonable fee for the 
operations of the central office.

VI. Reasonableness of Property Management Fees and Asset Management 
Fees

    Section 990.280 provides for the establishment of ``reasonable'' 
property management and asset management fees. Accordingly, fees must 
be reasonable to be considered as excess cash and not treated as 
program income. Property management fees, which may include a 
bookkeeping fee, are to be earned monthly for each occupied unit or 
approved vacancy, as per 24 CFR 990.140 and 990.145, respectively. In 
accordance with Sec.  990.140, asset management fees are to be earned 
based on the total number of units under the Annual Contributions 
Contract (ACC) for each project.
    The following guidelines are offered to assist PHAs in determining 
whether their fees are reasonable. However, PHAs may establish higher 
fees other than those provided in these guidelines, as provided in 
section IX of this notice.

A. Property Management Fee

    A PHA may charge a reasonable property management fee based on any 
of the following:
    1. The property management fee schedules established for each HUD 
Multifamily Field Office. Generally, the Office of Multifamily Housing 
establishes fee ranges for federally subsidized properties that reflect 
120 percent of the mean property management fee for profit-motivated 
properties that are well managed, in good physical condition, and are 
managed by independent agents with no identity of interest with the 
owners; or
    2. The 80th percentile property management fee paid by all for-
profit and unlimited dividend Federal Housing Administration (FHA) 
properties, by HUD Field Office, excluding such programs as 
cooperatives and nursing homes.
    The property management fee may include a reasonable bookkeeping 
fee for the property accounting function. The average bookkeeping fee 
in HUD's multifamily housing programs is about $3.50 per unit per month 
(PUM) (2004 data). Generally, HUD will consider $7.50 PUM to be a 
reasonable fee. A higher bookkeeping fee for PHAs reflects higher 
centralized information technology and human resource costs present in 
public housing. For financial reporting purposes, this bookkeeping fee, 
as is standard business practice, is to be presented separately from 
the property management fee on the PHA's financial statements.

B. Asset Management Fee

    HUD will generally consider an asset management fee charged to each 
property of $10 PUM as reasonable. Asset management fees are based on 
all units under an ACC. In multifamily housing, the asset management 
functions of owners are primarily funded through cash flows. This fee 
amount was determined based on an examination of cash flows in HUD's 
multifamily properties and the consideration that certain asset 
management activities in public housing are also recovered through the 
Capital Fund management fee.

VII. Assignment of Assets to the Central Office Cost Center and 
Determination of Initial Working Capital

    Section 990.280(b) of the final rule requires PHAs to separate all 
assets and liabilities between the properties and the central office 
cost center.
    A PHA's central office cost center will operate off of fees and 
other allowable charge-backs (as well as other revenue sources outside 
the public housing program). Like any other business area, the PHA's 
central office cost center will need a reasonable amount of working 
capital in order to perform its functions properly. As such, PHAs, when 
assigning assets between properties and the central office cost center, 
may assign to the central office cost center an amount equal to six 
months of property management fees, including bookkeeping fees, and 
asset management fees based on all units under ACC, regardless of unit 
status. This assignment may take place at the time the PHA assigns its 
initial balance sheet data, when first converting to property-based 
accounting. To the extent that a PHA does not have sufficient reserves 
to make such an assignment, a PHA may accrue these amounts. This 
working capital, like the fees themselves, will not be considered 
program income.

VIII. Management Fees for Capital Fund, Housing Choice Voucher and 
Other Public Housing Grant Programs

    In programs where it applies, OMB Circular A-87 allows PHAs to use 
a fee-

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for-service in lieu of allocation systems for the reimbursement of 
overhead costs. HUD encourages this approach for several reasons. 
First, it simplifies a PHA's accounting systems. Second, it relieves 
HUD from the requirement to review overhead allocations and to monitor 
the spending of such funds. Third, it encourages PHAs to become more 
businesslike, in that any revenue in excess of expenses can be used to 
support the mission of the PHA (i.e., retained earnings of the central 
office cost center are not considered program income). The following 
guidelines are designed to assist PHAs intending to implement a fee-
for-service approach in establishing appropriate management fees.

A. Capital Fund Program

    A PHA may charge up to a maximum 10 percent of the annual Capital 
Fund grant as a management fee. While current program rules (Sec.  
968.112) allow PHAs to charge up to 10 percent of the Capital Fund 
grant for ``Administration,'' these administrative costs must be 
specifically apportioned and/or documented. Under a fee-for-service 
system, the PHA may charge a management fee of 10 percent, regardless 
of actual costs.

B. Housing Choice Voucher Program

    HUD encourages the adoption of a fee-for-service methodology for 
the Housing Choice Voucher Program (HCV). Existing appropriations 
language restricts the use of administrative fees to activities related 
to the provision of tenant-based rental activity authorized under 
Section 8. Costs directly related to the day-to-day operations of the 
Section 8 program such as salaries of occupancy specialists or rented 
space for intake activities clearly qualify under this definition while 
overhead costs require more stringent documentation. For PHAs that 
elect to use a fee-for-service methodology for its HCV program, HUD 
will consider a management fee of up to 20% of the administrative fee 
or up to $12 PUM per voucher leased, whichever is higher, as meeting 
the requirements of the appropriations act. Under this methodology, 
PHAs can also charge the HCV program a $7.50 PUM bookkeeping fee for 
the program accounting function.
    PHAs that elect to maintain an allocation system for the recovery 
of overhead costs under the HCV program cannot charge the HCV program 
more than the allocated amount and must maintain auditable 
documentation to support its allocation of costs and their relationship 
to the provision of tenant-based rental activity authorized under 
section 8.

C. PHA Administrative Fee for Mixed Finance Development

    A reasonable administrative fee amount paid with Public Housing 
Funds for the mixed finance development is 3% of the total property 
budget. This amount is intended to cover PHA administrative costs. 
Alternatively, an administrative fee of up to 6% is considered 
reasonable provided the housing authority is able to support that the 
fee is appropriate in accordance with section IX of this notice.

D. Other Public and Indian Housing Grants

    If a fee rate has not been established for a grant, a PHA should 
charge no more than 15 percent of the grant amount as a management fee 
for other Public Housing grants. Where administrative cost are set 
through other notices, regulations and existing grant agreements, for 
example the ROSS program and the annual NOFA requirements, these 
policies and agreements are controlling.

IX. Demonstrating Fee Reasonableness

    If a PHA considers the fees in this notice to be inadequate to 
address their individual circumstances, a PHA may use data that 
reflects conditions of the local or national market. HUD is aware that 
PHAs are diverse, having different resources and constraints. During 
this period of interim guidance and prior to any rulemaking that may be 
initiated on fees, PHAs may document, as support, that a fee charged is 
appropriate for the scope of work, specific circumstances of the 
property, and local or national market for the services provided. The 
data used may include fees paid by the PHA for private management of 
public housing through effective competition. PHAs should be ready to 
justify the departure from fees in these guidelines upon inquiry from 
HUD or other interested parties.
    In conformity with standard business practices, PHAs are encouraged 
to maintain supporting documentation explaining the basis of its fees. 
PHAs are also encouraged to consult with HUD on fees that may depart 
from this guidance prior to charging the fees. HUD will provide a PHA 
with it views on the reasonableness of the fees intended to be charged.

X. PHAS Transition Rules

    The move to asset management will require HUD to revise the PHAS. 
Currently, PHAS is an entity-wide assessment system whereas asset 
management utilizes a property-specific focus. As a result, for the 
first year of compliance with property-based budgeting and accounting, 
during which time that PHAs are making organizational changes, the PHA 
will receive a transition score under the revised PHAS. Incentive 
awards under the Capital Fund during the time that PHAs receive 
transition PHAS scores will be based on the PHA's latest PHAS score 
prior to conversion to asset management.
    All PHAs that are or will be classified as troubled will continue 
to be governed by their memorandum of agreements and other pertinent 
program rules. Moreover, although PHAs will only receive transition 
scores, PHAs must continue to comply with all rules associated with the 
public housing program and must continue to manage with economy and 
efficiency.

XI. Property Identifications

    Under Sec.  990.265, PHAs must identify their property for purposes 
of asset management. Guidance regarding this exercise was contained in 
PIH Notice 2006-10 (issued February 3, 2006), entitled ``Identification 
of Projects for Asset Management.'' These new property identifications 
will become the new measurement and funding focus of HUD. It is not 
necessary to revise the property numbers on the ACC. A copy of PIH 
Notice 2006-10 may be downloaded from http://www.hudclips.org.

XII. Inter-Relationship With Capital Fund

    Section 990.280(a) provides that property-based budgeting and 
accounting will be applied to all programs and revenues sources that 
support properties under the ACC, including the Capital Fund. When a 
PHA transfers funds from the Capital Fund to the Operating Fund, these 
funds lose their Capital Fund Program identity and are then governed by 
all Operating Fund rules. All other Capital Fund eligible activities 
are bound by the Capital Fund Program rules and the Annual PHA Plan 
requirements. Additionally, where a PHA may use Capital Funds for 
``management improvements'' and ``operations,'' it may only use those 
amounts to fund ``property'' expenses and not expenses of the central 
office cost center.

XIII. PHAs With Fewer Than 250 Units

    For PHAs with fewer than 250 units of public housing and which have 
not elected to convert to asset management, only Sections X, XI, and 
XII of this

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notice are applicable. HUD included in the September 19, 2005, 
Operating Fund final rule accommodations to enable PHAs with fewer than 
250 units to more easily convert to asset management, such as allowing 
small PHAs to treat all of their units as one property. Section 990.280 
of the Operating Fund program regulations provides for the 
establishment a ``HUD-accepted central office cost center'' by PHAs 
converting to asset management. In the case of a small PHA operating as 
a single property, the establishment of a separate cost center would be 
contradictory to the streamlining and cost-efficiency goals of the 
September 19, 2005, final rule. The establishment of a separate cost 
center would impose financial and administrative burden on the PHA 
that, because it is operating as a single property, would not stand to 
benefit from the coordination and centralization of multiple 
properties. Accordingly, those PHAs with fewer than 250 units choosing 
to operate as one property need not establish a central office cost 
center that is separate from other PHA functions. Those small PHAs with 
fewer than 250 units that operate as more than one property and choose 
to convert to asset management, and that believe the establishment of a 
separate cost center would impose an undue financial or administrative 
burden, may seek regulatory relief from HUD from the central office 
cost center requirement; however, during the first two years of 
property-based budgeting and accounting, these PHAs need not establish 
a central office cost center.

XIV. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements for the Operating Fund 
Program have been approved by the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and 
assigned OMB Control Number 2577-0029. In accordance with the Paperwork 
Reduction Act, HUD 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 OMB control number.

Environmental Impact

    This Notice provides operating instructions and procedures in 
connection with activities under a Federal Register document that has 
previously been subject to a required environmental review. 
Accordingly, under 24 CFR 50.19(c)(4), this Notice is categorically 
excluded from environmental review under the National Environmental 
Policy Act (42 U.S.C. 4321).

    Dated: August 30, 2006.
Paula O. Blunt,
General Deputy Assistant, Secretary for Public and Indian Housing.
[FR Doc. 06-7475 Filed 8-31-06 4:12 pm]
BILLING CODE 4210-67-P