[Federal Register Volume 77, Number 131 (Monday, July 9, 2012)]
[Rules and Regulations]
[Pages 40253-40255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-16731]


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DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3560

RIN 0575-AC66


Reserve Account

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

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SUMMARY: Through this action, the Rural Housing Service (RHS) is 
amending its regulation to change the Reserve Account for new 
construction for the Sections 514/516 Farm Labor Housing (FLH) program 
and the Section 515 Rural Rental Housing (RRH) program. This action 
will not affect reserve accounts for existing portfolios.

DATES: Effective Date: This rule is effective September 7, 2012.

FOR FURTHER INFORMATION CONTACT: Michael Steininger, Acting Director, 
Multi-Family Housing Preservation and Direct Loan Division, Rural 
Housing Service, U.S. Department of Agriculture, STOP 0781, 1400 
Independence Avenue SW., Washington, DC 20250-0781. Telephone: 202-720-
1610 (this is not a toll-free number); email: 
[email protected].

SUPPLEMENTARY INFORMATION:

Classification

    This final rule has been determined to be not significant and was 
reviewed by the Office of Management and Budget (OMB) under Executive 
Order 12866.

Civil Justice Reform

    This final rule has been reviewed under E.O. 12988, Civil Justice 
Reform. If this final rule is adopted: (1) Unless otherwise 
specifically provided, all State and local laws that are in conflict 
with this rule will be preempted; (2) no retroactive effect will be 
given to this rule except as specifically prescribed in the rule; and 
(3) administrative proceedings of the National Appeals Division of the 
Department of Agriculture (7 CFR part 11) must be exhausted before 
bringing suit.

Regulatory Flexibility Act

    The final rule has been reviewed with regard to the requirements of 
the Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has 
determined and certified by signature on this document that this rule 
will not have a significant economic impact on a substantial number of 
small entities. This rulemaking action does not involve a new or 
expanded program nor does it require any more action on the part of a 
small business than required of a large entity.

Paperwork Reduction Act

    There are no new reporting and recordkeeping requirements 
associated with this rule.

E-Government Act Compliance

    RHS is committed to complying with the E-Government Act, by 
promoting the use of the Internet and other information technologies in 
order to provide increased opportunities for citizen access to 
Government information, services, and other purposes.

Unfunded Mandate Reform Act (UMRA)

    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for state, local and tribal 
governments or the private sector. Therefore, this rule is not subject 
to the requirements of Sections 202 and 205 of the UMRA.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' RHS determined that the proposed 
action does not constitute a major Federal action significantly 
affecting the quality of the environment. Therefore in accordance with 
the National Environmental Policy Act of 1969, Public Law 91-190, an 
Environmental Impact Statement is not required.

Programs Affected

    The programs affected by this regulation are listed in the Catalog 
of Federal Domestic Assistance under numbers 10.405--Farm Labor Housing 
Loans and Grants; 10.415--Rural Rental Housing Loans; and 10.427--Rural 
Rental Assistance Payments.

Federalism

    For the reasons discussed above, this rule does not have 
significant Federalism implications that warrant the preparation of a 
Federalism assessment under Executive Order 13132.

[[Page 40254]]

Intergovernmental Consultation

    These loans are subject to the provisions of E.O. 12372 which 
require intergovernmental consultation with state and local officials. 
RHS conducts intergovernmental consultations for each loan in a manner 
delineated in 7 CFR part 1940, subpart J (available in any Rural 
Development office and on the Internet at http://www.rurdev.usda.gov).

Background Information

    In the past, Rural Development based its reserve account on a set 
percentage of a property's total development cost (TDC). With this 
final rule Rural Development will now base the reserve account amount 
on a life-cycle analysis or Capital Needs Assessment (CNA). Either 
reserve account analysis that meets Rural Development approval will be 
prepared by a third-party. The reserve account analysis will be used to 
determine the expected useful life of the building components and 
furnishings and to determine which building components or furnishings 
are the most cost efficient over the life of the building. The reserve 
account deposit level will be maintained through steady deposits to 
meet the needs of the project as they become due. The exact 
contribution amounts will be articulated in the borrower's loan 
agreement. Adjustments may be made at five or ten year intervals, 
either CNA or as part of the original analysis. Any adjustments that 
were not reflected in the original loan agreement will be reflected in 
an amendment to the loan agreement. The requirement for a reserve 
account analysis will be used for new construction rental housing 
funded under Sections 514/516 and Section 515 of the Housing Act of 
1949. The new requirement is intended to assure quality construction as 
well as long term viability of the complexes. Reserve levels will be 
based on life cycle costs or capital needs in order to ensure necessary 
resources are available when needed to replace essential building 
components. Current agency regulations require an annual minimum 
deposit of 1 percent of the TDC be put in a reserve account for FLH and 
RRH programs. The Agency has found over the years that the 1 percent 
requirement does not necessarily correlate to the long term needs of 
the property. This final regulatory change will ensure that reserve 
accounts properly sized to meet the capital needs anticipated at the 
time of construction. Due to the administrative burden involved, this 
change will only affect reserve account requirements of new 
construction rental housing funded under Sections 515 RRH or Sections 
514/516 FLH.

Public Comments

    The Agency received the following comments as a result of the 
publication as a Proposed Rule published in the Federal Register on 
April 5, 2007 (72 FR 16730-16731).
    The Agency received eight responses to the proposed regulatory 
change. The commentators represented Rural Development employees who 
work with the Multi-Family Housing Direct Programs, a Multi-Family 
developer and rental property owner, and Interest Groups. The comments 
are summarized as follows:
    1. Defining the formula that will be used in the life cycle 
analysis. A commenter suggested defining the formula to be used in the 
life cycle analysis as this could serve as a chart. Having the chart 
could alleviate people's resistance to calculating a full life cycle 
analysis for each component in the Multi Family Housing Direct 
Projects. Defining the formula could ease the concerns of Multi-Family 
Housing (MFH) borrowers regarding what basis was used to calculate the 
life cycle costs.
    The Agency does not have a general formula that is used for the 
life cycle cost analysis. The life cycle cost analysis is a 
professional report that is performed by a third-party that primarily 
describes a detailed analysis and review of the components and 
estimates the replacement cost in the future. The life cycle cost 
analysis is defined in 7 CFR 3560.11. The Agency reviews the results of 
the life cycle cost analysis for its acceptability and compliance with 
the definition contained in 7 CFR 3560.11. The Agency has made no 
changes in response to this comment.
    2. Increasing the Reserve Fund Requirement in excess of 1 percent, 
addressing the overcharging of gross rental incomes and the over-
inflation of property taxes which are causes of underfunded reserve 
accounts. Two commenters supported increasing the amount of 
contribution to the reserve account in excess of 1 percent as the 
commenters think the current system requiring this funding level is 
flawed and inadequate in regards to providing funding for improvements 
and/or renovations to existing properties. The comments suggested an 
increase in the amount of the contribution to the reserve account is a 
step in the right direction for newly built and rehabilitated 
properties in the future. Their comments also mentioned the gross 
overcharging of property management related costs that generally range 
from 20 percent to 30 percent of gross rental incomes. The private 
sector residential property management costs typically run less than 8 
percent. Lastly, they discussed the over-inflation of property taxes 
which are causes of underfunded reserve accounts. Management companies 
and owners do not have a personal risk at stake with the Section 515 
property and therefore fail to challenge their annual over-inflated tax 
bills and assessments. As a result, rent income funding that could be 
used to properly fund reserve accounts instead goes to the local 
Government. The Agency will not make a change to the regulation in 
response to these comments. The goal of the regulation is to move the 
reserve deposits off a percentage basis and base the reserve account 
amount on the facts of the CNA or life cycle cost analysis. The Agency 
agrees that the reserve accounts based on a percentage can be 
underfunded and the change to the reserve account rule should help with 
that problem for new construction. While these comments related to 
operating expense are appreciated, the focus of this change will remain 
solely on properly sizing reserve accounts.
    3. One commentator also agreed with the change to the reserve 
account requirements as the change would benefit MFH projects by 
linking reserve account amounts to anticipated needs for repair and 
replacement of building systems and components instead of the current 1 
percent of TDC that are now set-aside in the reserve accounts.
    4. Two commentators agreed with the change to the reserve account 
requirements, but cautioned the Agency that it might be cost 
prohibitive for smaller properties to review the CNA or life cycle cost 
analysis every 5 years. In response to this comment, the Agency has 
added a clause to the regulation that states contributions adjustments 
can be made every 5 or 10 years based on a revised CNA or as part of 
the original life cycle cost analysis. So a revised CNA will not be 
required in 5 years.
    5. Addressing the Reserve Requirements during ownership transfers 
and assumptions and/or subsequent loans. One commenter suggested in 
addition to reserve requirements for new construction, the rule should 
address reserve requirements during ownership transfers and assumptions 
and/or subsequent loans. The Agency does not see a need to adopt this 
comment because the change to the regulation only addresses new 
construction and the regulations at 7 CFR 3560.406(d)(5) provide 
adequate guidance concerning

[[Page 40255]]

reserve requirements meeting the capital needs of the property when 
there is an ``ownership transfer or sale''. The change in the 
regulation only concerns new construction so it does not address the 
reserve requirements in the case of a subsequent loan, with an 
ownership transfer or sale and without an ownership transfer of sale. 
The Agency does not plan on making a change to the regulation in 
response to this comment at this time.
    6. Changing the wording in Section 3560.65. A commenter recommended 
changing the wording in Section 3560.65, as the analysis is really 
based upon the CNA or the Life Cycle Cost Analysis, prepared by a 
consultant or architect hired by the developer, not developed by Rural 
Development. We would note that the language ``Acceptable to Rural 
Development'' still allows for the CNA to be prepared by others but 
establish Rural Development as the final approval authority. The Agency 
agrees and will make the change to the regulation.
    7. Performing a CNA every 5 years, incurring the cost of the 
assessment and sharing the information. Two commenters suggested that 
Rural Development perform a CNA every 5 years. The first of the two 
commenters suggested, if the cost of updating a CNA every 5 years is 
prohibitive for a specific project, it may be more appropriate to allow 
the Rural Development staff and the project management to conduct 
reviews, with a process for resolving disparities in their 
recommendations. The second of the two commenters suggested the Rural 
Development program incur the cost of the assessment and share the 
information and adjust the reserve requirements accordingly, as rents 
cannot be raised to an amount that will cover all current and future 
reserve expenses. Utilizing Rural Development staff and project 
management to update a CNA is a potentially beneficial practice, and 
the Agency understands that CNAs can be cost prohibitive. Therefore, a 
revision as to the regulation has been made to allow for contribution 
adjustments every 5 or 10 years rather than every 5 years. These 
updated CNAs must be paid for by the borrower and conducted by a third-
party.
    8. Basing the reserve account deposits on a CNA or Life Cycle Cost 
Analysis. A commentator agreed that the Agency should base the reserve 
account deposits on a CNA or life cycle cost analysis. By doing this, 
MFH projects would have better project cash flow and improved long term 
performance which would benefit the low-income families residing in 
these units and provide sufficient reserves to maintain these projects 
in the long term, as well as the communities in which these projects 
are located. There is no need to change the rule for this comment.

List of Subjects in 7 CFR Part 3560

    Accounting, Government property management, Grant programs--housing 
and community development, Insurance, Loan programs--Agriculture, Loan 
programs--housing and community development, Mortgage.

    Therefore, chapter XXXV, Title 7 of the Code of Federal 
Regulations, is amended as follows:

Part 3560--Direct Multi-Family Housing Loans and Grants

0
1. The authority citation for Part 3560 continues to read as follows:

    Authority: 42 U.S.C. 1480.

Subpart B--Direct Loan and Grant Origination

0
2. Section 3560.65 is revised to read as follows:


Sec.  3560.65  Reserve account.

    (a) For new construction, to meet major capital expenses of a 
housing project, applicants must establish and fund a reserve account 
that meets the requirements of Sec.  3560.306. The applicant must agree 
to make monthly contributions to the reserve account pursuant to a 
reserve account analysis which sets forth how the reserve account funds 
will meet the capital needs of the property over an acceptable 20-year 
period. The reserve account analysis is based on either a Capital Needs 
Assessment or life cycle cost analysis, provided and acceptable to 
Rural Development by the applicant. Adjustments may be made to the 
contribution amount at 5 or 10-year intervals, either through an 
updated Capital Needs Assessment or as part of the original life cycle 
cost analysis. The cost of conducting either a Capital Needs Assessment 
or life cycle cost analysis will be paid for by the applicant. The cost 
of the initial Capital Needs Assessment or life cycle cost analysis may 
be included in the loan financing.
    (b) For ownership transfers or sales, the requirements of Sec.  
3560.406(d)(5) will be met.
    (c) For other existing properties, at a minimum the borrower must 
agree to make monthly contributions to the reserve account at the rate 
of 1 percent annually of the amount of total development cost until the 
reserve account equals 10 percent of the total development cost.

     Dated: May 29, 2012.
Tammye Trevi[ntilde]o,
Administrator, Rural Housing Service.
[FR Doc. 2012-16731 Filed 7-6-12; 8:45 am]
BILLING CODE 3410-XV-P