[Federal Register Volume 72, Number 137 (Wednesday, July 18, 2007)]
[Proposed Rules]
[Pages 39546-39554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-13846]



[[Page 39545]]

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Part V





Department of Housing and Urban Development





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24 CFR Parts 905 and 990



 Use of Public Housing Capital and Operating Funds for Financing 
Activities; Proposed Rule

  Federal Register / Vol. 72, No. 137 / Wednesday, July 18, 2007 / 
Proposed Rules  

[[Page 39546]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 905 and 990

[Docket No. FR-4843-P-01]
RIN 2577-AC49


Use of Public Housing Capital and Operating Funds for Financing 
Activities

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would allow public housing agencies (PHAs) 
to use proceeds under either the Capital Fund or Operating Fund 
programs for financing activities, including payments of debt service 
and customary financing costs for the modernization and development of 
public housing, including public housing in mixed-finance developments. 
The pledge of public housing projects and other property generally 
involves the long-term commitment of public housing funds. This 
proposed rule would support HUD's objective to enhance PHA capital 
improvement planning and the public housing program transition to asset 
management decision-making by establishing program requirements, 
submission requirements, and the approval process for PHAs to request 
authorization from HUD to pledge either capital or operating funds for 
debt service payments.

DATES: Comment Due Date: September 17, 2007.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Office of 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.
    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). Hearing- or speech-impaired individuals 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: Jeffrey Riddel, Director, Office of 
Capital Improvements, Office of Public and Indian Housing, Department 
of Housing and Urban Development, 451 Seventh Street, SW., Washington, 
DC 20410-8000; telephone number (202) 708-1640, extension 4999 (this is 
not a toll-free number). Hearing- or speech-impaired individuals may 
access this number through TTY by calling the toll-free Federal 
Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Legislative Background

    Section 519 of the Quality Housing and Work Responsibility Act of 
1998 (Pub. L. 105-276, approved October 21, 1998) amended the U.S. 
Housing Act of 1937 (1937 Act), to merge former sections 9 and 14 of 
the 1937 Act into a single section 9 providing for the capital fund 
(the Capital Fund) and the operating fund (the Operating Fund) 
(codified at 42 U.S.C. 1437g). The Capital Fund is established at 
section 9(d) of the 1937 Act and provides funding for, among other 
activities, the development, financing, and modernization of public 
housing projects. The Operating Fund is established at section 9(e) and 
provides funding for the operation and management of public housing. 
Section 9(e)(1)(I) provides that operating funds may be used for, among 
other purposes, ``the costs of repaying * * * debt incurred to finance 
the rehabilitation and development of public housing units, which shall 
be subject to such reasonable requirements as the Secretary may 
establish.'' Additionally, section 519 of the Quality Housing and Work 
Responsibility Act of 1998 added section 30 to the 1937 Act, and 
provides HUD the discretion, upon such terms and conditions as it may 
prescribe, to authorize a PHA to mortgage or otherwise grant a security 
interest in any public housing project or other property of the PHA.
    A study for HUD entitled ``Capital Needs of the Public Housing 
Stock in 1998'' (Abt Associates, March 2000) estimated a $22 billion 
capital needs backlog for public housing properties. The study also 
noted a $2 billion annual accrual in capital costs for ongoing repairs 
and replacements beyond ordinary maintenance for all public housing 
units. Annual appropriations for public housing capital expenses, which 
range from $2 billion to $3 billion, cannot by themselves address the 
backlog and accruing replacement and repair capital needs. Given the 
large amount of capital needs that PHAs have, the use of capital or 
operating funds for financing activities provides a mechanism for PHAs 
to leverage private sector financing for improvements with existing 
public housing assets. Therefore, this proposed rule proposes to expand 
the financial leveraging options available to PHAs. The rule would 
enable PHAs to use either the Capital Fund or the Operating Fund 
programs to service debt payments and, thereby, leverage additional 
funds to more fully address capital needs. This proposed rule would 
support HUD's objective to enhance PHA capital improvement planning and 
the public housing program transition to asset management decision-
making.
    The use of capital funds or operating funds to construct new public 
housing units is limited by section 9(g)(3) of the 1937 Act. PIH's 
Information Center (PIC) shall be used to determine compliance with 
section 9(g)(3) of the 1937 Act. The statute states that, with two 
specific exceptions, a PHA may not use capital or operating funds to 
construct new units if such construction would result in a net increase 
from the number of public housing units owned, assisted, or operated by 
the PHA on October 1, 1999, including any units demolished as part of a 
revitalization effort. The exceptions to this limitation are: (1) The 
PHA may use the Capital Fund or Operating Fund programs to construct 
units beyond this limitation; however, the Capital Fund and the 
Operating Fund formulas, except as stated in (2), shall not include 
these units for purposes of calculating the formulas; or (2) the 
formulas may provide, subject to limitations imposed by the Secretary,

[[Page 39547]]

for additional funding of units in excess of the limit if the units are 
part of a mixed-finance project or otherwise leverage private funds, 
and the estimated cost of the useful life of the project is less than 
the estimated cost of Section 8 assistance for the same period of time.
    In addition, where a PHA seeks to pledge future appropriations of 
capital or operating funds for debt repayment, such an arrangement is 
subject to the Antideficiency Act (31 U.S.C. 1341), which states that 
the federal government may not obligate amounts in excess of 
appropriated funds. Therefore, any pledge of future capital or 
operating funds is subject to future appropriations, and a lack of 
future appropriations could result in a lack of capital or operating 
funds to cover the obligation. PHA obligations issued pursuant to this 
proposed rule, and that are secured by a pledge of capital or operating 
funds, are not obligations of, nor guaranteed by, the U.S. Government. 
In the event of default, whether due to the lack of appropriations or 
other reasons, the PHA will be solely responsible for the debt. The 
proposed rule establishes a debt coverage ratio that is higher than the 
debt coverage ratio used for traditional multifamily financing. This 
higher debt coverage ratio is related to the appropriations risk 
associated with capital and operating funds.

II. This Proposed Rule

    This proposed rule would revise HUD's regulations for the Capital 
Fund at 24 CFR part 905, and add a new subpart K to HUD's regulations 
for the Operating Fund at 24 CFR part 990. The new subparts would allow 
PHAs to use the Capital Fund and Operating Fund programs for financing 
activities, including payments of debt service and of customary 
financing costs for the modernization and development of public 
housing, including public housing in mixed-finance developments.
    Further, the proposed rule would establish specific program 
requirements, submission requirements, and approval processes for PHAs 
to request authorization from HUD to pledge a portion of their annual 
capital fund grant or operating fund subsidies for debt service 
payments. To a great extent, the proposed rule would establish similar 
regulatory requirements for the Capital Fund and the Operating Fund. 
However, there would be several differences between the two programs, 
and interested persons should carefully review the proposed regulatory 
changes for both the Capital Fund and the Operating Fund. For example, 
pledges of operating funds shall be project specific. This section of 
the preamble presents a brief overview of the regulatory amendments 
that would be made by the proposed rule.
    The proposed rule would describe requirements incumbent upon a PHA 
that wants to use capital or operating funds for debt service or 
financing payments. Among other requirements, the PHA should have a 
non-troubled Public Housing Assessment System (PHAS) score overall and 
must be a standard performer or higher on the financial condition 
indicator. The proposed rule would also require that the PHA make 
certain showings in order to be eligible. For example, the PHA would be 
required to list the planned capital improvements and associated costs 
in an approved PHA plan. PHAs would also need to complete Physical 
Needs Assessments that cover their entire public housing portfolio for 
the term of the financing. The PHA must also provide independent 
reviews satisfactory to HUD demonstrating the PHA's management 
capacity, the reasonableness of the terms and conditions of the 
financing, and overall feasibility of the venture.
    While, at the option of the PHA, the Capital Fund Financing Plan 
(CFFP) allows for the possibility of direct payment to creditors so 
that debt service payments do not have to flow through the PHA, HUD 
does not consider it feasible to disburse pledged operating subsidy 
directly to creditors.
    As PHAs are transitioning into asset management and project-based 
accounting, it may be difficult to enter into Operating Fund Financing 
Program (OFFP) transactions based on operating cash flow (a project's 
annual revenue less expenses) as opposed to financing transactions 
secured and paid by excess cash flow (a project's unrestricted net 
assets or ``reserves''). By way of example, in regard to OFFP 
transactions based on cash flow, for PHAs with a fiscal year ending on 
June 30th: audits for the period ending June 30, 2008, will be the 
first audits completed for most PHAs pursuant to the new project-based 
accounting requirements. This proposed rule would require PHAs to be 
under project-based accounting, and would require PHAs to submit audits 
on a project level in order to obtain OFFP financing. Since OFFP 
financing is to be project-based, HUD invites comments on how it might 
otherwise determine the approvability of an OFFP proposal, given that 
historic financial data (non-project based) will be of limited 
applicability.
    Pursuant to 24 CFR part 968, PHAs may use up to 10 percent of their 
capital fund grants for administrative costs (or management fees under 
the asset management rules). This proposed rule would not permit PHAs 
to use the financing proceeds for additional administrative or central 
office cost center fees or costs. However, HUD encourages PHAs to 
leverage their CFFP or OFFP proceeds. PHAs that pursue mixed-finance 
development or modernization with CFFP or OFFP proceeds may use CFFP or 
OFFP proceeds, tax credit equity, or other sources for administrative 
costs. Furthermore, PHAs may use CFFP or OFFP proceeds to pay for staff 
salaries associated with construction management and allocable to fees 
and costs.
    The proposed rule would also describe HUD's review and approval 
process. HUD will review all complete Capital and Operating Fund 
Financing Program proposals for compliance with the regulatory 
requirements. HUD may require the PHA to make modifications to the 
proposal, and may require the PHA to re-submit all or any portion of 
the proposal. HUD will notify the PHA of its approval and any 
conditions of the approval. Within 60 days of closing, unless the time 
has otherwise been extended by HUD in writing, the PHA must submit to 
HUD a complete set of fully executed documents pertaining to the 
financing. Failure to provide the required documents to HUD within the 
required time period may result in HUD rescinding its approval.
    HUD is prohibited from using operating subsidies appropriated for a 
current fiscal year for prior year obligations. The proposed rule would 
clarify that operating subsidy made available in a fiscal year may be 
used for the costs of repaying debt that was incurred to finance the 
rehabilitation and development of public housing units. The payment of 
the debt service that becomes due in the current calendar year is not a 
``prior year obligation'' under the meaning of the above appropriations 
language.
    The requirements of this proposed rule would become effective for 
requests submitted to HUD for approval on or after the effective date 
of the final rule. Requests submitted prior to the effective date of 
the final rule would continue to be reviewed on a case-by-case basis as 
they have been in the past. Program requirements under this rule do not 
preclude PHAs from pledging other non-public housing properties owned 
by a PHA to secure private loan or bond financing.

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III. Development and Implementation of Financing Plans

    PHAs may consider a range of options when borrowing private 
capital, including bank loans, bond issuances, and other similar 
vehicles. For borrowing large sums, bond issuances can offer access to 
a wide market, but can be complex to assemble and issue. Bank loans are 
less complex and may be quicker to secure, particularly for limited 
borrowing for small PHAs. PHAs, particularly small PHAs, may form pools 
to take advantage of access to larger markets that might not otherwise 
be available. Pools also have some economies of scale. In addition, 
capital borrowing may be accomplished through a state housing and 
finance agency or local associations.
    Capital or operating fund financing requires a significant amount 
of advance planning and preparation by the PHA. A number of factors 
must be considered prior to submission of a request to HUD. These 
factors include, but are not limited to, the amount of its current 
capital or operating fund, current interest rates, the term of the 
borrowing, the condition of the PHA's inventory, criticality of 
individual work items, and the experience and expertise of the PHA in 
transactions of the size and nature contemplated. Any one or a 
combination of these factors can significantly affect the amount to be 
borrowed and work to be performed. PHAs are encouraged to obtain 
technical assistance (e.g., PHA counsel, financial advisors, 
architectural and engineering) early in the process. PHAs are also 
encouraged to consider resources available through state and local 
governments, such as state housing and finance agencies. HUD 
Headquarters will review all capital and operating fund financing 
proposals and is the principal point of contact for PHAs. Headquarters 
will coordinate its review with the local HUD Field Offices on issues 
involving such matters as PHA capacity and capital fund annual plans, 
Declarations of Trust, etc. PHAs must consult with the local HUD Field 
Office early in the development of the financing proposal as it relates 
to those matters. Particular attention should be given to the 
relationship of the items currently in the PHA Plan and the need to 
amend the Plan to incorporate the work and costs associated in their 
capital or operating fund financing proposal. Public housing 
requirements triggered by the use of financing proceeds (such as 
approval of acquisition or development proposals) would remain 
unchanged by this proposed rule.

IV. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in this rule have 
been submitted to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In accordance 
with the Paperwork Reduction Act, 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 OMB 
control number.
    The burden of the information collections in this proposed rule is 
estimated as follows:

                                       Reporting and Recordkeeping Burden
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                                                                                   Estimated
                                         Number of     Number of responses per    average time      Estimated
          Section reference               parties             respondent        for requirement   annual burden
                                                                                   (in hours)       (in hours)
----------------------------------------------------------------------------------------------------------------
Sections 9 and 30 of the U.S.                     50   1 Each (50)............           15.45              773
 Housing Act of 1937.
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    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning this 
collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this rule. Under the provisions 
of 5 CFR part 1320, OMB is required to make a decision concerning this 
collection of information between 30 and 60 days after today's 
publication date. Therefore, a comment on the information collection 
requirements is best assured of having its full effect if OMB receives 
the comment within 30 days of today's publication. This time frame does 
not affect the deadline for comments to the agency on the proposed 
rule, however. Comments must refer to the proposal by name and docket 
number (FR-4843) and must be sent to: HUD Desk Officer, Office of 
Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Fax number: (202) 395-6974; and Aneita Waites, 
Office of Public and Indian Housing, U.S. Department of Housing and 
Urban Development, Room 4116, 451 Seventh Street, SW., Washington, DC 
20410-5000.

Regulatory Planning and Review

    OMB reviewed this rule under Executive Order 12866 (entitled 
``Regulatory Planning and Review''). OMB determined that this rule is a 
``significant regulatory action'' as defined in 3(f) of the order 
(although not an economically significant regulatory action, as 
provided under section 3(f)(1) of the order). The docket file is 
available for public inspection between the hours of 8 a.m. and 5 p.m. 
weekdays in the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Room 10276, Washington, DC 20410-0500. Due to security measures at the 
HUD Headquarters building, an advance appointment to review the docket 
file must be scheduled by calling the Regulations Division at (202) 
708-3055 (this is not a toll-free number). Hearing- or speech-impaired 
individuals may access this number through TTY by calling the toll-free 
Federal Information Relay Service at (800) 877-8339.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments and the private sector. This proposed rule does

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not impose any federal mandate on any state, local, or tribal 
government or the private sector within the meaning of UMRA.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969 (42 U.S.C. 4332(2)(C)). The Finding of No Significant 
Impact is available for public inspection between the hours of 8 a.m. 
and 5 p.m. weekdays in the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Room 10276, Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The proposed regulatory changes will allow PHAs additional flexibility 
in using their capital and operating funds. However, the decision 
whether to use this capability is up to each PHA. Although some small 
entities may participate in the program, the rule does not impose any 
legal requirement or mandate upon them and, accordingly, will not have 
a significant impact on them. Therefore, the undersigned certifies that 
this rule will not have a significant economic impact on a substantial 
number of small entities, and an initial regulatory flexibility 
analysis is not required.
    Notwithstanding HUD's determination that this rule will not have a 
significant economic effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

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

Catalog of Federal Domestic Assistance Number

The Catalog of Federal Domestic Assistance number for 24 CFR parts 
905 and 990 is 14.850.

List of Subjects

24 CFR Part 905

    Grant programs--housing and community development, modernization, 
Public housing, Reporting and recordkeeping requirements.

24 CFR Part 990

    Grant programs--housing and community development, modernization, 
Public housing, Reporting and recordkeeping requirements.

    For the reasons discussed in this preamble, HUD proposes to amend 
24 CFR parts 905 and 990, as follows:

PART 905--THE PUBLIC HOUSING CAPITAL FUND PROGRAM

    1. The authority citation for 24 CFR part 905 is revised to read as 
follows:

    Authority: 42 U.S.C. 1437g, 42 U.S.C. 1437z-2, and 3535(d).

    2. Redesignate Sec.  905.10 and Sec.  905.120 as subpart A and add 
a heading for subpart A to read as follows:.

Subpart A--General

    3. Add and reserve subparts B through F, and add subpart G, 
consisting of Sec. Sec.  905.700 through 905.715, to read as follows:

Subpart G--Use of Capital Funds For Financing

Sec.
905.700 Purpose and description.
905.705 Program requirements.
905.710 Submission requirements.
905.715 HUD review and approval.


Sec.  905.700  Purpose and description.

    (a) This subpart sets forth the requirements necessary for a PHA to 
obtain HUD approval to borrow private capital and pledge a portion of 
its annual capital fund grant or public housing assets and other public 
housing property of the PHA as security.
    (b) Under the Capital Fund, PHAs are permitted to borrow private 
capital to finance public housing development or modernization 
activities. A PHA may use a portion of its capital fund for debt 
service payments and usual and customary financing costs associated 
with public housing development or modernization (including public 
housing in mixed-finance developments). Additionally, a PHA undertaking 
such financing activities may, subject to HUD's written approval, grant 
a security interest in its future annual capital fund grants, which 
shall be subject to the appropriation of those funds by Congress. The 
PHA's financing activities are not obligations or liabilities of the 
federal government. The federal government does not assume any 
liability with respect to any such pledge of future appropriations, and 
the federal government neither guarantees nor provides any full faith 
and credit for these financing transactions.


Sec.  905.705  Program requirements.

    (a) A PHA shall obtain written HUD approval for all capital fund 
financing transactions that pledge, encumber, or otherwise provide a 
security interest in public housing assets or other property, including 
capital funds, and use capital funds for the payment of debt service or 
other financing costs. HUD approval shall be based on:
    (1) The ability of the PHA to complete the financing transaction 
along with the associated improvements and to repay the debt;
    (2) The reasonableness of the provisions in the capital fund 
financing proposal considering the other pledges or commitments of 
public housing assets, as well as the pledge being proposed; and
    (3) Whether the PHA meets the requirements of this subpart.
    (b) Any pledge of future year capital funds under this section is 
subject to the availability of appropriations by Congress for that 
year.
    (c) Conditions on Use--(1) Development. Any new public housing 
developed using amounts under this Part (including proceeds from 
financing authorized under this Part) shall be operated under the terms 
and conditions applicable to public housing during the 40-year period 
that begins on the date on which the project becomes available for 
occupancy, except as otherwise provided in the 1937 Act.
    (2) Modernization. Any public housing or portion thereof that is 
modernized using amounts under this Part (including proceeds from 
financing authorized under this Part) shall be maintained and operated 
during the 20-year period that begins on the latest date on which the 
modernization is

[[Page 39550]]

completed, except as otherwise provided in the 1937 Act.
    (3) Operation. Any public housing project operated using operating 
fund amounts may not be disposed of before the expiration of the 10-
year period beginning upon the conclusion of the fiscal year for which 
such amounts were provided, except as otherwise provided in the 1937 
Act.
    (4) Applicability of latest expiration date. Public housing subject 
to these use conditions, or to any other provision of law mandating the 
operation of housing as public housing for a specific length of time, 
shall be maintained and operated as required until the latest such 
expiration date.
    (5) Any public housing rental projects upon which the financing 
proceeds will be used must show evidence of an effective declaration of 
trust being recorded in first position.
    (d) Public Housing Assessment System (PHAS) designation. Generally, 
a PHA shall be designated a Standard Performer or High Performer under 
PHAS, and must be a standard performer or higher on the management and 
financial condition indicators. HUD will consider requests from PHAs 
designated as Troubled under PHAS when the PHA is able to show that it 
has developed appropriate management and financial capability and 
controls that demonstrate its ability to successfully undertake the 
capital fund financing proposal.
    (e) Management capacity. A PHA shall have the capacity to undertake 
and administer private financing and construction or modernization of 
the size and type contemplated. In order to determine capacity, HUD may 
require the PHA to submit a Management Assessment conducted by an 
independent third party, in a form and manner prescribed by HUD.
    (f) Existing financing. A PHA shall identify the nature and extent 
of any existing encumbrances, pledges, or other financing commitments 
of public housing funds undertaken by the PHA.
    (g) Need for financing. A PHA must complete a physical needs 
assessment at the project level, in the form and manner prescribed by 
HUD, that covers the PHA's entire public housing portfolio for the term 
of the financing and takes into consideration existing needs and the 
life cycle repair and replacement of major building components. For 
modernization, the activity to be financed must be identified as a need 
in the physical needs assessment. Based on the physical needs 
assessment, the PHA must demonstrate its ability to maintain its entire 
public housing portfolio in accordance with the physical conditions 
standards prescribed by HUD. In making this demonstration, PHAs must 
reduce any projected future capital fund program grants to account for 
planned or anticipated activities that would have the effect of 
reducing or otherwise limiting the availability of future capital fund 
program grants. Notwithstanding the above, PHAs that pledge and use 
only Replacement Housing Factor Funds (RHF) in their capital fund 
financing transactions are not required to complete physical needs 
assessments.
    (h) Capital plans. (1) The PHA's annual and 5-year capital plans 
shall identify:
    (i) How the proceeds of the financing will be used; and
    (ii) The amount of capital fund assistance that will be used 
annually for debt service and any other costs related to the financing.
    (2) The work described in the plan will be based on the physical 
needs assessment. The plans shall detail work items (e.g., roof 
replacement, window replacement) by development. These work items will 
constitute performance measures upon which the PHA's performance will 
be evaluated. A general representation of the work (e.g., 
rehabilitation of Sunshine Homes development) is not sufficient.
    (3) The capital plan submission to the Field Office shall include a 
copy of the physical needs assessment described in Sec.  905.705(g).
    (4) Financing proceeds under this part may not be used for 
administration or central office cost center costs (except for mixed-
finance projects), management improvements, or upon non-viable 
projects, such as those subject to required conversion. Other than 
predevelopment costs, proceeds may not be used to reimburse costs 
already incurred.
    (i) Amount of capital fund for debt service. (1) In general, a PHA 
shall not pledge more than 33 percent of its annual capital fund grant 
for debt service payments, assuming level capital fund Congressional 
appropriations over the term of the debt obligation and any reduction 
attributable to activities projected by the PHA to occur during the 
term of the financing, such as demolition, disposition, or conversion 
of public housing units or other occurrences that could limit the 
availability of capital fund program funds, including a voluntary 
compliance agreement.
    (2) A PHA may be able to pledge more than 33 percent of its annual 
capital fund grant for debt service payments when the PHA is able to 
demonstrate, to HUD's satisfaction, that the remainder of its annual 
capital fund grant is sufficient to meet other capital improvement 
needs during the term of the financing. This demonstration shall be at 
a project level and include cost estimates to maintain each project on 
an annual basis.
    (3) In general, a PHA may pledge up to 50 percent, but use up to 
100 percent of any RHF grants for debt service payments. A RHF grant 
shall be used only to develop replacement public housing rental units 
in accordance with Sec.  905.10 and 24 CFR part 941.
    (j) Terms and conditions of financing. The terms and conditions of 
all financing shall be reasonable based on current market conditions. 
The financing documents shall include the following, as applicable:
    (1) Term. The term of the capital fund financing transaction shall 
not be more than 20 years. A longer term may be approved based on 
compelling circumstances identified by the PHA. All capital fund 
financing transactions shall be fully amortizing.
    (2) Acceleration. The financing documents shall provide that no 
acceleration is permitted.
    (3) Public housing assets. A PHA may not pledge any public housing 
assets unless specifically approved by HUD. PHAs seeking approval of a 
pledge of public housing assets must submit documentation to HUD that 
details the nature and priority of the pledge.
    (4) Variable interest rate. Variable interest rates may be approved 
subject to any conditions HUD may determine appropriate.
    (5) Other Pledges or Commitments. PHAs seeking approval of a pledge 
of public housing assets must describe the nature and extent of 
existing commitments or pledges of public housing assets, providing 
documentation of such other commitments or pledges to the extent 
required by HUD.
    (6) Financing documents must include any other terms and conditions 
as required by HUD.
    (k) Fairness opinion. The PHA shall provide an opinion, in a form 
and manner prescribed by HUD, from a qualified, independent, third-
party financial advisor attesting that the terms and conditions of the 
proposed financing transaction are reasonable given current market 
conditions with respect to such matters as interest rate, fees, costs 
of issuance, call provisions, and reserve fund requirements.
    (l) Construction management and financial controls. (1) The PHA 
shall have a plan describing how the PHA will ensure that:

[[Page 39551]]

    (i) Adequate controls are in place regarding the use of capital 
fund financing proceeds; and
    (ii) The improvements will be developed and completed in a timely 
manner consistent with the contract documents.
    (2) This plan shall contain protocols and financial control 
mechanisms that address the design of the improvements, construction 
inspections, construction draws, and requisition approval checks and 
balances. A PHA that is designated Troubled under PHAS, or other PHAs 
as determined by HUD, may be required to institute risk mitigation 
measures to ensure that the funds are used properly and for the 
purposes intended.
    (m) Work items. To the extent any changes in work items financed by 
capital fund financing proceeds meet or exceed the following threshold 
requirements determined by HUD, PHAs must obtain written approval of 
amendments to their capital fund financing proposal from HUD:
    (1) A change in the type of activity being financed (e.g., if the 
approved proposal contemplated the proceeds being used for 
modernization, but after the proposal is approved, the PHA decides 
instead to pursue development);
    (2) A change in the project being modernized or developed with the 
proceeds;
    (3) A reduction of 20 percent or more in the number of public 
housing units being modernized; or
    (4) An increase of 20 percent or more of the cost of nondwelling 
space.
    (n) Applicability of other federal requirements. The proceeds of 
capital fund financing are subject to all laws, regulations, and other 
requirements applicable to the use of capital fund grants made under 24 
CFR part 905, unless otherwise approved by HUD in writing.
    (o) Performance measures. In its annual capital plans, the PHA is 
required to identify specific items of work that will be accomplished 
using the proceeds of the proposed financing. The items, which shall be 
quantifiable, shall be the basis on which HUD evaluates a PHA's 
performance. Failure to meet the performance measures may result in:
    (1) Failure to receive HUD approval for future financing 
transactions;
    (2) Failure to be considered for future competitive grant programs; 
and
    (3) Other sanctions HUD deems appropriate and authorized by law or 
regulation.
    (p) Reporting requirements. (1) The PHA shall submit a performance 
and evaluation report on a quarterly basis within 30 days of the end of 
each quarter, as well as annually in the PHA plan, until a Cost 
Certification has been accepted by HUD.
    (2) A Cost Certification for a capital fund financing transaction 
must be included in a PHA's annual audit.


Sec.  905.710  Submission requirements.

    (a) All requests for HUD approval of capital fund financing 
transactions shall be submitted to the Assistant Secretary for Public 
and Indian Housing or the Assistant Secretary's designee. The PHA shall 
provide an original and two copies of each submission. The PHA also 
shall submit a copy to its local HUD Field Office.
    (b) Each financing proposal shall be tabbed and presented with the 
following information in the order listed:
    (1) PHA transmittal letter. A letter signed by the PHA Executive 
Director (or Chief Executive Officer, if applicable) transmitting the 
request for HUD approval of the Capital Fund financing transaction.
    (2) Term sheet. The HUD-prescribed Term Sheet describing the basic 
terms of the transaction and financing structure, including the amount 
of the financing, the term, interest rates, security, and reserve 
requirements.
    (3) Financing documents. A complete set of the financing documents 
that the PHA will execute in connection with the financing transaction. 
The financing documents must identify the nature and extent of any 
security being provided, as well as the position of any security 
interest. The financing documents are to be submitted to HUD only after 
they have been negotiated and agreed upon by the other parties to the 
transaction. HUD will not review preliminary documents that are still 
under negotiation.
    (4) Specific requests. A description of any specific HUD approvals, 
representations, or assurances required for closing.
    (5) Other documents as required by HUD.


Sec.  905.715  HUD review and approval.

    (a) After receipt of a capital fund financing proposal, HUD shall 
review it for completeness. HUD will return all incomplete or 
unapprovable proposals, identifying the deficiencies, and will not take 
any further action. HUD will also return proposals submitted by 
entities other than the PHA (e.g., the PHA's consultants). HUD shall 
review all complete proposals for compliance with the requirements set 
forth above. HUD may require the PHA to make modifications to any of 
the items submitted and may require the PHA to resubmit all or any 
portion of the proposal. After HUD determines that a proposal complies 
with all requirements, HUD shall notify the PHA in writing of its 
approval and any condition(s) of the approval.
    (b)(1) As applicable, with the approval letter HUD shall include 
two copies of a capital fund financing Amendment to Consolidated ACC 
(``Financing Amendment'').
    (2) Within 60 days of the closing, unless the time has otherwise 
been extended by HUD in writing, the PHA must submit:
    (i) Closing documents as directed by HUD; and
    (ii) All documents that require HUD to take certain actions, such 
as initiate debt service payments through HUD's automated systems.
    (3) Failure to provide the required documents to HUD within 60 days 
of HUD approval of the financing transaction may result in HUD 
rescinding its approval.

PART 990--THE PUBLIC HOUSING OPERATING FUND PROGRAM

    4. The authority citation for 24 CFR part 990 is revised to read as 
follows:

    Authority: 42 U.S.C. 1437g, 42 U.S.C. 1437z-2, and 3535(d).

    5. Add subpart K, consisting of Sec. Sec.  990.400 through 990.415, 
to read as follows:

Subpart K--Use of Operating Funds for Financing

Sec.
990.400 Purpose and description.
990.405 Program requirements.
990.410 Submission requirements.
990.415 HUD review and approval.


Sec.  990.400  Purpose and description.

    (a) This subpart sets forth the requirements necessary for a PHA to 
obtain HUD approval to borrow private capital and pledge a portion of 
its annual operating subsidy or other public housing assets as 
security.
    (b) Subject to HUD approval, PHAs may pledge operating cash flow 
from a project or excess cash from a project that exceeds 3 months of 
operating expenses. Operating cash flow from a project may be used to 
pay debt service associated with a mixed-finance project. Where such 
debt service is received by a PHA, those funds must be treated as 
operating subsidy. Under the Operating Fund, PHAs are permitted to 
borrow private capital to finance public housing development or 
modernization activities. Additionally, a PHA undertaking such 
financing activities may, subject to HUD's written approval, pledge and 
grant a security interest in

[[Page 39552]]

its property, including future annual operating subsidy, which shall be 
subject to the appropriation of those funds by Congress. In all 
circumstances, the PHA's financing activities are not obligations or 
liabilities of the federal government. The federal government does not 
assume any liability with respect to any such pledge of future 
appropriations, and the federal government neither guarantees nor 
provides any full faith and credit for these financing transactions.


Sec.  990.405  Program requirements.

    (a) A PHA must obtain written HUD approval for all operating fund 
financing transactions. HUD approval shall be based on:
    (1) The ability of the PHA to complete the financing transaction 
along with the associated improvements;
    (2) The reasonableness of the provisions in the operating fund 
financing proposal considering the other pledges or commitments of 
public housing assets, as well as the pledge being proposed;
    (3) The Capital Fund must be used first before any financing from 
the Operating Fund;
    (4) The ability of the PHA to maintain and operate the financed 
project(s), as well as repay debt service; and
    (5) Whether the PHA meets the requirements of this subpart.
    (b) All public housing projects for the PHA must be in compliance 
with this part, must be under project-based accounting, and must have 
submitted an audited financial statement for each project being 
financed.
    (c) Any pledge of future year operating subsidy under this section 
is subject to the availability of appropriations by Congress for that 
year.
    (d) Conditions on Use--(1) Development. Any new public housing 
developed using amounts under this program (including proceeds from 
financing authorized under this Part) shall be operated under the terms 
and conditions applicable to public housing during the 40-year period 
that begins on the date on which the project (or stage of the project) 
becomes available for occupancy, except as otherwise provided in the 
1937 Act.
    (2) Modernization. Any public housing or portion thereof that is 
modernized using amounts under this Part (including proceeds from 
financing authorized under this Part) shall be maintained and operated 
during the 20-year period that begins on the latest date on which the 
modernization is completed, except as otherwise provided in the 1937 
Act.
    (3) Operation. Any public housing project operated using amounts 
provided under this part may not be disposed of before the expiration 
of the 10-year period beginning upon the conclusion of the fiscal year 
for which such amounts were provided, except as otherwise provided in 
the 1937 Act.
    (4) Applicability of latest expiration date. Public housing subject 
to these use conditions, or to any other provision of law mandating the 
operation of housing as public housing for a specific length of time, 
shall be maintained and operated as required until the latest such 
expiration date.
    (5) Any public housing rental projects upon which the financing 
proceeds will be used must show evidence of an effective declaration of 
trust being recorded in first position.
    (e) Public Housing Assessment System (PHAS) designation. Generally, 
a PHA shall be designated a Standard Performer or High Performer under 
PHAS and must be a standard performer or higher on the management and 
financial condition indicators. HUD will consider requests from PHAs 
designated as Troubled under PHAS when the PHA is able to show that it 
has developed appropriate management and financial capability and 
controls that demonstrate its ability to successfully undertake the 
Operating Fund financing proposal.
    (f) Management capacity. A PHA shall have the capacity to undertake 
and administer private borrowing and construction or modernization of 
the size and type contemplated. In order to determine capacity, HUD may 
require the PHA to submit a Management Assessment conducted by an 
independent third party, in a form and manner prescribed by HUD.
    (g) Existing financing. A PHA shall identify the nature and extent 
of any existing encumbrances, pledges, or other financing commitments 
of public housing funds undertaken by the PHA.
    (h) Need for financing. A PHA must complete a physical needs 
assessment at the project level, in the form and manner prescribed by 
HUD, that covers the PHA's entire public housing portfolio for the term 
of the financing and takes into consideration the life cycle repair and 
replacement of major building components. For modernization, the 
activity to be financed must be identified as a need in the physical 
needs assessment. Based on the physical needs assessment, the PHA must 
demonstrate that the capital improvements to be financed cannot be 
addressed through the Capital Fund program due to the needs and 
priorities at other projects.
    (i) Capital plans. The PHA must submit an annual capital plan for 
the use of proceeds from operating fund financing in the same manner as 
if it were a grant under the Capital Fund Program (see 24 CFR part 
905).
    (1) The PHA's annual plans shall identify how the proceeds of the 
financing will be used.
    (2) The work described in the capital plan will be based on the 
physical needs assessment described in Sec.  990.405(h). The annual 
capital plan shall detail work items (e.g., roof replacement, window 
replacement) by development. These work items will represent 
Performance Measures upon which the PHA's performance will be 
evaluated. A general representation of the work (e.g., rehabilitation 
of Sunshine Homes development) is not sufficient.
    (3) The capital plan submission to the Field Office shall include a 
copy of the physical needs assessment described in Sec.  905.405(h) of 
this chapter.
    (4) Financing proceeds under this part may not be used for 
administration or central office cost center costs (except for mixed-
finance projects), management improvements, or non-viable projects, 
such as those subject to required conversion. Other than predevelopment 
costs, proceeds may not be used to reimburse costs already incurred.
    (j) Amount of Operating Fund for debt service. To be approved for 
financing activities under the Operating Fund program, the PHA must 
demonstrate that the project has sufficient resources to meet the 
financing obligations. Generally, the project being financed must 
demonstrate debt service coverage of 3.0. Additionally, each project 
must set aside, in a restricted account, 12 months of debt service 
payments.
    (k) Independent Feasibility Analysis. As part of its submission 
package requesting HUD approval for its financing, the PHA must submit 
a financial feasibility analysis of each affected project, prepared by 
an independent party, in a manner to be prescribed by HUD. This 
feasibility analysis must demonstrate the ability of the subject 
project to support the debt service payments, other financing costs, 
and operating costs.
    (l) Terms and conditions of financing. The terms and conditions of 
all financings shall be reasonable based on current market conditions. 
The financing documents shall include the following, as applicable:
    (1) Term. The term of the operating fund financing transaction 
shall not be more than 10 years. A longer term may be approved based on 
compelling circumstances identified by the PHA.

[[Page 39553]]

All Operating Fund financing transactions shall be fully amortizing.
    (2) Acceleration. The financing documents shall provide that 
acceleration is not permitted.
    (3) Pledge of public housing assets. A PHA may not pledge any 
public housing assets, unless specifically approved by HUD. PHAs 
seeking HUD approval of a pledge of public housing assets must submit 
documentation to HUD that details the nature and priority of the 
pledge.
    (4) Variable interest rate. Variable interest rates may be approved 
subject to any conditions HUD may determine appropriate.
    (5) Other Pledges or Commitments. PHAs seeking approval of a pledge 
of public housing assets must describe the nature and extent of 
existing commitments or pledges of public housing assets, providing 
documentation of such other commitments or pledges to the extent 
required by HUD.
    (6) Financing documents must include any other terms and conditions 
as required by HUD.
    (m) Fairness opinion. The PHA shall provide an opinion, in a form 
and manner prescribed by HUD, from a qualified, independent, third-
party financial advisor attesting that the terms and conditions of the 
proposed financing transaction are reasonable given current market 
conditions with respect to such matters as interest rate, fees, costs 
of issuance, call provisions, and reserve fund requirements.
    (n) Construction management and financial controls. (1) The PHA 
shall have a plan describing how the PHA will ensure that:
    (i) Adequate controls are in place regarding the use of the 
operating fund financing proceeds; and
    (ii) The improvements will be developed and completed in a timely 
manner consistent with the contract documents.
    (2) This plan shall contain protocols and financial control 
mechanisms that address the design of the improvements, construction 
inspections, construction draws, and requisition approval checks and 
balances. A PHA that is designated Troubled under PHAS, or other PHAs 
as determined by HUD, may be required to institute risk mitigation 
measures, as approved by HUD, to ensure that the funds are used 
properly and for the purposes intended.
    (o) Work items. To the extent any changes in work items financed by 
operating fund financing proceeds meet the following threshold 
requirements determined by HUD, PHAs must obtain written approval of 
amendments to their operating fund financing proposal from HUD:
    (1) A change in the type of activity being financed (e.g., if the 
approved proposal contemplated the proceeds being used for 
modernization, but after the proposal is approved, the PHA decides 
instead to pursue development);
    (2) A change in the project being modernized or developed with the 
proceeds;
    (3) A reduction of 20 percent or more in the number of public 
housing units being modernized; or
    (4) An increase of 20 percent or more of the cost of nondwelling 
space.
    (p) Applicability of other federal requirements. The proceeds of 
the operating fund financing shall be treated as capital funds under 24 
CFR part 905, and are subject to all laws, regulations, and other 
requirements applicable to the use of capital fund grants made under 24 
CFR part 905, unless otherwise approved by HUD in writing.
    (q) Performance measures. The PHA is required to identify in its 
annual capital plans specific items of work that will be accomplished 
using the proceeds in the proposed financing proposal. The items, which 
shall be quantifiable, shall be the basis on which HUD evaluates a 
PHA's performance. Failure to meet the performance measures may result 
in:
    (1) Failure to receive HUD approval for future financing 
transactions;
    (2) Failure to be considered for future competitive grant programs; 
and
    (3) Other sanctions HUD deems appropriate and as authorized by law 
or regulation.
    (r) Reporting requirements. (1) The PHA shall submit a performance 
and evaluation report that includes, in addition to information on 
capital expenses and expenditures, a narrative describing the progress 
that has been made to date with the improvements associated with the 
operating fund financing transaction. At a minimum, the narrative shall 
discuss the progress of the construction against the schedules, any 
problems encountered, cost overruns, and any associated claims or 
litigation. The performance and evaluation report should be submitted 
to the HUD Field Office on a quarterly basis within 30 days of the end 
of each quarter, as well as annually in the PHA plan, until a Cost 
Certification has been accepted by HUD.
    (2) A Cost Certification for an operating fund financing 
transaction must be included in a PHA's annual audit.
    (s) Type of Security Interest Pledged. As part of its submission 
package, the PHA must state the type/nature of the security interest 
that will be pledged.
    (t) Eligibility of Operating Subsidy for Costs of Repaying Debt. 
Operating subsidy made available in a fiscal year may be used for the 
costs of repaying debt incurred to finance the rehabilitation and 
development of public housing units. Current operating subsidy may be 
used for the costs of repaying debt for prior rehabilitation and 
development of public housing units that become due in the current 
calendar year.


Sec.  990.410  Submission requirements.

    (a) All requests for HUD approval of operating fund financing 
transactions shall be submitted to the Assistant Secretary for Public 
and Indian Housing or the Assistant Secretary's designee. The PHA shall 
provide an original and two copies of each submission. The PHA also 
shall submit a copy to its local HUD Field Office.
    (b) Each financing proposal shall be tabbed and presented with the 
following information in the order listed:
    (1) PHA transmittal letter. A letter signed by the PHA Executive 
Director (or Chief Executive Officer, if applicable) transmitting the 
request for HUD approval of the operating fund financing transaction.
    (2) Term sheet. The HUD-prescribed Term Sheet describing the basic 
terms of the transaction and financing structure, including the amount 
of the financing, the term, interest rates, security, and reserve 
requirements.
    (3) Financing documents. A complete set of the financing documents 
that the PHA will execute in connection with the financing transaction. 
The financing documents must identify the nature and extent of any 
security being provided, as well as the position of any security 
interest. The financing documents are to be submitted to HUD only after 
they have been negotiated and agreed upon by the other parties to the 
transaction. HUD will not review preliminary documents that are still 
under negotiation.
    (4) Specific requests. A description of any specific HUD approvals, 
representations, or assurances required for closing.
    (5) Other documents as required by HUD.


Sec.  990.415  HUD review and approval.

    (a) After receipt of an operating fund financing proposal, HUD 
shall review the proposal for completeness. HUD will return all 
incomplete proposals, identifying the deficiencies, and will not take 
any further action. HUD will also return proposals submitted by

[[Page 39554]]

entities other than the PHA (e.g., the PHA's consultants). HUD shall 
review all complete proposals for compliance with the requirements set 
forth above. HUD may require the PHA to make modifications to any of 
the items submitted and may require the PHA to resubmit all or any 
portion of the proposal. After HUD determines that a proposal complies 
with all requirements, HUD shall notify the PHA in writing of its 
approval and any condition(s) of the approval.
    (b)(1) As applicable, with the approval letter HUD shall include 
two copies of an operating fund financing Amendment to Consolidated ACC 
(``Financing Amendment'').
    (2) Within 60 days of the closing, unless the time otherwise has 
been extended by HUD in writing, the PHA must submit:
    (i) Closing documents as directed by HUD; and
    (ii) All documents that HUD requires as a condition for it to take 
certain actions, such as initiate debt service payments through HUD's 
automated systems.
    (3) Failure to provide the required documents to HUD within 60 days 
of HUD approval of the financing transaction may result in HUD 
rescinding its approval.

    Dated: June 8, 2007.
Orlando J. Cabrera,
Assistant Secretary for Public and Indian Housing.
[FR Doc. E7-13846 Filed 7-17-07; 8:45 am]
BILLING CODE 4210-67-P