[Federal Register Volume 78, Number 119 (Thursday, June 20, 2013)]
[Rules and Regulations]
[Pages 37106-37114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-14721]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 891

[Docket No. FR-5167-F-02]
RIN 2502-AI67


Streamlining Requirements Governing the Use of Funding for 
Supportive Housing for the Elderly and Persons With Disabilities 
Programs

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

ACTION: Final rule.

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SUMMARY: This final rule amends HUD's regulations governing the Section 
202 Supportive Housing for the Elderly Program (Section 202) and the 
Section 811 Supportive Housing for Persons with Disabilities Program 
(Section 811) to streamline the requirements applicable to Section 202 
and Section 811 mixed-finance developments. This rule removes 
restrictions on the portions of developments not funded through capital 
advances, lifts barriers on participation in the development of the 
projects, and eliminates burdensome funding requirements. These changes 
are anticipated to attract private capital and the expertise of the 
private developer community to create attractive and affordable 
supportive housing developments for the elderly and for persons with 
disabilities. Through this rule, HUD also brings up-to-date certain 
regulations governing all Section 202 and Section 811 developments, not 
solely mixed-finance developments. Overall, the changes made by this 
rule permit greater flexibility in the design of Section 202/811 units, 
and extend the duration of the availability of capital advance funds.
    This final rule is part of a larger effort to reform the Section 
202 and Section 811 programs, which will include implementation of the 
changes made to these programs by the Frank Melville Supportive Housing 
Investment Act of 2010 and the Section 202 Supportive Housing for the 
Elderly Act of 2010. A subsequent rule, which will focus on the 
statutory changes that require rulemaking for implementation, is 
expected to be published in 2013.

DATES: Effective Date: July 22, 2013.

FOR FURTHER INFORMATION CONTACT: Aretha Williams, Office of Housing 
Assistance and Grant Administration, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street SW., Room 6136, 
Washington, DC 20410-8000; telephone number 202-708-3000 (this is not a 
toll-free number). Persons with hearing or speech impairments may 
access this number via TTY by calling the toll-free Federal Relay 
Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose of the Regulatory Action

    The regulatory amendments made by this rule are designed to provide 
greater flexibility in the design, construction, and management of 
Section 202/811 mixed-finance developments, to increase such 
development. The Section 202/811 mixed-finance program, established by 
interim and final rules issued in 2003 and 2005,\1\ allows for the 
participation of the private developer community, leveraging their 
capital and expertise, to create attractive and affordable supportive 
housing developments for the elderly or persons with disabilities. In 
light of the current housing market, with limited private financing for 
the development of supportive housing, this rule streamlines 
requirements pertaining to mixed-finance developments to attract 
private capital for the development of mixed-finance housing. This rule 
allows for more flexibility in such areas as the drawdown of capital 
advance funds and noncapital advance funds and removes certain 
restrictions relating to noncapital advance funds. In addition, this 
rule would update certain regulations governing all Section 202 and 
Section 811 developments, which have not been updated since 2005, to 
conform to changes in law, policy, and practices that affect these 
developments.
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    \1\ See HUD rules published on December 1, 2003, at 68 FR 67316, 
and on September 13, 2005, at 70 FR 54200.
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B. Summary of the Major Provisions of the Regulatory Action

    This final rule updates the regulations governing mixed-finance 
developments for the Section 202 and Section 811 programs. This rule 
amends several definitions used in the mixed-finance development 
program, based on changes to these terms made by the Frank Melville 
Supportive Housing Investment Act of 2010 and the Section 202 
Supportive Housing for the Elderly Act of 2010. These changes lessen 
restrictions with respect to who can be an owner. In addition, this 
rule removes the restriction on using HUD funds for certain amenities, 
exempts contracts for sale of land between owner and sponsor from 
conflict of interest provisions, clarifies what constitutes substantial 
rehabilitation, requires smoke detectors

[[Page 37107]]

and alarm devices be installed in any dwelling or facility bedroom or 
other primary sleeping area, extends the duration of fund reservations 
for capital advances, provides that HUD's requirements applicable to 
capital advance units are not applicable to non-202/811 supported units 
in the project, permits mixed-finance developers to use low-income 
housing tax credits (LIHTCs) more effectively, permits noncapital 
advance funds to be disbursed before the drawdown of capital advance 
funds, and permits the use of funds for paying off bridge or 
construction financing or repaying or collateralizing bonds.

C. Costs and Benefits

    The regulations established by this final rule are limited in 
applicability to those Section 202 or Section 811 projects that apply 
as mixed-finance (Section 202/811 mixed finance projects). Section 202/
811 mixed-finance projects are those with private funding to supplement 
Federal funding. The only new requirement established by this final 
rule is a requirement that owners provide a smoke detector and alarm in 
every bedroom or primary sleeping area. Though this requirement is new 
to the program regulations, the requirement is supportive of the R2-R4 
multifamily standards in the International Building Code, the 
International Residential Code, the International Existing Building 
Code, and the International Property Maintenance Code, which apply in 
the vast majority of jurisdictions in the country through state or 
local adoption. Requiring smoke detectors is a requirement in most 
local code, and fire detectors are generally required for property 
insurance. Given the widespread requirement for smoke detectors, 
whether as a matter of state or local codes or for property insurance, 
the inclusion of such requirement in this regulation places no 
additional burden on any developer or owner complying with state or 
local codes. Additionally, the rule does not dictate a specific 
technology or product.
    The fact that smoke and fire detection equipment generally save 
lives and protect property in a cost effective way is well supported in 
the literatures.\2\ There may be some benefits to tenants and 
communities with existing projects if the improved clarity from HUD 
enables a dispute over smoke detector installation or maintenance to be 
resolved more quickly.
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    \2\ For example Liu Y, Mack KA, Diekman ST (2012) Smoke alarm 
giveaway and installation programs: an economic evaluation. American 
Journal of Preventive Medicine (4):385-91.
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    The primary focus of this rule is to expand flexibility in the 
program by removing previous prohibitions on amenities within Section 
202 and Section 811 developments, but not requiring owners to provide 
such amenities. The amenities are those that are fairly standard in 
today's apartments and will benefit the residents of program units and 
make HUD units more attractive and capable of attracting and retaining 
tenants.
    The final rule also removes the previous prohibition on healthcare 
facilities in mixed-finance Section 202 developments, but not within 
Section 811 developments, for the reasons discussed later in this 
preamble. Under the final rule, HUD now permits healthcare facilities 
in mixed-finance Section 202 developments so long as HUD does not 
finance the facilities, and the use of the facilities must be voluntary 
for the residents of the projects.
    The removal of the previous prohibitions on amenities and 
healthcare facilities makes it difficult to predict their impact on 
future Section 202 and 811 units, as the programs together produce only 
a few hundred developments a year (193 in 2008, 170 in 2009, and 143 in 
2010), the overall economic impact from these potentially small changes 
in development and unit configuration is expected to be small.
    A more detailed discussion of the costs and benefits of this rule 
is provided in section VI of this preamble.

II. Background

A. HUD's Section 202/811 Mixed-Finance Development Program

    The Section 202 and Section 811 programs were established to allow 
very low-income elderly persons and persons with disabilities the 
opportunity to live with dignity by providing affordable rental housing 
offering a range of supportive services to meet the needs of these 
populations. The American Homeownership and Economic Opportunity Act of 
2000 (Pub. L. 106-569, 114 Stat. 2944, approved December 27, 2000) 
(AHEO Act) amended the authorizing statutes for the Section 202 program 
(Section 202 of the Housing Act of 1959 (12 U.S.C. 1701q)) and the 
Section 811 program (Section 811 of the Cranston-Gonzalez National 
Affordable Housing Act of 1990 (42 U.S.C. 8013)) to allow for the 
participation of for-profit limited partnerships in the ownership of 
Section 202 and Section 811 supportive housing, which helped facilitate 
the use of low-income housing tax credits and mixed-finance methods to 
infuse private capital into Section 202 and Section 811 developments. 
HUD's regulations governing Section 202/811 mixed-finance development 
are found in 24 CFR part 891, subpart F. The Section 202 Supportive 
Housing for the Elderly Act of 2010 (Pub. L. 111-372) (Section 202 Act 
of 2010) and the Frank Melville Supportive Housing Investment Act of 
2010 (Pub. L. 111-374) (Melville Act) were both signed into law on 
January 4, 2011 (collectively, the Acts), and amended the authorizing 
statutes for Section 202 and Section 811, respectively.

III. The March 2012 Proposed Rule

    On March 28, 2012 (77 FR 18723), HUD published a proposed rule 
primarily to streamline the requirements for mixed-finance Section 202 
and Section 811 developments, and provide more flexibility for program 
participants. Current economic conditions have reduced the availability 
of private financing for the development of supportive housing. To 
attract needed private capital, HUD determined that amendments to the 
Section 202 and Section 811 program regulations were necessary to 
further streamline the mixed-finance development process for Section 
202 and 811 housing. While the existing regulations applicable to 
mixed-finance developments have facilitated the creation of 
approximately 1,017 mixed-finance units, they also, in certain 
circumstances, limit project sponsors from accessing private sector 
capital and expertise. The changes proposed in March 2012, as 
summarized below, and made final by this rule, provide mixed-finance 
owners with more options, better facilitate the use of low-income 
housing tax credits, and attract other private funding, and, thereby, 
promote the construction of supportive housing developments that 
include additional, non-Section 202/811 supported units for the elderly 
and persons with disabilities.
    The Section 202 Act of 2010 and the Melville Act amended the 
authorizing statutes for Section 202 and Section 811, respectively, and 
made important reforms to the Section 202 and Section 811 programs. 
While the majority of the reforms made by these Acts do not directly 
affect the Section 202/811 mixed-finance development program, HUD is 
taking the opportunity to update the definitions of ``private nonprofit 
organizations'' to conform to the Acts, as these definitions directly 
impact the mixed-finance program. The Section 202 Act of 2010 and the 
Melville Act provide a much-needed foundation for practical 
improvements to the Section

[[Page 37108]]

202 and Section 811 programs.\3\ The regulatory amendments in this rule 
build upon the Acts from the 111th Congress to further modernize the 
operation of Section 202 and Section 811 in the mixed-finance context.
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    \3\ HUD issued a notice (H 2012-8) entitled ``Updated 
Requirements for Prepayment and Refinance of Section 202 Direct 
Loans'' on May 4, 2012. See http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/notices/hsg. HUD 
also issued a Notice of Funding Availability on May 15, 2012, for 
the Section 811 Project Rental Assistance Demonstration program 
authorized by the Melville Act (funding provided under the 
Consolidated and Further Continuing Appropriations Act, 2012, Public 
Law 112-55, 125 Stat. 552). See http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/grants/fundsavail/nofa12/sec811PRAdemo.
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    The March 28, 2012, rule proposed to amend both the general section 
of regulations governing the Section 202 and Section 811 programs, and 
the sections in part 891 specifically governing the mixed-finance 
program. Key changes to the program regulations proposed by the March 
28, 2012, rule included the following:
     Establishing, in the case of a nonprofit organization 
sponsoring multiple developments, the criteria for transferring the 
responsibilities of a single-entity nonprofit owner of an individual 
development to the governing board of the sponsor that is the 
sponsoring organization of multiple developments;
     Revising, consistent with the Section 202 Act of 2010, the 
definition of ``private nonprofit organization'' to include for-profit 
limited partnerships of which the sole general partner is a for-profit 
corporation or a limited liability company that is wholly owned and 
controlled by one or more nonprofit organizations;
     Requiring that a corporation be ``owned and controlled'' 
by a nonprofit organization in the definition of ``private nonprofit 
organization,'' consistent with the Melville Act's removal of the term 
``wholly owned'' from the definition;
     Allowing an owner or sponsor of a Section 202 development 
to be an ``instrumentality of a public body'';
     Including, as a qualification, an owner be a single-asset 
entity, and replacing the term ``single-purpose'' with ``single-
asset,'' defined as an entity in which the mortgaged property is the 
only asset of the owner and has no more than one owner;
     Defining ``substantial rehabilitation'' as improvements to 
a property that is in a deteriorated or substandard condition that 
endangers the health, safety, or well-being of the residents, but would 
not include cosmetic improvements and must meet certain criteria;
     Requiring smoke detectors and alarm devices be installed 
in any dwelling or facility bedroom or other primary sleeping area;
     Providing that restrictions on prohibited facilities in 
Section 202 mixed-finance developments only apply to the capital 
advance-funded portion, and not to the entire development;
     Exempting, from the conflict of interest provisions, 
contracts for the sale of land between an owner and the sponsor or the 
sponsor's nonprofit affiliate;
     Providing that the requirements of paragraph (b) of Sec.  
891.130 regarding identity of interest do not apply in the mixed-
finance context, while maintaining the applicability of the conflict of 
interest provisions in paragraph (a) of Sec.  891.130;
     Extending the duration of availability of fund 
reservations for capital advances to 24 months in all cases, with the 
option of extending this period to 36 months;
     Providing that requirements applicable to capital advance 
units are not applicable to non-202/811 supported units in the project, 
and clarifying that the transfer of physical or financial assets of a 
Section 202 or Section 811 development is not permitted unless HUD 
determines that the transfer is part of a transaction that will ensure 
``the continued operation of the capital advance units'' for at least 
40 years in a manner that will provide low-income housing for the 
elderly or persons with disabilities;
     Permitting noncapital advance funds to be disbursed before 
the drawdown of capital advance funds to increase the developer's 
flexibility in financing the project; and
     Permitting the use of funds for paying off bridge or 
construction financing or repaying or collateralizing bonds.

IV. Summary of Significant Changes in this Final Rule

    The following changes were made to the proposed rule at this final 
rule stage:
     Removal of the definitions of ``substantial 
rehabilitation'' and ``repairs, renovations, and improvements'', which 
also means the removal of the $6500 threshold and the minimum useful 
life of 55 years;
     Re-adding the definition of ``rehabilitation'' that was 
originally in part 891, and adding that an improvement of an existing 
structure requires 15 percent or more of the estimated development cost 
to rehabilitate the project for a useful life of 40 years. The useful 
life period commences upon execution of the capital advance agreement.
     Allowing as eligible units two-bedroom resident units, so 
long as a portion of the units are financed by other sources. Resident 
units may be two-bedroom units if the square footage in excess of the 
one-bedroom size limits is treated as excess amenities.

V. Discussion of Public Comments Received on the March 28, 2012, 
Proposed Rule

    This final rule follows publication of the March 28, 2012, proposed 
rule and takes into consideration public comments received on that 
proposed rule. The public comment period closed on May 29, 2012. HUD 
received five public comments (one comment submitted on behalf of 
multiple organizations) in response to the proposed rule. Comments were 
submitted by a housing corporation, a housing finance agency, nonprofit 
organizations, and an association of aging services organization, an 
affordable housing management organization, a community development 
support organization, and private individuals. None of the commenters 
opposed the rule. Overall the commenters were supportive of the changes 
proposed by the March 28, 2012, rule.
    One commenter welcomed HUD to make any other changes that would 
make easier the process of creating low-income housing for seniors and 
persons with disabilities, as the need for such housing grows rapidly. 
Another commenter stated that the rule brought the requirements of the 
Section 202 and 811 programs into greater conformance with other 
programs, which would facilitate coordination among programs.
    Another commenter stated that the most significant of the changes 
from the proposed rule were the revisions relating to the drawdown of 
capital grant funds in mixed-finance situations. The commenter said 
that greater flexibility in the scheduling of drawdown of noncapital 
advance funds would be very helpful. The commenter also stated that the 
ability to apply Section 202 capital advance funds to repay bridge 
financing would solve a serious problem with the existing regulations, 
which the commenter stated conflicted with requirements of the Internal 
Revenue Service. The commenter stated that the existing regulations 
required virtually every mixed-finance project utilizing LIHTC equity 
to apply for and obtain a HUD waiver in order to utilize tax-exempt 
bond proceeds in the manner required

[[Page 37109]]

by the Internal Revenue Code. The commenter stated that the proposed 
change would save substantial time and expense, and reduce uncertainty 
in the development process.
    Another commenter supported the proposed change to the funding 
reservation deadline, stating that HUD recognized the complexity of 
assembling all the resources needed to construct a Section 202 or 
Section 811 project, which makes it very difficult to meet the current 
18-month funding reservation deadline, and thus resulted in a very high 
frequency of requests to HUD for time extensions. The commenter 
explained that creating and processing extension requests is not a good 
use of time for either developer staff or HUD staff, and the extension 
of the basic term to 24 months (with the possibility of extensions to 
36 months) is much more realistic.
    Another commenter praised the removal of the ban on individual unit 
balconies and decks, trash compactors, washers, and dryers in units 
that are funded with a HUD capital grant. This commenter stated that 
HUD recognized that in today's market these amenities cannot reasonably 
be regarded as excessive, and instead are essential to assure long-term 
marketability and economic viability of these properties.
    However, the commenters, although supportive of the changes, did 
raise a few issues about specific amendments offered by the March 2012 
rule, and these issues and HUD's responses follow.
    Comment: Conflict of interest. Two comments addressed the conflict 
of interest changes under 24 CFR 891.130. One commenter stated that if 
a sponsoring organization of multiple developments is now able to 
assume responsibilities for financial compliance and administrative 
responsibilities for the single-entity, nonprofit owner, the sponsor 
should also be able to serve as property manager for the project. This 
commenter said that this kind of situation should not be considered a 
conflict of interest under Sec.  891.130, and should not be subject to 
the limitation that no more than two persons salaried by the sponsor or 
management affiliate thereof serve as nonvoting directors. The 
commenter explained that effective property management is the key to a 
compliant project, and a sponsor with multiple projects needs the 
ability to serve in this capacity without restriction in order to 
manage its portfolio. This commenter stated that since HUD approves 
property management fees, there should be no concerns of undue 
financial benefit to the sponsor. This commenter asked how a sponsor 
can exercise the role envisioned by the Melville Act if the sponsor 
cannot have more than two nonvoting members on the owner board when it 
elects to manage its own Section 202 portfolio of properties.
    Another commenter applauded HUD for the proposed amendment to Sec.  
891.130 to establish that the sale of land between related parties is 
not necessarily deemed to constitute a conflict of interest, stating 
that this change will be particularly helpful because very often the 
land for a new project is most efficiently obtained by purchasing 
excess real estate from an affiliated nonprofit entity.
    HUD Response. The change to 24 CFR 891.205 allows HUD to determine 
the criteria for transferring the responsibilities of a single-entity, 
nonprofit owner of an individual development to the governing board of 
the sponsoring organization. The act of transferring responsibilities 
to the governing board of the sponsor does not require those board 
members to also replace or become board members of the owner entity. 
Therefore, property management responsibilities may be performed by the 
sponsor without adding more than two nonvoting members to the owner 
board of directors and causing a conflict of interest. As stated, the 
criteria for transferring responsibilities of an owner will be 
determined by HUD through subsequent guidance. HUD will consider 
allowing more than two persons salaried by the sponsor or management 
affiliate to serve as nonvoting directors on the owner's board of 
directors.
    Comment: Definition of private nonprofit organization. Two 
commenters expressed concerns with the changes to the definition of 
``private nonprofit organization''. One commenter explained that 
according to the proposed rule, the Section 202 Act of 2010 changed the 
definition to allow for ownership of projects by limited partnerships 
of which the sole general partner is a for-profit corporation or a 
limited liability company that is wholly owned and controlled by one or 
more nonprofit organizations. This commenter further explained that the 
proposed rule states that the Melville Act did not extend the 
definition to include limited liability companies and, therefore, does 
not appear to provide for a limited liability company to be the general 
partner. This commenter stated that while the Melville Act did not 
explicitly extend this definition, neither did it prohibit liability 
companies from acting as the general partner of a limited partnership 
owner. This commenter pointed out that the intent of the Melville Act 
as well as these regulations is to facilitate use of LIHTCs, and no 
obvious purpose is served by distinguishing between the allowable 
ownership structures for Section 811 and Section 202 projects.
    In addition, this commenter stated that by allowing use of a 
limited liability corporation (LLC), HUD would facilitate nonprofit 
corporations with experience in developing housing and providing 
supportive services to persons with disabilities to join with other 
nonprofit developers with experience in LIHTCs to cosponsor and develop 
such projects, without incorporating new nonprofit corporations to act 
as the general partner. The commenter stated that, in California, this 
would save significant time and cost that would otherwise be spent in 
securing tax exempt status for the new nonprofit corporation and 
recognition by the state of the eligibility of the new nonprofit 
sponsor to receive real estate tax exemptions for the proposed project. 
This commenter explained that eliminating this step would therefore 
assist such sponsors in meeting the stringent deadlines imposed by the 
California Tax Credit Allocation Committee for start of construction of 
projects that are allocated 9 percent tax credits. This commenter 
requested that HUD adopt the same language for Section 811 projects as 
for Section 202 projects in these regulations, to allow for use of a 
limited liability company or LLC that is wholly owned and controlled by 
one or more nonprofit organizations as the general partner in a mixed-
finance development.
    Another commenter stated that the preamble to the proposed rule 
creates potential ambiguity regarding the definition of ``private 
nonprofit organization''. This commenter explained that the preamble 
stated: ``An additional change made by the Section 202 Act of 2010 is 
that the definition will now include for-profit limited partnerships of 
which the sole general partner is a for-profit corporation or a limited 
liability company that is wholly owned and controlled by one or more 
nonprofit organizations.'' The commenter found that it is possible to 
interpret this sentence as saying that any for-profit corporation (and 
not just a corporation controlled by nonprofit entities) can be the 
general partner of a mixed-finance owner. This commenter explained that 
while the regulation itself is clear on this point, it would be helpful 
if the preamble to the final rule eliminates the possible ambiguity.
    HUD Response. The proposed rule incorporates the latest statutory 
changes to the Section 811 program. The

[[Page 37110]]

Melville Act of 2010 did not add for-profit limited liability companies 
as an eligible general partner. A technical correction to the Melville 
Act is under HUD consideration.
    With respect to the comment about the potential ambiguity of the 
definition of ``nonprofit organization,'' HUD agrees that additional 
clarity would be helpful. HUD clarifies that the additional change made 
by the Section 202 Act of 2010 means that the definition of ``nonprofit 
organization'' will now include for-profit limited partnerships, of 
which the sole general partner is a for-profit corporation or a limited 
liability company, and that are both wholly owned and controlled by one 
or more nonprofit organizations.
    Comment: Definitions of repairs and substantial rehabilitation. One 
commenter stated that under HUD's rule, when funding both ``repairs, 
replacements, and improvements'' and ``substantial rehabilitation,'' 
the property is required to achieve a 55-year useful life, and that an 
exception to this standard is allowed when rehabilitation is limited to 
substantially replacing two or more major building components. The 
commenter stated that it did not understand the programmatic 
significance of designating rehabilitation as either ``repairs, 
replacements and improvements'' or ``substantial rehabilitation.'' The 
commenter stated that if there is no significance in terms of 
eligibility, financing terms and conditions, or useful life, the 
definition section could be simplified by eliminating these two 
definitions. The commenter suggested that the two definitions could be 
replaced by simply imposing a useful life requirement when 
rehabilitation of any amount is performed, with the proposed exception 
of the limited replacement of two or more major building components.
    Another commenter found the definition of ``substantial 
rehabilitation'' to be very long, somewhat confusing, and inconsistent 
with the widely used and more streamlined definition contained in 
section 5.12 of the Multifamily Accelerated Processing (MAP) Guide. 
This commenter stated that in the Section 202 context, HUD has recently 
used the MAP Guide definition of substantial rehabilitation in Notice 
H2012-8\4\, relating to the refinancing of Section 202 direct loans. 
This commenter offered that another definition was not needed given 
that the term ``substantial rehabilitation'' is used only in the 
subparts of part 891, relating to the old Direct Loan program, which is 
no longer being funded. The commenter stated if a definition of 
``substantial rehabilitation'' is needed for current Section 202/811 
construction, then HUD should use the definition currently contained in 
the MAP Guide and apply the definition consistently throughout all of 
HUD's programs.
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    \4\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/notices/hsg.
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    HUD Response. HUD has revised the final rule by eliminating the 
definitions of ``substantial rehabilitation'' and ``repairs, 
renovations, and improvements.'' Therefore, a $6500 threshold no longer 
applies. The definition of ``rehabilitation'' will remain in part 891 
and will mirror the previous language, except that an improvement of an 
existing structure requires 15 percent or more of the estimated 
development cost to rehabilitate the project for a useful life of 40 
years. HUD agrees with the commenters that 55 years was an over 
investment. HUD concluded that it was reasonable to tie the useful life 
to the term of the capital advance. See Sec.  891.170, entitled 
``Repayment of capital advance.''
    Comment: Minimum investment and useful life requirements. HUD 
specifically solicited public comment on the minimum investment of 
$6500 and the minimum useful life of 55 years under the definitions of 
``repairs, replacements and improvements'' and ``substantial 
rehabilitation'' (77 FR 18725). Two commenters had concerns about these 
specific requirements. One commenter recommended reducing the 55-year 
useful life requirement to 40 years for both ``repairs, replacements 
and improvements'' and ``substantial rehabilitation.'' The commenter 
stated that while a 55-year useful life is a laudable goal, it does not 
conform to other common standards of useful life of residential rental 
property, such as the income tax code. The commenter also stated that a 
55-year useful life standard creates incentives to over-invest in 
properties to drive up per-unit development costs to achieve the longer 
useful life.
    Another commenter stated that if the MAP Guide definition is not 
adopted in the final rule, then the concept of rehabilitating ``to a 
useful life of 55 years'' is disproportionately high for a $6500 
threshold. The commenter stated that any required useful life should 
not exceed the term of the capital advance. The commenter suggested 
that HUD should clarify the date at which the useful life period begins 
and state whether the ``useful life'' requirement pertains only to the 
$6500 per-dwelling-unit standard, or also applies to the 15 percent-of-
estimated-replacement cost standard. Lastly, the commenter agreed that 
as suggested by the Federal Register notice, the long-standing $6500/
unit minimum for ``substantial rehabilitation'' needed to be updated 
periodically for inflation.
    HUD Response. For the reasons provided in the response to the 
preceding comment, HUD has removed the $6500 threshold and the useful 
life minimum of 55 years from the final rule.
    Comment: Definition of single asset entity. One commenter suggested 
that HUD revise the definition of ``single asset entity'' to read: 
``Single-asset entity, for the purpose of this subpart, means an entity 
in which the mortgaged property is the only asset of the owner, and the 
entity is the only owner of the property.''
    HUD Response. HUD accepts this comment and has revised the 
definition accordingly under Sec.  891.105.
    Comment: Health-related facilities. One commenter approved of the 
proposed change to Sec.  891.813, stating that the change would allow, 
for mixed-finance project, non-202 funds to be used for health-related 
facilities, such as infirmaries and nursing stations. This commenter 
stated that this change is a helpful step, and furthers HUD's goal of 
assuring that Section 202 projects can serve frail seniors. This 
commenter requested that HUD recognize the needs of the market and of 
the clientele, as well as be in line with HUD's evolving policies, and 
urged HUD to be more open and allow Section 202 costs of construction 
to cover designs in accordance with ``universal design'' guidelines, to 
assure that seniors can continue to function comfortably in their homes 
as they age. In addition, the commenter stated that HUD should be more 
open to allowing two-bedroom units to be financed by the Section 202 
program, to accommodate low-income frail residents who require live-in 
caretakers.
    HUD Response. The most current Section 202 guidelines encourage the 
use of universal design and consider it as an eligible cost. Universal 
design is the design of the living environment to be usable by all 
people regardless of ability, without the need for adaptation or 
specialized design. Universal design recognizes the need for living 
spaces to be barrier-free and provide easy mobility and independence 
for people with a broad variety of physical needs. Universal design is 
distinct from Federal accessibility requirements under the Fair Housing 
Act, Section 504 of the Rehabilitation Act of 1973, and

[[Page 37111]]

titles II and III of the Americans with Disabilities Act, as 
applicable. All applicable Federal accessibility requirements must be 
met in projects promoting universal design.
    HUD will not allow two-bedroom units to be financed by the Section 
202 program. However, as part of this final rule, HUD will allow two-
bedroom resident units, so long as a portion of the units are financed 
by other sources. Under Sec.  891.210, resident units may be two-
bedroom units provided that the square footage in excess of the one-
bedroom size limits are treated as excess amenities as specified in 
Sec.  891.120.

VI. Costs and Benefits of the New Program Regulations

    The changes made to the program regulations governing Section 202/
Section 811 mixed-finance developments are largely directed to 
expanding flexibility in the program. The only change in the final rule 
that represents a new requirement for program participants is that 
owners must provide a smoke detector and alarm in every bedroom or 
primary sleeping area. Though this constitutes a new requirement added 
to the program regulations, it is not a new requirement for the 
majority of owners because smoke detectors placed in every bedroom or 
primary sleeping area is already required by most local codes.\5\
---------------------------------------------------------------------------

    \5\ See http://www.usfa.fema.gov/downloads/pdf/campaigns/smokealarms/smoke_alarm_requirements.pdf.
---------------------------------------------------------------------------

    Apart from establishing this requirement, the changes made by this 
final rule are directed to removing prohibitions and providing more 
flexibility to owners and investors. The rule removes some previous 
prohibitions on providing certain amenities within Section 202 and 
Section 811 developments. The final rule allows the program to fund 
units that contain dishwashers, trash compactors, washers and dryers, 
and units that have patios or balconies attached. The final rule also 
removes the previous prohibition on having healthcare facilities in 
mixed-finance Section 202 developments, but not in Section 811 
developments. With respect to Section 811 developments, as stated in 
the proposed rule, ``HUD recognizes the importance of maintaining the 
restrictions on prohibited facilities for Section 811 developments for 
both capital advance and non-capital advance portions of the project. 
HUD is committed to preventing the isolation of persons with 
disabilities that might occur should medical facilities be contained in 
Section 811 developments.'' (See 77 FR 18725, third column.)
    HUD's previous regulations had a blanket prohibition against 
medical facilities, as a safeguard against the institutionalization of 
the elderly and disabled populations. While, through this final rule, 
HUD removes the prohibition on certain amenities and having healthcare 
facilities in Section 202 developments, HUD does put in place of these 
prohibitions a requirement to include these amenities or healthcare 
facilities. Where healthcare facilities are located in Section 202 
developments, use of the facilities must be voluntary for the residents 
of the projects. Consequently, removing the prohibition on these 
amenities and facilities is unlikely to increase costs to the program, 
especially since there is no requirement to provide these amenities or 
facilities. With respect to amenities, the amenities are those that are 
fairly standard in today's apartments and will benefit the residents of 
program units and make HUD units more capable of retaining tenants, 
thereby reducing vacancies.
    While providing the amenities is not expected to increase program 
cost, HUD submits that one benefit may be that the wider range of 
allowable amenities may combat any discrimination against subsidized 
housing by reducing the potential for program-participating units and 
their occupants to be singled out as subsidized units within a mixed-
finance development. The voluntary nature of these changes made by this 
final rule makes it difficult to predict their impact on future Section 
202/811 mixed-finance units, as the programs together produce only a 
few hundred developments a year (193 in 2008, 170 in 2009, and 143 in 
2010). The overall economic impact from these potentially only small 
changes in development and unit configuration is expected to be small.
    The final rule also provides benefits from improving government 
processes. For example, extending the time of availability of capital 
advance funds from 18 to 24 months should limit the number of waivers 
HUD needs to process as developers regularly exceed the 18-month 
timeline. In 2010, HUD processed 49 such waivers in what is described 
as a time consuming, case specific process, which was 33 percent of the 
waivers the program office processed that year.
    The remaining changes in the final rule are definitional and offer 
participants greater flexibility and clarity within the program at no 
obvious cost to the program or participants.

VII. Findings and Certifications

Regulatory Review--Executive Order 13563

    Executive Order 13563 directs that, where relevant, feasible, and 
consistent with regulatory objectives, and to the extent permitted by 
law, agencies are to identify and consider regulatory approaches that 
reduce burdens and maintain flexibility and freedom of choice for the 
public. This rule, consistent with Executive Order 13563, lessens 
restrictions in the Section 202 and Section 811 programs, including the 
removal of some previous prohibitions on amenities and healthcare 
facilities, broadens participation through the expansion of the 
definition of ``private nonprofit organization,'' and streamlines and 
improves program operations to attract additional private capital and 
expertise from the private developer community. As provided in the 
discussion in section VI of this preamble, the regulatory changes 
provide significantly more flexibility to participants in the 
development of Sections 202/811 mixed-finance developments.

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. 
In the mixed-finance context, this final rule amends HUD's Section 202 
and 811 program regulations governing capital advances, for-profit 
limited partnerships, and mixed-finance development methods to 
facilitate the development and availability of housing for the elderly 
and persons with disabilities. These regulatory amendments do not 
impose any additional regulatory burdens on entities participating in 
these programs. As has been discussed in the preamble to this final 
rule, these amendments reduce regulatory burden and increase 
flexibility in mixed-financed developments in order to attract private 
capital and expertise to the construction of supportive housing for the 
elderly and persons with disabilities. These regulatory changes would 
also streamline the use of low-income tax credits, as well as the 
obtaining of funding from other sources. National, regional, and local 
developers utilize the mixed-finance program and will save time and 
gain efficiency from no longer having to request regulatory waivers.

[[Page 37112]]

    Accordingly, the undersigned certifies that this final rule will 
not have a significant economic impact on a substantial number of small 
entities.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made at the proposed rule stage, in accordance with HUD regulations 
at 24 CFR part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). That finding 
remains applicable to this final rule and is available for public 
inspection between the hours of 8 a.m. and 5 p.m., weekdays, in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 
20410-0500. Due to security measures at the HUD Headquarters building, 
please schedule an appointment to review the finding by calling the 
Regulations Division at 202-708-3055 (this is not a toll-free number).

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either: (1) Imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (2) the rule 
preempts state law, unless the agency meets the consultation and 
funding requirements of section 6 of the Executive Order. This rule 
will not have federalism implications and would not impose substantial 
direct compliance costs on state and local governments or preempt state 
law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (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 on the private sector. This rule does not 
impose any Federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of UMRA.

Catalogue of Federal Domestic Assistance

    The Catalogue of Federal Domestic Assistance Number for the 
principal Federal Housing Administration single-family mortgage 
insurance program is 14.117.

List of Subjects in 24 CFR Part 891

    Aged, Grant programs--housing and community development, 
Individuals with disabilities, Loan programs--housing and community 
development, Rent subsidies, Reporting and recordkeeping requirements.
    Accordingly, for the reasons discussed in the preamble, HUD amends 
24 CFR part 891 as follows:

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

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

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

0
2. In Sec.  891.105, revise the introductory text and the definition of 
``rehabilitation,'' and add the definitions of ``Acquisition with or 
without repair,'' and ``Single-asset entity,'' in alphabetical order to 
read as follows:


Sec.  891.105  Definitions.

    The following definitions apply, as appropriate, throughout this 
part. Other terms with definitions unique to the particular program are 
defined in Sec. Sec.  891.205, 891.305, 891.505, and 891.805, as 
applicable.
    Acquisition with or without repair means the purchase of existing 
housing and related facilities.
* * * * *
    Rehabilitation means the improvement of the condition of a property 
from deteriorated or substandard to good condition. Rehabilitation may 
vary in degree from the gutting and extensive reconstruction to the 
cure of substantial accumulation of deferred maintenance. Cosmetic 
improvements alone do not qualify as rehabilitation under this 
definition. Rehabilitation may also include renovation, alteration, or 
remodeling for the conversion or adaptation of structurally sound 
property to the design and condition required for use under this part, 
or the repair or replacement of major building systems or components in 
danger of failure. Improvement of an existing structure requires 15 
percent or more of the estimated development cost to rehabilitate the 
project for a useful life of 40 years. The useful life period commences 
upon execution of a capital advance agreement.
* * * * *
    Single-asset entity, for the purpose of this subpart, means an 
entity in which the mortgaged property is the only asset of the owner, 
and the entity is the only owner of the property.
* * * * *

0
3. In Sec.  891.120, revise paragraphs (a), (c), and (d) to read as 
follows:


Sec.  891.120  Project design and cost standards.

* * * * *
    (a) Property standards. Projects under this part must comply with 
HUD Minimum Property Standards as set forth in 24 CFR part 200, subpart 
S.
* * * * *
    (c) Restrictions on amenities. Projects must be modest in design. 
Amenities not eligible for HUD funding include atriums, bowling alleys, 
swimming pools, saunas, and jacuzzis. Sponsors may include certain 
excess amenities, but they must pay for them from sources other than 
the Section 202 or 811 capital advance. They must also pay for the 
continuing operating costs associated with any excess amenities from 
sources other than the Section 202 or 811 project rental assistance 
contract.
    (d) Smoke detectors. Smoke detectors and alarm devices must be 
installed in accordance with standards and criteria acceptable to HUD 
for the protection of occupants in any dwelling or facility bedroom or 
other primary sleeping area.
* * * * *

0
4. In Sec.  891.130:
0
a. Amend paragraph (a)(2)(ii) by removing the word ``and'' that follows 
the semicolon;
0
b. Amend paragraph (a)(2)(iii) by removing the period at the end and 
adding in its place ``;and'';
0
c. Add a new paragraph (a)(2)(iv); and
0
d. Remove paragraph (c) to read as follows:


Sec.  891.130  Prohibited relationships.

* * * * *
    (a) * * *
    (2) * * *
    (iv) Contracts for the sale of land.
* * * * *

0
5. Revise Sec.  891.160 to read as follows:


Sec.  891.160  Audit requirements.

    Nonprofit organizations receiving assistance under this part are 
subject to the audit requirements of 24 CFR 5.107.

0
6. Revise Sec.  891.165 to read as follows:


Sec.  891.165  Duration of capital advance.

    (a) The duration of the fund reservation for a capital advance with 
construction advances is 24 months from the date of initial closing. 
This duration can be up to 36 months, as approved by HUD on a case-by-
case basis.
    (b) The duration of the fund reservation for projects that elect 
not to

[[Page 37113]]

receive any capital advance before construction completion is 24 months 
from the date of issuance of the award letter to the start of 
construction. This duration can be up to 36 months, as approved by HUD 
on a case-by-case basis.

0
7. In Sec.  891.170, revise paragraph (b) to read as follows:


Sec.  891.170  Repayment of capital advance.

* * * * *
    (b) Transfer of assets. The transfer of physical and financial 
assets of any project under this part is prohibited, unless HUD gives 
prior written approval. Approval for transfer will not be granted 
unless HUD determines that the transfer to a private nonprofit 
corporation, consumer cooperative (under the Section 202 Program), a 
private nonprofit organization (under the Section 811 Program), or an 
organization meeting the definition of ``mixed-finance owner'' in Sec.  
891.805, is part of a transaction that will ensure the continued 
operation of the capital advance units for not less than 40 years (from 
the date of original closing) in a manner that will provide rental 
housing for very low-income elderly persons or persons with 
disabilities, as applicable, on terms at least as advantageous to 
existing and future tenants as the terms required by the original 
capital advance.

0
8. In Sec.  891.205, revise the definitions of ``Owner,'' ``Private 
nonprofit organization,'' and paragraph (3) of the definition of 
``Sponsor'' to read as follows:


Sec.  891.205  Definitions.

* * * * *
    Owner means a single-asset private nonprofit organization that may 
be established by the Sponsor that will receive a capital advance and 
project rental assistance payments to develop and operate supportive 
housing for the elderly as its legal owner. Owner includes an 
instrumentality of a public body. The purposes of the Owner must 
include the promotion of the welfare of the elderly. The Owner may not 
be controlled by or be under the direction of persons or firms seeking 
to derive profit or gain therefrom.
    Private nonprofit organization means any incorporated private 
institution or foundation:
    (1) No part of the net earnings of which inures to the benefit of 
any member, founder, contributor, or individual;
    (2) That has a governing board:
    (i) The membership of which is selected in a manner to assure that 
there is significant representation of the views of the community in 
which such housing is located; and
    (ii) Which is responsible for the operation of the housing assisted 
under this section, except that, in the case of a nonprofit 
organization that is the sponsoring organization of multiple housing 
projects assisted under this section, HUD may determine the criteria or 
conditions under which financial, compliance, and other administrative 
responsibilities exercised by a single-entity private nonprofit 
organization that is the owner corporation of an individual housing 
project may be shared or transferred to the governing board of such 
sponsoring organization; and
    (3) Which is approved by HUD as to financial responsibility.
* * * * *
    Sponsor * * *
    (3) That is approved by the Secretary as to administrative and 
financial capacity and responsibility. The term Sponsor includes an 
instrumentality of a public body.
* * * * *

0
9. Section 891.210 is revised to read as follows:


Sec.  891.210  Special project standards.

    (a) In general. In addition to the applicable project standards in 
Sec.  891.120, resident units in Section 202 projects are limited to 
efficiencies or one-bedroom units, except as specified under paragraph 
(b) of this section. If a resident manager is proposed for a project, 
up to two bedrooms could be provided for the resident manager unit.
    (b) Exception. Resident units in Section 202 projects may be two-
bedroom units if a portion of the units are financed by other sources. 
Resident units may be two-bedroom units provided that the square 
footage in excess of the one-bedroom size limits are treated as excess 
amenities as specified in Sec.  891.120.

0
10. In Sec.  891.305, revise the heading of the definition of 
``Nonprofit organization'' to read ``Private nonprofit organization'' 
and redesignate the definition in correct alphabetical order, and 
revise the first sentence of the definition of ``Owner'' to read as 
follows:


Sec.  891.305  Definitions.

* * * * *
    Owner means a single-asset private nonprofit organization 
established by the Sponsor that will receive a capital advance and 
project rental assistance payments to develop and operate, as its legal 
owner, supportive housing for persons with disabilities under this 
part. * * *
* * * * *
0
11. Revise Sec.  891.805 to read as follows:


Sec.  891.805  Definitions.

    In addition to the definitions at Sec. Sec.  891.105, 891.205, and 
891.305, the following definitions apply to this subpart:
    Mixed-finance owner, for the purpose of the mixed-finance 
development of housing under this part, means a single-asset, for-
profit limited partnership of which a private nonprofit organization is 
the sole general partner. The purpose of the mixed-finance owner must 
include the promotion of the welfare of the elderly or persons with 
disabilities, as appropriate.
    Private nonprofit organization, for the purpose of this subpart, 
means:
    (1) In the case of supportive housing for the elderly:
    (i) An organization that meets the requirements of the definition 
of ``private nonprofit organization'' in Sec.  891.205; and
    (ii) A for-profit limited partnership, the sole general partner of 
which owns at least one-hundredth of one percent of the partnership 
assets, whereby the sole general partner is either: an organization 
meeting the requirements of Sec.  891.205 or a for-profit corporation 
wholly owned and controlled by one or more organizations meeting the 
requirements of Sec.  891.205 or a limited liability company wholly 
owned and controlled by one or more organizations meeting the 
requirements of Sec.  891.205. If the project will include units 
financed with the use of federal Low-Income Housing Tax Credits and the 
organization is a limited partnership, the requirements of section 42 
of the IRS code, including the requirements of section 42(h)(5), apply. 
The general partner may also be the sponsor, so long as it meets the 
requirements of this part for sponsors and general partners.
    (2) In the case of supportive housing for persons with 
disabilities:
    (i) An organization that meets the requirements of the definition 
of ``private nonprofit organization'' in Sec.  891.305; and
    (ii) A for-profit limited partnership, the sole general partner of 
which owns at least one-hundredth of one percent of the partnership 
assets, whereby the sole general partner is either: an organization 
meeting the requirements of Sec.  891.305 or a corporation owned and 
controlled by an organization meeting the requirements of Sec.  
891.305. If the project will include units financed with the use of 
federal Low-Income Housing Tax

[[Page 37114]]

Credits and the organization is a limited partnership, the requirements 
of section 42 of the IRS code, including the requirements of section 
42(h)(5), apply. The general partner may also be the sponsor, so long 
as it meets the requirements of this part for sponsors and general 
partners.

0
12. In Sec.  891.813, revise paragraphs (b) and (c) to read as follows:


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

* * * * *
    (b) Assistance under this subpart may not be used for excess 
amenities, as stated in Sec.  891.120(c), or for Section 202 
``prohibited facilities,'' as stated in Sec.  891.220. Such amenities 
or Section 202 prohibited facilities may be included in a mixed-finance 
development only if:
    (1) The amenities or prohibited facilities are not financed, 
maintained, or operated with funds provided under the Section 202 or 
Section 811 program;
    (2) The amenities or prohibited facilities are designed with 
appropriate safeguards for the residents' health and safety; and
    (3) The assisted residents are not required to use, participate in, 
or pay a fee for the use or maintenance of the amenities or prohibited 
facilities, although they are permitted to do so voluntarily. Any fee 
charged for the use, maintenance, or access to amenities or prohibited 
facilities by residents must be reasonable and affordable for all 
residents of the development.
    (c) Notwithstanding any other provision of this section, Sec.  
891.315 on ``prohibited facilities'' shall apply to mixed-finance 
developments containing units assisted under Section 811.
0
13. In Sec.  891.830, revise paragraphs (b) and (c)(4) to read as 
follows:


Sec.  891.830  Drawdown.

* * * * *
    (b) Non-capital advance funds may be disbursed before capital 
advance proceeds or the capital advance funds may be drawn down in an 
approved ratio to other funds, in accordance with a drawdown schedule 
approved by HUD.
    (c) * * *
    (4) The capital advance funds drawn down will be used only for 
eligible costs actually incurred in accordance with the provisions of 
this subpart and the approved mixed-finance project, which include 
costs stated in 12 U.S.C. 1701q(h) and 42 U.S.C. 8013(h). Capital 
advance funds may be used for paying off bridge or construction 
financing, or repaying or collateralizing bonds, but only for the 
portion of such financing or bonds that was used for capital advance 
units; and
* * * * *

0
14. Revise Sec.  891.832 to read as follows:


Sec.  891.832  Prohibited relationships.

    (a) Paragraph (a) of Sec.  891.130, describing conflicts of 
interest, applies to mixed finance developments.
    (b) Paragraph (b) of Sec.  891.130, describing identity of 
interest, does not apply to mixed-finance developments.

0
15. Revise Sec.  891.848 to read as follows:


Sec.  891.848  Project design and cost standards.

    (a) The project design and cost standards at Sec.  891.120 apply to 
mixed-finance developments under this subpart, with the exception of 
Sec.  891.120(c), subject to the provisions of Sec.  891.813(b).
    (b) For Section 202 mixed-finance developments, the prohibited 
facilities requirements described at Sec.  891.220 shall apply to only 
the capital advance-funded portion of the Section 202 mixed-finance 
developments under this subpart, subject to the provisions of Sec.  
891.813(b).
    (c) For Section 811 mixed-finance developments, the prohibited 
facilities requirements described at Sec.  891.315 shall apply to the 
entire mixed-finance development.

    Dated: June 17, 2013.
Carol J. Galante,
 Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2013-14721 Filed 6-19-13; 8:45 am]
BILLING CODE 4210-67-P