[Federal Register Volume 78, Number 206 (Thursday, October 24, 2013)]
[Rules and Regulations]
[Pages 63748-63793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-23230]



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Vol. 78

Thursday,

No. 206

October 24, 2013

Part III





Department of Housing and Urban Development





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24 CFR Parts 903, 905, 941, et al.





Public Housing Capital Fund Program; Final Rule

  Federal Register / Vol. 78 , No. 206 / Thursday, October 24, 2013 / 
Rules and Regulations  

[[Page 63748]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 903, 905, 941, 968, and 969

[Docket No. FR-5236-F-02]
RIN-2577-AC50


Public Housing Capital Fund Program

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

ACTION: Final rule.

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SUMMARY: This final rule combines and streamlines the former legacy 
public housing modernization programs, including the Comprehensive 
Grant Program (CGP), the Comprehensive Improvement Assistance Program 
(CIAP), and the Public Housing Development Program (which encompasses 
mixed-finance development), into the Capital Fund Program (CFP). This 
rule defines qualified PHAs, which are not required to file annual 
plans. The rule expands HUD's current requirement that a Public Housing 
Authority (PHA) submit a physical needs assessment (PNA) to include 
small PHAs as well as large PHAs, but provides small PHAs additional 
time to plan for and implement this requirement. The rule allows PHAs 
to request a total development cost (TDC) exception for integrated 
utility management, capital planning, and other capital and management 
activities that promote energy conservation and efficiency, including 
green construction and retrofits, which include windows; heating system 
replacements; wall insulation; site-based generation; advanced energy 
savings technologies, including renewable energy generation; and other 
such retrofits. The rule also makes changes to replacement housing 
factor funds and the threshold for management improvements. Because 
this rule streamlines programs, several formerly separate regulations 
are eliminated with the implementation of this rule.

DATES: Effective date: November 25, 2013. The incorporation by 
reference of certain publications listed in the rule is approved by the 
Director of the Federal Register as of November 25, 2013.

FOR FURTHER INFORMATION CONTACT: Jeffrey Riddel, Director, Office of 
Capital Improvements, Office of Public and Indian Housing, Department 
of Housing and Urban Development, 451 7th Street SW., Washington, DC 
20410-8000; telephone number 202-708-1640 (this is not a toll-free 
number). Hearing- or speech-impaired individuals may access this number 
through TTY by calling the toll-free Federal Relay Service at 800-877-
8339.

SUPPLEMENTARY INFORMATION: This final rule follows a February 7, 2011, 
proposed rule and makes changes in response to public comment on the 
proposed rule and further consideration of issues by HUD.

I. Executive Summary

A. Purpose of the Regulatory Action

    This final rule implements section 9 of the United States Housing 
Act of 1937 (the 1937 Act), which created the CFP as part of the 
Quality Housing and Work Responsibility Act of 1998 (title V, Pub. L. 
105-276, approved October 21, 1998). The Capital Fund consolidated the 
former public housing modernization programs, including the 
Comprehensive Grant Program (CGP), the Comprehensive Improvement 
Assistance Program (CIAP), and the Public Housing Development Program 
(which encompasses mixed-finance development). In 2008, the Housing and 
Economic Responsibility Act (HERA) (Pub. L. 110-289, approved July 30, 
2008) made changes to the CFP, namely the removal of the former 
emergency set-aside for natural disasters and emergencies, and the 
creation of a category of ``qualified PHAs,'' smaller PHAs that are 
relieved from certain paperwork submission requirements. To date, there 
has been no comprehensive regulation implementing these statutory 
requirements and updates. Thus, rather than a comprehensive, user 
friendly regulation, PHAs have been required to use annual processing 
notices to supplement outdated regulations in various parts of title 24 
of the Code of Federal Regulations (CFR), including parts 905, 941, and 
965.
    This regulation is necessary to consolidate the legacy 
modernization programs in one part of the CFR and to update the 
regulations in accordance with current law. An updated regulation with 
current program requirements is needed to provide new staff members 
with the knowledge necessary to manage the Capital Fund and Mixed 
Finance Development programs proficiently. In addition, the regulated 
community needs a single, clear, updated regulation in order to have 
complete and current information.
    The Capital Fund formula itself, currently codified at 24 CFR 
905.10, is reorganized at Sec.  905.400. This formula includes a number 
of coefficients that are to be inserted into the equation. These 
coefficients are unchanged by this rule. The coefficients were defined 
as part of a negotiated rulemaking that occurred in 1999 and 2000. The 
proposed rule can be found at 64 FR 49924 (September 14, 1999) and the 
final rule can be found at 65 FR 14426 (March 16, 2000).

B. Summary of the Major Provisions of the Regulatory Action

    This rulemaking: Establishes a new definition section and proposes 
several new definitions to be included in the section; clarifies 
Capital Fund eligible and ineligible activities, and incorporates 
energy efficiency standards; incorporates into part 905 of public 
housing modernization the regulations at 24 CFR part 968, which part is 
removed by this final rule; incorporates the development and mixed-
finance development requirements of part 941, which also is removed; 
expands the requirement for a PNA to include small, as well as large, 
PHAs (specific requirements pertaining to the PNA will be addressed in 
a separate rulemaking), but delays the applicability of this provision 
for small PHAs until 30 days after the end of a federal fiscal year 
quarter following HUD's publication of a notice in the Federal Register 
announcing application of the provision.
    The rulemaking also incorporates by reference the 2009 
International Energy Conservation Code (IECC) and American Society of 
Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) 
standard 90.1-2010, ``Energy Standard for Buildings Except Low-Rise 
Residential Buildings.'' The ASHRAE standard can be found at http://www.ashrae.org/standards-research-technology/standards-guidelines. The 
2009 IECC can be purchased at http://shop.iccsafe.org/.
    This rulemaking also: Clarifies the calculation of TDC limits and 
establishes the ability for PHAs to request a TDC exception for 
integrated utility management, capital planning, and other capital and 
management activities that promote energy conservation and efficiency; 
establishes 5 years of a Demolition or Disposition Transitional Funding 
(DDTF) grant that will be included in the regular Capital Fund formula 
grant, to replace the Replacement Housing Factor (RHF) grant of up to 
10 years; provides for a DDTF transition period; clarifies at Sec.  
905.202(b) that because of their emergent nature, emergencies that are 
not identified in the 5-year action plan (statutorily required by 
section 5A of the 1937 Act) are eligible costs; revises the description 
of eligible amenities at Sec.  905.202(c); phases in over 5 years a cap 
of 10 percent of a PHA's Capital

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Fund that the PHA may expend on management improvements; and revises 
the identity of interest regulations in accordance with HUD's actual 
practice to provide PHAs with the flexibility to use an instrumentality 
as a general contractor in mixed-finance projects, as long as cost 
requirements are met, without having to request a waiver.

C. Costs and Benefits

    This rule does not have any direct financial impact on the level of 
funding for the CFP, but has the potential to create some financial 
transfers among program participants of less than $100 million 
annually. The rule will cap management improvement expenditures from 
the Capital Fund at 10 percent, phasing in the cap over 5 years. On 
average, PHAs use approximately 8 percent of their Capital Fund grants 
on management improvements, with many PHAs using considerably less, and 
larger PHAs of more than 250 units using 9 percent. The 10 percent cap 
would not cause significant transfers outside of the CFP, though the 10 
percent cap would require significant expenditure changes for some PHAs 
that spend a high percentage of their Capital Fund grants on management 
improvements.
    This final rule will also have significant benefits. This rule 
updates and consolidates the CFP regulations and related regulations 
having to do with the use of Capital Funds for development and 
modernization, as well as regulations for continuing operation of low-
income housing after completion of debt service. In addition, the rule 
codifies recent statutory requirements enacted in HERA. The benefits of 
the rule such as regulatory consolidation, program clarification, 
removal of obsolete references, and enhanced efficiencies justify the 
promulgation of this rule.

II. Background

    Section 9 of the U.S. Housing Act of 1937 (1937 Act) (42 U.S.C. 
1437g) is the statutory basis for the Public Housing Capital Fund 
(Capital Fund) and the Public Housing Operating Fund (Operating Fund). 
The Operating Fund is established by Section 9(e) of the 1937 Act, and 
the Capital Fund, which is the focus of this rule, is established by 
section 9(d) of the 1937 Act (42 U.S.C. 1437g(d)). Section 9(d) lists 
the various items for which the Capital Fund may be used, including 
development, modernization, maintenance, vacancy reduction, code 
compliance, demolition and replacement, homeownership activities, and 
energy efficiency, among others. Other important provisions found in 
section 9(d) of the 1937 Act are: The requirement for HUD to develop a 
formula to determine the amount of Capital Funds that are allocated to 
PHAs in each fiscal year (42 U.S.C. 1437g(d)(2)); flexibility for a 
small PHA to use up to 100 percent of its Capital Fund grant and for a 
large PHA to use up to 20 percent of its Capital Fund grant for 
purposes ordinarily pertaining to the Operating Fund (section 9(g) of 
the 1937 Act pertaining to limitation on use of funds; 42 U.S.C. 
1437g(g)); and penalties for the slow obligation and expenditure of 
Capital Funds (section 9(j) of the 1937 Act, 42 U.S.C. 1437g(j). All of 
these requirements based in statute and others added by regulation 
constitute the CFP. Additionally, due to changes made to the annual 
plan statutorily required of PHAs (PHA Annual Plan) by section 5A of 
the 1937 Act, and the need to have grant reporting in compliance with 
the requirements of the CFP, and other federal reporting requirements, 
the CFP informational requirements will be decoupled from the PHA 
Annual Plan requirements. HUD will make necessary changes to the HUD 
forms involving the CFP budget and reporting requirements.
    Section 2702 of the HERA amended section 5A of the 1937 Act (42 
U.S.C. 1437c-1) to provide that certain PHAs, called ``qualified 
PHAs,'' are not required to file the PHA Annual Plan called for in 
section 5A(b)(1) of the 1937 Act (42 U.S.C. 1437c-1(b)(1)), although 
these PHAs, along with nonqualified PHAs, must file the 5-year plan and 
a civil rights certification required under section 5A(d)(16) of the 
1937 Act, 42 U.S.C. 1437c-1(d)(16). Qualified PHAs under section 2702 
are those that administer 550 or fewer units--considered as the sum of 
all the public housing units and vouchers under section 8(o) of the 
1937 Act (42 U.S.C. 1437f(o)) (section 8) administered by a PHA--and 
which are not designated as a troubled PHA under section 6(j)(2), and 
which do not have a failing score under the Section 8 Management 
Assessment Program (SEMAP) during the prior 12 months. Please see the 
preamble to the proposed rule of February 7, 2011 (76 FR 6654-6682), 
for further discussion of the statutory background.

III. The Proposed Rule

    Significant changes to the CFP regulations that were proposed by 
the February 7, 2011, rule included the following:
     Establishment of a new definition section and proposing 
several new definitions to be included in this section.
     Clarification of Capital Fund eligible and ineligible 
activities and incorporating energy efficiency standards.
     Incorporation into part 905 of public housing 
modernization the regulations at 24 CFR part 968, which part is removed 
by this final rule.
     Establishment of annual plan submission requirements for 
nonqualified PHAs as defined in section 2702 of HERA and Capital Fund 
submission requirements for qualified and nonqualified PHAs.
     Expansion of the requirement for a PNA to include small, 
as well as large, PHAs. The requirements pertaining to PNA may be 
addressed in a separate rulemaking.\1\
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    \1\ Part 968 promulgated December 21, 1989, instituted a 
requirement for large (Comprehensive Grant) PHAs to complete a PNA 
as a part of the Comprehensive Plan (see 968.315(e)(2). This rule 
does not add new PNA requirements for large PHAs but rather 
continues the current requirements with the only change being that 
small PHAs will also have to comply with those requirements. The 
current PNA requirements include completion of a brief summary of 
the physical improvements needed to bring each development to HUD 
standards for modernization, energy conservation life-cycle cost 
effective performance standards, and lead-based paint testing and 
abatement standards; the replacement needs of equipment and 
structural elements during the period covered; a preliminary 
estimate of cost; any physical disparities between buildings 
occupied predominantly by one racial or ethnic group and the 
physical improvements required to correct the disparity; and the 
number of units the PHA is proposing for substantial rehabilitation 
and subsequent sale, if any.
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     Clarification that Energy Star appliances and systems, and 
cost-effective energy measures, are eligible costs.
     Incorporation of the IECC and American Society of Heating, 
Refrigerating, and ASHRAE standard 90.1-2010, ``Energy Standard for 
Buildings Except Low-Rise Residential Buildings.'' The ASHRAE standard 
can be found at http://www.ashrae.org/standards-research-technology/
standards--guidelines. The 2009 IECC can be purchased at http://shop.iccsafe.org/
     Clarification of the calculation of TDC limits and 
establishment of the ability for PHAs to request a TDC exception for 
integrated utility management, capital planning, and other capital and 
management activities that promote energy conservation and efficiency.
     Limitations on the number of years that PHAs will receive 
RHF grants.
     Provision for RHF transition funding for PHAs that have 
already begun receiving RHF funding grants at the time the new 5-year 
program comes

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into effect. Those PHAs would receive 10 full years of replacement 
funding.
     Setting of costs limits for the CFP fee at 10 percent of 
the annual Capital Fund grant.
     Reduction of the amount of the grant that may be spent on 
management improvements from 20 percent to 10 percent over a 3-year 
period.
     Revisions to the requirements for timely obligation and 
expenditure of Capital Funds currently found at 24 CFR 905.120.
     Incorporation of the design and construction requirements 
currently found in 24 CFR 941.203 into part 905.
     Establishment of requirements for funding Resident 
Management Corporation (RMC) activities.
     Establishment of rules on contracting requirements and the 
use of force account labor.
     Incorporation of development requirements, including those 
pertaining to mixed-finance projects.
     Implementation of section 35(h) of the 1937 Act, 42 U.S.C. 
1437z-7(h), allowing for deviations from Public Housing Requirements, 
under specified conditions, to ensure the long-term feasibility of 
mixed-finance projects, while still ensuring certain tenant 
protections.
     Prohibition on a PHA pledging its assets without written 
HUD approval.
     Establishment of sanctions for noncompliance with HUD 
contracts and regulations.

IV. Summary of Significant Changes in This Final Rule

    The following changes were made to the proposed rule at this final 
rule stage:
     Revises the definitions of Capital Fund Annual 
Contributions Contract (CF ACC); Public Housing Requirements; Qualified 
PHA; and public housing funds. This final rule adds a definition of 
Declaration of Trust (DOT) and of Declaration of Restrictive Covenant.
     Clarifies that the provisions of direct social services 
and the costs for security guards or ongoing security services are not 
eligible management improvements.
     Provides, as one option to the guaranty of irrevocability 
of funding, that the required letter of credit is to be valued at 10 
percent of the contract price (the proposed rule would have required a 
letter of credit to be valued at 25 percent of the contract price).
     Clarifies at Sec.  905.202(b) that because of their 
emergent nature, emergencies that are not identified in the 5-year 
action plan (statutorily required by section 5A of the 1937 Act) are 
eligible costs.
     Revises the description of eligible amenities at Sec.  
905.202(c).
     Implements, over a 5-year time period, a 10 percent cap on 
the amount of Capital Funds that a PHA may spend on management 
improvements. (In contrast, the proposed rule would have implemented 
this cap over 3 years.)
     Establishes 5 years of a DDTF grant that will be included 
in the regular Capital Fund formula grant. Since DDTF will be included 
in the formula grant, the DDTF grant will not be subject to the same 
requirements as the RHF grants and will be usable for modernization as 
well as development. PHAs will be able to use the DDTF for any eligible 
activity under the CFP and this funding will not be subject to 
accumulation, although the DDTF grant will be subject to the same 
statutory requirements as any Capital Fund grant and the terms of the 
appropriation of Capital Funds from Congress.
    In addition to the above listed changes, the following changes are 
also made via the final rule.
    The final rule delays the applicability of Sec.  905.300(a) for 
small PHAs. HUD is taking this action to provide small PHAs additional 
time to prepare for the implementation of the requirement to submit a 
PNA. Specifically, small PHAs will be subject to this provision 30 days 
following the end of a federal fiscal year quarter following HUD's 
publication of a notice in the Federal Register announcing application 
of the provision. Moreover, HUD plans to delineate a time frame for 
submission of a PNA such that the first submission by a small PHA would 
not be sooner than 6 months after the end of the federal fiscal 
quarter.
    The final rule gives PHAs more time to prepare for the change to 
DDTF. Starting in Fiscal Year (FY) 2014, PHAs that would be newly 
eligible for RHF funding will receive instead 5 years of DDTF. In FY 
2014, if a PHA has one or more years of first-increment RHF funding, 
the PHA will receive the remaining years of first-increment RHF and an 
additional 5 years of DDTF. If, in FY 2014, a PHA has already started 
receiving second increment RHF funding, the PHA will receive the 
remaining years of second increment RHF funding. An Excel spreadsheet 
that describes the impact of HUD's changes to DDTF is available at 
http://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/programs/ph/capfund.
    The final rule provides that PHAs that remove units because of 
homeownership are not eligible for replacement funding under an RHF.
    This final rule corrects an error in proposed Sec.  905.602(b), 
that addressed limitations on new construction. In the proposed rule, 
acquisition was improperly excluded from the limitations. HUD's 
interpretation of construction in this context, as including 
acquisition, was properly reflected in the regulatory preamble of the 
February 7, 2011, proposed rule at 76 FR 6654, third column, which 
stated as follows:

    Section 9(g)(3) of the 1937 Act (42 U.S.C. 1437g(g)(3)) imposes 
limitations on the use of the Capital Fund or Operating Fund for new 
construction. Generally, the CF formula shall not provide PHAs 
funding for the purpose of constructing public housing units (which 
includes acquisition), if the construction would result in a net 
increase from the number of housing units owned, operated, or 
assisted by the PHA on October 1, 1999. . . .''

However, the rule text at proposed Sec.  905.602 did not correctly 
reflect this interpretation. This error is corrected in final rule 
Sec.  905.602(b).
    The final rule makes changes to proposed Sec.  905.604(n), which 
addressed deviations from HUD requirements under 35(h) of the 1937 Act 
(see 42 U.S.C. 1437z-7(h)). The proposed rule would have required that 
to allow for deviations in a mixed-finance project because of a change 
in appropriations or other change in law preventing a PHA from 
providing Operating Funds, at least 20 percent of the units must be 
nonpublic housing rental units. In addition, the proposed rule would 
have predetermined specific allowable deviations. Some commenters 
objected to the 20 percent threshold and the limited allowable 
deviations. This final rule allows for more flexibility. As the statute 
provides, there must be a ``significant number'' of units that are not 
public housing. Rather than specific allowable deviations, the PHA, on 
behalf of the mixed-finance owner entity (Owner Entity) would submit an 
Alternative Management Plan to HUD, which would explain the reasons for 
the deviation and the proposed changes, among other details (see Sec.  
905.604(k) of this final rule).
    This final rule revises the identity of interest regulations in 
accordance with HUD's actual practice. This revision provides PHAs with 
the flexibility to use an instrumentality as a general contractor in 
mixed-finance projects, as long as cost requirements are met, without 
having to request a waiver. The identity of interest general contractor 
must have submitted the lowest bid in response to a request for bids, 
or, in the alternative, the PHA must submit a written justification to 
HUD, including

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an independent cost estimate, that demonstrates that the identity of 
interest general contractor's costs are less than or equal to the 
independent third party cost estimate. Identity of interest contractors 
will be considered by HUD as part of the development proposal approval. 
Since 2008, HUD has consistently granted waivers to allow this 
procedure to be followed; 45 waiver requests have been granted, and no 
waiver request was denied in that period. Additionally, HUD previously 
published this provision for comment (see HUD's proposed rule entitled 
``Streamlining Public Housing Programs'' (FR-4990-P-01), published on 
August 8, 2008, at 73 FR 45373 and, generally, received supportive 
comments. The comments on the 2008 proposed rule can be found at http://www.regulations.gov.

V. The Public Comments

    The public comment period on the proposed rule closed on April 8, 
2011, and 45 public comments were received. Comments were received from 
a variety of stakeholders, including PHAs, trade associations, housing 
advocates, and individuals.

Definitions (Sec.  905.108)

    Issue: The proposed definition of ``Capital Fund Annual 
Contributions Contract (CF ACC)'' appears to conflate the definition of 
the entire ACC (which is a contract addressing the operation of public 
housing) with that of a Capital Funds amendment (presumably limited to 
the special terms applicable to the provision of Capital Funds).
    HUD Response: To avoid possible ambiguity, this final rule modifies 
the proposed definition of CF ACC to more clearly indicate that this is 
an amendment to the Consolidated Annual Contributions Contract 
(Consolidated ACC). It should also be noted that the ACC is a grant 
agreement that addresses not only the operation of public housing but 
also the development and modernization of public housing.
    Issue: The definition of ``development'' in Sec.  905.200(b)(2) 
appears to be limited to activities to add units to inventory; 
notwithstanding the reference to nondwelling facilities, it is unclear 
what else might be covered given the limiting phrase. Also, the 
definition of ``development'' should include a facility that is being 
modernized.
    HUD Response: The reference to ``development'' in this paragraph is 
in the context of eligible housing, not a general definition of 
development, and is part of a larger list of eligible activities. The 
paragraph states that the eligible activities under the rubric of 
development include ``construction and acquisition with or without 
rehabilitation; any and all undertakings necessary for planning, 
design, financing, land acquisition, demolition, construction, or 
equipment, including development of public housing units, and 
buildings, facilities, and/or related appurtenances (i.e., nondwelling 
facilities/spaces). Development of mixed-finance projects includes the 
provision of public housing through a regulatory and operating 
agreement, master contract, individual lease, condominium or 
cooperative agreement, or equity interest.''
    Issue: The definition of ``Community Renewal Costs'' in Sec.  
905.108 states that Capital Funds may be used for community renewal 
costs, but not what those costs are, which makes it difficult to apply 
the TDC formula at Sec.  905.314(e). The commenter states that this 
term should be defined.
    HUD Response: Community Renewal costs consist of the sum of the 
following HUD-approved costs related to the development of a public 
housing project: planning (including proposal preparation), 
administration, site acquisition, relocation, demolition, and site 
remediation of environmental hazards associated with public housing 
units that will be replaced on the project site, interest and carrying 
charges, off-site facilities, community buildings and nondwelling 
facilities, contingency allowance, insurance premiums, any initial 
operating deficit, on-site streets, on-site utilities, and other costs 
necessary to develop the project that are not covered under the ACC. 
This final rule adds this information to the definition.
    Issue: The definition of ``Public Housing Requirements'' should be 
revised to specifically reference the Consolidated ACC and all 
amendments, rather than referring to the CF ACC Amendment without the 
underlying document. If there is intended to be a split between the CF 
ACC Amendment and the Mixed-Finance ACC Amendment, references to the CF 
ACC should be corrected accordingly. The definition should read:

    Public Housing Requirements. All requirements applicable to 
public housing including, but not limited to, the 1937 Act; HUD 
regulations; the Consolidated Annual Contributions Contract, 
including amendments; HUD notices; and all applicable federal 
statutes, executive orders, and regulatory requirements, as these 
requirements may be amended from time to time.

    HUD Response: HUD accepts this recommendation and the change is 
incorporated into the definition at Sec.  905.108.
    Issue: HUD's regulation at Sec.  903.3 does not directly define the 
term ``qualified'' PHA. The commenter recommends that to make the final 
rule transparent and conducive to public understanding, it should list 
the 3 factors necessary for a small PHA to be ``qualified'' in order to 
avoid having a PHA Annual Plan. The commenter additionally notes that 
while the proposed rule's summary and overview declare that the 
proposed PHA Annual Plan change would merely incorporate the definition 
of ``qualified PHA'' in the PHA Annual Plan regulation at Sec.  903.3, 
the actual proposed rule text removes the current subsection explaining 
the purpose of the PHA Annual Plan.
    HUD Response: For ease of use and transparency, this final rule 
incorporates the definition of ``qualified PHA'' that is provided in 
Sec.  903.3, which, in turn, adopts the statutory definition for this 
term in section 2702 of HERA (codified at 42 U.S.C. 1437c-1(b)(3)(C)), 
rather than relying on a cross-reference:
    The term ``qualified PHA'' means a public housing agency that meets 
the following requirements:
    (1) The sum of the number of public housing dwelling units 
administered by the agency, and the number of vouchers under section 
8(o) of the United States Housing Act of 1937 (42 U.S.C. 1437f(o)) 
administered by the agency, is 550 or fewer; and
    (2) The agency is not designated under section 42 U.S.C. 
1437d(j)(2) as a troubled public housing agency and does not have a 
failing score under SEMAP during the prior 12 months.
    Issue: The definition of ``Owner Entity'' requires that the rule 
make clear, either in the definition or elsewhere, that a mixed-finance 
development can be owned by an Owner Entity, a PHA, or, alternatively, 
an instrumentality.
    HUD Response: HUD has clarified the definition of Owner Entity as 
it relates to mixed-finance in Sec. Sec.  905.108 and 905.604(a)(1).
    Issue: In proposed Sec.  906.604(b)(4), the definition of 
``participating party'' is overbroad.
    HUD Response: This term is no longer used this final rule.
    Issue: The rule should include a definition of ``partners,'' used 
in Sec.  905.108; a definition of ``declaration of trust''; a 
definition of ``modernization''; and a definition of ``mixed-finance 
modernization.''
    HUD Response: ``Partner'' was proposed to be defined in Sec.  
905.604(b); however, because the term applies

[[Page 63752]]

elsewhere, this final rule moves the definition to Sec.  905.108. 
``Mixed-finance modernization'' is defined at Sec.  905.108, 905.200 
and 905.604. Definitions of ``Declaration of Trust'' and 
``modernization'' are added to this final rule at Sec.  905.108.
    Issue: The definition of ``public housing'' excludes HOPE VI and 
other non-Capital Fund assistance that HUD regulates.
    HUD Response: To capture the Public Housing Funding that HUD 
regulates, this final rule defines ``public housing funds'' in a more 
inclusive manner at Sec.  905.108 to include HOPE VI and other funds 
appropriated for public housing uses, including development, 
rehabilitation, and operations.

Total Development Cost (TDC)

    Issue: Several commenters expressed support for limiting 
modernization costs to 90 percent of TDC as well as for the TDC 
exception in Sec.  905.314(c) for integrated utility management, 
capital planning, and other capital and management activities that 
promote energy conservation and efficiency, including green 
construction and retrofits.
    One commenter, however, stated that there is a lack of clarity in 
the language of Sec.  905.314(c) because the terminology varies between 
``exception'' and ``waiver,'' where a waiver is normally a more 
formalized process than a simple regulatory exception.
    HUD Response: This final rule retains the 90 percent of TDC 
threshold for modernization. On the issue of exception or waiver, the 
commenter is correct, ``exception'' is the correct term and is used in 
Sec.  905.314(c) of this final rule.
    Issue: One commenter states that while the rule deals with Capital 
Funds, it should also include other sources of funding for public 
housing such as HOPE VI, Choice Neighborhoods, ``Development funds,'' 
and any other sources that may become available in the future. The 
commenter states, for example, Sec.  905.314(c), on TDC, currently 
covers only development with Capital Funds and that this section should 
be revised to include all public housing funding sources.
    HUD Response: HUD agrees that, because of the federal interest in 
maximizing the use of funds, TDC applies to all public housing funds 
and revises Sec.  905.314(c)(1) of this final rule accordingly.
    Issue: Heating-and-cooling-degree-days should continue to be an 
essential factor when considering exceptions to TDC. The unique 
expenses associated with implementing energy-saving and green features 
that represent high front-end costs, which may or may not be ``cost 
saving sensitive'' but are highly sensitive to depleting energy 
sources, should be treated similarly. The commenter states that the 
rule should directly and specifically address the eligible high front-
end expenses when green features emphasize renewable energy sources 
that far exceed TDC, in exchange for preserving the other energy 
sources that are depleting.
    HUD Response: This final rule provides for a TDC exception for 
integrated utility management, capital planning, and other capital and 
management activities that promote energy conservation and efficiency. 
HUD believes that, rather than trying to address each possible special 
case in the rule, this exception preserves PHA discretion to address 
the commenter's concern as well as other similar concerns that may 
arise in individual cases.

Contracts and Contracting

    Issue: This commenter states that the proposed rule should 
subordinate its terms for a covenant to the terms of the financing deal 
for development. As for the covenant for modernization, it should 
subordinate such terms only when Capital Fund financing is involved in 
the modernization of the property. The commenter states that for all 
other cases it would appear that the 20-year covenant for modernization 
could then be a reasonable provision for inclusion in a final rule.
    HUD Response: Section 9(d)(3)(B) of the 1937 Act (42 U.S.C. 
1437g(d)(3)(B)) requires use restrictions to remain on the property for 
20 years from the date that modernization is completed with Capital 
Funds on any public housing or portion thereof. HUD retaining a 
priority position as to HUD's financing ensures that the low-income use 
requirements will continue to be met. HUD has interpreted the 1937 Act 
to allow appurtenances to be excepted from the definition of public 
housing (e.g., nondwelling properties such as administrative buildings) 
which, if included in public housing, would have had to remain under 
the Declaration of Trust for 20 years from the latest date on which 
modernization is completed, but may have liens prior to the Declaration 
of Trust.
    Issue: The proposed regulation at Sec.  905.316(a), which provides 
that PHA procurement must comply with 24 CFR part 85, should be limited 
to activities funded with Capital Funds.
    HUD Response: Section 905.31(a) explicitly refers to public housing 
capital activities; no further clarification is necessary.
    Issue: A commenter stated that Sec.  905.316(d)(2)(iv), which 
refers to irrevocable letters of credit as an assurance of completion, 
is insufficient because the specific terms are not stated. The rule 
should require that, before accepting a letter of credit, the PHA have 
its counsel review the proposal form and opine that the PHA and HUD are 
fully protected under its terms. Another commenter stated that the 25 
percent requirement is inconsistent with modern private sector practice 
and imposes extra costs that do not materially increase the PHA's 
security, and, in the context of mixed finance, is unnecessary because 
the tax credit investors have a strong monetary interest in completion.
    HUD Response: The main condition that HUD is concerned about, as 
stated in the rule, is irrevocability. The letter of credit is only one 
option for the assurance, and the PHA may select one of the other 
options. Therefore, HUD does not believe a change is necessary 
regarding further specificity of the terms. However, HUD agrees to 
lower the percentage requirement to reflect modern practice, and this 
final rule now requires a 10 percent irrevocable letter of credit at 
Sec.  905.316(d)(iv).
    Issue: Proposed Sec.  905.308(b)(4) appears to be an incredible 
expansion of prevailing wage rate requirements, since it appears to 
apply to third party contracts and to professionals. The commenter 
requests clarification as to whether, under this section, architects, 
engineers and technicians must be paid the prevailing wage rates and 
questioned how to find those rates.
    HUD Response: The commenter is incorrect; HUD is not expanding the 
Davis-Bacon wage rate requirements in this rule. These are standard 
Davis-Bacon provisions and are required by statute; specifically, as 
Davis-Bacon requirements related to HUD-funded projects under the 1937 
Act (42 U.S.C. 1437j(a)). Guidance can be found at the Department of 
Labor's wage rate site, http://www.wdol.gov/. HUD also has a Web page 
with Davis-Bacon information at http://portal.hud.gov/hudportal/HUD?src=/program_offices/labor_relations.
    Issue: One commenter asked whether Sec.  905.326, which imposes a 
5-year time frame for record retention, intends to add an additional 2 
years to the record retention required under 24 CFR 85.36(i)(11) and 
85.42(b).
    HUD Response: Yes, based on the life cycle of Capital Funds, this 
rule adds 2 years to the 3 years required under 24 CFR part 85, for a 
total of 5 years.

[[Page 63753]]

    Issue: As to Sec.  905.318, a commenter states that a title 
insurance policy is not available before a PHA takes title.
    HUD Response: Title insurance is required at the time the property 
is acquired by the PHA. This final rule makes this clarification.

Forms

    Issue: The definition of ``Cooperation Agreement'' references a 
form prescribed by HUD, form HUD-52481, which is available in HUDClips 
(http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/forms/), but one commenter stated that the form 
states that it is a drafting guide.
    HUD Response: This form has always been a guide because State and 
local law must be considered as well. Many PHAs have used this form 
``as is'' and that is acceptable as long as it conforms to State and 
local law.
    Issue: One commenter stated that there should be an exception for 
the use of American Institute of Architects forms, such as AIA-B108-
2009 under Sec.  905.316(b)(use of HUD-prescribed contract forms).
    A commenter stated that one of HUD's proposed changes to part 905 
would require that PHAs nationwide use standard mandated contract 
forms. The commenter states that while PHAs should be required to 
incorporate certain terms and conditions in their contract, they must 
also have flexibility to address local legal requirements, which may 
vary from state to state.
    HUD Response: HUD-prescribed contract forms include necessary 
federal and Public Housing Requirements. HUD intends to limit the use 
of contract forms to HUD forms, because nonstandard and local forms do 
not reflect the appropriate federal limitations. Therefore, HUD has not 
changed the form requirements.
    Issue: The rule is inconsistent with respect to references to ACC 
forms. The rule refers variously to a mixed-finance ACC Amendment 
(Sec.  905.604(k)(2)), ACC Amendment (throughout Sec.  905.604(k)), and 
CF Amendment (Sec.  905.612(b)) in closely related provisions. The rule 
seems to suggest that it intends to replace 3 ACC forms currently in 
use with a single CF ACC amendment, but is inconsistent in this 
respect.
    HUD Response: It is not the intention of this rule to replace the 3 
ACC forms with a single ACC Amendment. There is one consolidated ACC, 
and separate ACC Amendments for different sections of the program. A 
definition of ACC Amendment has been added to Sec.  905.108. There are 
separate ACC Amendments for the various areas of the Capital Fund 
Program (CFP), including but not limited to the CFP annual formula 
grant, CFP annual RHF grants, the Capital Fund Education and Training 
Community Facility Program grants that were awarded, and mixed-finance 
grants.

Replacement Housing Factor (RHF)

    Issue: Reduction in RHF grant. PHAs that have a reduction in units 
due to demolition and disposition have been eligible for an additional 
grant, the RHF grant. PHAs have been entitled to an initial 5 years of 
RHF funding and an additional 5 years of RHF funding if certain 
conditions are met. The rule proposed, for units demolished or disposed 
of on or after the effective date of this rule, to reduce the RHF to 5 
years of funding, in total.
    One commenter observed that this change would have a positive 
impact on the availability of Capital Funds. Several other commenters, 
however, objected to this change and stated that RHF funding should be 
standardized to 10 years because RHF funding is the best approach for 
developing replacement housing, and many PHAs have compelling reasons 
for demolishing or disposing of public housing property and need this 
resource, which is one of the few resources remaining to assist with 
new public housing. There are still thousands of distressed housing 
units, and until these can be improved, RHF funding should continue at 
10 years. PHAs have a capital backlog of an estimated $32 billion and 
an average of 10,000 units are lost each year. RHF funding adds up to a 
vital resource over the course of 10 years, especially given the 
uncertainty of funding from year to year. PHAs cannot count on an award 
of HOPE VI or Choice Neighborhood grants, because they are scarce and 
directed to certain types of projects. The RHF constitutes the only 
resource available that is dedicated to replacement public housing, and 
is an important resource for PHAs that do not have HOPE VI funds.
    One commenter stated that because the funding is only paid to PHAs 
that have removed units, without HUD development funds it can take 
years to develop a viable, fundable plan to for replacement housing. 
One commenter stated that a PHA cannot count on other resources, and 
that RHF ``constitutes the only resource available that is dedicated to 
replacement public housing. HUD has not done a study of RHF, including 
its leveraging effectiveness, and has not established a sound basis for 
dramatically cutting this much-needed resource.'' Even with 10 years' 
worth of funding, agencies must look for other resources, and thus it 
is not sensible to reduce the amount provided by the RHF even more.
    HUD Response: While the RHF is an important tool for development of 
replacement housing, in the current limited funding environment, the 
need for replacement housing for a few PHAs has to be balanced with the 
needs of the majority of PHAs whose Capital Funds modernize existing 
public housing. These needs are quantified in a study released in June 
2011 on modernization needs, ``Capital Needs in the Public Housing 
Program,'' prepared by Abt Associates, available at http://portal.hud.gov/hudportal/documents/huddoc?id=PH_Capital_Needs.pdf. 
The study found that the Nation's 1.2 million public housing units have 
an estimated total of $25.6 billion in existing capital needs. 
Regarding demolition and disposition needs, the Capital Fund and other 
sources of funding, such as section 8 funding for replacement housing, 
can be used to meet these needs. The change in the RHF will result in 
an increase in Capital Funds, which is a more flexible resource.
    However, given the significance of the change, this final rule 
allows for a longer transition period than proposed. PHAs that would be 
newly eligible for RHF funding in Federal Fiscal Year (FFY) 2014 will 
instead receive 5 years of DDTF from the Capital Fund. The Federal 
Fiscal Year is defined in Sec.  905.108 of this rule as the fiscal year 
that begins each year on October 1 and ends on September 30 of the 
following year (PHA fiscal years can have different beginning and 
ending dates). PHAs that have already begun receiving first-increment 
RHF funding by FFY 2014 will receive the remainder of their first 
increment and 5 years of DDTF. If a PHA is already receiving second-
increment RHF funding by FFY 2014, it will receive the remainder of its 
second-increment RHF funding. DDTF funding would have fewer limitations 
than RHF funding, in that it could be used for modernization needs (of 
which there is a substantial backlog) as well as development; at the 
same time, statutory requirements applicable to the Capital Fund, such 
as the requirements for expenditure and obligation in section 9(j) of 
the 1937 Act (42 U.S.C. 1437g(j)), will apply. This is a generous 
transition and should ameliorate the issues discussed by the 
commenters.
    Issue: Scattered site replacement housing. One commenter stated 
that eliminating 5 years of RHF funds would tie the hands of PHAs that 
replace older public housing units with new

[[Page 63754]]

scattered-site units. Such units may take years to come online and that 
the local housing opportunities commission is inclined to pass over 
units in areas with a high affordable housing concentration in favor of 
units in wealthier areas. The commenter also stated that reducing the 
time frame for RHF funding may restrict efforts to develop mixed-
finance developments that include some public housing because such 
deals and regulatory regimes are complex.
    HUD Response: Firstly, if the PHA in question has already received 
at least one year of RHF funding as of the effective date of this final 
rule, the PHA will be eligible under Sec.  905.400(k) for an additional 
5 years of RHF funding. Secondly, the change in RHF grant funding will 
increase the amount of Capital Funds, which is a more flexible resource 
that, unlike RHF funds, can be used for any Capital Fund purpose, be it 
development or modernization. This flexibility is particularly 
important in the case of smaller PHAs whose RHF funds typically are not 
enough at any one time to engage in development activities. In many 
cases, by the time these unused funds are recaptured by HUD, they are 
lost to their intended use for assisted housing because the life cycle 
of the funding has expired and the funds must be returned to the 
Department of the Treasury as general revenues. Under DDTF, PHAs in 
this situation will be able to use the funds for modernization needs, 
thus assuring that funds intended for housing needs actually go to that 
purpose. Also, because these funds are, in fact, Capital Funds and not 
part of a separate appropriation, the phased-in decrease to 5 years 
means that there will be more Capital Funds available to all PHAs 
receiving Capital Fund grants.
    Issue: Grandfathering. Commenters stated that PHAs currently 
receiving RHF grants should retain their full 10 years of eligibility.
    HUD Response: Under this final rule, PHAs that have received at 
least one year of RHF funding as of the effective date of this rule 
will be eligible for 10 years of RHF grants if they meet the regulatory 
requirements of this rule, including leveraging (see Sec.  905.400(i)).
    Issue: Accumulation of RHF funds. Commenters stated that 10 years 
of RHF grants should be ``banked'' or accumulated on a PHA's behalf, 
and paid out if the PHA meets obligations to develop one or more HUD-
approved mixed-finance projects.
    HUD Response: Appropriations statutes, not regulations, control the 
period of availability of federal funds, including Capital Funds; in 
the case of FY 2010, FY 2011, and FY 2012 Capital Funds, the funds are 
available only until September 30, 2013; September 30, 2014; and 
September 30, 2015, respectively (see, respectively, div. A, tit. II, 
Pub. L. 111-117 (approved December 16, 2009); div. B, tit. I, section 
1103, Public Law 112-10 (approved April 15, 2011); and div. C, tit. II, 
Public Law 112-55 (approved November 18, 2011). This limitation 
prevents lengthy multiyear accumulations as suggested. Even were the 
funds involved to be appropriated as no-year funds, as a general 
matter, HUD finds that it is not appropriate for public funds to remain 
unobligated and unexpended for long periods of time, a policy also 
expressed in section 9(j) of the 1937 Act (42 U.S.C. 1437g(j)), which 
penalizes PHAs for delayed obligation and expenditure of funds.
    Issue: Reduce administrative costs rather than eliminating RHF 
grants. Commenters stated that while administering the RHF grants can 
be cumbersome for HUD, the administration of the program should be 
simplified rather than HUD reducing the amount made available to the 
program. The commenters suggested that if the number of units receiving 
RHF grants is relatively stable from year to year, then after an 
initial cost, 5 years of RHF funding may not reduce the remaining money 
in the Capital Fund, while alleviating some of HUD's administrative 
burden.
    HUD Response: Administrative costs are not the major contributor to 
the need to reduce the total number of years of RHF funding. RHF funds 
and traditional Capital Fund grants are both funded from the same 
appropriation, which was $2.044 billion in FFY 2011. While RHF is an 
important tool for development of replacement housing, the need for 
replacement housing for a few PHAs has to be balanced with the needs of 
the majority of PHAs whose Capital Funds modernize existing public 
housing. Reducing RHF grants from 10 years to 5 years will make more 
funds available for modernization. It is also common for PHAs to 
accumulate 5 years of funding and then realize there are insufficient 
funds to develop units and, subsequently, reject the funding, or allow 
the funding to be recaptured. When this occurs, most of the funding 
that is returned to HUD must be transferred to the Treasury, and cannot 
be redistributed because, during the accumulation, the life cycle of 
the funds from the first and seconds years of second-increment funding 
will have expired.
    Regarding administrative costs, the replacement housing policy that 
is presented in this final rule has been revised from the policy 
presented in the proposed rule, based on public comment. The revised 
policy simplifies the administration of the program for both HUD staff 
and PHAs. While the revised policy will still only provide 5 years of 
additional funding for units removed from inventory due to demolition 
or disposition, the limitations on the current RHF funding will be 
eliminated, allowing PHAs to use the funding for any eligible costs 
under the Capital Fund program, including development.
    Issue: Plans for future disposition activities rely upon RHF grants 
to fund the development of new rental and homeownership units. With the 
elimination of the one-for-one replacement statutory requirement the 
need for RHF grants has become greater over time because it provides 
critical financing to demolish outdated properties. Additionally, the 
proposed change would make it more difficult to maintain significant 
numbers of highly subsidized units in mixed-finance properties.
    HUD Response: Capital Funds and section 8 funds are available for 
these purposes. Furthermore, this final rule provides for a lengthier 
transition period and, beginning in FY 2014, DDTF funds that can be 
used on the same basis as Capital Funds.
    Issue: RHF grants should not be available for units lost to 
homeownership, but only for units lost because of demolition or 
disposition, and should be limited to highly leveraged replacement 
rental transactions using only HUD's mixed-finance methodology.
    HUD Response: In this final rule, RHF grants eligibility is based 
on units lost as a result of demolition and disposition, but not 
homeownership. In addition, there is a leveraging requirement for PHAs 
that have already received some RHF funding as of the effective date of 
this rule and wish to receive an additional 5 years. HUD does not agree 
that RHF grants should be restricted to mixed-finance as that is overly 
inflexible.
    Issue: Second-increment RHF funds continue to be needed to replace 
housing losses resulting from ongoing, necessary demolition and 
disposition. PHAs state that they made demolition and disposition plans 
based on RHF funding being available.
    HUD Response: As originally designed, the RHF grants were never 
intended to fund the cost of replacement of every unit demolished or 
disposed of from the PHA's inventory. However, in order to ease the 
transition for PHAs that have already demolished or

[[Page 63755]]

disposed of units that are relying in part on RHF grants, the proposed 
RHF regulation has been modified in this final rule at Sec.  905.400(j) 
and Sec.  905.400(k). PHAs that have received at least one year of 
first increment RHF funding prior to FFY 2014, the proposed effective 
date of the DDTF, will be eligible to receive up to 10 years of funding 
for units removed from inventory as a result of demolition or 
disposition. The additional 5 years of DDTF funding will not be subject 
to the same restrictions as RHF grants because it will be included in 
the Capital Fund grant (although it will be subject to the same legal 
requirements as any Capital Fund grant, including the obligation and 
expenditure requirements of section 9(j) of the 1937 Act (42 U.S.C. 
1437g(j)), and any time limit placed on the appropriation by the 
applicable appropriations act). It should be noted that the PHA always 
has the option to use additional Capital Fund formula grant funds as a 
resource in a mixed-finance transaction.
    Issue: The change to RHF grants will severely impact bond funding, 
where the 10 years of RHF grants were a major determinant to the amount 
of bonds issued. The commenter cites an example in which a ``vast 
majority'' of units slated for demolition were demolished well before 
FY 2010, but, because a few units were not demolished until 2010, the 
units remained in the Public Housing Information Center (PIC) database 
in FFY 2010 and would apparently be subject to the proposed rule 
limiting RHF grants to a single 5-year increment even though 10 years 
of RHF grants from the demolition of these units had been pledged to an 
outstanding bond issue. HUD should use the date of the demolition or 
disposition application, not the date of removal from the PIC system, 
to determine the applicability of new RHF grant rules.
    HUD Response: Under this final rule, the postponement of the RHF 
transition to FY 2014, along with the future provision of DDTF funding, 
should allow for bond funding to continue. As to the issue of using the 
date of the application to determine the applicability of new RHF grant 
rules, the mere existence of an application is far too preliminary a 
step. First of all, a given application may or may not be approved. 
Secondly, even if approved, there are cases when demolition does not 
occur for a considerable period of time, even years. Despite the single 
example cited by the commenter, the approach that will generally help 
ensure the best use of public housing funds, and which is the most 
verifiable, is to base the payment of RHF or DDTF funds on removal of 
the units from the PIC system.
    Issue: Due to the federal budget crisis, RHF funding should be 
eliminated altogether. Since PHAs also receive tenant protection 
vouchers, the government is ``paying double'' for each unit removed.
    HUD Response: Removing RHF funding altogether would have negative 
consequences for PHAs that have planned demolitions and dispositions 
based on future availability of RHF grant increments for replacement 
housing. On the other hand, to the extent possible, in today's funding 
environment, PHAs must use federal funds to leverage other sources of 
funding. HUD believes that the RHF transition provisions in this final 
rule for PHAs already receiving, and relying on, RHF grants offer the 
best balance between the need to maximize sources of funding and the 
need to fund adequate replacement housing. PHAs newly coming into the 
RHF program as of FY 2014 will receive 5 years of more flexible DDTF 
funds. It should be noted that in order to prevent duplicative funding, 
RHF and DDTF funding is prohibited for a PHA that will replace units 
using another source of federal funding (see Sec.  905.400(i)(5)(iii) 
of this final rule).
    Issue: HUD has not undertaken a study of the RHF grant program, 
including its leveraging effectiveness, and has not established a sound 
basis for dramatically cutting this much-needed resource.
    HUD Response: HUD has many years of experience with RHF grants and 
leveraging, which has shown that without leverage it is quite difficult 
to achieve unit replacement. HUD is not dramatically cutting a much 
needed resource. Not only will all activities that are currently 
eligible under the RHF grant program still be eligible under DDTF, but 
the DDTF will also allow PHAs to use this funding on any eligible 
activity under the Capital Fund Program. Further, HUD is providing a 
lengthier transition to DDTF to accommodate PHAs' concerns. It should 
be noted that the funding for the RHF and DDTF grants is taken out of 
the general Capital Fund Appropriation. In limiting the DDTF funding to 
5 years, the funding that would have gone to only specific PHAs 
receiving 10 years of RHF funding, will now be distributed among all of 
the PHAs receiving a Capital Fund formula grant.
    Issue: Several commenters objected to the apparent retroactive date 
of the change to RHF.
    HUD Response: The changes to the RHF grant program will not be 
retroactive, but will be implemented starting in FFY 2014, which should 
ameliorate the impact.
    Issue: In order to compensate for RHF grants that will be ``lost'' 
under this provision, PHAs should have the freedom to select higher-
income applicants.
    HUD Response: Under this final rule, PHAs that have demolished or 
disposed of units, and have begun to receive first-increment RHF 
funding as of FFY 2014, will be eligible for an additional 5 years of 
DDTF. Other PHAs will have significant advance notice that they will be 
eligible for only 5 years of DDTF and can do their financial planning 
accordingly. Finally, there is no direct nexus between funding for 
replacement housing and admission of higher-income residents.
    Issue: The change to RHF funding is contrary to the statutory 
requirement that the Capital Fund formula be developed by negotiated 
rulemaking.
    HUD Response: The statutory requirement of section 9(f) of the 1937 
Act (42 U.S.C. 1437g(f)), is that ``the formulas . . . shall be 
developed according to procedures for issuance of regulations under the 
negotiated rulemaking procedure. . . .'' HUD interprets this to mean 
that the formulas are initially developed by negotiated rulemaking, not 
that each subsequent revision requires negotiated rulemaking. HUD 
previously fulfilled this statutory obligation to this regulation (see 
HUD's final rule published on September 14, 1999 at 64 FR 49924).
    Issue: Funding for small numbers of units. Some PHAs disposed of or 
demolished small numbers of units at various times, which resulted in 
RHF allocations too small to acquire or develop any replacement units. 
PHAs should be allowed to use funds that fall below certain thresholds 
for other public housing uses, such as modernization. One commenter 
stated that HUD should consider setting a minimum threshold for RHF 
funding, below which a PHA may elect to use it for general Capital Fund 
purposes and not replacement housing.
    HUD Response: The final rule addresses these issues by providing 
that the 5-year DDTF be given to PHAs in their Capital Fund formula 
grant. The formula grant, along with the increment that has been added, 
can be used for any Capital Fund eligible purpose, including 
development of replacement housing or modernization.
    Issue: The rule should include an exception where PHAs that 
demonstrate hardship will be eligible for a second increment of RHF 
funding. Hardship could include, but not be limited to, in-

[[Page 63756]]

process development projects that anticipated second-increment RHF 
funding and localities with critical shortages of affordable housing.
    HUD Response: The final rule addresses the issue of in-process 
development by extending the transition and providing for DDTF. As for 
other forms of ``hardship,'' such as shortages of affordable housing, 
HUD already provides funds for housing development and for vouchers, 
among other forms of funding.

Eligible Activities and Costs

    Issue: Is the phrase ``public housing capital assistance'' in Sec.  
905.314(b) intended to be broader than ``Capital Funds?'' If so, other 
included funding sources should be specified.
    HUD Response: HUD has added a definition of ``public housing 
funds'' in Sec.  905.108 that encompasses a broader source of funds.
    Issue: A commenter stated that the language in proposed Sec.  
905.202 designating those items that are ``not modest in design and 
cost,'' or not ``customary for the locality'' as ineligible is overly 
broad and could disqualify many green and energy conservation measures 
and complicate the use of Capital Funds for all but the simplest of 
projects.
    HUD Response: Green and energy conservation measures that do not 
otherwise qualify as eligible activities will be covered by the TDC 
exception found in Sec.  905.314(c) of this final rule. Further, it has 
been long-standing regulatory description and PHA practice to design, 
construct, and equip public housing units to improve substandard 
conditions and to harmonize with the neighborhoods they occupy, meet 
building standards, and achieve modest levels of comfort and 
liveability for the low-income public housing residents to be served, 
and all at a reasonable costs as defined under TDC. See e.g., former 24 
CFR 941.203 and 968.112(b) and (o).
    Issue: Add ``except for emergencies'' to proposed Sec.  905.202(b), 
which identifies activities and costs not identified in the 5-year 
action plan as ineligible costs.
    HUD Response: This final rule clarifies that emergencies that are 
not identified in the 5-year action plan are eligible costs.
    Issue: The proposed regulation at Sec.  905.202(g) uses a test for 
ineligible costs (``in excess of the amount directly attributable to 
the public housing units'') that may be read more literally than is 
appropriate. In a mixed-finance project, for instance, are the common 
areas ``directly attributable'' to the public housing units? Costs 
should be deemed ineligible when they are disproportionate to the 
benefit received by the public housing program in relation to other 
programs, or similar standard. The commenter also states that in Sec.  
905.314(a), the concept of ``costs directly attributable to the public 
housing program'' should be replaced with a reasonability or 
proportionality concept. The commenter also states that it is 
inappropriate for HUD to reserve the right in Sec.  905.202(i) to 
retroactively find costs ineligible, when such costs otherwise came 
within the definition of eligibility and did not violate some standard 
set forth in the rulemaking provisions of the Administrative Procedure 
Act (APA) (5 U.S.C. 501 et seq.).
    Another commenter stated that the ``directly attributable'' 
standard does not provide a standard by which a PHA can justify a 
cost's eligibility. This commenter states that the principles for cost 
allocation in OMB Circular A-87 (Cost Principles for State, Local, and 
Indian Tribal Governments) should be the basis for the eligibility 
determination.
    HUD Response: HUD disagrees. While concepts such as proportionality 
and reasonability are subjective, direct attribution to the intended 
purpose of the funds is objective. In general practice, the objective 
measures would not exclude eligible costs along the lines of what the 
commenter claimed. By requiring direct attribution to public housing, 
HUD is ensuring responsible use of government funds, and acting in 
accordance with 2 CFR Part 225. As to the APA issue, the APA requires 
public notice and an opportunity to comment on the rule itself, which 
the public has received regarding this rule. Each individual decision 
that may be made under this rule is not subject to additional notice 
and comment. On the contrary, it is entirely lawful for federal 
agencies to reserve discretion over managing their own programs.
    As to OMB Circular A-87, Cost Principles for State, Local, Indian, 
and Tribal Governments, now codified at 2 CFR part 225 (part 225), the 
final rule cites part 225 in relation to reasonable costs, and as one 
test for ineligible costs under Sec.  905.202(d). However, by 
suggesting that 2 CFR part 225 be the sole test for the connection 
between the costs and the public housing program, the comment 
misunderstands the nature of the circular. Part 225 is designed to 
identify basic principles, not to take the place of specific program 
regulations. Part 225 states, inter alia, ``The principles are for the 
purpose of cost determination and are not intended to identify the 
circumstances or dictate the extent of Federal or governmental unit 
participation in the financing of a particular program or project.'' 
(See 2 CFR part 225, Appendix A, General Principles for Determining 
Allowable Costs, at Sec.  A.1). Also, part 225 states that allowable 
costs must conform to ``governing regulations as to the types or 
amounts of cost items.'' (See Id. at Sec.  C.1.d). By requiring direct 
attribution to public housing, HUD is acting well within the scope of 2 
CFR part 225, its statutory authority, and APA principles.
    Issue: While Sec.  905.200(b)(12) makes approved homeownership 
activities eligible, some activities--such as relocation assistance, 
mobility counseling, and homeownership counseling--may appropriately 
occur prior to the approval of a specific homeownership plan. After the 
introductory phrase ``activities associated with approved 
homeownership,'' the rule should add ``provided, however, that 
activities under sections C and D may occur prior to approval of the 
homeownership plan.''
    HUD Response: Resident relocation and mobility counseling, which 
includes those items mentioned in the comment, are separately eligible 
under Sec.  905.200(b)(10) of this final rule. While the physical 
relocation has to be after the approval of the homeownership plan, the 
mobility counseling and surveying of the tenants can be done at any 
time. However, as the section in question does not specify the need for 
a homeownership plan or timing in relation to it, no rule revision is 
required.
    Issue: Under Sec.  905.312(a), are amenities such as air 
conditioners, dishwashers, washing machines and dryers eligible costs, 
or prohibited luxuries?
    HUD Response: HUD agrees that some further clarification may be 
helpful with respect to amenities. This final rule clarifies that air 
conditioning is an eligible modest amenity. Further clarification on 
luxury items and modest amenities will be provided in future guidance.
    Issue: Are Capital Funds eligible to be used to construct office, 
resident service, or maintenance facilities?
    HUD Response: Yes.
    Issue: How does Sec.  905.202(f), on direct provision of social 
services, relate to management improvements, and could HUD provide some 
examples?
    HUD Response: Section 905.202(f) provides that direct provision of 
social services is not an eligible Capital Fund expense. Examples of 
such ineligible expenses, provided in the rule, are salaries for social 
workers or General

[[Page 63757]]

Educational Developmental (GED) teachers, and this prohibition would 
apply to other benefits for such workers as well. Statutorily, under 42 
U.S.C. 1437g(d), services simply are not Capital Fund eligible costs; 
rather, the costs of the provision of services may be an operating cost 
under the Operating Fund as provided in 42 U.S.C. 1437g(e)(1)(D). While 
it is not entirely clear what the commenter means by ``relate to 
management improvements,'' the commenter appears to be asking whether 
these types of costs may nonetheless be permitted under the Capital 
Fund as management improvements. Eligible management improvements under 
Sec.  905.200(b)(7) of this rule include activities that have a linkage 
between the management improvement and the correction of an identified 
management deficiency. Generally, the ineligible social services 
expenses about which the commenter asks would not be tied to management 
in such a way as to make them eligible as management improvements. HUD 
may issue further guidance on this subject in the future.
    Issue: One commenter states that, in Sec.  905.200(b)(8), the 
discussion of eligible resident self-sufficiency activities refers to 
funding from the Operating Fund for $25 per-unit, per-month, for 
resident participation. The commenter states that Operating Fund rule 
at 24 CFR 990.190(e) references only $25 per annum.
    HUD Response: This statement is corrected in this final rule.
    Issue: The examples of Capital Fund-related legal costs at Sec.  
905.200(b)(13) are too limited and should be expanded. Costs that 
specifically should be mentioned include: negotiating and drafting 
mixed-finance arrangements; negotiating and reviewing property 
descriptions; title policies, regulatory interpretation, opinions, 
drafting, reviewing, and negotiating evidentiary documents for mixed-
finance development, the Capital Fund financing program, conventional 
development, and acquisition transactions.
    HUD Response: Unfortunately, existing funding does not allow every 
potential legal cost that one can envision to be expressly included. 
All of the legal costs mentioned in the comment would be eligible if 
they were reasonable in cost and related to the Capital Fund 
development activities. However, this rule is not intended to be an 
exclusive list of eligible and Capital Fund-related legal costs.
    Issue: Section 905.200(b)(7)(iii) (``Activities that include or 
foster equal opportunity'') should be revised to include Limited 
English Proficiency(LEP), Reasonable Accommodation, and Violence 
against Women Act (VAWA) policies and their implementation as part of 
equal opportunity requirements.
    HUD Response: Housing counseling for residents and prospective 
residents, as well as the design and construction of accessibility 
improvements, are eligible under the Capital Fund. (See Sec. Sec.  
905.200(b), 905.200(b)(7)(i) and (iv) and 905.200 (b)(10) of the 
rule.). Generally, a PHA would use operating subsidy or other 
noncapital resources for staffing and program materials for LEP or 
VAWA, rather than management improvements under the Capital Fund.
    Issue: Proposed Sec.  905.200(b)(4) states that vacancy reduction 
may be an eligible activity. It would be helpful for the rule to be 
more explicit about what is expected, either in the rule itself or in 
guidance. Also, compliance with accessibility requirements should be 
explicitly mentioned under proposed Sec.  905.200(b)(6) and should be 
more specific.
    HUD Response: HUD is making no change to the final rule text, but 
may issue future guidance on this and other issues. As to accessibility 
specifically, Sec.  905.312 addresses accessibility requirements.
    Issue: The rule should allow set-asides of capital replacement 
reserves for future modernization as an eligible activity. The 
inclusion of ``modernization'' as an eligible activity in section 
9(d)(1)(A) of the 1937 Act (42 U.S.C. 1437g(d)(1)(A))-- coupled with 
the authorization to accumulate funds to undertake modernization, 
substantial rehabilitation, or new construction of units in section 
9(j)(1)(B) of the 1937 Act (42 U.S.C. 1437g(j)(1)(B))-- should be 
sufficient legal basis to allow for such capital replacement reserves.
    HUD Response: Replacement reserves as such are not an authorized 
use of Capital Funds under section 9 of the 1937 Act (42 U.S.C. 1437g). 
Under section 9(j)(1)(B) of the 1937 Act (42 U.S.C. 1437g(j)(1)(B)), 
accumulated funds for modernization are required to be expended within 
24 months once sufficient funds are accumulated to undertake an 
activity.
    Issue: Subpart B, starting at Sec.  905.200, should have more 
precise language describing what is covered by the subpart.
    HUD Response: HUD agrees and has made the suggested revision at 
Sec.  905.200(a) of this final rule.
    Issue: The term ``significant'' in the phrase ``. . . PHA must have 
determine that there is no debt service payments, significant Capital 
Fund needs, or emergency needs that must be met prior to transferring 
100 percent of its funds to operating expenses'' in 24 CFR 
905.314(1)(2) should be clarified.
    HUD Response: HUD is considering issuing guidance to assist HUD 
field offices and PHAs with what information should be evaluated prior 
to allowing a small PHA to transfer all of its Capital Funds to 
Operations.

Federalization and Federalism

    Issue: The rule should clarify the meaning of Sec.  905.602(c) of 
the proposed rule, prohibiting federalization of certain projects. One 
commenter stated that the rule should provide that federalization is 
prohibited except as otherwise approved by HUD. Another commenter 
stated that there is no authority for prohibiting nonfederal public 
housing owned by a PHA from being federalized as provided in that 
section and that such policy is not in the interest of preserving 
affordable housing. Another commenter noted that the only authority for 
allowing federalization is found in section 9(n) of the 1937 Act (42 
U.S.C. 1437g(n)), and that any such language should be carefully 
limited to apply only to ``covered locally developed public housing 
units'' as defined in section 9(n). This commenter stated that there is 
no other statutory authority to limit a PHA's decision to bring PHA-
owned properties into the public housing program, subject to the HUD 
approvals generally required for public housing development. In some 
instances, such units may provide the most economical and best 
opportunities for the production of replacement public housing.
    HUD Response: This final rule revises proposed Sec.  905.602(c) 
titled ``Federalization,'' to make a more general statement that 
nonpublic housing properties may be used in the development of public 
housing units provided all requirements of the 1937 Act and the 
development requirements of this part are met. For historical 
reference, former section 9(n) of the 1937 Act was never used by HUD to 
federalize projects. Former section 9(n) was repealed by the 
Consolidated Appropriations Resolution, 2003 (Pub. L. 108-7, 117 Stat. 
1, approved February 20, 2003; see 117 Stat. 502) with additional 
directions applicable to ``covered locally developed public housing 
units'' in the states of New York and Massachusetts. HUD's regulation 
at Sec.  905.602(c) is neither a development exception nor a new 
development method relying on any form of prior authority relating to 
Federalization. Instead, HUD may consider any

[[Page 63758]]

property presented for development of public housing units under all of 
the existing requirements of the 1937 Act and 24 CFR part 905.
    Issue: HUD's proposed regulation at Sec.  905.602(c) should be 
revised to provide that a PHA may acquire and modernize a building that 
it already owns outside the public housing system, if that same 
modernization would be permitted for new construction under Sec.  
905.602(b).
    HUD Response: Section 905.602(c), both as proposed and in this 
final rule, allows this activity to occur.
    Issue: This rule triggers Executive Order 13132 on Federalism. This 
rule opens the public housing market to private partnerships with 
restrictions on the public on obtaining information and attending 
meetings, and without the accountability required for use of public 
funds. The commenter states that planning issues are under the 
jurisdiction of local municipalities under state requirements.
    HUD Response: Executive Order 13132 on Federalism concerns 
regulations and proposed legislation that have substantial direct 
effects on the states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. This 
regulation does not have these direct effects on states or on the 
relationship between the Federal Government and the states. This rule, 
which is authorized by statute, establishes substantive regulations and 
procedures for the use of federal funds by PHAs, as directed by 
statute, and does not preempt state law. Therefore, this rule does not 
trigger the Executive Order.

Conversion of Units

    Issue: A commenter states that Sec.  905.10(f)(3) as codified prior 
to the effective date of this final rule indicates that the total 
estimated need of the development is unchanged by conversion of units. 
The commenter states, however, that the preamble to the final rule 
adopting the existing regulation explains that ``reduction of units is 
not based only on demolition or disposition.'' If the intention of the 
new Capital Fund rule is not to change the formula, the language of the 
current rule regarding conversions should remain. The commenter 
expressed concern about the impact of this rule, considering the unit 
conversion it must undertake at one of its developments. HUD's policy, 
as stated in the proposed rule, would result in a permanent loss that 
is difficult for a housing agency of a small size to absorb. If a small 
PHA has an outstanding Capital Fund Financing Program loan, the terms 
of which require maintaining its public housing stock to generate 
sufficient Capital Fund grants to sustain three-to-one debt service 
coverage, HUD's proposed rule also may mean that it cannot undertake 
the necessary reconfiguration without partial prepayment of the loan.
    The commenter further states that HUD's funding policy should 
encourage rather than discourage PHA action to convert efficiencies to 
one-bedroom units. Because PHAs have the same square footage to manage 
and renovate, it would be reasonable for the Capital Fund to build in 
the proper incentive by not taking away funds when conversions occur.
    HUD Response: The Capital Fund formula is based on a complex 
calculation with a variety of characteristics including, but not 
limited to, the number of units in the development, the average number 
of bedrooms, and the location and age of the development. Based on the 
way the formula is calculated, if one PHA has a larger formula share it 
reduces the formula share for other PHAs. It was never the intent of 
the Capital Fund formula to result in HUD continuing to pay the 
modernization needs or the administrative costs of units that no longer 
exist at one housing authority while making other housing authorities 
with modernization needs pay for them, which would be the result if the 
Capital Fund were used to pay for units lost to conversion. The 
incentive for reconfiguration or conversion for the PHA is to better 
serve the needs of the low-income families in the community. 
Furthermore, funding for reconfiguration or preparing units for 
conversion, and any necessary relocation, are eligible Capital Fund 
expenses.
    Issue: A commenter states that while the new rule specifically 
states that reconfiguration of units will alter Capital Fund formula 
funding allocations, this policy was not articulated in the Capital 
Fund rule prior to the proposed rule and may have unintended 
consequences, such as a decrease of subsidy to the agency.
    A commenter states that Sec.  905.400(f)(3) differs from the 
current regulation, which is that conversion of public housing units 
does not change the Capital Fund formula shares. This proposed policy 
will discourage, for example, combining of unmarketable efficiency 
units into one-bedroom units.
    HUD Response: HUD is aware that some PHAs have been confused about 
the intent of the proposed provision, Sec.  905.400(f)(3), as well as 
the current provision, 24 CFR 905.10. The purpose of this provision is 
to clarify HUD's policy as it has consistently been implemented.
    Issue: How does the limit on new units found at Sec.  905.602(b)(1) 
apply to merged units? May a PHA replace merged units, and will the new 
units be eligible for Capital Fund and operating subsidy?
    HUD Response: This limit based on the number of units in management 
as of October 1, 1999, would remain the same. Thus, for example, if a 
PHA had a unit count of 100 as of 1999 and in FY 2005 the PHA decided 
to merge 6 efficiency units into 3 one-bedroom units, the PHA's unit 
count would be reduced to 97, and the PHA would be allowed to build 3 
additional units.

Separating CFP Informational Requirements From PHA Annual Plan 
Requirements

    Issue: Small PHAs should not have the same reporting requirements 
as large authorities and should operate as stated in HERA. Removing 
some reporting requirements from the annual plan and making their 
submission separate would result in small housing authorities being 
obligated to submit forms from which they are currently exempt. Even 
with the passage of HERA, small housing authorities continue to suffer 
from an excessive regulatory structure. HUD should not reestablish a 
regulatory burden that has been lifted by HERA. HUD should find a less 
burdensome method of receiving any necessary information, such as 
through an annual audit.
    HUD Response: These commenters appear to be referring to qualified 
PHAs, a category established under HERA as ``a public housing agency 
meeting the following requirements: (1) the sum of public housing 
dwelling units administered by the public housing agency and the number 
of vouchers under section 8(o) of the 1937 Act is 550 or fewer, and (2) 
the public housing agency is not designated as a troubled PHA under 
section 6(j)(2) and does not have a failing score under SEMAP during 
the prior 12 months.'' While qualified PHAs are exempt from submitting 
a PHA Annual Plan, they are not exempt from the requirement to hold an 
annual public hearing or to submit a 5-Year Plan. Further, HUD has 
authority under section 9 of the 1937 Act (42 U.S.C. 1437g) to obtain 
information needed to calculate the Capital Fund formula and monitor 
the implementation of the CFP.
    Issue: Large PHAs (over 550 units) that are required to submit both 
a PHA

[[Page 63759]]

Annual Plan and a Capital Fund program submission should be able to 
submit those documents at the same time as permitted under current 
rules. A key goal of the PHA planning process under section 5A of the 
1937 Act (42 U.S.C. 1437c-1) is to unify and consolidate PHA planning 
and reporting requirements from the various programs that PHAs 
administer in order to create efficiencies for PHAs and HUD, and also 
to provide residents and the community with an opportunity to review 
the PHA's plans holistically. The changes included in this proposed 
rule may have the impact of requiring a second public process, reducing 
efficiency, and creating confusion in the community about the 
opportunities for input. If a PHA submits their annual plan, and then 
subsequently submits a Capital Fund budget that alters the annual plan, 
the PHA will be required to hold a second public hearing process, 
unnecessarily burdening PHAs.
    A commenter states that a separate public process from developing 
the agency plan should not be required. Combining these processes has 
worked well. The commenter also stated that it is difficult to get 
resident participation and that all parts of a PHA are tied together 
and should be discussed in total, rather than the context of individual 
meetings. The commenter concluded that combining this public 
consultation has worked well for over 10 years. Decoupling the capital 
planning from the overall agency planning will make it more difficult 
to see the big picture of the PHA, require more administrative time and 
expense for the PHA with separate resident advisory board actions, and 
make it more challenging for the PHA Board to pass an agency budget 
that contains both operating and capital expenditures. Furthermore, it 
may not be feasible to schedule a resident meeting and a Board of 
Directors meeting in time to comply with HUD deadlines for submission 
of the ACC Amendment. This commenter suggests HUD extend the deadlines.
    HUD Response: HUD's regulations at Sec.  905.300(b)(3)-(4) are 
revised in this final rule to clarify that the PHA is to present the 
Capital Fund submission to the public and its residents and Resident 
Association Board (RAB) concurrent with the public hearing being held 
on the PHA Annual Plan. By making these submissions concurrent, the PHA 
will be able to present an integrated plan for public housing to the 
community and to the RAB. The PHA must consider the recommendations of 
the RAB concerning both the PHA Annual Plan (under current 24 CFR part 
903) and the Capital Fund submission, and these submissions must be 
consistent with any applicable Consolidated Plan. This final rule 
further clarifies that the required forms and information on the 
Capital Fund submission will be submitted along with the Annual 
Contributions Contract Amendment submitted to HUD when the annual 
Capital Fund awards are made.
    Issue: How does HUD have the discretion to require separate 
reporting requirements for the Capital Fund activities, considering 
that certain items, such as capital improvements and asset management, 
are required to be in the PHA Plan?
    HUD Response: The PHA Annual Plan requirements are satisfied with 
general information, as opposed to the more specific information 
required for Capital Fund formula purposes. They are not the same 
requirements.
    Issue: The language regarding budget submission requires 
clarification. According to a commenter, the proposed rule states that: 
``The PHA's budget must be approved by the PHA's Board of 
Commissioners, but does not require HUD approval (see Sec.  
905.300(b)(1)).'' If that in fact is the case, why require the budget 
to be submitted to HUD when the CFP ACC is submitted to HUD? The 
proposed rule should state that the budget must be approved and 
therefore gets submitted to HUD for review and approval, or that the 
PHA's budget must be approved by the PHA's Board of Commissioners, and 
does not need to be submitted to HUD for its review and approval. One 
commenter states that PHA Board approval only should be required.
    HUD Response: This final rule revises Sec.  905.300(b)(1)(iv) to 
state that the PHA's 5-Year Action Plan and budget must have been 
approved by the PHA's Board of Commissioners before it is submitted to 
HUD for review and approval. Under the current process for Qualified 
PHAs HUD reviews the PHA's budget for eligible activities and 
compliance with cost limits and other requirements. The HUD review is 
tantamount to HUD approval. Therefore, the language has been changed to 
signify that HUD approval is required.
    Issue: HUD should provide additional funding to defray the cost of 
the PNA inspection. Another commenter questioned whether PNA 
inspections would be conducted by PHA staff or outside firms, thus 
resulting in additional costs. Another commenter stated that the rule 
should provide more details about the PNA. Another commenter stated 
that the PNA should be a flexible planning tool and not impose 
requirements.
    HUD Response: The PNA is currently addressed in a separate 
rulemaking (see HUD's proposed rule published on July 20, 2011, at 76 
FR 43219), which provides details on the PNA. Unfortunately, due to 
constraints on funding, HUD cannot provide extra funds for this 
purpose.\2\
---------------------------------------------------------------------------

    \2\ Please see footnote 1 for more information.
---------------------------------------------------------------------------

    Issue: A commenter stated that in Sec.  905.300(b)(3) the reference 
relating to the PHA Annual Plan is confusing as the CFP is being 
decoupled from the PHA Annual Plan process. The commenter questioned 
whether HUD is requiring a separate consultation via the processing of 
the PHA Annual Plan or it can be a stand-alone process. Another 
commenter states that decoupling CFP requirements from the PHA annual 
plan is ``essential to guaranteeing resident input''; however, it may 
also be beneficial to maintain explicit requirements for resident 
meetings and input.
    HUD Response: In this final rule, most cross references in Sec.  
905.300(b) to 24 CFR part 903 are removed and Sec.  905.300 is expanded 
to include sections on resident and RAB participation, public hearings, 
definition of significant amendment, criteria for plan revision, and 
procedures for HUD review and approval. These changes should ensure 
that the decoupling is complete.

Development, Redevelopment, and Modernization

    Issue: Since this regulation replaces part 941 in full, whenever 
the rule regulates the development process, it should refer not only to 
Capital Funds, but also HOPE VI, Choice Neighborhoods, development 
funds, and other sources appropriated by Congress for the development 
of public housing.
    HUD Response: This final rule includes a definition of ``public 
housing funds'' at Sec.  905.108 to provide this broader definition.
    Issue: Proposed Sec.  905.314(g) provides that the modernization 
cost limit is 90 percent of TDC. One commenter suggests that the rule 
allow determination for redevelopment to be made when modernization 
costs reach a lower threshold such as 70 or 80 percent. In such cases, 
when the community believes such modernization expenditures would not 
be prudent use of federal financial assistance, such a community or PHA 
should be able to decide instead to demolish and develop new affordable 
housing.
    HUD Response: Demolition of public housing is governed by section 
18 of the

[[Page 63760]]

1937 Act (42 U.S.C. 1437p) and is beyond the scope of this rulemaking.
    Issue: The reference to Capital Fund financing in proposed Sec.  
905.600(c) is unclear.
    HUD Response: Proposed Sec.  905.600(c) on Capital Fund financing 
is revised in this final rule. HUD's final rule on Capital Fund 
financing (see final rule published on October 21, 2010, at 75 FR 
65208) is incorporated in subpart E of this final rule.
    Issue: Proposed Sec.  905.600(d) suggests that a PHA or a PHA's 
partner would solicit construction bids after approval of a development 
proposal. At least in the mixed-finance environment, a final 
development proposal cannot be submitted without a firm construction 
price.
    HUD Response: In this final rule, HUD's regulation at Sec.  
905.600(c) on the development process is revised. HUD does not dictate 
when a PHA or a PHA's partner solicits construction bids. However, the 
PHA must submit, as part of its Development Proposal (Sec.  905.606), 
an independent construction cost estimate or actual executed 
construction contract that supports the permanent and construction 
budgets for the project.
    Issue: Proposed Sec.  905.600(e)(7) should refer to ``proceeds'' of 
an Operating Fund Financing Program (OFFP).
    HUD Response: This final rule makes this revision at Sec.  
905.600(d)(8).
    Issue: Proposed Sec.  905.202(h) is overbroad and could be read to 
prohibit temporary or bridge funding.
    HUD Response: This section, at Sec.  905.202(i) of this final rule, 
refers to costs that are actually funded by a duplicate source and 
temporary or bridge financing does not result in duplicate funding.
    Issue: Section 9(l) of the 1937 Act (42 U.S.C. 1437g(l)) allows for 
capital- and operating-fund-only transactions, and permits HUD to 
reduce the period during which the property must be operated according 
to Public Housing Requirements. However, the proposed rule does not 
reflect this flexibility. Also, following the statute, the rule should 
allow PHAs to make section 8 assistance available in cases where there 
is operating assistance but not Capital Fund assistance.
    HUD Response: Generally, the reference in Sec.  905.304(a)(3) to 
``such shorter period as permitted by HUD by an exception'' implements 
the flexibility under 42 U.S.C. 1437g(l).
    In the case of mixed-finance specifically, Sec.  905.604(j)(3)(ii) 
states that the term of the ACC Amendment will be determined based on 
the assistance provided under Sec.  905.304, ``unless reduced by the 
Secretary.'' Also, if the PHA is no longer able to provide operating 
subsidy, final rule Sec.  905.604(j)(3)(iii) permits early termination 
of the DOT or Declaration of Restrictive Covenants and provides public 
housing residents with a relocation option, which may be a unit in 
another project or a Housing Choice Voucher.
    Issue: A commenter stated that the proposed regulation at Sec.  
905.312(c)(1) should not refer to outdated Handbook 7485.2 REV.
    HUD Response: This handbook is not referenced in the rule.

Mixed Finance

    Issue: All provisions of this rule should be premised on the belief 
that the interests of all participants are advanced if the regulations 
permit a predictable and efficient restructuring such that a project 
can be operated on a stable basis with whatever level of federal 
subsidy is reliably available.
    HUD Response: Along with statutory compliance, this rule also 
provides for sufficient flexibility to meet project goals.
    Issue: The rule should provide more extensive standards. The 
articulated standards in the proposed rule bridge the gap about 
halfway--they include some substantive standards, yet do not include 
some of the fundamental ``rules'' that have developed over the years 
regarding, for example, funding and replenishing of reserves and 
required segregation of public housing funds (both direct subsidy and 
tenant rents) from attachment in the case of foreclosure or loan 
acceleration.
    HUD Response: The types of issues to which the commenter refers are 
matters of policy and procedure that are best stated in guidance, such 
as PIH Notices and policy statements.
    Issue: HUD's regulation at Sec.  905.600(d) should be revised to 
take into account that, in mixed-finance, the construction contract is 
virtually always signed before proposal approval. Accordingly, the 
second sentence of Sec.  905.600(d)(3) should be revised to remove the 
phrase, ``After HUD approval of the development proposal. . . .''
    HUD Response: This final rule adopts, at Sec.  905.600(c)(3), this 
revision to accord with general industry practice.
    Issue: Commenters questioned language suggesting why the mixed-
finance category includes projects funded entirely with Capital Funds.
    HUD Response: If there is an Owner Entity other than the PHA, the 
project is considered mixed-finance even if 100 percent of the funding 
is public housing Capital Funding. However, if the PHA holds a 100 
percent interest in the project, it is not a mixed-finance project.
    Issue: The rule is overbroad in requiring the formation of an 
``Owner Entity'' in situations where nonpublic housing sources are 
being utilized, but no third-party participation in the ownership is 
required. There are instances, where state or local resources may be 
used, where the rule would seem to require another entity, but the 
transaction should not require the PHA to go to the expense of 
establishing and maintaining a separate Owner Entity.
    HUD Response: This final rule revises Sec.  905.604 to clarify this 
role of the Owner Entity. The partnership arrangement to which the 
commenter refers applies in mixed-finance situations; where the PHA 
owns 100 percent of the units, mixed-finance development would not 
apply.
    Issue: Proposed Sec.  905.604(a) should be revised to reflect that 
in some cases, such as meeting Davis-Bacon requirements, only the 
mixed-finance owner can comply; the PHA can require compliance, but 
cannot directly comply itself.
    HUD Response: HUD agrees, and this final rule incorporates the 
suggested change at Sec.  905.600(a).
    Issue: HUD's regulation at Sec.  905.604(h), ``Irrevocability of 
financial commitment,'' should allow alternatives to the opinion of 
counsel. The opinion of counsel will not always be feasible to obtain.
    HUD Response: The opinion of counsel as to irrevocability is an 
option, not a requirement. Please note that this final rule places this 
material at Sec. Sec.  905.606(a)(6)(iii)(A) through (D).
    Issue: HUD's regulation at Sec.  905.604(h)(1) states that, to 
ensure the irrevocability of funds, that the PHA or the Owner Entity be 
``ready willing, and able'' to attain milestones. Also, the conditions 
in the legal documents must be ``commercially reasonable.'' These terms 
are vague and could lead to a finding of noncompliance if an auditor 
applies a different definition of commercial reasonableness.
    HUD Response: This final rule, in Sec.  905.606(a)(6)(iii)(A), 
revises this terminology to avoid ambiguity. The contractual conditions 
must be ``generally consistent with similar affordable housing 
transactions,'' and the PHA or Owner Entity must know of no 
``impediments that would prevent the project from moving forward 
consistent with'' the project milestones.
    Issue: The requirement in proposed Sec.  905.604(h)(3), that 
counsel has examined the availability of financing, seems to mean that 
counsel will examine the funding for the funding

[[Page 63761]]

source, which may be feasible in some cases, such as funds received 
from a city, but not in the case of bank or Assisted Housing Program 
(AHP) funds, because those entities will not reveal their funding 
sources.
    HUD Response: This proposed section (now at Sec.  
905.606(a)(6)(iii)(D)) is revised in this final rule to clarify that it 
is the participating parties' financing that is examined.
    Issue: In the case of operating-fund-only assistance under proposed 
Sec.  905.604(k), one commenter stated that the provisions that require 
use restrictions to continue for a substantial and virtually indefinite 
period, whether or not there is operating subsidy to support them, are 
highly problematic for mixed-finance deals. The full flexibility 
permitted by 42 U.S.C. 1437g(l) should be utilized in order to give 
lenders and investors assurance that if sufficient subsidy ceases to be 
available, they will be promptly released from the obligation to house 
people who require such subsidy. In operating-fund-only projects, in 
such cases, section 8 assistance should be used to allow residents to 
remain if they wish.
    HUD Response: This final rule implements the ability for HUD to 
reduce the use restriction period found in 42 U.S.C. 1437g(l) (see 
Sec.  905.604(j)(2)(ii) and (iii)). If the use restrictions are 
terminated, the PHA must provide residents with a decent, safe, 
sanitary, and affordable unit to which they can relocate, which may 
include a public housing unit in another development or a Housing 
Choice voucher.
    Issue: Proposed Sec.  905.608, which covers the site acquisition 
proposal, only applies to acquisition with Capital Funds and should 
include acquisition with all available sources, including HOPE VI and 
other funds.
    HUD Response: This final rule adds a definition of ``public housing 
funds'' to include not only Capital Funds, but also HOPE VI, Choice 
Neighborhoods, development funds, or any other funds appropriated by 
Congress for public housing development.
    Issue: There is no justification in Sec.  905.608(f) for stating 
that, absent HUD approval, the purchase price may not exceed the 
appraised value, because the federal interest in cost reasonableness is 
generally accomplished by TDC rules.
    HUD Response: TDC is applicable to new development and acquisition 
of existing housing. The TDC operates as a constraint on excessive 
payments of public funds in the context of Sec.  905.608 along with 
HUD's requirement for a PHA to provide an appraisal of the property.
    Issue: Proposed Sec.  905.612(b)(2) on mixed-finance drawdown 
ratios is unclear as to whether the requirement applies only to the 
final drawdown ratio or to interim ratios as well.
    HUD Response: This final rule clarifies this paragraph to refer to 
the overall drawdown ratio.
    Issue: While the rule requires that HUD funds be drawn down in the 
same ratio as other funding sources, projects are more economically 
feasible when interest-free HUD funds can be drawn first.
    HUD Response: HUD's regulation at Sec.  905.612(b)(2) clarifies 
that upon completion of the project, the ratio of public housing funds 
to non-public housing funds for the overall project must remain as 
reflected in the executed documents. The ratio does not apply to the 
construction period.
    Issue: HUD's proposed regulation at Sec.  905.604(b)(6) should be 
revised to acknowledge that Public Housing Requirements do not apply to 
non-mixed-finance development.
    HUD Response: This section is clarified in the final rule. Public 
Housing Requirements apply to public housing-related work or mixed-
finance development as meant in this subpart.
    Issue: Proposed Sec. Sec.  905.316, 905.318, and 905.320(b) and (c) 
appear to apply to both mixed-finance and conventional development, yet 
this is not clear from their language.
    HUD Response: This final rule clarifies these sections.
    Issue: HUD's proposed regulation at Sec.  905.604(a) is unclear as 
to whether it applies only to the PHA, mixed-finance owner, or both.
    HUD Response: This final rule revises this section. Final Sec.  
905.604(a)(1) explains the possible ownership structures under mixed-
finance.
    Issue: Rather than stating that mixed-finance contracts should 
``specify that they comply'' with listed requirements, mixed-finance 
contracts should be required simply to contain no provisions 
inconsistent with the applicable regulations.
    HUD Response: An affirmative statement of compliance provides a 
basis for HUD to take enforcement action if the statement is untrue, 
which is an assurance that HUD requires when committing public funds.
    Issue: The rule should codify the authority to retain the original 
DOFA that existed prior to a mixed-finance transaction.
    HUD Response: The rule codifies the current practice. In Sec.  
905.604(a)(4) of this final rule, the Department will retain the date 
of full availability (DOFA) if a PHA is doing mixed-finance 
modernization.
    Issue: The rule should be more specific as to the minimum 
information required by a PHA for the release funds for predevelopment 
assistance under proposed Sec.  905.612(a)(3).
    Response: HUD reviews each mixed-finance project separately, as the 
structure and financing of each project is unique. HUD has issued 
``Cost Control and Safe Harbor Standards for Rental Mixed-Finance 
Development,'' which contains provisions related to predevelopment 
expenses. Further, HUD has internal mechanisms for evaluating each 
mixed-finance project and issues that arise within the context of 
mixed-finance development. These mechanisms are the best way to manage 
mixed-finance projects, including the use of public housing funds for 
predevelopment purposes. Therefore, to date, there has been no need to 
issue generally applicable guidance on the use of public housing funds 
for predevelopment expenses related to mixed-finance development.
    Issue: A commenter asked under what circumstance HUD would approve 
a PHA to exceed the 5 percent limit for predevelopment costs under 
Sec.  905.612(a)(2).
    HUD Response: As the rule states, this will be determined on a case 
by case basis. HUD declines to speculate about the circumstances under 
which this may occur.

Deviations Under Section 35(h) of the 1937 Act, 42 U.S.C. 1437z-7(h)

    Issue: A commenter stated that additional flexibility for mixed-
finance projects is considered helpful, for instance flexibility with 
rent and income eligibility requirements for projects with 20 percent 
or more nonpublic housing units. Another commenter stated that the 
threshold should be the lesser of 10 percent or 10 units. Another 
commenter stated that such flexibility should be granted for all public 
housing stock.
    HUD Response: HUD's regulation at Sec.  905.604(k) of this final 
rule provides flexibility where a PHA has a project in which a 
``significant number'' of units are other than public housing units, 
following the statutory language under section 35(h) of the 1937 Act 
(42 U.S.C. 1437z-7(h)), which addresses mixed-finance development. The 
statute allows deviations under the specific statutory conditions 
stated, which do not apply to all public housing stock.
    Issue: The standard for allowing ``restructuring'' is too limiting 
and ``HUD should expand it to the extent interpretation permits, and 
should

[[Page 63762]]

generally recognize the ability of parties to make restructuring 
decision outside this standard where the standard need not be 
applied.'' This commenter states that the phrase ``reduction in 
appropriations'' is meaningless without a recognized starting point, 
and suggests that the per-unit appropriations in 1998 would be a 
reasonable starting point for interpretation. In addition, any 
definition should recognize the likelihood of continuing inflation; a 
flat appropriation over 10 years would be the equivalent of a 50 
percent effective reduction in funding at an inflation rate of 7 
percent. This commenter states that HUD may interpret ``reduction in 
appropriations'' to be a reduction in the present value of the per-unit 
appropriation available. This commenter also states that HUD should 
recognize that many Regulatory and Operating (R&O) Agreements, for good 
reason, limit the operating-subsidy pass-through obligation of the PHA 
with reference to what the PHA is receiving from HUD. For instance, an 
R&O Agreement might provide for the PHA to pass through 90 percent of 
what it actually receives for that project. In literal terms, such a 
PHA is never prevented by a funding reduction from meeting its 
obligations, because its obligations automatically decrease, yet 
clearly a project receiving 50 percent of its intended subsidy would be 
in deep trouble and require deviation under section 35(h) of the 1937 
Act. The commenter states that skilled drafters could provide alternate 
35(h) triggers, such as a PHA failure to provide alternate non-
operating subsidy funding in specified circumstances. This commenter 
states that ``HUD needs to take care that it does not carelessly 
eliminate these triggers.'' This commenter states that the rule 
eliminates these triggers by replacing the statutory phrase ``from 
meeting its contractual obligations'' with ``from providing Operating 
Funds as provided in its contractual agreement.''
    HUD Response: This final rule implements the statutory authority 
correctly, and the statute is unambiguous in referring to ``a reduction 
in appropriations under section 1437g,'' meaning an actual reduction in 
appropriations from Congress, not a change as a by-product of 
inflation. HUD recognizes that projects are structured differently. For 
this reason, this final rule removes the proposed section on 
``Allowable Deviations.'' HUD encourages PHAs to draft R&O agreements 
that clearly address the issue of reduction in appropriation and 
clearly identify a ``starting point,'' or baseline amount, from which a 
reduction in operating subsidy caused by a reduction in appropriation 
can be calculated. In addition, as requested by the commenter, to avoid 
unintended impacts, HUD has revised the language in the final rule 
concerning a public housing agency's inability to meet its contractual 
obligations to mirror the phrasing in the statue.
    Issue: HUD should propose to Congress legislation allowing 
deviations from Public Housing Requirements that do not rely on section 
35 of the 1937 Act (42 U.S.C. 1437z-7).
    HUD Response: HUD, through rulemaking, interprets and implements 
enacted legislation. The subject of proposing additional legislation is 
beyond the scope of this rulemaking process.
    Issue: A commenter stated that the allowable deviations in the 
proposed rule are too limiting and unclear. For example, it is not 
clear if the ``increased public housing rents'' contemplated by 
proposed Sec.  905.604(n)(2)(i) are different from those contemplated 
by proposed Sec.  905.604(n)(2)(iii). More generally, HUD should not 
require a complicated sequencing of remedies; each situation will be 
different, and the paramount requirement for this rule is that it gives 
the PHA and owner the ability to design a restructuring plan 
appropriate to their circumstances.
    Commenters objected to specific allowable deviations in the 
proposed rule. A commenter stated that limiting a rent increase under 
proposed Sec.  905.604(n)(2)(iii) to the ``amount strictly needed'' is 
too inflexible. One commenter stated that the rule should not allow 
PHAs to eliminate eligibility restrictions altogether as contemplated 
in Sec.  905.604(n)(2)(ii).
    HUD Response: The allowable deviations are removed in this final 
rule in favor of a case-by-case approach, under which the Owner Entity 
will submit an Alternative Management Plan, which HUD will review.
    Issue: HUD's annual reevaluation and approval of the transformation 
plan under proposed Sec.  905.604(n)(5) should provide that, once the 
annual update is properly submitted, the existing plan remains in 
effect pending HUD action.
    HUD Response: The intent is for the existing plan to remain in 
effect until HUD disapproves it or approves a change. This final rule 
revises Sec.  905.604(k)(4) accordingly.
    Issue: One commenter stated that the tenant protections in Sec.  
905.604(n)(2)(iv) should be limited to 2 years; otherwise, if a PHA has 
limited resources to relocate tenants, it may be unwilling to act and 
leave the mixed-finance owner without a remedy.
    HUD Response: The proposed regulation at Sec.  905.604(n)(2) is 
removed in this final rule. The regulation at Sec.  
905.604(k)(2)(ii)(C) addresses tenant protections and states that the 
responsibility for relocation is with the PHA or as included in the 
agreement between a PHA and the Owner Entity. The PHA should address 
this issue when negotiating its Regulatory and Operating Agreement with 
an Owner Entity.
    Issue: The requirement in proposed Sec.  905.604(n)(3)(iii)(D) that 
Public Housing Requirements be reinstated once the PHA restores 
operating subsidies to their normal level could be subject to 
misinterpretation, and deviations switch on and off from year to year.
    HUD Response: HUD will consider providing additional guidance on 
the timing of reinstatement in the future, based on experience with 
this issue.
    Issue: Proposed Sec.  905.604(n)(3)(iv)(A) does not specify whether 
the reference to ``reduced allocation of operating subsidy'' refers to 
the subsidy provided by HUD or the subsidy passed through by the PHA.
    HUD Response: The statute on which this section is based refers to 
reduced appropriations; what is meant is a reduction in appropriations 
resulting in a reduction of subsidy allocation. This final rule 
clarifies this point at Sec.  905.604(k)(2)(iv)(B).
    Issue: To ensure that project owners have pursued available 
alternative remedies prior to undertaking an Alternative Management 
Plan, the rule should require that project owners demonstrate that 
available development resources are being utilized to offset deficits 
with the public housing units.
    HUD Response: Along with eliminating the allowed deviations and 
requiring the PHA to submit an Alternative Management Plan, this final 
rule includes such a provision as part of the supporting documentation 
that a PHA will submit with its an Alternative Management Plan (Sec.  
905.604(k)(2)(iv)(D)).
    Issue: One commenter states that proposed Sec.  
905.604(n)(3)(iv)(E), which requires prior expenditure of 50 percent of 
a named reserve, seems to contradict Sec.  905.604(n)(2)(ii), which 
states that deviations from Public Housing Requirements are permitted 
only if the owner has expended all operating subsidy reserve funds put 
aside for this eventuality. A commenter states that this section should 
be eliminated, as requirements for operating reserves vary

[[Page 63763]]

greatly in mixed-finance projects, and may not be appropriate for this 
use.
    HUD Response: This final rule, at Sec.  905.604(k)(2)(iv)(D), 
removes an expenditure of reserve requirement and states more generally 
that the owner entity must use ``all available means'' to offset the 
reduction in appropriation or change in applicable law, including the 
use of other public and private development resources, the use of cash 
flow from any nonpublic housing units, funds from other operating 
deficit reserves, and so forth.
    Issue: A commenter states that to ensure that project owners have 
pursued available alternative remedies prior to undertaking an 
Alternative Management Plan, the rule should require that project 
owners demonstrate that available development resources are being 
utilized to offset deficits with the public housing units.
    HUD Response: This final rule at Sec.  905.604(k)(2)(iv)(D) 
requires the PHA to provide documentation that the Owner Entity has 
used all available means to offset the impact of reduced operating 
subsidy.
    Issue: Commenter states that HUD's regulations implementing 35(h) 
of the 1937 Act (42 U.S.C. 1437z-7(h)) should take care to state that 
they do not affect, one way or the other, the ability of PHAs and their 
partners to restructure a project consistent with standard Public 
Housing Requirements.
    HUD Response: That section only applies to deviations from 
statutory requirements under the conditions specified. It does not 
affect mixed-finance arrangements consistent with statute and 
regulation.
    Issue: The word ``solely'' in proposed Sec.  
905.604(n)(3)(iv)(B)(``The deficit in operating revenues is 
attributable solely to the reduction in operating subsidy''), as such 
situations are likely to have multiple causes.
    HUD Response: This final rule uses the term ``primarily'' instead 
of ``solely'' (Sec.  904.604(k)(2)(iv)(B)).
    Issue: Deviations should be allowed for changes in law other than 
appropriations.
    HUD Response: The statute allows for deviations in the case of a 
reduction in appropriations or other change in law that makes a PHA 
unable to fulfill its contractual obligations with respect to a 
specific number of public housing units. This final rule implements 
this statutory authority at Sec.  905.604(k).
    Issue: The reference to ``contractual agreement'' in Sec.  
905.604(n)(1) should be changed to ``Regulatory and Operating Agreement 
(R&O),'' which is more specific.
    HUD Response: There may be instances where an agreement is not 
through an R&O.
    Issue: A commenter states that implementation of ``transformation 
remedies'' (42 U.S.C. 1437z-7(h)) should be postponed until HUD has had 
broad discussions with stakeholders to ensure that appropriate 
protections remain in place for PHAs and residents. This commenter is 
particularly concerned about the potentially serious consequences of 
implementing a regulation that facilitates the loss of public housing 
units in the current political and economic environment.
    HUD Response: HUD, at this time, cannot predict how many or which 
projects will require such deviations, and views that the greater risk 
is that, without an Alternative Management Plan under the statute and 
regulations, units will be permanently lost, where under transformation 
the deviation may be temporary. By removing in this final rule the 
proposed paragraph allowing deviations automatically under certain 
conditions, HUD will review each request and apply oversight to the 
process. HUD submits that this is the best choice under current 
conditions.
    Issue: The proposed regulation at Sec.  905.604(n) places the risk 
on PHAs regardless of the contractually agreed upon structure of a 
mixed-finance deal or the underlying business arrangement between a 
public housing authority and, for example, its private developer 
partner. The commenter states that one example is making the PHA 
responsible for tenant relocation, including moving costs (Sec.  
905.604(n)(2)(iv)). This commenter states that in many mixed-finance 
transactions, investors require reserves to be sized, in part, to pay 
for relocation costs. Shifting responsibility to PHAs for such costs 
may not be part of existing deal structures and would result in a 
substantial realignment of risk in a mixed-finance transaction.
    HUD Response: This final rule provides for required relocation 
according to the contractual agreement between the PHA and the Owner 
Entity (see Sec.  905.604(k)(2)(ii)(C)).
    Issue: The phrase ``in HUD's sole discretion'' should be removed 
from proposed Sec.  905.604(n)(4). The commenter states that this 
phrase removes the issue from judicial review.
    HUD Response: While HUD does not agree with the commenter regarding 
judicial review, this final rule clarifies the review of an Alternative 
Management Plan, in Sec.  905.604(k)(3), by providing examples of some, 
but not all, of the reasons why HUD might disapprove an Alternative 
Management Plan.

Energy Conservation Requirements

    Issue: Many PHA commenters stated that HUD should not mandate 
energy conservation measures without giving PHAs the flexibility to 
determine their own priorities. The rule should make it clear that PHAs 
are not required to implement everything recommended in an energy 
audit, but that energy needs must be balanced against other PHA needs. 
Many of these PHAs supported energy conservation, generally.
    One commenter stated that if energy audits and their corresponding 
recommended energy conservation measures are to be relied upon clearly, 
established and standardized measurement systems should be established 
so that uniformity of results is achieved. If measurement standards and 
recommendations vary from audit to audit, Capital Funds could be 
continuously wasted from year to year based on the new and/or 
conflicting recommendations.
    One commenter stated that HUD and industry would benefit from more 
research and discussion on this topic.
    Other commenters stated that not all energy audits produce savings 
or are reliable and there could be burdens on PHAs. Some commenters 
stated that they are skeptical of a cost-effectiveness approach to 
spend Capital Funds.
    Other commenters suggested use of a 20-year, voluntary rolling base 
freeze on public housing utility consumption levels.
    One commenter questioned the cost effectiveness of energy 
conservation measures (ECMs), and also stated that there could be 
situations where an audit may find an ECM not to be cost effective, 
when in fact it is an improvement that the PHA should implement as part 
of a modernization. This commenter stated that return on investment 
(ROI) should always be a factor in determining whether or not it makes 
sense to implement a recommendation. Another commenter stated that in 
addition to ROI, health and safety, conflicting modernization 
schedules, and the validity of energy audit results need to be 
considered.
    One commenter stated that it should be determined whether using the 
funds for the energy conservation measures now would take away from 
future development needs or be premature.
    One commenter stated that energy trade-offs need to be easy to plan 
and implement, not burdensome and complicated.
    One commenter stated that in determining which energy conservation 
measures should be implemented, it is important whether the item is

[[Page 63764]]

something that would have been replaced anyway.
    HUD Response: HUD is handling the energy audit process, ECMs, and 
ROI issues under a separate rulemaking (see the proposed rule of 76 FR 
71287 et seq.). The 20-year rolling base freeze relates to the current 
Operating Fund rule at 24 CFR part 990 and is outside the scope of this 
rulemaking.
    Issue: One commenter endorsed incorporating the International 
Energy Conservation Code (IECC) in various subsections of the proposed 
rule related to what types of projects are eligible for Capital Funds. 
The commenter suggested that HUD reference the 2009 IECC to promote 
energy efficiency over the life of those projects. One commenter stated 
that because the section specifies the required design and construction 
requirements for affected building projects, the International Building 
Code (IBC) and the IECC will also provide compliance with several other 
requirements listed in this section, including compliance with ASHRAE 
standard 90.1-2010, ``Energy Standard for Buildings Except Low-Rise 
Residential Buildings,'' an accepted alternative means of compliance 
with chapter 5 of the IECC.
    HUD Response: This final rule references the 2009 edition of the 
IECC, in Sec. Sec.  905.200 and 905.312, rather than the 2006 IECC, and 
references the ASHRAE standard.

Reductions in the Amount of Capital Funds for Management Improvements

    Issue: Commenters expressed concern about limiting the amount of 
Capital Fund budget that can be used for management improvements to 10 
percent. Although PHA's on average only use 8 percent, the flexibility 
to go up to 20 percent is important and has a significant upside 
without a corresponding downside; for instance where PHAs need multiple 
infusions of capital for management improvement purposes at the same 
time, which may occur when a PHA becomes near-troubled or troubled. 
Also, such flexibility might be needed in an emergency. PHAs rarely use 
too much of their Capital Fund for management improvement, and HUD 
provides a solution to a problem that does not exist. Often there are 
statutory restrictions that prevent overly high usage, such as using 50 
percent. HUD has not provided evidence that PHAs are mismanaging their 
Capital Fund for nonconstruction activities. It is counterintuitive 
that in a period of underfunding of PHAs, HUD would introduce a 
proposal that limits flexibility, authorized under statute, for PHAs to 
administer their CFP to meet local needs.
    PHAs need the flexibility to use limited funds to address the ever-
growing capital improvements necessary to ensure continued assisted 
housing for low-income residents; therefore, the current rule should be 
kept as is.
    A PHA may need additional assistance for training, consulting, 
information technology upgrades, or security services and, with the 
prospect of being forced to use reserves for operational expenses 
during the next fiscal year, the use of CFP for management improvements 
will be crucial. One PHA commenter cited the need to pay a resident 
coordinator.
    Another commenter cited a possible need to upgrade computer systems 
and train users. Another commenter referenced ``investments in 
technology,'' community policing, and security measures. Another 
commenter cited the Americans with Disabilities Act (42 U.S.C. 12101 et 
seq.) compliance, the Violence Against Women Act (VAWA) (Pub. L. 109-
162, approved January 5, 2006), and the Limited English Proficiency 
programs.
    Another commenter cited the funding environment and projections of 
flat or declining funding. Another commenter cited resident training 
and service goals, and suggested a 15 percent limit as more reasonable.
    HUD Response: In a limited funding environment, HUD has the 
obligation to ensure that PHAs expend their funds to maintain their 
properties in good physical condition. HUD agrees that resident 
training and service are important goals. Capital Funds may be used for 
capital expenditures (hard costs) to facilitate programs to improve the 
empowerment and economic self-sufficiency of public housing residents, 
as well as for resident-related management improvements. It is 
important to mention this not only with respect to capital and 
management improvement funding, but also that, generally, Section 3 of 
the Housing and Community Development Act of 1968 (12 U.S.C. 1701u) 
requires, to the greatest extent feasible, that PHAs make their best 
efforts to ensure that employment and other economic opportunities 
generated by certain of HUD's Capital Fund- assisted activities are 
directed to low- and very-low- income persons, in accordance with 12 
U.S.C. 1701u and HUD's Section 3 regulations at 24 CFR part 135.\3\ 
Examples of such resident training and economic opportunities would be 
job training (e.g., painting and carpentry or computer skills and data 
entry) for residents and resident business development (e.g., painting 
contracting business or jobs in the PHA's offices, related to 
management assistance) for the purposes of carrying out activities 
related to the Capital Fund management or physical improvements. In 
addition, HUD has taken the public comments into consideration and 
revises the Management Improvements Policy in this final rule in order 
to allow PHAs more time for making any necessary adjustments. This 
final rule reduces the standard allowable percentage for management 
improvements from up to 20 percent to up to 10 percent for all PHAs 
over a 5-year period, rather than the 3 years proposed.
---------------------------------------------------------------------------

    \3\ While 12 U.S.C. 1701u uses ``best efforts'' with respect to 
the efforts required of PHAs, their contractors and subcontractors 
and uses ``to the greatest extent feasible'' with respect to the 
efforts required of program assistance programs (e.g., housing and 
community development programs), HUD has determined that there is 
very little difference between these terms, and that the same level 
of effort is to be undertaken by HUD and all recipients and 
contractors regardless of the source of HUD financial assistance. 
That level of effort is ``to the greatest extent feasible.'' (See, 
59 FR 33866, 33877, June 30, 1994).
---------------------------------------------------------------------------

    It should be noted that while some items mentioned by commenters 
are eligible expenses under the Capital Fund Program (CFP)--such as 
compliance with section 504 of the Rehabilitation Act of 1973 (29 
U.S.C. 701 et seq.), housing counseling for residents and prospective 
residents, and the design and construction of accessibility 
improvements--others such as staffing for security services, VAWA, and 
Limited English Proficiency, are not. Based on the responses to the 
proposed changes to the Management Improvements Policy, it has become 
evident that there is confusion over what items are eligible management 
improvement activities; therefore, eligible and ineligible activities 
under management improvements have been clarified at Sec. Sec.  
905.200(b)(7) and 905.202(h), respectively.
    It should also be noted that the commenter misunderstands HUD's 
policy to conserve scarce resources as a statement that PHAs are 
mismanaging their Capital Funds, which HUD has never contended. 
However, as a recent modernization study entitled ``Capital Needs in 
the Public Housing Program (available at http://portal.hud.gov/hudportal/documents/huddoc?id=PH_Capital_Needs.pdf) has shown, there 
are huge outstanding modernization needs (over $25 billion in 2010 
dollars), and there has been insufficient regulation of the allocation 
of management funds.

[[Page 63765]]

One result has been that large amounts of management funds have been 
used to, for example, fund and operate security staff, which should be 
an operating expense. HUD's regulation in this area intends to ensure 
that in this difficult fiscal environment sufficient modernization 
funds are allocated for modernization needs.
    Issue: The reduction of the amount for management improvements will 
cause an ``undue financial burden to PHAs.'' Resident Opportunities and 
Self Sufficiency (ROSS), Community Supportive Services, and HOPE VI are 
not formula grants, and there is no guarantee a PHA would be successful 
in its grant application to receive such funding. Without the full 20 
percent management improvement funding, PHAs that do not receive Public 
Housing Drug Elimination Program (PHDEP) funds might have to cancel 
security and drug elimination programs. While the current Capital Fund 
formula does allow for the potential use an additional 20 percent of 
appropriated Capital Funds to be used for operations, not all PHA's 
elect to or are eligible to utilize this funding mechanism. Reducing 
the management improvement amount by 50 percent would be penalizing 
those PHAs that are not utilizing this option.
    Another commenter stated that the ROSS program has become 
politically disfavored, and that HOPE VI funding will be eliminated. 
The commenter was skeptical of HUD equating the 20-percent use of 
Capital Funds for operations with the 20 percent use of Capital Funds 
for management improvements, while housing authorities cannot use 20 
percent of Capital Funds for management improvements as they can for 
operations. The commenter also stated that the proposed rule ignores 
that public housing programs are underfunded and housing authorities 
will not benefit from further restrictions on funding that limits how 
they operate.
    HUD Response: The purpose of limiting the management improvement 
percentage is to help ensure that the PHAs spend appropriate amounts on 
the basic task of providing decent, safe, and sanitary housing. HUD is 
aware that this change may require a period of time of adjustment for 
PHAs. Therefore, HUD is phasing in the 10 percent cap over 5 years 
rather than the 3 years proposed.
    HUD agrees that funding for operations does not necessarily equate 
to funding for management improvements, although there may be some 
overlap and all large PHAs (250 units or greater) are eligible under 
the statute to use up to 20 percent of their annual Capital Fund grant 
for operations, as long as it is in the PHA Plan and the PHA does not 
have emergency conditions that need to be corrected immediately. 
However, generally, all PHAs are working under a limited funding 
environment under which they have a legal obligation to provide decent, 
safe, and sanitary housing. HUD believes that the course it has 
chosen--to limit the amount that can be taken from the Capital Fund and 
to provide flexibility for those PHAs that are clearly spending enough 
Capital Fund to maintain the physical condition of their property--is 
the best use of limited funding.
    Issue: There should be a direct correlation of management 
improvements to improved program performance.
    HUD Response: HUD believes as a general matter that the issue is 
not performance, but the proper allocation of limited Capital Funds. 
HUD believes that the bulk of those funds should go to capital needs, 
and that the vast majority of PHAs are not using and do not need to 
use, more than 10 percent for eligible management improvements.
    Issue: Larger PHAs, in particular, may have higher management costs 
that require flexibility in their use of their grant, and so those PHAs 
with 250 or more units should be allowed to continue using 20 percent 
of the Capital Fund grant for management improvements.
    HUD Response: The actual usage of management improvements indicates 
that most PHAs use 10 percent or less of their Capital Funds for 
eligible management improvements. However, because some PHAs do use 
more, HUD is allowing more time than proposed to phase in the cap. The 
10 percent overall cap will be phased in over 5 years.
    Issue: One commenter stated that the proposed rule should be 
modified to include specific accounting instructions for the way in 
which to properly assign the 10 percent to the Central Office Cost 
Center.
    HUD Response: As an administrative rather than regulatory matter, 
HUD may address this issue in guidance, but not in this rulemaking.

Other Issues

    Issue: Resident participation. While it is commendable for the rule 
to include resident participation costs as eligible costs under Sec.  
905.200(b)(8)(ii), it would be helpful for HUD to take some additional 
action on resident participation.
    HUD Response: This final rule incorporates, at Sec.  905.300(b)(3), 
the resident participation and resident advisory board requirements 
formerly in 24 CFR part 903.
    Issue: Tenants should be able to access technical assistance to 
help them understand either the budget or structural issues. The 
commenter states that there should be support for technical assistance 
through a capital operating account and that technical assistance 
should be offered on the regional and national level.
    HUD Response: Funding for additional technical assistance (there is 
currently limited technical assistance for RAB training) is outside the 
scope of this rulemaking. This is an issue of appropriations.
    Issue: Commenters are concerned about the dates of implementation 
in the proposed rule.
    HUD Response: The implementation dates for the DDTF and the RHF 
transition can be found in Sec.  905.400(j)-(k) and the implementation 
date for management improvements will be in accordance with the 
effective date of the rule. The rule only applies prospectively.
    Issue: Adding the Public Housing Development Program to the list of 
programs eligible for the Capital Fund program may have a negative 
effect by spreading already scarce funds to more places as this program 
includes mixed-finance development. The commenter stated that mixed-
income finance development may not have as high a degree of need as the 
low-income housing and that possible renovations could be more 
expensive in those buildings because they are for people of higher 
economic standing.
    HUD Response: As to the fact that development is an eligible 
expense under the Capital Fund, this is statutorily required under 
section 9(d)(1) of the 1937 Act (42 U.S.C. 1437g(d)(1)). As to the 
potential for higher costs of renovations in mixed-finance housing, HUD 
is not aware of any evidence of these higher costs, and development of 
public housing via mixed-finance development is subject to the same 
limitations on TDC and Housing Construction Costs as non-mixed-finance 
development of public housing.
    Issue: A commenter disagreed with language under proposed Sec.  
905.400(d)(3)(ii), which stated that units with a DOFA date of October 
1, 1991, or after, shall be considered to have zero existing 
modernization need. The commenter stated that it is more cost effective 
to maintain a unit than it is to renovate it to address deferred 
maintenance and delayed capital improvements or to replace it. The 
commenter stated that buildings will

[[Page 63766]]

have capital needs in less than 20 years and need to accrue Capital 
Funds. Another commenter stated that the time frame for having existing 
modernization needs should be changed to 10 years.
    HUD Response: This calculation was determined by the original 
negotiated rulemaking, and will not be revised in this rulemaking. 
However, HUD agrees that this is one of several components of the 
formula that should be reevaluated. Consequently, HUD is considering 
initiating another proposed rule to solely address the Capital Fund 
formula.
    Issue: A commenter stated that there is a fundamental illogic in 
allocating 50 percent of Capital Funds to ``existing modernization 
needs,'' as defined, and 50 percent to ``accrual needs,'' as defined. 
Under the rule, a building constructed after 1991 would be deemed to 
have no modernization needs. The proportion of buildings in the public 
housing inventory that are more than 20 years old will decrease over 
time. Therefore, the inventory will be divided among an ever-smaller 
group of buildings, even as the post-1991 buildings age and become 
needier.
    HUD Response: Similar to HUD's response to the preceding comment, 
these allocations are part of the original negotiated rulemaking and 
will not be revised in this rulemaking, but, as already noted, HUD is 
considering initiating another proposed rule on the Capital Fund 
formula.
    Issue: A commenter stated that the proposed guidelines for site and 
neighborhood standards are overly rigid and unnecessarily restrictive. 
HUD should revise these standards to allow for PHAs to provide on-site 
replacement housing sufficient to meet community needs, regardless of 
the number of units previously existing on the site. The commenter also 
stated that the proposed requirement that sites used for replacement 
housing be accessible to necessary services through public 
transportation would not work in rural areas and small communities, 
where public transportation is limited or nonexistent.
    HUD Response: It is HUD's responsibility to help ensure that some 
of the public housing that is demolished or disposed of is replaced, 
and to help ensure that there is sufficient public housing to serve the 
low-income community. As a result, PHAs, when submitting site 
acquisition or development proposals, are required to select sites that 
support this responsibility. HUD recognizes that each site selected for 
the construction or rehabilitation of public housing presents unique 
circumstances that reflect the neighborhood or community slated for the 
construction or rehabilitation. Consequently, HUD will balance the need 
for housing and the overall impact of the rehabilitation of public 
housing on residents when reviewing these development proposals against 
the site and neighborhood criteria identified in Sec.  905.602(d). This 
final rule revises Sec.  905.602(d)(9) to reflect the commenter's 
concern about lack of public transportation in rural areas.
    Issue: A commenter stated that the standard in Sec.  
905.602(d)(5)(ii) should be revised to insert the phrase ``public 
housing'' to read:

    . . . the number of public housing units being constructed is 
the minimum number needed to house current residents that want to 
remain at the site, so long as the number of [public housing] units 
is significantly fewer than the number being demolished . . .

    HUD Response: HUD agrees with this clarification and this final 
rule makes the suggested revision.
    Issue: It is unclear what is meant by Sec.  905.306(b), ``Items and 
costs.''
    HUD Response: This term refers to items and costs listed in the 
PHA's budget and Capital Fund 5-Year Action Plan. To be obligated, 
these items and costs must meet the definition of ``obligation'' found 
in Sec.  905.108.
    Issue: HUD should include in Sec. Sec.  905.306 and 905.310 the 
authorization found in section 35(b)(1) of the 1937 Act, 42 U.S.C. 
1437z-7(b)(1) for a PHA to deposit funds in an escrow account in order 
to collateralize construction financing, whether through a bond issue 
or otherwise. The commenter states that escrow is a crucial technique 
for obtaining 4 percent Low Income Housing Tax Credits (LIHTC), in 
particular. In addition, the regulation should state explicitly that 
deposit into the escrow account constitutes expenditure for all 
deadline purposes.
    HUD Response: To put this authority into effect, the statutory 
language requires HUD to issue regulations. HUD will consider doing so 
in the future.
    Issue: The Sec.  905.304(a) requirement to record a Declaration of 
Trust on ``all public housing property'' is vague. The commenter 
suggests reference to a Declaration of Trust recorded against real 
property on which a public housing project is located.
    HUD Response: The phrase ``all public housing property'' is an 
appropriate phrase that accurately covers both the PHA's land and 
improvements, each of which must be subject to the Declaration of 
Trust.
    Issue: HUD's proposed regulation at Sec.  905.304(a)(3) requires 
projects receiving operating fund assistance to operate as public 
housing for the following 10 years, ``except as permitted by HUD by an 
exception.'' This rule should provide operating-fund-only projects with 
the maximum flexibility permitted by the 1937 Act to cease public 
housing operations if subsidies are reduced or suspended.
    HUD Response: Each situation should be evaluated and determined by 
its own merits. A broad exception for an entire class of projects does 
not sufficiently protect the public interest.
    Issue: The rule should remove references to Public Housing 
Development and Major Reconstruction of Obsolete Projects (MROP) 
funding, which program no longer exists.
    HUD Response: PHAs still have unobligated balances in Public 
Housing Development and MROP grants, and so MROP cannot yet be removed 
from the rule.
    Issue: The rule should be revised to provide that Moving to Work 
(MTW) agencies shall submit plans for expenditures of their Capital 
Funds pursuant to the terms of their MTW agreements, and any contrary 
requirements in the regulations will not apply to MTW PHAs.
    HUD Response: HUD's proposed regulation at Sec.  905.300(b)(10) has 
been revised at this final rule to incorporate guidance on MTW agencies 
providing the Capital Fund submission information through the MTW plan.
    Issue: PHA performance should be rewarded with respect to timely 
obligation and expenditure of funds.
    HUD Response: Timely obligating and expending funds simply means 
that a PHA is meeting the statutory legal requirements of 42 U.S.C. 
1437g(j). HUD does not agree that PHAs should be rewarded for meeting 
basic legal requirements.
    Issue: Terminology should be updated to reflect changes in asset 
management and project-level accounting.
    HUD Response: HUD believes this final rule uses the appropriate 
terminology.
    Issue: One commenter asked for clarification of whether Sec.  
905.312(b), on inspections of work in progress and goods delivered, 
applies only to mixed-income developments.
    HUD Response: The section applies to both mixed-finance and public 
housing development.
    Issue: One commenter objected to the fact that Sec.  905.700, 
``Other security interests,'' may be read to require HUD approval of 
transactions that provide recourse to nonpublic housing property of a 
PHA.
    HUD Response: HUD's regulation at Sec.  905.700 implements the 
statutory

[[Page 63767]]

language at section 30 of the 1937 Act, 42 U.S.C. 1437z-2, which states 
that HUD, upon such terms and conditions as it may prescribe, may 
authorize a PHA to ``mortgage or otherwise grant a security interest in 
any public housing project or other property of the PHA.''

VI. Incorporation by Reference

    42 U.S.C. 12709 requires HUD to adopt energy efficiency standards 
that meet or exceed the requirements of the 2006 International Energy 
Conservation Code (hereafter in this section referred to as ``the 2006 
IECC''), or, in the case of multifamily high-rises, the requirements of 
the American Society of Heating, Refrigerating, and Air-Conditioning 
Engineers Standard 90.1-2004. This statute also provides for the 
updating of those standards by adopting amended standards. Accordingly, 
the following updated standards are incorporated by reference in Sec.  
905.110 of this final rule with the approval of the Director of the 
Office of the Federal Register under 5 U.S.C. 552(a) and 1 CFR part 51:
     ASHRAE 90.1-2010, ``Energy Standard for Buildings Except 
Low-Rise Residential Buildings.''
     The 2009 International Energy Conservation Code (IECC).
    All approved material may be obtained from the organization that 
developed the standard. These standards also are available for 
inspection at HUD's Office of Policy Development and Research, 
Affordable Housing Research and Technology Division, Department of 
Housing and Urban Development, telephone number 202-708-4370 (this is 
not a toll-free number). In addition, the standards are available for 
inspection at the National Archives and Records Administration (NARA). 
For information on the availability of this material at NARA, call 202-
741-6030 or go to http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.
    Other resources are:
     ASHRAE 90.1-2010, ``Energy Standard for Buildings Except 
Low-Rise Residential Buildings,'' by the American Society of Heating, 
Refrigerating, and Air-Conditioning Engineers, Inc., 1791 Tulle Circle 
NE., Atlanta, GA 30329 (http://www.ashrae.org/standards-research-technology/standards-guidelines), and
     The 2009 International Energy Conservation Code (IECC) by 
the International Code Council, 500 New Jersey Avenue NW., 6th Floor, 
Washington, DC 20001 (1-888-422-7233) (http://www.iccsafe.org/Store).
    The incorporated standards are found in this final rule at 
Sec. Sec.  905.200(b)(6)(ii) and 905.312(b)(1).

VII. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and, therefore, subject to review by the Office of Management and 
Budget (OMB) in accordance with the requirements of the order. 
Executive Order 13563 (Improving Regulations and Regulatory Review) 
directs executive agencies to analyze regulations that are ``outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned. Executive Order 13563 also 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 was determined to be a ``significant 
regulatory action'' as defined in section 3(f) of Executive Order 12866 
(although not an economically significant regulatory action, as 
provided under section 3(f)(1) of the Executive Order).
    With respect to Executive Order 12866, it is determined that this 
final rule would not have any impact on the level of funding for the 
CFP--which level is determined by annual congressional appropriations--
but would potentially create some financial transfers among program 
participants. The total amount of transfers is estimated to be less 
than $100 million annually, with most of the transfers being 
interagency transfers attributable to the Demolition or Disposition 
Transitional Funding (DDTF). However, the benefits of the rule such as 
regulatory consolidation, program clarification, removal of obsolete 
references, and enhanced efficiencies, justify the rule regardless of 
the transfers of funding involved.
    A summary of the changes made to the proposed rule at the final 
rule stage can be found in the preamble of the final rule. These 
changes can be aggregated in two groups:
1. Revision of Definitions and Other Clarifications
    The final rule accommodates changes to definitions and provides 
other clarifications in response to public comments on the proposed 
rule, and further consideration of the issues by HUD. These actions 
bring much needed clarity to the Capital Fund Program.
    For example, the proposed definition of ``Capital Fund Annual 
Contributions Contract (CF ACC)'' appeared to conflate the definition 
of the entire ACC (which is a contract addressing the operation of 
public housing) with that of a Capital Funds amendment (presumably 
limited to the special terms applicable to the provision of Capital 
Funds). To avoid possible ambiguity, this final rule modifies the 
proposed definition of CF ACC to more clearly indicate that this is an 
amendment to the Consolidated Annual Contributions Contract.
2. Program Requirements
A. Management Improvement
    The proposed rule called for the gradual phase down of the 
management improvements funding limit from up to 20 percent to up to 10 
percent over a period of 3 fiscal years. This final rule extends the 
phase-in over a 5-year time period. Following the phase down all PHAs 
would be limited to using up to 10 percent for management improvements. 
The 20 percent standard was implemented by regulation; it is not a 
statutory limitation.
    HUD has determined, using 2008 data, that approximately 440 of the 
3129 PHAs expended in excess of 10 percent of their Capital Funds for 
management improvements, corresponding to a total of $28.4 million. 
That sum represents an approximation of the amount of funding currently 
allocated to management improvements that effectively would be 
transferred to other eligible Capital Funds activities.
    HUD notes, however, that collectively and on average, PHAs expend 
well below the 10 percent threshold. Still using the 2008 data, $2.14 
billion was distributed by formula to PHAs under the Capital Fund 
Program. Of that amount, only $99,693,783, or about 4.65 percent, was 
expended by PHAs for management improvements. Overall, the average 
amount expended by PHAs for management improvements was 8.1 percent.
    These results suggest that the potential transfer of $28.4 million 
would be observed at the level of each individual PHA. Collectively, 
and for the program as a whole, there would not be any transfers since 
PHAs, on an average, budget less than 10 percent for management 
improvements.
    In reviewing the impact of HUD's 10 percent cap on management 
improvements, it is important to note that the cap does not imply a 
cost to the PHAs or a reduction in funding. With

[[Page 63768]]

the limit, PHAs with a management improvements budget over 10 percent 
of their annual Capital Fund allocation will simply have to realign 
their budget over a 5 year period and transfer the excess to other 
eligible capital fund activities within the PHA.
    There is also no cost to be borne by PHAs and there is no reduction 
of the annual Capital Fund allocation to the PHA when the limit becomes 
effective. Further, there should be no disruption of activities already 
planned and included in the PHA plan. In this regard, it should be 
noted that Capital Fund expenditures are guided by the PHA's 5-year 
plan and annual statement, which describe the work to be carried out in 
the budget year. The fact that this final rule calls for a phase-down 
over 5 years mitigates any adverse programmatic impact to the PHA and 
allows work items already budgeted to be funded using management 
improvements funds to be completed, if the PHA so desires.
    The restriction established by this rule is that no new work items 
in excess of 10 percent of the PHA's annual Capital Fund allocation 
would be approved using management improvements funds. The limitation 
and the priority change will leave a larger percentage of the PHA's 
annual Capital Fund grant available to be used for physical 
improvements, and will cause a transfer from and to an economic agent 
outside of the PHAs. Traditionally, PHAs spend management improvement 
funds on management information systems equipment, resident 
initiatives, etc. Stakeholders in these lines of business may see a 
reduction of activities from PHAs that routinely budget more than 10 
percent to management improvements, as a result of the 10 percent 
limit.
    Nevertheless, the potential benefit for capping the management 
improvements budget to 10 percent, down from 20 percent is to target 
the bulk of the capital funds to other capital fund--eligible 
activities, such as physical improvements. Recent studies, such as the 
Capital Needs Assessment, have stressed an urgent need for additional 
funding for physical improvements.
B. Capital Fund Formula
    This proposed rule proposes the phase-down of the Replacement 
Housing Factor (RHF) from a 10-year long RHF program to a 5-year RHF 
program for PHAs that remove units from the inventory based on 
demolition or disposition.
    The final rule establishes 5 years of a DDTF grant that will be 
included in the regular Capital Fund formula grant. The modification 
would alter the distribution of funds amongst program participants and 
thus create some inter-agency transfers. It should be noted that the 
main difference at this stage is on the way funds are distributed to 
eligible PHAs and the eligible use of funds. The DDTF grant will not be 
subject to the same requirements as the RHF grant, and it will allow 
PHAs to fund modernization as well as development, and fund any 
eligible activity under the Capital Fund Program. The need for more 
modernization is quantified in a study released in June 2011 on 
modernization needs, ``Capital Needs in the Public Housing Program,'' 
prepared by Abt Associates, available at http://portal.hud.gov/hudportal/documents/huddoc?id=PH_Capital_Needs.pdf. The study found 
that the Nation's 1.2 million public housing units have an estimated 
total of $25.6 billion in existing capital needs.
    This final rule will also have significant benefits. This rule 
updates and consolidates the Capital Fund Program regulations and 
related regulations having to do with the use of Capital Funds for 
development and modernization, as well as regulations for continuing 
operation of low-income housing after completion of debt service. In 
addition, the rule codifies recent statutory requirements enacted in 
HERA. The benefits of the rule, such as regulatory consolidation, 
program clarification, removal of obsolete references, and enhanced 
efficiencies, make the rule necessary. Although HUD established the 
Capital Fund formula in 2000, HUD has continued to rely on Capital Fund 
Program requirements to the extent that these requirements were not 
superseded by statutory requirements.
    The update in energy standards is made on the basis of a review of 
analysis prepared pursuant to the Energy Independence and Security Act 
(Pub. L. 110-140, approved December 19, 2007) showing that the average 
simple payback is 3.45 years for the energy savings resulting from 
implementing IECC 2009 to equal the incremental cost of the 
improvements.\4\ This payback period is significantly less than the 
useful life of affected components and as a result the benefits of 
compliance with IECC 2009 outweigh the costs. It is noted that 
regardless of HUD's determination, 37 states have adopted IECC 2009 or 
IECC 2012, making the current HUD IECC 2006 standard moot in those 
states in addition to others, such as California, that enforce a 
stricter state standard than IECC. Generally, the IECC establishes 
baseline expectations for energy efficiency that consumers can rely 
upon as a matter of public policy. Without the requirement of the IECC 
to implement baseline energy conservation measures, real estate owners 
in both the public and private sectors generally would not implement 
energy conservation solely on the basis of energy savings. This is 
because the incentive for such measures in the form of cost savings 
often does not accrue to the entity implementing the energy 
conservation measure, creating a misplaced incentive. If there are 
market failures or barriers that are not reflected in the return of the 
investment, then the market penetration of energy-efficient investment 
will be less than optimal. Consistent with the search cost approach to 
imperfect information, landlords have a reduced incentive to provide 
energy-efficient appliances to their tenants.\5\
---------------------------------------------------------------------------

    \4\ Zachary Pachette, John Miller, Mike DeWein, Incremental 
Construction Cost Analysis for New Homes, Building Code Assistance 
Project, Updated June 2011. (Retrieved from: http://bcap-ocean.org/incremental-cost-analysis).
    \5\ Allcott, Hunt and Michael Greenstone, 2012, ``Is there an 
Energy-Efficiency Gap?'' National Bureau of Economic Research, 
Working Paper 17766; Gillingham, Kenneth, Matthew Harding, and David 
Rapson. 2012. ``Split Incentives and Household Energy Consumption.'' 
Energy Journal 33 (2): 37-62.
    .
---------------------------------------------------------------------------

    It is determined that this final rule is not economically 
significant. This final rule accommodates changes made to the proposed 
rule in response to public comments and other consideration of issues 
by HUD. Like the proposed rule, this final has the potential to 
generate some transfers caused by the modification of the formula grant 
to accommodate the introduction of the DDTF. Notwithstanding, the rule 
will yield some substantial benefits such as regulatory consolidation, 
program clarification, and removal of obsolete references.
    With respect to Executive Order 13563, the preamble has 
demonstrated that, in response to public comment, and following further 
consideration of the issues by HUD, components of the Capital Fund 
regulations have been made more flexible and less burdensome.
    The docket file is available for public inspection in the 
Regulations Division, Office of the General Counsel, Room 10276, 451 
7th Street SW., Washington, DC 20410-0500. Due to security measures at 
the HUD Headquarters building, please schedule an appointment to review 
the docket file by calling the Regulations Division at 202-708-3055 
(this is not a toll-free

[[Page 63769]]

number). Individuals with speech or hearing impairments may access this 
number via TTY by calling the Federal Relay Service, toll-free at 800-
877-8339.

Paperwork Reduction Act

    The information collection requirements contained in this final 
rule have been submitted for review and approval by the Office of 
Management and Budget (OMB) under the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501 et seq.). The information collection requirements for 
the Capital Fund program are assigned OMB control numbers 2577-0157, 
2577-0226, 2577-0265, and 2577-0275. The information collection 
requirements in this final rule include largely pre-existing 
information collection requirements. However, the information 
collection requirements of some preexisting forms are being revised to 
reduce the paperwork burden. Specifically, the information collection 
requirements in this rule reflect a decrease of 32,222 burden hours 
from the preexisting forms. This decrease reflects statutory changes 
enacted by sections 2701 and 2702 of the Small PHA Paperwork Reduction 
Act, title VII of the Housing and Economic Recovery Act of 2008 (HERA) 
(Pub. L. 110-289, approved July 30, 2008). Specifically, HERA excepts 
qualified PHAs from the requirement of section 5A of the U.S. Housing 
Act of 1937 (42 U.S.C. 1437 et seq.) to prepare and submit an Annual 
PHA Plan. Qualified PHAs under HERA are defined as those PHAs with less 
than 550 public housing units and Housing Choice Vouchers (HCV) 
combined that are not in troubled performance status. This provision 
significantly reduces the paperwork burdens and associated costs for 
qualified PHAs, which represent approximately 68 percent of the PHAs 
that administer public housing programs. Under HERA, qualified PHAs are 
exempt from preparing and submitting a PHA Annual Plan and are only 
required to submit the 5-Year PHA Plan once every 5 years. The sections 
in this rule that contain the current information collection 
requirements and the upcoming revisions that are awaiting OMB approval, 
as well as the estimated adjusted burden of the pending revisions, are 
set forth in the following table.

----------------------------------------------------------------------------------------------------------------
                                                     Number of     Total annual    Average hours   Total annual
     CFR Section (related forms referenced)         respondents      responses     per response    burden hours
----------------------------------------------------------------------------------------------------------------
Sec.   905.604(k), Transition Plan, OMB Control              920             920           18.46          16,980
 No. 2577-0275..................................
Sec.   905.300(b)(8) Annual Statement/                     3,163           3,163               8          25,304
 Performance and Evaluation Report, HUD form
 50075.1, OMB Control No. 2577-0265, current....
Sec.   905.300(b)(8) Annual Statement/                     1,551           1,551            4.18            6488
 Performance and Evaluation Report, HUD form
 50075.1, OMB Control No. 2577-0265, pending
 approval.......................................
Sec.   905.300(b)(1) Capital Fund 5-Year Action            3,163           3,163            3.00            9489
 Plan, HUD form 50075.2, OMB Control No. 2577-
 0226, current..................................
Sec.   905.300(b)(1) Capital Fund 5-Year Action            1,551           1,551            2.09           3,244
 Plan, HUD form 50075.2, OMB Control No. 2577-
 0226, pending approval.........................
Sec.   903.3 PHA 5-Year and Annual Plan, HUD               4,139           4,139            4.28          17,719
 form 50075, OMB Control No. 2577-0226, current.
Sec.   903.3 PHA 5-Year and Annual Plan, HUD               4,053           4,053             2.6          10,558
 form 50075, OMB Control No. 2577-0226, pending
 approval.......................................
                                                 ---------------------------------------------------------------
    Total current burden hours..................  ..............  ..............  ..............          52,512
                                                 ---------------------------------------------------------------
        Total burden hours once pending forms     ..............  ..............  ..............          20,290
         are approved...........................
----------------------------------------------------------------------------------------------------------------

    All estimates include the time for reviewing instructions, 
searching existing data sources, gathering or maintaining the needed 
data, and reviewing the information.
    The docket file is available for public inspection. For information 
or a copy of the paperwork package submitted to OMB, contact: Colette 
Pollard at 202-708-0306 (this is not a toll free number) or via email 
at [email protected]. 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.

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 rule does 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 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)), and 
remains applicable to this final rule. 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 7th 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 
Federal Relay Service, at toll-free 800-877-8339.

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. 
This rule reflects the transition from PHA-wide accounting to an asset 
management model, and therefore changes some of the language regarding 
the Capital Fund formula to reflect the new accounting model. The only 
significant change in the Capital Fund formula calculation is a 
proposal to limit the number of years a PHA is eligible to receive RHF 
grants

[[Page 63770]]

to replace units removed from the inventory by demolition, disposition, 
or homeownership from 10 years to 5 years. The Capital Fund formula 
amount that is freed up because of fewer RHF grants will cause an 
increase in the amount of Capital Funds available to the remainder of 
the PHAs, which includes a large number of small PHAs. Since most small 
PHAs do not demolish or dispose of a significant number of public 
housing units, reducing RHF eligibility to 5 years should benefit small 
PHAs. 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.

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 numbers for 24 CFR parts 
905, 941, 968, and 969 are 14.850, 14.872, 14.882, 14.883.

List of Subjects

24 CFR Part 903

    Administrative practice and procedure, Public housing, Reporting 
and recordkeeping requirements.

24 CFR Part 905

    Grant programs--housing and community development, Incorporation by 
reference, Public housing, Reporting and recordkeeping requirements.

24 CFR Part 941

    Grant programs--housing and community development, Loan programs--
housing and community development, Public housing.

24 CFR Part 968

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

24 CFR Part 969

    Grant programs--housing and community development, Low and moderate 
income housing, and Public housing.

    Accordingly, for the reasons stated in the preamble, under the 
authority of 42 U.S.C. 3535(d), HUD amends 24 CFR chapter IX as 
follows:

PART 903--PUBLIC HOUSING AGENCY PLANS

0
1. The authority citation for part 903 is revised to read as follows:

    Authority: 42 U.S.C. 1437c; 42 U.S.C. 1437c-1; Pub. L. 110-289; 
42 U.S.C. 3535d.


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2. Revise Sec.  903.3 to read as follows:


Sec.  903.3  What is the purpose of this subpart?

    (a) This subpart specifies the requirements for PHA plans, required 
by section 5A of the United States Housing Act of 1937 (42 U.S.C. 
1437c-1) (the Act), as amended.
    (b) The purpose of the plans is to provide a strategic planning 
framework for PHA management operations and capital planning:
    (1) Local accountability; and
    (2) An easily identifiable source by which public housing 
residents, participants in the tenant-based assistance program, and 
other members of the public may locate basic PHA policies, rules and 
requirements concerning the PHA's operations, programs and services.
    (c) Title VII of the Housing and Economic Reform Act, Public Law 
110-289, section 2702, amends 42 U.S.C. 1437c-1(b) to provide qualified 
PHAs an exemption from the requirement of section 5A of the Act to 
submit an annual PHA Plan. The term ``qualified PHA'' means a public 
housing agency that meets the following requirements:
    (1) The sum of the number of public housing dwelling units 
administered by the agency, and the number of vouchers under section 
8(o) of the United States Housing Act of 1937 (42 U.S.C. 1437f(o)) 
administered by the agency, is 550 or fewer; and
    (2) The agency is not designated under section 42 U.S.C. 
1437d(j)(2) as a troubled public housing agency, and does not have a 
failing score under SEMAP during the prior 12 months.

PART 905--THE PUBLIC HOUSING CAPITAL FUND PROGRAM

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3. The authority citation for part 905 is revised to read as follows:

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


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4. Revise subpart A to read as follows:
Subpart A--General
Sec.
905.100 Purpose, general description, and other requirements.
905.102 Applicability.
905.104 HUD approvals.
905.106 Compliance.
905.108 Definitions.
905.110 Incorporation by reference.

Subpart A--General


Sec.  905.100  Purpose, general description, and other requirements.

    (a) Purpose. The Public Housing Capital Fund Program (Capital Fund 
Program or CFP) provides financial assistance to public housing 
agencies (PHAs) and resident management corporations (RMC) (pursuant to 
24 CFR 964.225) to make improvements to existing public housing. The 
CFP also provides financial assistance to develop public housing, 
including mixed-finance developments that contain public housing units.
    (b) General description. Congress appropriates amounts for the 
Capital Fund in HUD's annual appropriations. In order to receive a 
Capital Fund grant, the PHA must:
    (1) Validate project-level information in HUD's data systems, as 
prescribed by HUD;
    (2) Have an approved CFP 5-Year Action Plan;
    (3) Enter into a Capital Fund Annual Contributions Contract (CF 
ACC) Amendment to the PHA's Annual Contributions Contract (as defined 
in 24 CFR 5.403) with HUD; and
    (4) Provide a written certification and counsel's opinion that all 
property receiving Capital Fund assistance is under a currently 
effective Declaration of Trust (DOT) and is in compliance with the CF 
ACC and the Act.
    (c) Informational requirements. Section 905.300 of this part 
describes the information to be submitted to HUD for the CFP. HUD uses 
the CF formula set forth in Sec.  905.400 of this part, along with data 
provided by the PHA and other information, including, but not limited 
to, the high-performance information from the Real Estate Assessment 
Center (REAC) and location cost indices, to determine each PHA's annual 
grant amount. HUD notifies each PHA of the amount of the grant and 
provides a CF ACC Amendment that must be signed by the PHA and executed 
by HUD in order for the PHA to access the grant. After HUD executes the 
CF ACC Amendment, the PHA may draw down funds for eligible costs that

[[Page 63771]]

have been described in its CFP Annual Statement/Performance and 
Evaluation Report or CFP 5-Year Action Plan.
    (d) Eligible activities. Eligible Capital Fund costs and activities 
as further described in subpart B of this part include, but are not 
limited to, making physical improvements to the public housing stock 
and developing public housing units to be added to the existing 
inventory. With HUD approval, a PHA may also leverage its public 
housing inventory by borrowing additional capital on the private market 
and pledging a portion of its annual Capital Funds for debt service, in 
accordance with Sec.  905.500 of this part.
    (e) Obligation and expenditure requirements. A PHA must obligate 
and expend its Capital Funds in accordance with Sec.  905.306 of this 
part. The PHA will directly employ labor, either temporarily or 
permanently, to perform work (force account) or contract for the 
required work in accordance with 24 CFR part 85. Upon completion of the 
work, the PHA must submit an Actual Modernization Cost Certificate 
(AMCC) or Actual Development Cost Certificate (ADCC) and a final 
Performance and Evaluation Report (in accordance with Sec.  905.322 of 
this part) to HUD to close out each Capital Fund grant.
    (f) Financing and development. Section 905.500 of this part 
regulates financing activities using Capital Funds and Operating Funds. 
Section 905.600 of this part contains the development requirements, 
including those related to mixed-finance development, formerly found in 
24 CFR part 941. Section 905.700 of this part describes the criteria 
for the use of Capital Funds for other security interests. Section 
905.800 of this part addresses PHA compliance with Capital Fund 
requirements and HUD capability for review and sanction for 
noncompliance.


Sec.  905.102  Applicability.

    All PHAs that have public housing units under an Annual 
Contributions Contract (ACC), as described in 24 CFR 5.403, are 
eligible to receive Capital Funds.


Sec.  905.104  HUD approvals.

    All HUD approvals required in this part must be in writing and from 
an official designated to grant such approval.


Sec.  905.106  Compliance.

    PHAs or owner/management entities or their partners are required to 
comply with all applicable provisions of this part. Execution of the CF 
ACC Amendment, submissions required by this part, and disbursement of 
Capital Fund grants from HUD are individually and collectively deemed 
to be the PHA's certification that it is in compliance with the 
provisions of this part and all other Public Housing Program 
Requirements. Noncompliance with any provision of this part or other 
applicable requirements may subject the PHA and/or its partners to 
sanctions contained in Sec.  905.804 of this part.


Sec.  905.108  Definitions.

    The following definitions apply to this part:
    1937 Act. The term ``1937 Act'' is defined in 24 CFR 5.100.
    Accessible. As defined in 24 CFR 8.3.
    ACC. The Annual Contributions Contract between HUD and a PHA 
covering a public housing project or multiple public housing projects.
    ACC Amendment. An Amendment to the ACC to reflect specific changes 
made to a PHA's public housing inventory or funding. An ACC Amendment 
may be a Capital Fund ACC Amendment, a Mixed-Finance ACC Amendment, a 
Capital Fund Financing ACC Amendment, or other form of amendment 
specified by HUD.
    Additional Project Costs. The sum of the following HUD-approved 
costs related to the development of a public housing project, which are 
not included in the calculation of the Total Development Cost (TDC) 
limit, but are included in the maximum project cost as stated in Sec.  
905.314(b). Additional project costs include the following:
    (1) Costs for the demolition or remediation of environmental 
hazards associated with public housing units that will not be rebuilt 
on the original site; and
    (2) Extraordinary site costs that have been verified by an 
independent state-registered, licensed engineer (e.g., removal of 
underground utility systems; replacement of off-site underground 
utility systems; extensive rock and/or soil removal and replacement; 
and amelioration of unusual site conditions, such as unusual slopes, 
terraces, water catchments, lakes, etc.); and
    (3) Cost effective energy-efficiency measures in excess of standard 
building codes.
    Capital Fund (CF). The fund established under section 9(d) of the 
1937 Act (42 U.S.C.) 1437g(d).
    Capital Fund Annual Contributions Contract Amendment (CF ACC). An 
amendment to the Annual Contributions Contract (ACC) under the 1937 Act 
between HUD and the PHA containing the terms and conditions under which 
the Department assists the PHA in providing decent, safe, and sanitary 
housing for low-income families. The CF ACC must be in a form 
prescribed by HUD, under which HUD agrees to provide assistance in the 
development, modernization, and/or operation of a low-income housing 
project under the 1937 Act and the PHA agrees to modernize and operate 
the project in compliance with all Public Housing Requirements.
    Capital Fund Program Fee. A fee that may be charged to a Capital 
Fund grant by the PHA to cover costs associated with oversight and 
management of the CFP by the PHA Central Office Cost Center (COCC). 
These costs include duties related to general capital planning, 
preparation of the Annual Plan, processing of the Line of Credit 
Control System (LOCCS), preparation of reports, drawing of funds, 
budgeting, accounting, and procurement of construction and other 
miscellaneous contracts. The CFP fee is the administrative cost for 
managing a Capital Fund grant for a PHA subject to asset management.
    Community Renewal Costs. Community Renewal Costs consist of the sum 
of the following HUD-approved costs related to the development of a 
public housing project: planning (including proposal preparation); 
administration; site acquisition; relocation; demolition of--and site 
remediation of environmental hazards associated with--public housing 
units that will be replaced on the project site; interest and carrying 
charges; off-site facilities; community buildings and nondwelling 
facilities; contingency allowance; insurance premiums; any initial 
operating deficit; on-site streets; on site utilities; and other costs 
necessary to develop the project that are not covered under the Housing 
Construction Cost (HCC). Public housing capital assistance may be used 
to pay for Community Renewal Costs in an amount equivalent to the 
difference between the HCC paid for with public housing capital 
assistance and the TDC limit.
    Cooperation agreement. An agreement, in a form prescribed by HUD, 
between a PHA and the applicable local governing body or bodies that 
assures exemption from real and personal property taxes, provides for 
local support and services for the development and operation of public 
housing, and provides for PHA payments in lieu of taxes (PILOT).
    Date of Full Availability (DOFA). The last day of the month in 
which substantially all (95 percent or more) of the units in a public 
housing project are available for occupancy.
    Declaration of Restrictive Covenant. The Declaration of Restrictive 
Covenant

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is a legal instrument that binds the PHA and the Owner Entity to 
develop mixed-finance projects in compliance with Public Housing 
Requirements and restricts disposition of the property, including 
transferring, conveying, assigning, leasing, mortgaging, pledging or 
otherwise encumbering the property.
    Declaration of Trust (DOT). A legal instrument that grants HUD an 
interest in public housing property. It provides public notice that the 
property must be operated in accordance with all public housing federal 
requirements, including the requirement not to convey or otherwise 
encumber the property unless expressly authorized by federal law and/or 
HUD.
    Development. Any or all undertakings necessary for planning, land 
acquisition, demolition, construction, or equipment in connection with 
a public housing project.
    Emergency work. Capital Fund related physical work items that if 
not done pose an immediate threat to the health or safety of residents, 
and which must be completed within one year of funding. Management 
Improvements are not eligible as emergency work and therefore must be 
covered by the CFP 5-Year Action Plan before the PHA may carry them 
out.
    Energy audit. A systematic review of the energy requirements and 
consumption for property with the intent to identify potential 
opportunities for energy and water savings through improved operational 
efficiency or more efficient components.
    Expenditure. Capital Funds disbursed by the PHA to pay for 
obligations incurred in connection with work included in a CFP 5-Year 
Action Plan that has been approved by the PHA Board of Commissioners 
and HUD. Total funds expended means cash actually disbursed and does 
not include retainage.
    Federal Fiscal Year (FFY). The Federal Fiscal Year begins each year 
on October 1 and ends on September 30 of the following year.
    Force account labor. Labor employed directly by the PHA on either a 
permanent or a temporary basis.
    Fungibility. As it relates to the Capital Fund Program, fungibility 
allows the PHA to substitute work items between any of the years within 
the latest approved CFP 5-Year Action Plan, without prior HUD approval.
    HCC. The sum of the following HUD-approved costs related to the 
development of a public housing project: dwelling unit hard costs 
(including construction and equipment), builder's overhead and profit, 
the cost of extending utilities from the street to the public housing 
project, finish landscaping, and the payment of Davis-Bacon wage rates.
    Line of Credit Control System (LOCCS). LOCCS is a HUD grant 
disbursement system. LOCCS currently provides disbursement controls for 
over 100 HUD grant programs. LOCCS-Web is an intranet version of LOCCS 
for HUD personnel. eLOCCS is the Internet link to LOCCS data for HUD 
business partners.
    Mixed-finance modernization. Use of the mixed-finance method of 
development to modernize public housing projects described in Sec.  
905.604.
    Modernization. Modernization means the activities and items listed 
in Sec.  905.200(b)(4-18).
    Natural disaster. An extraordinary event, such as an earthquake, 
flood, or hurricane, affecting only one or few PHAs, but excluding 
presidentially declared emergencies and major disasters under the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 
U.S.C. 5121 et seq).
    Obligation. A binding agreement for work or financing that will 
result in outlays, immediately or in the future. All obligations must 
be incorporated within the CFP 5-Year Action Plan that has been 
approved by the PHA Board of Commissioners and HUD. This includes funds 
obligated by the PHA for work to be performed by contract labor (i.e., 
contract award), or by force account labor (i.e., work actually started 
by PHA employees). Capital Funds identified in the PHA's CFP 5-Year 
Action Plan to be transferred to operations are obligated by the PHA 
once the funds have been budgeted and drawn down by the PHA. Once these 
funds are drawn down they are subject to the requirements of 24 CFR 
part 990.
    Open grant. Any grant for which a cost certificate has not been 
submitted and which has not reached fiscal closeout as described in 
Sec.  905.322 of this part.
    Operating fund. Assistance provided under 24 CFR part 990 pursuant 
to section 9(e) of the 1937 Act (42 U.S.C. 1437g(e)) for the purpose of 
operation and management of public housing.
    Owner entity. An entity that owns public housing units. In mixed-
finance development, the Owner Entity may be the PHA, or may be an 
entity in which the PHA owns a partial interest, or may be an entity in 
which the PHA has no ownership interest. The Owner Entity is subject to 
the applicable requirements of this subpart.
    Partner. A third-party entity with which the PHA has entered into a 
partnership or other contractual arrangement to provide for the mixed-
finance development of public housing units pursuant to this subpart. 
The partner has primary responsibility with the PHA for the development 
and/or operation of the public housing units and is subject to the 
applicable requirements of subpart F of this part.
    Physical Needs Assessment (PNA). A systematic review of all the 
major physical components of property to result in a long-term schedule 
for replacement of each component and estimated capital costs required 
to meet the replacement need.
    PIH Information Center (PIC). PIH's current system for recording 
data concerning: the public housing inventory, the characteristics of 
public housing and Housing Choice Voucher --assisted families, the 
characteristics of PHAs, and performance measurement of PHAs receiving 
Housing Choice Voucher funding.
    Public Housing Agency (PHA). Any state, county, municipality, or 
other governmental entity or public body or agency or instrumentality 
of these entities that is authorized to engage or assist in the 
development or operation of public housing under this part.
    Public Housing Assessment System (PHAS). The assessment system 
under 24 CFR part 902 for measuring the properties and PHA management 
performance in essential housing operations, including rewards for high 
performers and consequences for poor performers.
    Public housing capital assistance. Assistance provided by HUD under 
the Act in connection with the development of public housing under this 
part, including Capital Fund assistance provided under section 9(d) of 
the Act, public housing development assistance provided under section 5 
of the Act, Operating Fund assistance used for capital purposes under 
section 9(g)(2) or 9(e)(1)(I) (with HUD's approval of such financing of 
rehabilitation and development of public housing units) of the Act, and 
HOPE VI grant assistance.
    Public housing funds. Any funds provided through the Capital Fund 
or Other Public Housing Development Sources, such as HOPE VI, Choice 
Neighborhoods, Development Funds, disposition proceeds that a PHA may 
realize under section 18 of the 1937 Act (42 U.S.C. 1437p), or any 
other funds appropriated by Congress for public housing.
    Public housing project. The term ``public housing'' means low-
income housing, and all necessary appurtenances thereto, assisted under 
the 1937 Act, other than assistance under 42 U.S.C. 1437f of the 1937 
Act (section 8). The term ``public housing''

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includes dwelling units in a mixed-finance project that are assisted by 
a public housing agency with public housing capital assistance or 
Operating Fund assistance. When used in reference to public housing, 
the term ``project'' means housing developed, acquired, or assisted by 
a PHA under the 1937 Act, and the improvement of any such housing.
    Public housing requirements. All requirements applicable to public 
housing including, but not limited to, the 1937 Act; HUD regulations; 
the Consolidated Annual Contributions Contract, including amendments; 
HUD notices; and all applicable federal statutes, executive orders, and 
regulatory requirements, as these requirements may be amended from time 
to time.
    Reasonable cost. An amount to rehabilitate or modernize an existing 
structure that is not greater than 90 percent of the TDC for a new 
development of the same structure type, number, and size of units in 
the same market area. Reasonable costs are also determined with 
consideration of HUD regulations including 24 CFR part 85, and 2 CFR 
part 225 (codifying OMB Circular A-87).
    Reconfiguration. The altering of the interior space of buildings 
(e.g., moving or removing interior walls to change the design, sizes, 
or number of units).
    Uniform Federal Accessibility Standards (UFAS). As defined in 24 
CFR 8.32; see also 24 CFR part 40.


Sec.  905.110  Incorporation by reference.

    (a) Certain material is incorporated by reference into this part, 
with the approval of the Director of the Federal Register, under 5 
U.S.C. 552(a) and 1 CFR part 51. To enforce any edition other than that 
specified in this section, HUD must publish notice of change in the 
Federal Register and the material must be available to the public. 
Incorporated material is available from the sources listed below and is 
available for inspection at HUD's Office of Policy Development and 
Research, Affordable Housing Research and Technology Division, 
Department of Housing and Urban Development, telephone number 202-408-
4370 (this is not a toll-free number). This material is also available 
for inspection at the National Archives and Records Administration 
(NARA). For information on the availability of this material at NARA, 
call 202[hyphen]741[hyphen]6030 (this is not a toll-free number) or go 
to http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.
    (b) American Society of Heating, Refrigerating, and Air-
Conditioning Engineers, Inc., 1791 Tulle Circle NE., Atlanta, GA 30329 
(http://www.ashrae.org/standards-research-technology/standards-guidelines).
    (1) ASHRAE 90.1-2010, ``Energy Standard for Buildings Except Low-
Rise Residential Buildings,'' copyright 2010, IBR approved for 
Sec. Sec.  905.200(b) and 905.312(b) of this part.
    (2) [Reserved].
    (c) International Code Council, 500 New Jersey Avenue NW., 6th 
Floor, Washington, DC 20001.
    (1) International Energy Conservation Code (IECC), January 2009, 
IBR approved for Sec. Sec.  905.200(b) and 905.312(b).
    (2) [Reserved].

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5. Add subparts B, C, and D to read as follows:
Subpart B--Eligible Activities
Sec.
905.200 Eligible activities.
905.202 Ineligible activities and costs.
905.204 Emergencies and natural disasters.
Subpart C--General Program Requirements
905.300 Capital fund submission requirements.
905.302 Timely submission of the CF ACC amendment by the PHA.
905.304 CF ACC term and covenant to operate.
905.306 Obligation and expenditure of Capital Fund grants.
905.308 Federal requirements applicable to all Capital Fund 
activities.
905.310 Disbursements from HUD.
905.312 Design and construction.
905.314 Cost and other limitations.
905.316 Procurement and contract requirements.
905.318 Title and deed.
905.320 Contract administration and acceptance of work.
905.322 Fiscal closeout.
905.324 Data reporting requirements.
905.326 Records.
Subpart D--Capital Fund Formula
905.400 Capital Fund formula (CF formula).

Subpart B--Eligible Activities


Sec.  905.200  Eligible activities.

    (a) General. Activities that are eligible to be funded with Capital 
Funds as identified in this section include only items specified in an 
approved CFP 5-Year Action Plan as identified in Sec.  905.300, or 
approved by HUD for emergency and natural disaster assistance, other 
than presidentially declared natural disasters and emergencies.
    (b) Eligible activities. Eligible activities include the 
development, financing, and modernization of public housing projects, 
including the redesign, reconstruction, and reconfiguration of public 
housing sites and buildings (including compliance with the accessible 
design and construction requirements contained in 24 CFR 8.32, 24 CFR 
part 40, 24 CFR part 100, 28 CFR 35.151, and 28 CFR part 36, as 
applicable) and the development of mixed-finance projects, including 
the following:
    (1) Modernization. Modernization is defined in Sec.  905.108 of 
this part;
    (2) Development. Development refers to activities and related costs 
to add units to a PHA's public housing inventory under Sec.  905.600 of 
this part, including: construction and acquisition with or without 
rehabilitation; any and all undertakings necessary for planning, 
design, financing, land acquisition, demolition, construction, or 
equipment, including development of public housing units, and 
buildings, facilities, and/or related appurtenances (i.e., nondwelling 
facilities/spaces). Development of mixed-finance projects include the 
provision of public housing through a regulatory and operating 
agreement, master contract, individual lease, condominium or 
cooperative agreement, or equity interest.
    (3) Financing. Debt and financing costs (e.g., origination fees, 
interest) incurred by PHAs for development or modernization of PHA 
projects that involves the use of Capital Funds, including, but not 
limited to:
    (i) Mixed finance as described in Sec.  905.604 of this part;
    (ii) The Capital Fund Financing Program (CFFP) as described in 
Sec.  905.500 of this part; and
    (iii) Any other use authorized by the Secretary under section 30 of 
the 1937 Act (42 U.S.C. 1437).
    (4) Vacancy reduction. Physical improvements to reduce the number 
of units that are vacant. Not included are costs for routine vacant 
unit turnaround, such as painting, cleaning, and minor repairs. Vacancy 
reduction activities must be remedies to a defined vacancy problem 
detailed in a vacancy reduction program included in the PHA's CFP 5-
Year Action Plan.
    (5) Nonroutine maintenance. Work items that ordinarily would be 
performed on a regular basis in the course of maintenance of property, 
but have become substantial in scope because they have been postponed 
and involve expenditures that would otherwise materially distort the 
level trend of maintenance expenses. These activities also include the 
replacement of obsolete utility systems and dwelling equipment.
    (6) Planned code compliance. Building code compliance includes

[[Page 63774]]

design and physical improvement costs associated with:
    (i) Correcting violations of local building code or the Uniform 
Physical Condition Standards (UPCS) under the Public Housing Assessment 
System (PHAS), and
    (ii) A national building code, such as those developed by the 
International Code Council or the National Fire Protection Association; 
and the IECC or ASHRAE 90.1-2010 (both incorporated by reference, see, 
Sec.  905.110 of this part), for multifamily high-rises (four stories 
or higher), or a successor energy code or standard that has been 
adopted by HUD for new construction pursuant to section 109 of the 
Cranston-Gonzales National Affordable Housing Act, Public Law 101-625, 
codified at 42 U.S.C. 12709, or other relevant authority.
    (7) Management improvements. Noncapital activities that are 
project-specific or PHA-wide improvements needed to upgrade or improve 
the operation or maintenance of the PHA's projects, to promote energy 
conservation, to sustain physical improvements at those projects, or 
correct management deficiencies. PHAs must be able to demonstrate the 
linkage between the management improvement and the correction of an 
identified management deficiency, including sustaining the physical 
improvements. HUD encourages PHAs, to the greatest extent feasible, to 
hire residents as trainees, apprentices, or employees to carry out 
activities under this part, and to contract with resident owned 
businesses as required by section 3 of the Housing and Community 
Development Act of 1968, 12 U.S.C. 1701u. Management improvement costs 
shall be fundable only for the implementation period of the physical 
improvements, unless a longer period, up to a maximum of 4 years, is 
clearly necessary to achieve performance targets. Eligible activities 
include the following costs:
    (i) Training for PHA personnel in operations and procedures, 
including resident selection, rent collection and eviction;
    (ii) Improvements to management, financial, and accounting control 
systems of the PHA;
    (iii) Improvement of resident and project security;
    (iv) Activities that assure or foster equal opportunity; and
    (v) Activities needed in conjunction with capital expenditures to 
facilitate programs to improve the empowerment and economic self-
sufficiency of public housing residents, including the costs for 
resident job training and resident business development activities to 
enable residents and their businesses to carry out Capital Fund-
assisted activities.
    (vi) Resident management costs not covered by the Operating Fund 
include:
    (A) The cost of technical assistance to a resident council or RMC 
to assess feasibility of carrying out management functions for a 
specific development or developments;
    (B) The cost to train residents in skills directly related to the 
operation and management of the development(s) for potential employment 
by the RMC;
    (C) The cost to train RMC board members in community organization, 
board development, and leadership;
    (D) The cost of the formation of an RMC; and
    (E) Resident participation costs that promote more effective 
resident participation in the operation of the PHA in its Capital Fund 
activities, including costs for staff support, outreach, training, 
meeting and office space, childcare, transportation, and access to 
computers that are modest and reasonable.
    (8) Economic self-sufficiency. Capital expenditures to facilitate 
programs to improve the empowerment and economic self-sufficiency of 
public housing residents.
    (9) Demolition and reconfiguration. (i) The costs to demolish 
dwelling units or nondwelling facilities subject to prior approval by 
HUD, where required, and other related costs for activities such as 
relocation, clearing, and grading the site after demolition, and 
subsequent site improvements to benefit the remaining portion of the 
existing public housing property, as applicable.
    (ii) The costs to develop dwelling units or nondwelling facilities 
approved by HUD, where required, and other related costs for activities 
such as relocation, clearing and grading the site prior to development.
    (iii) The costs to reconfigure existing dwelling units to units 
with different bedroom sizes or to a nondwelling use.
    (10) Resident relocation and mobility counseling. Relocation and 
other assistance (e.g., reimbursement to affected residents of 
reasonable out-of-pocket expenses incurred in connection with temporary 
relocation, including the cost of moving to and from temporary housing 
and any increase in monthly rent/utility costs) as may be required or 
permitted by applicable Public Housing Requirements for permanent or 
temporary relocation, as a direct result of modernization, development, 
rehabilitation, demolition, disposition, reconfiguration, acquisition, 
or an emergency or disaster.
    (11) Security and safety. Capital expenditures designed to improve 
the security and safety of residents.
    (12) Homeownership. Activities associated with public housing 
homeownership, as approved by HUD, such as:
    (i) The cost of a study to assess the feasibility of converting 
rental units to homeownership units and the preparation of an 
application for the conversion to homeownership or for the sale of 
units;
    (ii) Construction or acquisition of units;
    (iii) Downpayment assistance;
    (iv) Closing cost assistance;
    (v) Subordinate mortgage loans;
    (vi) Construction or permanent financing such as write downs for 
new construction, or acquisition with or without rehabilitation; and
    (vii) Other activities in support of the primary homeownership 
activities above, including but not limited to:
    (A) Demolition to make way for new construction;
    (B) Abatement of environmentally hazardous materials;
    (C) Relocation assistance and mobility counseling;
    (D) Homeownership counseling;
    (E) Site improvements; and
    (F) Administrative and marketing costs.
    (13) Capital Fund-related legal costs (e.g., legal costs related to 
preparing property descriptions for the DOT, zoning, permitting, 
environmental review, procurement, and contracting).
    (14) Energy efficiency. Allowed costs include:
    (i) Energy audit or updated energy audits to the extent Operating 
Funds are not available and the energy audit is included within a 
modernization program.
    (ii) Integrated utility management and capital planning to promote 
energy conservation and efficiency measures.
    (iii) Energy and water conservation measures identified in a PHA's 
most recently updated energy audit.
    (iv) Improvement of energy and water-use efficiency by installing 
fixtures and fittings that conform to the American Society of 
Mechanical Engineers/American National Standards Institute standards 
A112.19.2-1998 and A112.18.1-2000, or any revision thereto, applicable 
at the time of installation, and by increasing energy efficiency and 
water conservation by such other means as the Secretary determines are 
appropriate.
    (v) The installation and use of Energy Star appliances whenever 
energy systems, devices, and appliances are replaced, unless it is not 
cost-effective

[[Page 63775]]

to do so, in accordance with Section 152 of the Energy Policy Act of 
2005, 42 U.S.C. 15841.
    (vi) Utility and energy management system automation, and metering 
activities, including changing mastermeter systems to individually 
metered systems if installed as a part of a modernization activity to 
upgrade utility systems; for example, electric, water, or gas systems 
of the PHA consistent with the requirements of 24 CFR part 965.
    (15) Administrative costs. Any administrative costs, including 
salaries and employee benefit contributions, other than the Capital 
Fund Program Fee, must be related to a specific public housing 
development or modernization project and detailed in the CFP 5-Year 
Action Plan.
    (16) Audit. Costs of the annual audit attributable to the portion 
of the audit covering the CFP in accordance with Sec.  905.322(c) of 
this part.
    (17) Capital Fund Program Fee. This fee covers costs associated 
with oversight and management of the CFP attributable to the HUD-
accepted COCC as described in 24 CFR part 990 subpart H. These costs 
include duties related to capital planning, preparing the CFP Annual 
Statement/Performance and Evaluation Report, preparing the CFP 5-Year 
Action Plan, the monitoring of LOCCS, preparing reports, drawing funds, 
budgeting, accounting, and procuring construction and other 
miscellaneous contracts. This fee is not intended to cover costs 
associated with construction supervisory and inspection functions that 
are considered a front-line cost of the project.
    (18) Emergency activities. Capital Fund related activities 
identified as emergency work, as defined in Sec.  905.108 of this part, 
whether or not the need is indicated in the CFP 5-Year Action Plan.


Sec.  905.202  Ineligible activities and costs.

    The following are ineligible activities and costs for the CFP:
    (a) Costs not associated with a public housing project or 
development, as defined in Sec.  905.604(b)(1);
    (b) Activities and costs not included in the PHA's CFP 5-Year 
Action Plan, with the exception that expenditures for emergencies and 
disasters, as defined in Sec.  905.204 of this subpart, that are not 
identified in the 5-year Action Plan because of their emergent nature 
are eligible costs;
    (c) Improvements or purchases that are not modest in design and 
cost because they include amenities, materials, and design in excess of 
what is customary for the locality. Air conditioning is an eligible 
modest amenity;
    (d) Any costs not authorized as outlined in 2 CFR part 225 
(codifying OMB Circular A-87), including, but not limited to, indirect 
administrative costs and indemnification;
    (e) Public housing operating assistance, except as provided in 
Sec.  905.314(l) of this part;
    (f) Direct provision of social services through either force 
account or contract labor. Examples of ineligible direct social 
services include, but are not limited to, salaries for social workers 
or GED teachers;
    (g) Eligible costs that are in excess of the amount directly 
attributable to the public housing units when the physical or 
management improvements, including salaries and employee benefits and 
contributions, will benefit programs other than public housing, such as 
section 8 Housing Choice Voucher or local revitalization programs;
    (h) Ineligible management improvements include:
    (1) Costs for security guards or ongoing security services (Capital 
Funds may only be used for the initial capital (e.g., fencing, lights, 
and cameras) or noncapital (e.g., training of in-house security staff) 
management improvements but may not be used for the ongoing costs, such 
as security guards after the end of the implementation period of the 
physical improvements);
    (2) General remedial education; and
    (3) Job counseling, job development and placement, supportive 
services during training, and the hiring of a resident coordinator. No 
continued Capital Funds will be provided after the end of the 
implementation period of the management improvements. The PHA shall be 
responsible for finding other funding sources, reducing its ongoing 
management costs, or terminating the management activities;
    (i) Eligible cost that is funded by another source and would result 
in duplicate funding; and
    (j) Any other activities and costs that HUD may determine on a 
case-by-case basis.


Sec.  905.204  Emergencies and natural disasters.

    (a) General. PHAs are required by the CF ACC to carry various types 
of insurance to protect it from loss. In most cases, insurance coverage 
will be the primary source of funding to pay repair or replacement 
costs associated with emergencies and natural disasters. Where the 
Department's Annual Appropriations Act establishes a set-aside from the 
Capital Fund appropriation for emergencies and natural disasters, the 
procedures in this section apply.
    (b) Emergencies and natural disasters. An emergency is an 
unforeseen or unpreventable event or occurrence that poses an immediate 
threat to the health and safety of the residents that must be corrected 
within one year of funding. A natural disaster for purposes of the 
Capital Fund reserve, is a non-presidentially declared disaster. In the 
event an emergency or natural disaster arises, HUD may require a PHA to 
use any other source that may legally be available, including 
unobligated Capital Funds, prior to providing emergency or natural 
disaster funds from the set-aside. The Department will review, on a 
case-by-case basis, requests for emergency and natural disaster funding 
from PHAs.
    (c) Procedure to request emergency or natural disaster funds. To 
obtain emergency or natural disaster funds, a PHA shall submit a 
written request in the form and manner prescribed by HUD. In a natural 
disaster where the PHA requires immediate relief to preserve the 
property and safety of the residents, the PHA may submit a preliminary 
request outlined in paragraph (d) of this section. Subsequently, the 
PHA is required to complete and submit the remaining information 
outlined in paragraph (e) of this section, at a time prescribed by HUD. 
For emergency requests, PHAs are to follow the procedures outlined in 
paragraph (e) of this section.
    (d) Procedure to request preliminary natural disaster grant for 
immediate preservation. A PHA may request a preliminary grant only for 
costs necessary for immediate preservation of the property and safety 
of the residents. The application should include the reasonable 
identification of damage and preservation costs as determined by the 
PHA. An independent assessment will be required when the PHA submits 
the final request or when the PHA reconciles the preliminary 
application grant with the actual amounts received from the Federal 
Emergency Management Agency (FEMA), insurance carriers, and other 
natural disaster relief sources. Regardless of whether further funding 
from the set-aside is requested, at a time specified by HUD, the PHA 
will be expected to provide a reconciliation of all funds received, to 
ensure that the PHA does not receive duplicate funding.
    (e) Procedure for an emergency or a final request for natural 
disaster funds. In the request the PHA shall:

[[Page 63776]]

    (1) Identify the public housing project(s) with the emergency or 
natural disaster condition(s).
    (2) Identify and provide the date of the conditions that present an 
unforeseen or unpreventable threat to the health, life, or safety of 
residents, in the case of emergency; or Natural disaster (e.g., 
hurricane, tornado, etc.).
    (3) Describe the activities that will be undertaken to correct the 
emergency or the conditions caused by the natural disaster and the 
estimated cost.
    (4) Provide an independent assessment of the extent of and the cost 
to correct the condition. The assessment must be specific as to the 
damage and costs associated with the emergency or natural disaster. An 
independent estimate of damage and repair cost is required as a part of 
the final natural disaster application. For natural disasters, the 
assessment must identify damage specifically caused by the natural 
disaster. The set-aside can be used only to pay costs to repair or 
replace a public housing project damaged as a result of the natural 
disaster, not for nonroutine maintenance or other improvements.
    (5) Provide a copy of a currently effective DOT covering the 
property and an opinion of counsel that there are no preexisting liens 
or other encumbrances on the property.
    (6) Demonstrate that without the requested funds from the set-
aside, the PHA does not have adequate funds available to correct the 
emergency condition(s).
    (7) Identify all other sources of available funds (e.g., insurance 
proceeds, FEMA).
    (8) Any other material required by HUD.
    (f) HUD Action. HUD shall review all requests for emergency or 
natural disaster funds. If HUD determines that a PHA's request meets 
the requirements of this section, HUD shall approve the request subject 
to the availability of funds in the set-aside, in the order in which 
requests are received and are determined approvable.
    (g) Submission of the CF ACC. Upon being provided with a CF ACC 
Amendment from HUD, the PHA must sign and date the CF ACC Amendment and 
return it to HUD by the date established by HUD. HUD will execute the 
signed and dated CF ACC Amendment submitted by the PHA.

Subpart C--General Program Requirements


Sec.  905.300  Capital fund submission requirements.

    (a) General. Unless otherwise stated, the requirements in this 
section apply to both qualified PHAs (as described in Sec.  903.3(c) of 
this chapter) and nonqualified PHAs. Each PHA must complete a 
comprehensive physical needs assessment (PNA).
    (1) Applicability. Small PHAs (PHAs that own or operate fewer than 
250 public housing units) must comply with the requirements of this 
section beginning 30 days after the end of the federal fiscal year 
quarter following HUD's publication of a notice in the Federal 
Register.
    (2) [Reserved].
    (b) Capital Fund program submission requirements. At the time that 
the PHA submits the ACC Amendment(s) for its Capital Fund Grants(s) to 
HUD, the PHA must also submit the following items:
    (1) CFP 5-Year Action Plan. (i) Content. The CFP 5-Year Action Plan 
must describe the capital improvements necessary to ensure long-term 
physical and social viability of the PHA's public housing developments, 
including the capital improvements to be undertaken within the 5-year 
period, their estimated costs, status of environmental review, and any 
other information required for participation in the CFP, as prescribed 
by HUD. In order to be entitled to fungibility, PHA's must have an 
approved 5-year Action Plan. Except in the case of emergency/disaster 
work, the PHA shall not spend Capital Funds on any work that is not 
included in an approved CFP 5-Year Action Plan and its amendments.
    (ii) Budget. The Capital Fund Budget for each of the 5 years shall 
be prepared by a PHA using the form(s) prescribed by HUD. Work items 
listed in the budget must include, but are not limited to, the 
following:
    (A) Where a PHA has an approved Capital Fund Financing Program 
(CFFP) loan, debt service payments for the grants from which the 
payments are scheduled;
    (B) Where a PHA has an approved CFFP loan, the PHA shall also 
include all work and costs, including debt service payments, in the CFP 
5-Year Action Plan. Work associated with the use of financing proceeds 
will be reported separately in a form and manner prescribed by HUD; or
    (C) Work affecting health and safety and compliance with regulatory 
requirements such as section 504 of the Rehabilitation Act of 1973 and 
HUD's implementing regulations at 24 CFR part 8, and the lead-based 
paint poisoning prevention standards at 24 CFR part 35, before major 
systems (e.g., heating, roof, etc.) and other costs of lower priority.
    (iii) PHA Criteria for Significant Amendment or Modification. The 
PHA must include in the basic criteria that the PHA will use for 
determining a significant amendment or modification to the CFP 5-Year 
Action Plan. In addition to the criteria established by the PHA, for 
the purpose of the CFP, a proposed demolition, disposition, 
homeownership, Capital Fund financing, development, or mixed-finance 
proposal are considered significant amendments to the CFP 5-Year Action 
Plan.
    (iv) Submission. The PHA must submit a Board-approved CFP 5-Year 
Action Plan at least once every 5 years. The PHA may choose to update 
its CFP 5-Year Action Plan every year. The PHA shall indicate whether 
its CFP 5-Year Action Plan is fixed or rolling. Prior to submission to 
HUD, the 5-Year Action Plan must have been approved by the PHA's Board 
of Commissioners. In any given year that a PHA does not have a CFP 5-
Year Action Plan that is approved by the PHA Board of Commissioners and 
HUD, the Capital Fund grant(s) for these PHAs will be reserved and 
obligated; however, the PHA will not have access to those funds until 
its CFP 5-Year Action Plan is approved by the PHA Board of 
Commissioners and HUD.
    (v) Significant amendments or modification to the CFP 5 Year Action 
Plan. PHAs making significant amendments or modifications to the CFP 5-
Year Action Plan, as defined in paragraph (b)(1)(iii) of this section, 
must follow the requirements of this section.
    (A) A PHA after submitting its 5-Year Action Plan may amend or 
modify the plan. If the amendment or modification is a significant 
amendment or modification, as defined in paragraph (b)(1)(iii) of this 
section, the PHA:
    (1) May not adopt the amendment or modification until the PHA has 
duly called a meeting of its Board of Commissioners (or similar 
governing body) and the meeting at which the amendment or modification 
is adopted, is open to the public; and
    (2) May not implement the amendment or modification until 
notification of the amendment or modifications are provided to HUD and 
approved by HUD in accordance with HUD's plan review procedures, as 
provided in paragraph (b)(6) of this section.
    (B) Each significant amendment or modification to a plan submitted 
to HUD is subject to the requirement of paragraph (b)(3) of this 
section.
    (2) Certifications required for receipt of Capital Fund grants. The 
PHA is also required to submit various certifications to HUD, in a form 
prescribed by HUD, including, but not limited to:
    (i) Certification of PIC Data;

[[Page 63777]]

    (ii) Standard Form--Disclosure of Lobbying Activities;
    (iii) Civil Rights Compliance, in a form prescribed by HUD; and
    (iv) Certification of Compliance with Public Hearing Requirements.
    (3) Conduct of public hearing and Resident Advisory Board 
Consultation. A PHA must annually conduct a public hearing and consult 
with the Resident Advisory Board (RAB) of the PHA to discuss the 
Capital Fund submission. The PHA may elect to conduct a separate annual 
public hearing in order to solicit public comments or to hold the 
annual public hearing at the same time as the hearing for the Annual 
PHA Plan, the 5-Year Plan, or the required annual hearing for qualified 
public housing authorities. The hearing must be conducted at a location 
that is convenient to the residents served by the PHA.
    (i) Not later than 45 days before the public hearing is to take 
place, the PHA must:
    (A) Make the Capital Fund submission along with the material 
required under this paragraph (b) available to the residents and the 
RAB; and
    (B) Publish a notice informing the public that the information is 
available for review and inspection; that a public hearing will take 
place on the plan; and of the date, time, and location of the hearing.
    (C) PHAs shall conduct reasonable outreach activities to encourage 
broad public participation in the review of the Capital Fund 
submission.
    (4) Public and RAB comments. The PHA must consider the comments 
from the residents, the public, and the RAB on the Capital Fund 
submission, or any significant modification thereto. In submitting the 
final CFP 5-Year Action Plan to HUD for approval, or any significant 
amendment or modification to the 5-Year Action Plan to HUD for 
approval, the PHA must include a copy of the recommendations made by 
the RAB(s) and a description of the manner in which the PHA addressed 
these recommendations.
    (5) Consistency with Consolidated Plan. The Capital Fund submission 
must be consistent with any applicable Consolidated Plan.
    (6) HUD review and approval. The CFP submission requirements must 
meet the requirements of this part as well as the Public Housing 
Program Requirements as defined in Sec.  905.108 of this part. A PHA is 
required to revise or correct information that is not in compliance, 
and HUD has the authority to impose administrative sanctions until the 
appropriate revisions are made. HUD will review the CFP submission 
requirements to determine whether:
    (i) All of the information that is required to be submitted is 
included;
    (ii) The information is consistent with the needs identified in the 
PNA and data available to HUD; and
    (iii) There are any issues of compliance with applicable laws, 
regulations, or contract requirements that have not been addressed with 
the proposed use of the Capital Fund.
    (7) Time frame for submission of CFP requirements. The requirements 
identified in this paragraph (b) must be submitted to HUD, in a format 
prescribed by HUD, at the time that the PHA submits its signed CF ACC 
Amendment.
    (8) Performance and Evaluation Report. (i) All PHAs must prepare a 
CFP Annual Statement/Performance and Evaluation Report at a time and in 
a format prescribed by HUD. These reports shall be retained on file for 
all grants for which a final Actual Modernization Cost Certificate 
(AMCC) or an Actual Development Cost Certificate (ADCC) has not been 
submitted. A final Performance and Evaluation Report must be submitted 
in accordance with 24 CFR 905.322, at the time the PHA submits its AMCC 
or ADCC.
    (ii) PHAs that are designated as troubled performers under PHAS (24 
CFR part 902) or as troubled under the Section 8 Management Assessment 
Program (SEMAP) (24 CFR part 985), and/or were identified as 
noncompliant with section 9(j) obligation and expenditure requirements 
during the fiscal year, shall submit their CFP Annual Statement/
Performance and Evaluation Reports to HUD for review and approval.
    (iii) All other PHAs, that are not designated as troubled 
performers under PHAS and are not designated as troubled under SEMAP, 
and that were in compliance with section 9(j) obligation and 
expenditure requirements during the fiscal year, shall prepare a CFP 
Annual Statement/Performance and Evaluation report for all open grants 
and shall retain the report(s) on file at the PHA, to be available to 
HUD upon request.
    (9) Moving to Work (MTW) PHAs. MTW PHAs are to submit the Capital 
Fund submissions as part of the MTW Plan annually, as required by the 
MTW Agreement.
    (c) [Reserved]
    (d) [Reserved]


Sec.  905.302  Timely submission of the CF ACC amendment by the PHA.

    Upon being provided with a CF ACC Amendment from HUD, the PHA must 
sign and date the CF ACC Amendment and return it to HUD by the date 
established. HUD will execute the signed and dated CF ACC Amendment 
submitted by the PHA. If HUD does not receive the signed and dated 
Amendment by the submission deadline, the PHA will receive the Capital 
Fund grant for that year; however, it will have less than 24 months to 
obligate 90 percent of the Capital Fund grant and less than 48 months 
to expend these funds because the PHA's obligation start date and 
disbursement end date for these grants will remain as previously 
established by HUD.


Sec.  905.304  CF ACC term and covenant to operate.

    (a) Period of obligation to operate as public housing. The PHA 
shall operate all public housing projects in accordance with the CF 
ACC, as amended, and applicable HUD regulations, for the statutorily 
prescribed period. These periods shall be evidenced by a recorded DOT 
on all public housing property. If the PHA uses Capital Funds to 
develop public housing or to modernize existing public housing, the CF 
ACC term and the covenant to operate those projects are as follows:
    (1) Development activities. Each public housing project developed 
using Capital Funds shall establish a restricted use covenant, either 
in the DOT or as a Declaration of Restrictive Covenants, to operate 
under the terms and conditions applicable to public housing for a 40-
year period that begins on the date on which the project becomes 
available for occupancy, as determined by HUD.
    (2) Modernization activities. For PHAs that receive Capital Fund 
assistance, the execution of each new CF ACC Amendment establishes an 
additional 20-year period that begins on the latest date on which 
modernization is completed, except that the additional 20-year period 
does not apply to a project that receives Capital Fund assistance only 
for management improvements.
    (3) Operating Fund. Any public housing project developed that 
receives Operating Fund assistance shall have a covenant to operate 
under requirements applicable to public housing for a 10-year period 
beginning upon the conclusion of the fiscal year for which such amounts 
were provided, except for such shorter period as permitted by HUD by an 
exception.

[[Page 63778]]

    (b) Mortgage or security interests. The PHA shall not allow any 
mortgage or security interest in public housing assets, including under 
section 30 of the 1937 Act (42 U.S.C. 1437z-2), without prior written 
approval from HUD. PHAs that undertake financing unsecured by public 
housing assets shall include the following nonrecourse language in all 
financing documents as follows:
    ``This financing is non-recourse to any public housing property 
(real or personal property including all public housing assets or 
income), or disposition proceeds approved pursuant to Section 18 of the 
United States Housing Act of 1937 (unless explicitly permitted by HUD 
in the Section 18 approval letter).''
    (c) Applicability of latest expiration date. All public housing 
subject to this part or required by law shall be maintained and 
operated as public housing, as prescribed, until the latest expiration 
date provided in section 9(d)(3) of the 1937 Act (42 U.S.C. 
1437g(d)(3)) or any other provision of law or regulation mandating the 
operation of the housing as public housing, or under terms and 
conditions applicable to public housing, for a specified period of 
time.


Sec.  905.306  Obligation and expenditure of Capital Fund grants.

    (a) Obligation. A PHA shall obligate each Capital Fund grant, 
including formula grants, Replacement Housing Factor (RHF) grants, 
Demolition and Disposition Transitional Funding (DDTF) grants, and 
natural disaster grants, no later than 24 months after, and emergency 
grants no later than 12 months after, the date on which the funds 
become available to the PHA for obligation, except as provided in 
paragraphs (c) and (d) of this section. However, a PHA with unobligated 
funds from a grant shall disregard this requirement for up to not more 
than 10 percent of the originally allocated funds from that grant. The 
funds become available to the PHA when HUD executes the CF ACC 
Amendment. With HUD approval, and subject to the availability of 
appropriations, the PHA can accumulate RHF grants for up to 5 years or 
until it has adequate funds to undertake replacement housing. The PHA 
shall obligate 90 percent of the RHF grant within 24 months from the 
date that the PHA accumulates adequate funds, except as provided in 
paragraph (c) of this section.
    (b) Items and costs. For funds to be considered obligated, all 
items and costs must meet the definition of ``obligation'' in Sec.  
905.108 of this part.
    (c) Extension to obligation requirement. The PHA may request an 
extension of the obligation deadline, and HUD may grant an extension 
for a period of up to 12 months, based on:
    (1) The size of the PHA;
    (2) The complexity of the CFP of the PHA;
    (3) Any limitation on the ability of the PHA to obligate the 
amounts allocated for the PHA from the Capital Fund in a timely manner 
as a result of state or local law; or
    (4) Any other factors that HUD determines to be relevant.
    (d) HUD extension for other reasons. HUD may extend the obligation 
deadline for a PHA for such a period as HUD determines to be necessary, 
if HUD determines that the failure of the PHA to obligate assistance in 
a timely manner is attributable to:
    (1) Litigation;
    (2) Delay in obtaining approvals from the Federal Government or a 
state or local government that is not the fault of the PHA;
    (3) Compliance with environmental assessment and abatement 
requirements;
    (4) Relocating residents;
    (5) An event beyond the control of the PHA; or
    (6) Any other reason established by HUD by notice in the Federal 
Register.
    (e) Failure to obligate. (1) For any month during the fiscal year, 
HUD shall withhold all new Capital Fund grants from any PHA that has 
unobligated funds in violation of paragraph (a) of this section. The 
penalty will be imposed once the violations of paragraph (a) are known. 
The PHA may cure the noncompliance by:
    (i) Requesting in writing that HUD recapture the unobligated 
balance of the grant; or
    (ii) Continuing to obligate funds for the grant in noncompliance 
until the noncompliance is cured.
    (2) After the PHA has cured the noncompliance, HUD will release the 
withheld Capital Fund grant(s) minus a penalty of one-twelfth of the 
grant for each month of noncompliance.
    (f) Expenditure. The PHA shall expend all grant funds within 48 
months after the date on which funds become available, as described in 
paragraph (a) of this section. The deadline to expend funds may be 
extended only by the period of time of a HUD-approved extension of the 
obligation deadline. No other extensions of the expenditure deadline 
will be granted. All funds not expended will be recaptured.


Sec.  905.308  Federal requirements applicable to all Capital Fund 
activities.

    (a) The PHA shall comply with the requirements of 24 CFR part 5 
(General HUD Program Requirements; Waivers), 24 CFR part 85 
(Administrative Requirements for Grants and Cooperative Agreements to 
State, Local and Federally Recognized Indian Tribal Governments), and 
this part.
    (b) The PHA shall also comply with the following program 
requirements.
    (1) Nondiscrimination and equal opportunity. The PHA shall comply 
with all applicable nondiscrimination and equal opportunity 
requirements, including, but not limited to, the Department's generally 
applicable nondiscrimination and equal opportunity requirements at 24 
CFR 5.105(a) and the Architectural Barriers Act of 1968 (42 U.S.C. 4151 
et seq.), and its implementing regulations at 24 CFR parts 40 and 41. 
The PHA shall affirmatively further fair housing in its use of funds 
under this part, which includes, but is not limited to, addressing 
modernization and development in the completion of requirements at 24 
CFR 903.7(o).
    (2) Environmental requirements. All activities under this part are 
subject to an environmental review by a responsible entity under HUD's 
environmental regulations at 24 CFR part 58 and must comply with the 
requirements of the National Environmental Policy Act of 1969 (NEPA)(42 
U.S.C. 4321 et seq.) and the related laws and authorities listed at 24 
CFR 58.5. HUD may make a finding in accordance with 24 CFR 58.11 and 
may perform the environmental review itself under the provisions of 24 
CFR part 50. In those cases where HUD performs the environmental review 
under 24 CFR part 50, it will do so before approving a proposed 
project, and will comply with the requirements of NEPA and the related 
requirements at 24 CFR 50.4.
    (3) Wage rates. (i) Davis-Bacon wage rates. For all work or 
contracts exceeding $2,000 in connection with development activities or 
modernization activities (except for nonroutine maintenance work, as 
defined in Sec.  905.200(b)(5) of this part), all laborers and 
mechanics employed on the construction, alteration, or repair shall be 
paid not less than the wages prevailing in the locality, as determined 
by the Secretary of Labor pursuant to the Davis-Bacon Act (40 U.S.C. 
3142).
    (ii) HUD-determined wage rates. For all operations work and 
contracts, including routine and nonroutine maintenance work (as 
defined in Sec.  905.200(b)(5) of this part), all laborers and 
mechanics employed shall be paid

[[Page 63779]]

not less than the wages prevailing in the locality, as determined or 
adopted by HUD pursuant to section 12(a) of the 1937 Act, 42 U.S.C. 
1437j(a).
    (iii) State wage rates. Preemption of state prevailing wage rates 
as provided at 24 CFR 965.101.
    (iv) Volunteers. The prevailing wage requirements of this section 
do not apply to volunteers performing development, modernization, or 
nonroutine maintenance work under the conditions set out in 24 CFR part 
70.
    (4) Technical wage rates. All architects, technical engineers, 
draftsmen, and technicians (other than volunteers under the conditions 
set out in 24 CFR part 70) employed in a development or modernization 
project shall be paid not less than the wages prevailing in the 
locality, as determined or adopted (subsequent to a determination under 
applicable state or local law) by HUD.
    (5) Lead-based paint poisoning prevention. The PHA shall comply 
with the Lead-Based Paint Poisoning Prevention Act (LPPPA) (42 U.S.C. 
4821 et seq.), the Residential Lead-Based Paint Hazard Reduction Act 
(42 U.S.C. 4851 et seq.), and the Lead Safe Housing Rule and the Lead 
Disclosure Rule at 24 CFR part 35.
    (6) Fire safety. A PHA shall comply with the requirements of 
section 31 of the Federal Fire Prevention and Control Act of 1974 (15 
U.S.C. 2227).
    (7) Flood insurance and floodplain requirements. The PHA will not 
engage in the acquisition, construction, or improvement of a public 
housing project located in an area that has been identified by the FEMA 
as having special flood hazards, unless:
    (i) The requirements of 24 CFR part 55, Floodplain Management, have 
been met, including a determination by a responsible entity under 24 
CFR part 58 or by HUD under 24 CFR part 50 that there is no practicable 
alternative to locating in an area of special flood hazards and the 
minimization of unavoidable adverse impacts;
    (ii) Flood insurance on the building is obtained in compliance with 
the Flood Disaster Protection Act of 1973 (42 U.S.C. 4001 et seq.); and
    (iii) The community in which the area is situated is participating 
in the National Flood Insurance Program in accordance with 44 CFR parts 
59 through 79, or less than one year has passed since FEMA notification 
regarding flood hazards.
    (8) Coastal barriers. In accordance with the Coastal Barriers 
Resources Act (16 U.S.C. 3501 et seq.), no financial assistance under 
this part may be made available within the Coastal Barrier Resources 
System.
    (9) Displacement, relocation, and real property acquisition. All 
acquisition or rehabilitation activities carried out under the Capital 
Fund, including acquisition of any property for development, shall 
comply with the Uniform Relocation Assistance and Real Property 
Acquisition Policies Act of 1970 (URA) (42 U.S.C. 4601-4655) and with 
implementing regulations at 49 CFR part 24. Demolition or disposition 
under section 18 of the 1937 Act, 42 U.S.C. 1437p, is covered by the 
relocation provisions at 24 CFR 970.21.
    (10) Procurement and contract requirement. PHAs and their 
contractors shall comply with section 3 of the Housing and Community 
Development Act of 1968 (12 U.S.C. 1701u) and HUD's implementing rules 
at 24 CFR part 135.


Sec.  905.310  Disbursements from HUD.

    (a) The PHA shall initiate a fund requisition from HUD only when 
funds are due and payable, unless HUD approves another payment schedule 
as authorized by 24 CFR 85.21.
    (b) The PHA shall maintain detailed disbursement records to 
document eligible expenditures (e.g., contracts or other applicable 
documents), in a form and manner prescribed by HUD.


Sec.  905.312  Design and construction.

    The PHA shall meet the following design and construction standards, 
as applicable, for all development and modernization.
    (a) Physical structures shall be designed, constructed, and 
equipped to be consistent with the neighborhoods they occupy; meet 
contemporary standards of modest design, comfort, and livability (see 
also Sec.  905.202(c) of this part); promote security; promote energy 
conservation; and be attractive so as to harmonize with the community.
    (b) All development projects shall be designed and constructed in 
compliance with:
    (1) A national building code, such as those developed by the 
International Code Council or the National Fire Protection Association; 
and the IECC or ASHRAE 90.1-2010 (both incorporated by reference, see 
Sec.  905.110 of this part), for multifamily high-rises (four stories 
or higher), or a successor energy code or standard that has been 
adopted by HUD pursuant to 42 U.S.C. 12709 or other relevant authority;
    (2) Applicable state and local laws, codes, ordinances, and 
regulations;
    (3) Other federal requirements, including fire protection and 
safety standards implemented under section 31 of the Fire 
Administration Authorization Act of 1992, 15 U.S.C. 2227 and HUD 
minimum property standards (e.g., 24 CFR part 200, subpart S);
    (4) Accessibility Requirements as required by section 504 of the 
Rehabilitation Act (29 U.S.C. 794) and implementing regulations at 24 
CFR part 8; title II of the Americans with Disabilities Act (42 U.S.C. 
12101 et seq.) and implementing regulations at 28 CFR part 35; and, if 
applicable, the Fair Housing Act (42 U.S.C. 3601-3619) and implementing 
regulations at 24 CFR part 100; and
    (5) Occupancy of high-rise elevator structures by families with 
children. Pursuant to 42 U.S.C. 1437d(a), a high-rise elevator 
structure shall not be provided for families with children regardless 
of density, unless the PHA demonstrates and HUD determines that there 
is no practical alternative.
    (c) All modernization projects shall be designed and constructed in 
compliance with:
    (1) The modernization standards as prescribed by HUD;
    (2) Accessibility requirements as required by section 504 of the 
Rehabilitation Act (29 U.S.C. 794) and implementing regulations at 24 
CFR part 8; title II of the Americans with Disabilities Act (42 U.S.C. 
12101 et seq.) and implementing regulations at 28 CFR part 35; and, if 
applicable, the Fair Housing Act (42 U.S.C. 3601-3619) and implementing 
regulations at 24 CFR part 100; and
    (3) Cost-effective energy conservation measures, identified in the 
PHA's most recently updated energy audit.
    (d) Pursuant to the Energy Policy Act of 2005, in purchasing 
appliances, PHAs shall purchase appliances that are Energy Star 
products or Federal Energy Management Program designed products, unless 
the PHA determines that the purchase of these appliances is not cost 
effective.


Sec.  905.314  Cost and other limitations.

    (a) Eligible administrative costs. Where the physical or management 
improvement costs will benefit programs other than Public Housing, such 
as the Housing Choice Voucher program or local revitalization programs, 
eligible administrative costs are limited to the amount directly 
attributable to the public housing program.
    (b) Maximum project cost. The maximum project cost represents the 
total amount of public housing capital assistance used in connection 
with the development of a public housing project, and includes:

[[Page 63780]]

    (1) Project costs that are subject to the TDC limit (i.e., HCC and 
Community Renewal Costs); and
    (2) Project costs that are not subject to the TDC limit (i.e., 
Additional Project Costs). The total project cost to be funded with 
public housing capital assistance, as set forth in the proposal and as 
approved by HUD, becomes the maximum project cost stated in the ACC 
Amendment. Upon completion of the project, the actual project cost is 
determined based upon the amount of public housing capital assistance 
expended for the project, and this becomes the maximum project cost for 
purposes of the ACC Amendment.
    (c) TDC limit. (1) Public housing funds, including Capital Funds, 
may not be used to pay for HCC and Community Renewal Costs in excess of 
the TDC limit, as determined under paragraph (b)(2) of this section. 
However, HOPE VI grantees will be eligible to request a TDC exception 
for public housing and HOPE VI funds awarded in FFY 1996 and prior 
years. PHAs may also request a TDC exception for integrated utility 
management, capital planning, and other capital and management 
activities that promote energy conservation and efficiency. HUD will 
examine the request for TDC exceptions to ensure that they would be 
cost-effective, so as to ensure that up-front expenditures subject to 
the exceptions would be justified by future cost savings.
    (2) Determination of TDC limit. HUD will determine the TDC limit 
for a public housing project as follows:
    (i) Step 1: Unit construction cost guideline. HUD will first 
determine the applicable ``construction cost guideline'' by averaging 
the current construction costs as listed in two nationally recognized 
residential construction cost indices for publicly bid construction of 
a good and sound quality for specific bedroom sizes and structure 
types. The two indices HUD will use for this purpose are the R.S. Means 
cost index for construction of ``average'' quality and the Marshall & 
Swift cost index for construction of ``good'' quality. HUD has the 
discretion to change the cost indices to other such indices that 
reflect comparable housing construction quality through a notice 
published in the Federal Register.
    (ii) Step 2: Bedroom size and structure types. The construction 
cost guideline is then multiplied by the number of units for each 
bedroom size and structure type.
    (iii) Step 3: Elevator and nonelevator type structures. HUD will 
then multiply the resulting amounts from step 2 by 1.6 for elevator 
type structures and by 1.75 for nonelevator type structures.
    (iv) Step 4: TDC limit. The TDC limit for a project is calculated 
by adding the resulting amounts from step 3 for all the public housing 
units in the project.
    (3) Costs not subject to the TDC limit. Additional project costs 
are not subject to the TDC limit.
    (4) Funds not subject to the TDC limit. A PHA may use funding 
sources not subject to the TDC limit (e.g., Community Development Block 
Grant (CDBG) funds, low-income housing tax credits, private donations, 
private financing, etc.) to cover project costs that exceed the TDC 
limit or the HCC limit described in this paragraph (c). Such funds, 
however, may not be used for items that would result in substantially 
increased operating, maintenance, or replacement costs, and must meet 
the requirements of section 102 of the Department of Housing and Urban 
Development Reform Act of 1989 (Pub. L. 101-235, approved December 15, 
1989) (42 U.S.C. 3545). These funds must be included in the project 
development cost budget.
    (d) Housing Construction Costs (HCC). (1) General. A PHA may not 
use Capital Funds to pay for HCC in excess of the amount determined 
under paragraph (d)(2) of this section.
    (2) Determination of HCC limit. HUD will determine the HCC limit as 
listed in at least two nationally recognized residential construction 
cost indices for publicly bid construction of a good and sound quality 
for specific bedroom sizes and structure types. The two indices HUD 
will use for this purpose are the R.S. Means cost index for 
construction of ``average'' quality and the Marshal & Swift cost index 
for construction of ``good'' quality. HUD has the discretion to change 
the cost indices to other such indices that reflect comparable housing 
construction quality through a notice published in the Federal 
Register. The resulting construction cost guideline is then multiplied 
by the number of public housing units in the project, based upon 
bedroom size and structure type. The HCC limit for a project is 
calculated by adding the resulting amounts for all public housing units 
in the project.
    (3) The HCC limit is not applicable to the acquisition of existing 
housing, whether or not such housing will be rehabilitated. The TDC 
limit is applicable to such acquisition.
    (e) Community Renewal Costs. Capital Funds may be used to pay for 
Community Renewal Costs in an amount equivalent to the difference 
between the HCC paid for with public housing capital assistance and the 
TDC limit.
    (f) Rehabilitation of existing public housing projects. The HCC 
limit is not applicable to the rehabilitation of existing public 
housing projects. The TDC limit for modernization of existing public 
housing is 90 percent of the TDC limit as determined under paragraph 
(c) of this section. This limitation does not apply to the 
rehabilitation of any property acquired pursuant to Sec.  905.600 of 
this part.
    (g) Modernization cost limits. If the modernization costs are more 
than 90 percent of the TDC, then the project shall not be modernized. 
Capital Funds shall not be expended to modernize an existing public 
housing development that fails to meet the HUD definition of reasonable 
cost found in Sec.  905.108 of this part, except for:
    (1) Emergency work;
    (2) Essential maintenance necessary to keep a public housing 
project habitable until the demolition or disposition application is 
approved; or
    (3) The costs of maintaining the safety and security of a site that 
is undergoing demolition.
    (h) Administrative cost limits and Capital Fund Program Fee. (1) 
Administrative cost limits (for non-asset-management PHAs). The PHA 
shall not budget or expend more than 10 percent of its annual Capital 
Fund grant on administrative costs, in accordance with the CFP 5-Year 
Action Plan.
    (2) Capital Fund Program Fee (for asset-management PHAs). For a PHA 
that is under asset management, the Capital Fund Program Fee and 
administrative cost limits are the same. For the Capital Fund Program 
Fee, a PHA may charge a management fee of up to 10 percent of the 
annual CFP formula grant(s) amount, excluding emergency and disaster 
grants and also excluding any costs related to lead-based paint or 
asbestos testing, in-house architectural and engineering work, or other 
special administrative costs required by state or local law.
    (i) Modernization. The PHA shall not budget or expend more than 10 
percent of its annual Capital Fund grant on administrative costs, in 
accordance with its CFP 5-Year Action Plan. The 10 percent limit 
excludes any costs related to lead-based paint or asbestos testing, in-
house Architectural and Engineering work, or other special 
administrative costs required by state or local law.
    (ii) Development. For development work with Capital Fund and RHF 
grants, the administrative cost limit is 3 percent of the total project 
budget, or, with HUD's approval, up to 6 percent of the total project 
budget.
    (i) Management improvement cost limits. In Fiscal Year (FY) 2014, a 
PHA shall not use more than 18 percent of its annual Capital Fund grant 
for eligible

[[Page 63781]]

management improvement costs identified in its CFP 5-Year Action Plan. 
In FY 2015, a PHA shall not use more than 16 percent of its annual 
Capital Fund grant for eligible management improvement costs identified 
in its CFP 5-Year Action Plan. In FY 2016, a PHA shall not use more 
than 14 percent of its annual Capital Fund grant for eligible 
management improvement costs identified in its CFP 5-Year Action Plan. 
In FY 2017, a PHA shall not use more than 12 percent of its annual 
Capital Fund grant for eligible management improvement costs identified 
in its CFP 5-Year Action Plan. In FY 2018 and thereafter, a PHA shall 
not use more than 10 percent of its annual Capital Fund grant for 
eligible management improvement costs identified in its CFP 5-Year 
Action Plan. Management improvements are an eligible expense for PHAs 
participating in asset management.
    (j) Types of labor. A PHA may use force account labor for 
development and modernization activities if included in a CFP 5-Year 
Action Plan that is approved by the PHA Board of Commissioners and HUD. 
HUD approval to use force account labor is not required when the PHA is 
designated as a high performer under PHAS.
    (k) RMC activities. When the entire development, financing, or 
modernization activity, including the planning and architectural 
design, is administered by an RMC, the PHA shall not retain any portion 
of the Capital Funds for any administrative or other reason, unless the 
PHA and the RMC provide otherwise by contract.
    (l) Capital Funds for operating costs. A PHA may use Capital Funds 
for operating costs only if it is included in the CFP 5-Year Action 
Plan that is approved by the PHA Board of Commissioners and HUD, and 
limited as described in paragraphs (l)(1) and (2) of this section. 
Capital Funds identified in the CFP 5-Year Action Plan to be 
transferred to operations are obligated once the funds have been 
budgeted and drawn down by the PHA. Once such transfer of funds occurs, 
the PHA must follow the requirements of 24 CFR part 990 with respect to 
those funds.
    (1) Large PHAs. A PHA with 250 or more units may use no more than 
20 percent of its annual Capital Fund grant for activities that are 
eligible under the Operating Fund at 24 CFR part 990.
    (2) Small PHAs. A PHA with less than 250 units, that is not 
designated as troubled under PHAS, may use up to 100 percent of its 
annual Capital Fund grant for activities that are eligible under the 
Operating Fund at 24 CFR part 990, except that the PHA must have 
determined that there are no debt service payments, significant Capital 
Fund needs, or emergency needs that must be met prior to transferring 
100 percent of its funds to operating expenses.


Sec.  905.316  Procurement and contract requirements.

    (a) General. PHAs shall comply with 24 CFR 85.36, and HUD 
implementing instructions, for all capital activities including 
modernization and development, except as provided in paragraph (c) in 
this section.
    (b) Contracts. The PHA shall use all contract forms prescribed by 
HUD. If a form is not prescribed, the PHA may use any Office of 
Management and Budget (OMB) approved form that contains all applicable 
federal requirements and contract clauses.
    (c) Mixed-finance development projects. Mixed-finance development 
partners may be selected in accordance with 24 CFR 905.604(h). 
Contracts and other agreements with mixed-finance development partners 
must specify that they comply with the requirements of Sec. Sec.  
905.602 and 905.604 of this part.
    (d) Assurances of completion. Notwithstanding 24 CFR 85.36(h), for 
each construction contract over $100,000, the contractor shall furnish 
the PHA with the following:
    (1) A bid guarantee from each bidder, equivalent to 5 percent of 
the bid price; and
    (2) One of the following:
    (i) A performance bond and payment bond for 100 percent of the 
contract price;
    (ii) A performance bond and a payment bond, each for 50 percent or 
more of the contract price;
    (iii) A 20 percent cash escrow;
    (iv) A 10 percent irrevocable letter of credit with terms 
acceptable to HUD, or
    (v) Any other payment method acceptable to HUD.
    (e) Procurement of recovered materials. PHAs that are state 
agencies and agencies of a political subdivision of a state that are 
using assistance under this part for procurement, and any person 
contracting with such PHAs with respect to work performed under an 
assisted contract, must comply with the requirements of section 6002 of 
the Solid Waste Disposal Act, as amended by the Resource Conservation 
and Recovery Act. In accordance with section 6002, these agencies and 
persons must procure items designated in guidelines of the 
Environmental Protection Agency (EPA) at 40 CFR part 247 that contain 
the highest percentage of recovered material practicable, consistent 
with maintaining a satisfactory level of competition, where the 
purchase price of the item exceeds $10,000 or the value of the quantity 
acquired in the preceding fiscal year exceeded $10,000; must procure 
solid waste management services in a manner that promotes energy and 
resource recovery; and must have established an affirmative procurement 
program for procurement of recovered materials identified in the EPA 
guidelines.


Sec.  905.318  Title and deed.

    The PHA, or, in the case of mixed-finance, the Owner Entity, shall 
obtain title insurance that guarantees the title is good and marketable 
before taking title to any and all sites and properties acquired with 
public housing funds. Immediately upon taking title to a property, the 
PHA or Owner Entity shall record the deed and a Declaration of Trust 
or, in the case of mixed finance, a Declaration of Restrictive 
Covenants, in the form and in the manner and order prescribed by HUD. 
The PHA shall at all times maintain a recorded Declaration of Trust or 
Declaration of Restrictive Covenants in the form and in the manner and 
order prescribed by HUD on all public housing projects covering the 
term required by this part.


Sec.  905.320  Contract administration and acceptance of work.

    (a) Contract administration. The PHA is responsible, in accordance 
with 24 CFR 85.36, for all contractual and administrative issues 
arising out of their procurements. The PHA shall maintain full and 
complete records on the history of each procurement transaction.
    (b) Inspection and acceptance. The PHA, or, in the case of mixed 
finance, the Owner Entity shall carry out inspections of work in 
progress and goods delivered, as necessary, to ensure compliance with 
existing contracts. If, upon inspection, the PHA determines that the 
work and/or goods are complete, satisfactory and, as applicable, 
otherwise undamaged, except for any work that is appropriate for 
delayed completion, the PHA shall accept the work. The PHA shall 
determine any holdback for items of delayed completion and the amount 
due and payable for the work that has been accepted, including any 
conditions precedent to payment that are stated in the construction 
contract or contract of sale. The contractor shall be paid for items 
only after the PHA inspects and accepts that work.
    (c) Guarantees and warranties. The PHA or, in the case of mixed 
finance, the Owner Entity, shall specify the guaranty period and 
amounts to be withheld, as applicable, and shall

[[Page 63782]]

provide that all contractor, manufacturer, and supplier warranties 
required by the construction and modernization documents shall be 
assigned to the PHA. The PHA shall inspect each dwelling unit and the 
overall project approximately 3 months after the beginning of the 
project guaranty period, 3 months before its expiration, and at other 
times as may be necessary to exercise its rights before expiration of 
any warranties. The PHA shall require repair or replacement of all 
defective items prior to the expiration of the guaranty or warranty 
periods.
    (d) Notification of completion. The PHA, or in the case of mixed 
finance, the Owner Entity, shall require that all contractors and 
developers notify the PHA in writing when the contract work, including 
any approved off-site work, will be completed and ready for inspection.


Sec.  905.322  Fiscal closeout.

    (a) General. Each Capital Fund grant and/or development project is 
subject to fiscal closeout. Fiscal closeout includes the submission of 
a cost certificate; an audit, if applicable; a final Performance and 
Evaluation Report; and HUD approval of the cost certificate.
    (b) Submission of cost certificate. (1) When an approved 
development or modernization activity is completed or when HUD 
terminates the activity, the PHA must submit to HUD the:
    (i) Actual Development Cost Certificate (ADCC) within 12 months. 
For purposes of the CF ACC, costs incurred between the completion of 
the development and the date of full availability (DOFA) becomes the 
actual development cost; and
    (ii) Actual Modernization Cost Certificate (AMCC) for each grant, 
no later than 12 months after the expenditure deadline but no earlier 
than the obligation end date. A PHA with under 250 units with an 
approved CFP 5-Year Action Plan for use of 100 percent of the Capital 
Fund grant in operations may submit the cost certificate any time after 
the funds have been budgeted to operations and withdrawn, as described 
in Sec.  905.314(l) of this part.
    (2) If the PHA does not submit the cost certificate and the final 
CFP Annual Statement/Performance and Evaluation Report within the 
period prescribed in this section, HUD may impose restrictions on open 
Capital Fund grants; e.g., establish review thresholds, set the grant 
to ``auto review'' (HUD automatically reviews it on a periodic basis), 
or suspend grants, until the cost certificate for the affected grant is 
submitted. These restrictions may be imposed by HUD after notification 
of the PHA.
    (c) Audit. The cost certificate is a financial statement subject to 
audit pursuant to 24 CFR 85.26. After submission of the cost 
certificate to HUD, the PHA shall provide the cost certificate to its 
independent public auditor (IPA) as part of its annual audit. After 
audit, the PHA will notify HUD of the grants included in the audit, any 
exceptions noted by the PHA auditor, and the schedule to complete 
corrective actions recommended by the auditor.
    (d) Review and approval. For PHAs exempt from the audit 
requirements, HUD will review and approve the cost certificate based on 
available information regarding the Capital Fund grant. For PHAs 
subject to an audit, HUD will review the information from the annual 
audit provided by the PHA and approve the certificate after all 
exceptions, if any, have been resolved.
    (e) Recapture. All Capital Funds in excess of the actual cost 
incurred for the grant are subject to recapture. Any funds awarded to 
the PHA that are returned or any funds taken back from the PHA in a 
fiscal year after the grant was awarded are subject to recapture.


Sec.  905.324  Data reporting requirements.

    The PHA shall provide, at minimum, the following data reports, at a 
time and in a form prescribed by HUD:
    (a) The Performance and Evaluation Report as described in Sec.  
905.300(b)(8) of this part;
    (b) Updates on the PHA's building and unit data as required by HUD;
    (c) Reports of obligation and expenditure; and
    (d) Any other information required for participation in the Capital 
Fund Program.


Sec.  905.326  Records.

    (a) The PHA will maintain full and complete records of the history 
of each Capital Fund grant, including, but not limited to, CFP 5-Year 
Action Plans, procurement, contracts, obligations, and expenditures.
    (b) The PHA shall retain for 5 years after HUD approves either the 
actual development or modernization cost certificate all documents 
related to the activities for which the Capital Fund grant was 
received, unless a longer period is required by applicable law.
    (c) HUD and its duly authorized representatives shall have full and 
free access to all PHA offices, facilities, books, documents, and 
records, including the right to audit and make copies.

Subpart D--Capital Fund Formula


Sec.  905.400  Capital Fund formula (CF formula).

    (a) General. This section describes the formula for allocating 
Capital Funds to PHAs.
    (b) Formula allocation based on relative needs. HUD shall allocate 
Capital Funds to the PHAs in accordance with the CF formula. The CF 
formula measures the existing modernization needs and accrual needs of 
PHAs.
    (c) Allocation for existing modernization needs under the CF 
formula. HUD shall allocate one-half of the available Capital Fund 
amount based on the relative existing modernization needs of PHAs, 
determined in accordance with paragraph (d) of this section.
    (d) PHAs with 250 or more units in FFY 1999, except the New York 
City and Chicago Housing Authorities. The estimates of the existing 
modernization needs for these PHAs shall be based on the following:
    (1) Objective measurable data concerning the following PHA, 
community, and project characteristics applied to each project:
    (i) The average number of bedrooms in the units in a project 
(Equation coefficient 4604.7);
    (ii) The total number of units in a project (Equation coefficient: 
10.17);
    (iii) The proportion of units in a project in buildings completed 
in 1978 or earlier. In the case of acquired projects, HUD will use the 
DOFA unless the PHA provides HUD with the actual date of construction 
completion. When the PHA provides the actual date of construction 
completion, HUD will use that date (or, for scattered sites, the 
average dates of construction of all the buildings), subject to a 50-
year cap. (Equation coefficient: 4965.4);
    (iv) The cost index of rehabilitating property in the area 
(Equation coefficient: -10608);
    (v) The extent to which the units of a project were in a 
nonmetropolitan area as defined by the United States Bureau of the 
Census (Census Bureau) during FFY 1996 (Equation coefficient: 2703.9);
    (vi) The PHA is located in the Southern census region, as defined 
by the Census Bureau (Equation coefficient: -269.4);
    (vii) The PHA is located in the Western census region, as defined 
by the Census Bureau (Equation coefficient: -1709.5);
    (viii) The PHA is located in the Midwest census region as defined 
by the Census Bureau (Equation coefficient: 246.2); and

[[Page 63783]]

    (2) An equation constant of 13851.
    (i) Newly constructed units. Units with a DOFA date of October 1, 
1991, or after, shall be considered to have a zero existing 
modernization need.
    (ii) Acquired projects. Projects acquired by a PHA with a DOFA date 
of October 1, 1991, or after, shall be considered to have a zero 
existing modernization need.
    (3) For New York City and Chicago Housing Authorities, based on a 
large sample of direct inspections. Prior to the cost calibration in 
paragraph (d)(5) of this section, the number used for the existing 
modernization need of family projects shall be $16,680 in New York City 
and $24,286 in Chicago, and the number for elderly projects shall be 
$14,622 in New York City and $16,912 in Chicago.
    (i) Newly constructed units. Units with a DOFA date of October 1, 
1991, or after, shall be considered to have a zero existing 
modernization need.
    (ii) Acquired projects. Projects acquired by a PHA with a DOFA date 
of October 1, 1991, or after, shall be considered to have a zero 
existing modernization need.
    (4) PHAs with fewer than 250 units in FFY 1999. The estimates of 
the existing modernization need shall be based on the following:
    (i) Objective measurable data concerning the PHA, community, and 
project characteristics applied to each project:
    (A) The average number of bedrooms in the units in a project. 
(Equation coefficient: 1427.1);
    (B) The total number of units in a project. (Equation coefficient: 
24.3);
    (C) The proportion of units in a project in buildings completed in 
1978 or earlier. In the case of acquired projects, HUD shall use the 
DOFA date unless the PHA provides HUD with the actual date of 
construction completion, in which case HUD shall use the actual date of 
construction completion (or, for scattered sites, the average dates of 
construction of all the buildings), subject to a 50-year cap. (Equation 
coefficient: -1389.7);
    (D) The cost index of rehabilitating property in the area, as of 
FFY 1999. (Equation coefficient: -20163);
    (E) The extent to which the units of a project were in a 
nonmetropolitan area as defined by the Census Bureau during FFY 1996. 
(Equation coefficient: 6157.7);
    (F) The PHA is located in the Southern census region, as defined by 
the Census Bureau. (Equation coefficient: 4379.2);
    (G) The PHA is located in the Western census region, as defined by 
the Census Bureau. (Equation coefficient: 3747.7);
    (H) The PHA is located in the Midwest census region as defined by 
the Census Bureau. (Equation coefficient: -2073.5); and
    (ii) An equation constant of 24762.
    (A) Newly constructed units. Units with a DOFA date of October 1, 
1991, or after, shall be considered to have a zero existing 
modernization need.
    (B) Acquired projects. Projects acquired by a PHA with a DOFA date 
of October 1, 1991, or after, shall be considered by HUD to have a zero 
existing modernization need.
    (5) Calibration of existing modernization need for cost index of 
rehabilitating property in the area. The estimated existing 
modernization need determined under paragraphs (d)(1), (2), or (3) of 
this section shall be adjusted by the values of the cost index of 
rehabilitating property in the area.
    (6) Freezing of the determination of existing modernization need. 
FFY 2008 is the last fiscal year that HUD will calculate the existing 
modernization need. The existing modernization need will be frozen for 
all developments at the calculation as of FFY 2008 and will be adjusted 
for changes in the inventory and paragraph (d)(4) of this section.
    (e) Allocation for accrual needs under the CF formula. HUD shall 
allocate the other half of the remaining Capital Fund amount based on 
the relative accrual needs of PHAs, determined in accordance with this 
paragraph of this section.
    (1) PHAs with 250 or more units, except the New York City and 
Chicago Housing Authorities. The estimates of the accrual need shall be 
based on the following:
    (i) Objective measurable data concerning the following PHA, 
community, and project characteristics applied to each project:
    (A) The average number of bedrooms in the units in a project. 
(Equation coefficient: 324.0);
    (B) The extent to which the buildings in a project average fewer 
than 5 units. (Equation coefficient: 93.3);
    (C) The age of a project, as determined by the DOFA date. In the 
case of acquired projects, HUD shall use the DOFA date unless the PHA 
provides HUD with the actual date of construction completion, in which 
case HUD shall use the actual date of construction (or, for scattered 
sites, the average dates of construction of all the buildings), subject 
to a 50-year cap. (Equation coefficient: -7.8);
    (D) Whether the development is a family project. (Equation 
coefficient: 184.5);
    (E) The cost index of rehabilitating property in the area. 
(Equation coefficient: -252.8);
    (F) The extent to which the units of a project were in a 
nonmetropolitan area as defined by the Census Bureau during FFY 1996. 
(Equation coefficient: -121.3);
    (G) PHA size of 6,600 or more units in FFY 1999. (Equation 
coefficient: -150.7);
    (H) The PHA is located in the Southern census region, as defined by 
the Census Bureau. (Equation coefficient: 28.4);
    (I) The PHA is located in the Western census region, as defined by 
the Census Bureau. (Equation coefficient: -116.9);
    (J) The PHA is located in the Midwest census region as defined by 
the Census Bureau. (Equation coefficient: 60.7); and
    (ii) An equation constant of 1371.9.
    (2) For the New York City and Chicago Housing Authorities, based on 
a large sample of direct inspections. Prior to the cost calibration in 
paragraph (e)(4) of this section the number used for the accrual need 
of family developments is $1,395 in New York City, and $1,251 in 
Chicago, and the number for elderly developments is $734 in New York 
City and $864 in Chicago.
    (3) PHAs with fewer than 250 units. The estimates of the accrual 
need shall be based on the following:
    (i) Objective measurable data concerning the following PHA, 
community, and project characteristics applied to each project:
    (A) The average number of bedrooms in the units in a project. 
(Equation coefficient: 325.5);
    (B) The extent to which the buildings in a project average fewer 
than 5 units. (Equation coefficient: 179.8);
    (C) The age of a project, as determined by the DOFA date. In the 
case of acquired projects, HUD shall use the DOFA date unless the PHA 
provides HUD with the actual date of construction completion. When 
provided with the actual date of construction completion, HUD shall use 
this date (or, for scattered sites, the average dates of construction 
of all the buildings), subject to a 50-year cap. (Equation coefficient: 
-9.0);
    (D) Whether the project is a family development. (Equation 
coefficient: 59.3);
    (E) The cost index of rehabilitating property in the area. 
(Equation coefficient: -1570.5);
    (F) The extent to which the units of a project were in a 
nonmetropolitan area as defined by the Census Bureau during

[[Page 63784]]

FFY 1996. (Equation coefficient: -122.9);
    (G) The PHA is located in the Southern census region, as defined by 
the Census Bureau. (Equation coefficient: -564.0);
    (H) The PHA is located in the Western census region, as defined by 
the Census Bureau. (Equation coefficient: -29.6);
    (I) The PHA is located in the Midwest census region as defined by 
the Census Bureau. (Equation coefficient: -418.3); and
    (ii) An equation constant of 3193.6.
    (4) Calibration of accrual need for the cost index of 
rehabilitating property in the area. The estimated accrual need 
determined under either paragraph (e)(2) or (3) of this section shall 
be adjusted by the values of the cost index of rehabilitation.
    (f) Calculation of number of units. (1) General. For purposes of 
determining the number of a PHA's public housing units and the relative 
modernization needs of PHAs:
    (i) HUD shall count as one unit:
    (A) Each public housing and section 23 bond-financed CF unit, 
except that each existing unit under the Turnkey III program shall 
count as one-fourth of a unit. Units receiving operating subsidy only 
shall not be counted.
    (B) Each existing unit under the Mutual Help program.
    (ii) HUD shall add to the overall unit count any units that the PHA 
adds to its inventory when the units are under CF ACC amendment and 
have reached DOFA by the date that HUD establishes for the FFY in which 
the CF formula is being run (hereafter called the ``reporting date''). 
New CF units and those reaching DOFA after the reporting date shall be 
counted for CF formula purposes in the following FFY.
    (2) Replacement units. Replacement units newly constructed on or 
after October 1, 1998, that replace units in a project funded in FFY 
1999 by the Comprehensive Grant formula system or the Comprehensive 
Improvement Assistance Program (CIAP) formula system shall be given a 
new CF ACC number as a separate project and shall be treated as a newly 
constructed development as outlined in Sec.  905.600 of this part.
    (3) Reconfiguration of units. Reconfiguration of units may cause 
the need to be calculated by the new configuration based on the formula 
characteristics in the building and unit's PIC module (refer to the 
formula sections here). The unit counts will be determined by the CF 
units existing after the reconfiguration.
    (4) Reduction of units. For a project losing units as a result of 
demolition and disposition, the number of units on which the CF formula 
is based shall be the number of units reported as eligible for Capital 
Funds as of the reporting date. Units are eligible for funding until 
they are removed due to demolition and disposition in accordance with a 
schedule approved by HUD.
    (g) Computation of formula shares under the CF formula. (1) Total 
estimated existing modernization need. The total estimated existing 
modernization need of a PHA under the CF formula is the result of 
multiplying for each project the PHA's total number of formula units by 
its estimated existing modernization need per unit, as determined by 
paragraph (d) of this section, and calculating the sum of these 
estimated project needs.
    (2) Total accrual need. The total accrual need of a PHA under the 
CF formula is the result of multiplying for each project the PHA's 
total number of formula units by its estimated accrual need per unit, 
as determined by paragraph (e) of this section, and calculating the sum 
of these estimated accrual needs.
    (3) PHA's formula share of existing modernization need. A PHA's 
formula share of existing modernization need under the CF formula is 
the PHA's total estimated existing modernization need divided by the 
total existing modernization need of all PHAs.
    (4) PHA's formula share of accrual need. A PHA's formula share of 
accrual need under the CF formula is the PHA's total estimated accrual 
need divided by the total existing accrual need of all PHAs.
    (5) PHA's formula share of capital need. A PHA's formula share of 
capital need under the CF formula is the average of the PHA's share of 
existing modernization need and its share of accrual need (by which 
method each share is weighted 50 percent).
    (h) CF formula capping. (1) For units that are eligible for funding 
under the CF formula (including replacement housing units discussed 
below), a PHA's CF formula share shall be its share of capital need, as 
determined under the CF formula, subject to the condition that no PHA's 
CF formula share for units funded under the CF formula can be less than 
94 percent of its formula share had the FFY 1999 formula system been 
applied to these CF formula-eligible units. The FFY 1999 formula system 
is based upon the FFY 1999 Comprehensive Grant formula system for PHAs 
with 250 or more units in FFY 1999 and upon the FFY 1999 Comprehensive 
Improvement Assistance Program (CIAP) formula system for PHAs with 
fewer than 250 units in FFY 1999.
    (2) For a Moving to Work (MTW) PHA whose MTW agreement provides 
that its CF formula share is to be calculated in accordance with the 
previously existing formula, the PHA's CF formula share, during the 
term of the MTW agreement, may be approximately the formula share that 
the PHA would have received had the FFY 1999 formula funding system 
been applied to the CF formula eligible units.
    (i) Replacement Housing Factor to reflect formula need for 
developments with demolition or disposition occurring on or after 
October 1, 1998, and prior to September 30, 2013. (1) RHF generally. 
PHAs that have a reduction in the number of units attributable to 
demolition or disposition of units during the period (reflected in data 
maintained by HUD) that lowers the formula unit count for the CFF 
calculation qualify for application of an RHF, subject to satisfaction 
of criteria stated in paragraph (i)(5) of this section
    (2) When applied. The RHF will be added, where applicable:
    (i) For the first 5 years after the reduction of units described in 
paragraph (i)(1) of this section; and
    (ii) For an additional 5 years if the planning, leveraging, 
obligation, and expenditure requirements are met. As a prior condition 
of a PHA's receipt of additional funds for replacement housing provided 
for the second 5-year period or any portion thereof, a PHA must obtain 
a firm commitment of substantial additional funds, other than public 
housing funds, for replacement housing, as determined by HUD.
    (3) Computation of RHF. The RHF consists of the difference between 
the CFF share without the CFF share reduction of units attributable to 
demolition or disposition and the CFF share that resulted after the 
reduction of units attributable to demolition or disposition.
    (4) Replacement housing funding in FFYs 1998 and 1999. Units that 
received replacement housing funding in FFY 1998 will be treated as if 
they had received 2 years of replacement housing funding by FFY 2000. 
Units that received replacement housing funding in FFY 1999 will be 
treated as if they had received one year of replacement housing funding 
as of FFY 2000.
    (5) PHA Eligibility for the RHF. A PHA is eligible for this factor 
only if the PHA satisfies the following criteria:
    (i) The PHA will use the funding in question only for replacement 
housing;
    (ii) The PHA will use the restored funding that results from the 
use of the replacement factor to provide

[[Page 63785]]

replacement housing in accordance with the PHA's 5-Year Action Plan, as 
approved by HUD under part 903 of this chapter as well as the PHA's 
Board of Commissioners;
    (iii) The PHA has not received funding for public housing units 
that will replace the lost units under Public Housing Development, 
Major Reconstruction of Obsolete Public Housing, HOPE VI, Choice 
Neighborhoods, Rental Assistance Payment (RAP), or programs that 
otherwise provide for replacement with public housing units;
    (iv) The PHA, if designated as a troubled PHA by HUD, and not 
already under the direction of HUD or an appointed receiver, in 
accordance with part 902 of this chapter, uses an Alternative 
Management Entity, as defined in part 902 of this chapter, for 
development of replacement housing and complies with any applicable 
provisions of its Memorandum of Agreement executed with HUD under that 
part; and
    (v) The PHA undertakes any development of replacement housing in 
accordance with applicable HUD requirements and regulations.
    (6) Failure to provide replacement housing in a timely fashion. (i) 
A PHA will be subject to the actions described in paragraph (i)(7)(ii) 
of this section if the PHA does not:
    (A) Use the restored funding that results from the use of the RHF 
to provide replacement housing in a timely fashion, as provided in 
paragraph (i)(7)(i) of this section and in accordance with applicable 
HUD requirements and regulations, and
    (B) Make reasonable progress on such use of the funding, in 
accordance with applicable HUD requirements and regulations.
    (ii) If a PHA fails to act as described in paragraph (i)(6)(i) of 
this section, HUD will require appropriate corrective action under 
these regulations, may recapture and reallocate the funds, or may take 
other appropriate action.
    (7) Requirement to obligate and expend RHF funds within the 
specified period. (i) In addition to the requirements otherwise 
applicable to obligation and expenditure of funds, PHAs are required to 
obligate assistance received as a result of the RHF within:
    (A) 24 months from the date that funds become available to the PHA; 
or
    (B) With specific HUD approval, 24 months from the date that the 
PHA accumulates adequate funds to undertake replacement housing.
    (ii) To the extent the PHA has not obligated any funds provided as 
a result of the RHF within the time frames required by this paragraph, 
or has not expended such funds within a reasonable time, HUD shall 
recapture the unobligated amount of the grant.
    (j) Demolition and Disposition Transitional Funding (DDTF) to 
reflect formula need for developments with demolition or disposition on 
or after October 1, 2013. (1) DDTF generally. In FFY 2014 and 
thereafter, PHAs that have a reduction in the number of units occurring 
in FFY 2013 and attributable to demolition or disposition are 
automatically eligible to receive Demolition and Disposition 
Transitional Funding. The DDTF will be included in their annual Capital 
Fund grant for a 5-year period to offset the reduction in funding a PHA 
would receive from removing units from inventory. DDTF is subject to 
the criteria stated in paragraph (j)(4) of this section.
    (2) When applied. DDTF will be added to a PHA's annual CFP grant, 
where applicable, for 5 years after the reduction of units described in 
paragraph (j)(1) of this section.
    (3) Computation of DDTF. The DDTF consists of the difference 
between the CFF share without the CFF share reduction of units 
attributable to demolition or disposition and the CFF share that 
resulted after the reduction of units attributable to demolition or 
disposition.
    (4) PHA eligibility for the DDTF. A PHA is eligible for this factor 
only if the PHA satisfies the following criteria:
    (i) The PHA will automatically receive the DDTF for reduction of 
units in accordance with paragraph (j)(1) of this section, unless the 
PHA rejects the DDTF funding for that fiscal year in writing;
    (ii) The PHA will use the funding in question for eligible 
activities under the Capital Fund Program, found at 905.200--such as 
modernization and development--that are included in the PHA's HUD 
approved CFP 5-Year Action Plan.
    (iii) The PHA has not received funding for public housing units 
that will replace the lost units from disposition proceeds, or under 
Public Housing Development, Major Reconstruction of Obsolete Public 
Housing, HOPE VI, Choice Neighborhoods, RAP, or programs that otherwise 
provide for replacement with public housing units;
    (iv) The PHA, if designated as a troubled PHA by HUD, and not 
already under the direction of HUD or an appointed receiver, in 
accordance with part 902 of this chapter, uses an Alternative 
Management Entity, as defined in part 902 of this chapter, and complies 
with any applicable provisions of its Memorandum of Agreement executed 
with HUD under that part; and
    (v) The PHA undertakes any eligible activities in accordance with 
applicable HUD requirements and regulations.
    (5) Requirement to obligate and expend DDTF funds within the 
specified period. (i) In addition to the requirements otherwise 
applicable to obligation and expenditure of Capital Funds, including 42 
U.S.C. 1437g(j) and the terms of the appropriation from Congress, PHAs 
are required to obligate funds received as a result of the DDTF within 
24 months from the date that funds become available to the PHA; or
    (ii) To the extent the PHA has not obligated any funds provided as 
a result of the DDTF within the time frames required by this paragraph, 
or expended such funds within a reasonable time frame, HUD shall reduce 
the amount of DDTF to be provided to the PHA.
    (k) RHF Transition. (1) PHAs that would be newly eligible for RHF 
in FFY 2014 will receive 5 years of DDTF.
    (2) PHAs that received a portion of a first increment RHF grant in 
FY 2013, for units removed from inventory prior to the reporting date 
of June 30, 2012, will receive up to 10 years of funding consisting of 
the remainder of first-increment RHF, subject to the requirements of 
Sec.  905.400(i) of this part, and, if eligible, 5 years of DDTF, 
subject to the requirements of Sec.  905.400(j) of this part.
    (3) PHAs that received a portion of a second increment RHF grant in 
FY 2013, for units removed from inventory prior to the reporting date 
of June 30, 2012, will continue to receive the remaining portion of the 
5-year increment as a separate second increment RHF grant, as described 
in Sec.  905.400(i) of this part.
    (l) Performance reward factor. (1) High performer. A PHA that is 
designated a high performer under the PHA's most recent final PHAS 
score may receive a performance bonus that is:
    (i) Three (3) percent above its base formula amount in the first 5 
years these awards are given (for any year in this 5-year period in 
which the performance reward is earned); or
    (ii) Five (5) percent above its base formula amount in future years 
(for any year in which the performance reward is earned);
    (2) Condition. The performance bonus is subject only to the 
condition that no PHA will lose more than 5 percent of its base formula 
amount as a result of the redistribution of funding from nonhigh 
performers to high performers.
    (3) Redistribution. The total amount of Capital Funds that HUD has 
recaptured

[[Page 63786]]

or not allocated to PHAs as a sanction for violation of expenditure and 
obligation requirements shall be allocated to the PHAs that are 
designated high performers under PHAS.

0
6. Add subparts F, G, and H to read as follows:
Subpart F--Development Requirements
Sec.
905.600 General.
905.602 Program requirements.
905.604 Mixed-finance development.
905.606 Development proposal.
905.608 Site acquisition proposal.
905.610 Technical processing.
905.612 Disbursement of Capital Funds--predevelopment costs.
Subpart G--Other Security Interests
905.700 Other security interests.
Subpart H--Compliance, HUD Review, Penalties, and Sanctions
905.800 Compliance.
905.802 HUD review of PHA performance.
905.804 Sanctions.

Subpart F--Development Requirements


Sec.  905.600  General.

    (a) Applicability. This subpart F applies to the development of 
public housing units to be included under an ACC and which will receive 
funding from public housing funds. PHAs must comply, or cause the Owner 
Entity and its contractors to comply, as applicable, with all of the 
applicable requirements in this subpart. Pursuant to Sec.  905.106 of 
this part, when a PHA, a PHA partner, and/or an Owner Entity submits a 
development proposal and, if applicable, a site acquisition proposal, 
and executes an ACC covering the public housing units being developed, 
it is deemed to have certified by those executed submissions its 
compliance with this subpart. Noncompliance with any provision of this 
subpart or other applicable statutes or regulations, or the ACC 
Amendment, and any amendment thereto may subject the PHA, the PHA's 
partner and/or the Owner Entity to sanctions contained in Sec.  905.804 
of this part.
    (b) Description. A PHA may develop public housing through the 
construction of new units or the acquisition, with or without 
rehabilitation, of existing units. A PHA may use any generally accepted 
method of development including, but not limited to:
    (1) Conventional. The PHA designs a project on a property it owns. 
The PHA then competitively selects an entity to build or rehabilitate 
the project.
    (2) Turnkey. The PHA advertises for and competitively selects a 
developer who will develop public housing units on a site owned or to 
be owned by the developer. Following HUD approval of the development 
proposal, the PHA and the developer execute a contract of sale and the 
developer builds the project. Once the project is complete, the 
developer sells it to the PHA.
    (3) Acquisition with or without rehabilitation. The PHA acquires an 
existing property that requires substantial, moderate, or no repair. 
Any repair work is done by PHA staff or contracted out by the PHA. The 
PHA must certify that the property was not constructed with the intent 
of selling it to the PHA or, alternatively, the PHA must certify that 
HUD requirements were followed in the development of the property.
    (4) PHA use of force account labor. The PHA uses staff to carry out 
new construction or rehabilitation, as provided in Sec.  905.314(j) of 
this part.
    (5) Mixed finance. Development or modernization of public housing 
units where the public housing units are owned in whole or in part by 
an entity other than a PHA, pursuant to Section 905.604.
    (c) Development process. The general development process for public 
housing development, using any method and with any financing, is as 
follows:
    (1) The PHA will identify a site to be acquired or a public housing 
project to be developed or redeveloped. The PHA or its Partner and/or 
the Owner Entity will prepare a site acquisition proposal pursuant to 
Sec.  905.608 of this part and/or a development proposal pursuant to 
Sec.  905.606 of this part for submission to HUD or as otherwise 
directed by HUD. The PHA may request predevelopment funding necessary 
for preparation of the acquisition proposal and/or development 
proposal, as stated in Sec.  905.612(a) of this part.
    (2) The PHA must consult with affected residents prior to 
submission of an acquisition proposal, development proposal, or both to 
HUD to solicit resident input into development of the public housing 
project.
    (3) After HUD approval of the site acquisition proposal and/or 
development proposal, HUD and the PHA shall execute the applicable ACC 
Amendment for the public housing units and record a Declaration of 
Trust or Declaration of Restrictive Covenants on all property acquired 
and/or to be developed. The PHA may then commence development of the 
units.
    (4) Upon completion of the public housing project, the PHA will 
establish the DOFA. After the DOFA, the PHA will submit a cost 
certificate to HUD attesting to the actual cost of the project that 
will be subject to audit.
    (d) Funding sources. A PHA may engage in development activities 
using any one or a combination of the following sources of funding:
    (1) Capital Funds;
    (2) HOPE VI funds;
    (3) Choice Neighborhoods funds;
    (4) Proceeds from the sale of units under a homeownership program 
in accordance with 24 CFR part 906;
    (5) Proceeds resulting from the disposition of PHA-owned land or 
improvements;
    (6) Private financing used in accordance with Sec.  905.604 of this 
part, Mixed-finance development;
    (7) Capital Fund Financing Program (CFFP) proceeds under Sec.  
905.500 of this part;
    (8) Proceeds resulting from an Operating Fund Financing Program 
(OFFP) approved by HUD pursuant to 24 CFR part 990; and
    (9) Funds available from any other eligible sources.


Sec.  905.602  Program requirements.

    (a) Local cooperation. Except as provided under Sec.  905.604(i) of 
this part for mixed-finance projects, the PHA must enter into a 
Cooperation Agreement with the applicable local governing body that 
includes sufficient authority to cover the public housing being 
developed under this subpart, or provide an opinion of counsel that the 
existing, amended, or supplementary Cooperation Agreement between the 
jurisdiction and the PHA includes the project or development.
    (b) New construction limitation. These requirements apply to the 
development (including new construction and acquisition) of public 
housing. All proposed new development projects must meet both of the 
following requirements:
    (1) Limitation on the number of units. A PHA may not use Capital 
Funds to pay for the development cost of public housing units if such 
development would result in a net increase in the number of public 
housing units that the PHA owned, assisted, or operated on October 1, 
1999. Subject to approval by the Secretary, a PHA may develop public 
housing units in excess of the limitation if:
    (i) The units are available and affordable to eligible low-income 
families and the CF formula does not provide additional funding for the 
specific purpose of constructing, modernizing, and operating such 
excess units; or
    (ii) The units are part of a mixed-finance project or otherwise 
leverage

[[Page 63787]]

significant additional investment, and the cost of the useful life of 
the projects is less than the estimated cost of providing tenant-based 
assistance under section 8(o) of the 1937 Act.
    (2) Limitations on cost. A PHA may not construct public housing 
unless the cost of construction is less than the cost of acquisition or 
acquisition and rehabilitation of existing units, including the amount 
required to establish, as necessary, an upfront reserve for replacement 
accounts for major repairs. A PHA shall provide evidence of compliance 
with this subpart either by:
    (i) Demonstrating through a cost comparison that the cost of new 
construction in the neighborhood where the PHA proposes to construct 
the housing is less than the cost of acquisition of existing housing, 
with or without rehabilitation, in the same neighborhood; or
    (ii) Documenting that there is insufficient existing housing in the 
neighborhood to acquire.
    (c) Existing PHA-owned nonpublic housing properties. Nonpublic 
housing properties may be used in the development of public housing 
units provided all requirements of the 1937 Act and the development 
requirements of this part are met.
    (d) Site and neighborhood standards. Each proposed site to be newly 
acquired for a public housing project or for construction or 
rehabilitation of public housing must be reviewed and approved by the 
field office as meeting the following standards, as applicable:
    (1) The site must be adequate in size, exposure, and contour to 
accommodate the number and type of units proposed. Adequate utilities 
(e.g., water, sewer, gas, and electricity) and streets shall be 
available to service the site.
    (2) The site and neighborhood shall be suitable to facilitating and 
furthering full compliance with the applicable provisions of title VI 
of the Civil Rights Act of 1964, title VIII of the Civil Rights Act of 
1968, Executive Order 11063, and HUD regulations issued under these 
statutes.
    (3) The site for new construction shall not be located in an area 
of minority concentration unless:
    (i) There are already sufficient, comparable opportunities outside 
areas of minority concentration for housing minority families in the 
income range that is to be served by the proposed project; or
    (ii) The project is necessary to meet overriding housing needs that 
cannot feasibly be met otherwise in that housing market area. 
``Overriding housing needs'' shall not serve as the basis for 
determining that a site is acceptable if the only reason that these 
needs cannot otherwise feasibly be met is that, due to discrimination 
because of race, color, religion, creed, sex, disability, familial 
status, or national origin, sites outside areas of minority 
concentration are unavailable.
    (4) The site for new construction shall not be located in a 
racially mixed area if the project will cause a significant increase in 
the proportion of minority to nonminority residents in the area.
    (5) Notwithstanding the foregoing, after demolition of public 
housing units a PHA may construct public housing units on the original 
public housing site or in the same neighborhood if the number of 
replacement public housing units is significantly fewer than the number 
of public housing units demolished. One of the following criteria must 
be satisfied:
    (i) The number of public housing units being constructed is not 
more than 50 percent of the number of public housing units in the 
original development; or
    (ii) In the case of replacing an occupied development, the number 
of public housing units being constructed is the number needed to house 
current residents who want to remain at the site, so long as the number 
of public housing units being constructed is significantly fewer than 
the number being demolished; or
    (iii) The public housing units being constructed constitute no more 
than 25 units.
    (6) The site shall promote greater choice of housing opportunities 
and avoid undue concentration of assisted persons in areas containing a 
high proportion of low-income persons.
    (7) The site shall be free from adverse environmental conditions, 
natural or manmade, such as: Toxic or contaminated soils and 
substances; mudslide or other unstable soil conditions; flooding; 
septic tank backups or other sewage hazards; harmful air pollution or 
excessive smoke or dust; excessive noise or vibrations from vehicular 
traffic; insect, rodent, or vermin infestation; or fire hazards. The 
neighborhood shall not be seriously detrimental to family life. It 
shall not be filled with substandard dwellings nor shall other 
undesirable elements predominate, unless there is a concerted program 
in progress to remedy the undesirable conditions.
    (8) The site shall be accessible to social, recreational, 
educational, commercial, and health facilities; health services; and 
other municipal facilities and services that are at least equivalent to 
those typically found in neighborhoods consisting largely of similar 
unassisted standard housing. The availability of public transportation 
must be considered.
    (9) The site shall be accessible to a range of jobs for low-income 
workers and for other needs. The availability of public transportation 
must be considered, and travel time and cost via public transportation 
and private automobile must not be excessive. This requirement may be 
given less consideration for elderly housing.
    (10) The project may not be built on a site that has occupants 
unless the relocation requirements at Sec.  905.308(b)(9) of this part 
are met.
    (11) The site shall not be in an area that HUD has identified as 
having special flood hazards and in which the sale of flood insurance 
has been made available under the National Flood Insurance Act of 1968, 
unless the development is covered by flood insurance required by the 
Flood Disaster Protection Act of 1973 and meets all applicable HUD 
standards and local requirements.
    (e) Relocation. All acquisition or rehabilitation activities 
carried out with public housing funds must comply with the provisions 
of Sec.  905.308(b)(9).
    (f) Environmental requirements. All activities under this part are 
subject to an environmental review by a responsible entity under HUD's 
environmental regulations at 24 CFR Part 58 and must comply with the 
requirements of the National Environmental Policy Act of 1969 (NEPA) 
(42 U.S.C. 4321 et seq.) and the related laws and authorities listed at 
24 CFR 58.5. HUD may make a finding in accordance with 24 CFR 58.11 and 
may perform the environmental review itself under the provisions of 24 
CFR Part 50. In those cases where HUD performs the environmental review 
under 24 CFR Part 50, it will do so before approving a proposed 
project, and will comply with the requirements of NEPA and the related 
requirements at 24 CFR 50.4.


Sec.  905.604  Mixed-finance development.

    (a) General. Mixed-finance development refers to the development 
(through new construction or acquisition, with or without 
rehabilitation) or modernization of public housing, where the public 
housing units are owned in whole or in part by an entity other than a 
PHA. If the public housing units being developed are 100 percent owned 
by the PHA, the project is not a mixed-finance project and will be not 
be subject to mixed-finance development requirements. However, all 
other development requirements of part 905

[[Page 63788]]

are applicable, and, if the project includes both public housing funds 
and private funding for development, the project may be subject to 
other applicable program requirements; e.g., the Capital Fund Financing 
Program, Operating Fund Financing Program, Public Housing Mortgage 
Program, etc.
    (1) Ownership. There are various potential scenarios for the 
ownership structure of a mixed-finance project, such as: public housing 
units may be owned entirely by a private entity; a PHA may co-own with 
a private entity; or a PHA affiliate or instrumentality may own or co-
own the units.
    (2) Partnerships. PHAs may choose to enter into a partnership or 
other contractual arrangement with a third party entity for the mixed-
finance development and/or ownership of public housing units.
    (3) Funding. Funding for mixed-finance developments may include one 
or a combination of funding sources, pursuant to Sec.  905.600(d) of 
this part.
    (4) Modernization. A mixed-finance project that involves 
modernization, rather than new construction, shall maintain the DOFA 
date that existed prior to modernization and shall be subject to the 
provisions of Sec.  905.304(a)(2) of this part regarding the applicable 
period of obligation to operate the public housing units.
    (b) Definitions applicable to this subpart. (1) Mixed-finance. The 
development (through new construction or acquisition, with or without 
rehabilitation) or modernization of public housing, using public 
housing, nonpublic housing, or a combination of public housing and 
nonpublic housing funds, where the public housing units are owned in 
whole or in part by an entity other than the PHA. A mixed-finance 
development may include 100 percent public housing (if there is an 
Owner Entity other than the PHA) or a mixture of public housing and 
nonpublic housing units.
    (2) Owner Entity. As defined in Sec.  905.108 of this part.
    (3) PHA instrumentality. An instrumentality is an entity related to 
the PHA whose assets, operations, and management are legally and 
effectively controlled by the PHA, and through which PHA functions or 
policies are implemented, and which utilizes public housing funds or 
public housing assets for the purpose of carrying out public housing 
development functions of the PHA. An instrumentality assumes the role 
of the PHA, and is the PHA under the Public Housing Requirements, for 
purposes of implementing public housing development activities and 
programs, and must abide by the Public Housing Requirements. 
Instrumentalities must be authorized to act for and to assume such 
responsibilities. For purposes of development, ownership of public 
housing units by an instrumentality would be considered mixed-finance 
development.
    (4) PHA affiliate. An affiliate is an entity, other than an 
instrumentality, formed by a PHA and in which a PHA has a financial or 
ownership interest or participates in its governance. The PHA has some 
measure of control over the assets, operations, or management of the 
affiliate, but such control does not rise to the level of control to 
qualify the entity as an instrumentality. For the purposes of 
development, ownership of public housing units by an affiliate would be 
considered mixed-finance development.
    (5) Public housing funds. As defined in Sec.  905.108 of this part.
    (c) Structure of projects. Each mixed-finance project must be 
structured to:
    (1) Ensure the continued operation of the public housing units in 
accordance with all Public Housing Requirements;
    (2) Ensure that public housing funds committed to a mixed-finance 
project are used only to pay for costs associated with the public 
housing units, including such costs as demolition, site work, 
infrastructure, and common area improvements.
    (3) To ensure that the amount of public housing funds committed to 
a project is proportionate to the number of public housing units 
contained in the project. To meet this ``pro rata test,'' the 
proportion of public housing funds compared to total project funds 
committed to a project must not exceed the proportion of public housing 
units compared to total number of units contained in the project. For 
example, if there are a total of 120 units in the project and 50 are 
public housing units, the public housing units are 42 percent of the 
total number of units in the project. Therefore the amount of public 
housing funds committed to the project cannot exceed 42 percent of the 
total project budget, unless otherwise approved by the Secretary. 
However, if public housing funds are to be used to pay for more than 
the pro rata cost of common area improvements, HUD will evaluate the 
proposal to ensure that common area improvements will benefit the 
residents in the development in a mixed-income project; and
    (4) Ensure that the project is within the Total Development Cost 
(TDC) and Housing Construction Cost (HCC) limits pursuant to Sec.  
905.314(c) and (d) of this part.
    (d) Process. Except as provided in this section, development of a 
mixed-finance project under this subpart is subject to the same 
requirements as development of public housing by a PHA entirely with 
public housing funds, as stated in Sec.  905.600 of this part. PHAs 
must submit an acquisition proposal under Sec.  905.608 and/or a 
development proposal under Sec.  905.606 or as otherwise specified by 
HUD.
    (e) Conflicts. In the event of a conflict between the requirements 
for a mixed-finance project and other requirements of this subpart, the 
mixed-finance Public Housing Requirements shall apply, unless HUD 
determines otherwise.
    (f) HUD approval. For purposes of this section only, any action or 
approval that is required by HUD pursuant to the requirements set forth 
in this section shall be construed to mean HUD Headquarters, unless the 
field office is authorized in writing by Headquarters to carry out a 
specific function in this section.
    (g) Comparability. Public housing units built in a mixed-financed 
development must be comparable in size, location, external appearance, 
and distribution to nonpublic housing units within the development.
    (h) Mixed-finance procurement. The requirements of 24 CFR Part 85 
and 24 CFR 905.316 are applicable to this subpart with the following 
exceptions:
    (1) PHAs may select a development partner using competitive 
proposals procedures for qualifications-based procurement, subject to 
negotiation of fair and reasonable compensation and compliance with TDC 
and other applicable cost limitations;
    (2) An Owner Entity (which, as a private entity, would normally not 
be subject to 24 CFR Part 85) shall be required to comply with 24 CFR 
Part 85 if HUD determines that the PHA or PHA instrumentality, or 
either of their members or employees, exercises significant decision 
making functions within the Owner Entity with respect to managing the 
development of the proposed units. HUD may, on a case-by-case basis, 
exempt such an Owner Entity from the need to comply with 24 CFR Part 85 
if it determines that the Owner Entity has developed an acceptable 
alternative procurement plan.
    (i) Identity of interest. If the Owner Entity or partner (or any 
other entity with an identity of interest with the Owner Entity or 
partner) of a mixed-finance project wants to serve as the general 
contractor for the mixed-finance project, it may award itself the 
construction contract only if:

[[Page 63789]]

    (1) The identity of interest general contractor's bid is the lowest 
bid submitted in response to a request for bids; or
    (2) The PHA submits a written justification to HUD that includes an 
independent third-party cost estimate that demonstrates that the 
identity of interest general contractor's costs are less than or equal 
to the independent third-party cost estimate; and
    (3) HUD approves the identity of interest general contractor in 
conjunction with HUD's approval of the development proposal for the 
mixed-finance project.
    (j) Operating Subsidy-Only and Capital Fund-Only Assistance. (1) 
General. This section refers to the mixed-finance development of public 
housing units that will be developed without public housing funds but 
will receive operating subsidy, or will be developed with public 
housing funds but will not receive operating subsidy.
    (2) Operating Subsidy-Only Development. Operating Subsidy-Only 
Development refers to mixed-finance projects where public housing units 
are developed without the use of public housing funds, but for which 
HUD agrees to provide operating subsidies under Section 9(e) of the 
1937 Act. These types of project are subject to the following 
provisions:
    (i) The newly developed public housing units will be included in 
the calculation of the Capital Fund formula in Sec.  905.400 of this 
part.
    (ii) An ACC Amendment will be executed to include the new public 
housing units. The term of the ACC Amendment will be determined based 
on the assistance as provided in Sec.  905.304, unless reduced by the 
Secretary.
    (iii) There shall be no disposition of the public housing units 
without the prior written approval of HUD, during, and for 10 years 
after the end of, the period in which the public housing units receive 
operating subsidy from the PHA, as required by 42 U.S.C. 1437g(3), as 
those requirements may be amended from time to time. However, if the 
PHA is no longer able to provide operating subsidies to the Owner 
Entity pursuant to Section 9(e) of the 1937 Act, the PHA may (on behalf 
of the Owner Entity) request that HUD terminate the Declaration of 
Trust or Declaration of Restrictive Covenants, as applicable. 
Termination under this section does not require disposition approval 
from HUD pursuant to Section 18 of the 1937 Act, 42 U.S.C. 1437p. 
However, the PHA must provide public housing residents with a decent, 
safe, sanitary, and affordable unit to which they can relocate, which 
may include a public housing unit in another development or a Housing 
Choice Voucher, and pay for the tenant's reasonable moving costs. The 
URA is not applicable in this situation.
    (iv) Where the PHA elects in the future to use public housing funds 
for modernization of these units, the PHA must execute an ACC Amendment 
with a 20-year use restriction and record a Declaration of Trust or 
Declaration of Restrictive Covenants, in accordance with Sec.  905.304. 
There may be no disposition of the public housing units without the 
prior written approval of HUD during the 20-year period, and the public 
housing units shall be maintained and operated in accordance with all 
applicable Public Housing Requirements (including the ACC), as those 
requirements may be amended from time to time.
    (3) Capital Fund-Only Development. Capital Fund-Only projects 
refers to mixed-finance projects where a PHA and its partners may 
develop public housing units using public housing funds for development 
of new units, but for which HUD will not be providing operating subsidy 
under Section 9(e) of the Act, 42 U.S.C. 1437g(e). These types of 
projects are subject to the following provisions:
    (i) The newly developed public housing units will not be included 
in the calculation of the Operating Fund formula.
    (ii) The PHA must sign an ACC Amendment, with a 40-year use 
restriction, for development of new units and record a Declaration of 
Trust or Declaration of Restrictive Covenants in accordance with Sec.  
905.304 of this part, unless the time period is reduced by the 
Secretary.
    (iii) There shall be no disposition of the public housing units, 
without the prior written approval of HUD, during a 40-year period, and 
the public housing units shall be maintained and operated in accordance 
with all applicable Public Housing Requirements (including the ACC), as 
required by section 9(d)(3) of the 1937 Act, 42 U.S.C. 1437g(d)(3), as 
those requirements may be amended from time to time.
    (4) Procedures. PHAs must follow the development approval process 
identified in Sec.  905.600.
    (k) Mixed-finance operations: Deviation from HUD requirements 
pursuant to section 35(h) of the 1937 Act, 42 U.S.C. 1437z-7(h). (1) 
Deviation. If a PHA enters into a contract with an entity that owns or 
operates a mixed-finance project, and the terms of the contract 
obligate the entity to operate and maintain a specified number of units 
in the project as public housing units, the contract may include terms 
that allow the Owner Entity to deviate from otherwise applicable Public 
Housing Requirements regarding rents, income eligibility, and other 
areas of public housing management with respect to all or a portion of 
the public housing units, subject to the following conditions:
    (i) There are a significant number of units in the mixed-finance 
project that are not public housing units;
    (ii) There is a reduction in appropriations under Section 9(e) of 
the 1937 Act (see 42 U.S.C. 1437g(e)) or a change in applicable law 
that results in the PHA being unable to fulfill its contractual 
obligation to the Owner Entity with respect to the public housing 
units;
    (iii) Prior to implementation of the contractual terms related to 
deviation from the Public Housing Requirements, HUD approves an 
Alternative Management Plan for the mixed-finance project; and
    (iv) The deviation shall be to the extent necessary to preserve the 
viability of those units while maintaining the low-income character of 
the units to the maximum extent practicable.
    (2) Preparation of an Alternative Management Plan. Should the PHA 
and the Owner Entity determine a need to deviate from the Public 
Housing Requirements, the PHA, on behalf of the Owner Entity, must 
submit an Alternative Management Plan to HUD for review and approval 
prior to implementation of any changes. The Plan must include the 
following:
    (i) A statement describing the Owner Entity's reasons for deviating 
from the Public Housing Requirements;
    (ii) An explanation of the Owner Entity's proposed remedies, 
including, but not limited to:
    (A) How the Owner Entity will select the residents (including the 
number and income levels of the families proposed to be admitted to the 
public housing units) and units to be affected by the proposed change;
    (B) The Owner Entity's timetable for implementing the Alternative 
Management Plan;
    (C) The impact on existing residents. Note that for any resident 
who is unable to remain in the unit as a result of implementation of 
the Alternative Management Plan, the resident must be relocated to a 
public housing unit or given a Housing Choice Voucher by the PHA or by 
another entity as provided for in the contractual agreement between the 
PHA and the Owner Entity;

[[Page 63790]]

    (iii) An amendment to the existing contractual agreement between 
the PHA and the Owner Entity that includes provisions which ensure 
that:
    (A) An update on the Alternative Management Plan is submitted 
annually to HUD to ensure that implementation of the provisions of the 
Alternative Management Plan continue to be appropriate;
    (B) The Owner Entity complies with the requirements of this subpart 
in its management and operation of the public housing units in 
accordance with the Alternative Management Plan;
    (C) The Owner Entity provides the PHA any income that is generated 
by the public housing units in excess of the Owner Entity's expenses on 
behalf of those units, as a result of implementation of provisions in 
the Alternative Management Plan;
    (D) The Owner Entity reinstates all Public Housing Requirements 
(including rent and income eligibility requirements) with respect to 
the original number of public housing units and number of bedrooms in 
the mixed-finance development, following the PHA's reinstatement of 
operating subsidies at the level originally agreed to in its contract 
with the Owner Entity; and
    (iv) Additional evidence. The PHA must provide documentation that:
    (A) The Owner Entity has provided copies of the Alternative 
Management Plan to residents of the project and provided the 
opportunity for review and comment prior to submission to HUD. The 
Owner Entity must have provided written notice to each of the public 
housing residents in the mixed-finance development of its intention to 
implement the Alternative Management Plan. Such notice must comply with 
all relevant federal, state, and local substantive and procedural 
requirements and, at a minimum, provide public housing residents 90 
days advance notice of any proposal to increase rents or to relocate 
public housing residents to alternative housing;
    (B) The revenues being generated by the public housing units (in 
combination with the reduced allocation of Operating Subsidy resulting 
primarily from a reduction in appropriations or changes in applicable 
law such that the PHA is unable to comply with its contractual 
obligations to the Owner Entity) are inadequate to cover the reasonable 
and necessary operating expenses of the public housing units. 
Documentation should include a financial statement showing actual 
operating expenses and revenues over the past 5 years and the projected 
expenses and revenues over the next 10 years;
    (C) A demonstration that the PHA cannot meet its contractual 
obligation, and;
    (D) The Owner Entity has attempted to offset with regard to the 
project, the impact of reduced operating subsidies or changes in 
applicable law by all available means; including the use of other 
public and private development resources, the use of cash flow from any 
nonpublic housing units, and funds from other operating deficient 
reserves.
    (3) HUD review. HUD will review the Alternative Management Plan to 
ensure that the plan meets the requirements of this subpart and that 
any proposed deviation from the Public Housing Requirements will be 
implemented only to the extent necessary to preserve the viability of 
the public housing units. Upon completion of HUD's review, HUD will 
either approve or disapprove the Alternative Management Plan. Reasons 
for HUD disapproval may include, but are not limited to, the following:
    (i) The justification for deviation from the Public Housing 
Requirements does not qualify in accordance with section 35(h) of the 
Act (42 U.S.C. 1437z-7(h)).
    (ii) The proposed deviation(s) from the Public Housing Requirements 
are not limited to preserving the viability of the public housing 
units.
    (iii) The information that HUD requires to be included in the 
Alternative Management Plan has not been included, is not accurate, or 
does not support the need for deviation from the Public Housing 
Requirements.
    (iv) HUD has evidence that the proposed Alternative Management Plan 
is not in compliance with other federal requirements, including civil 
rights laws.
    (4) HUD reevaluation and reapproval. The PHA, on behalf of the 
Owner Entity, must provide to HUD, for HUD approval, an annual update 
on the implementation of the Alternative Management Plan. The update 
must provide the status of the project and whether the circumstances 
originally triggering the need for the conditions contained in the 
Alternative Management Plan remain valid and appropriate. Any proposed 
changes in the Alternative Management Plan should also be identified. 
Once the annual update of the Alternative Management Plan is properly 
submitted, the existing Alternative Management Plan shall remain in 
effect until such time as HUD takes additional action to approve or 
disapprove the annual update.


Sec.  905.606  Development proposal.

    (a) Development proposal. Prior to developing public housing, 
either through new construction or through acquisition, with or without 
rehabilitation, a PHA must submit a development proposal to HUD in the 
form prescribed by HUD, which will allow HUD to assess the viability 
and financial feasibility of the proposed development. A development 
proposal must be submitted for all types of public housing development, 
including mixed-finance. Failure to submit and obtain HUD approval of a 
development proposal may result in the public housing funds used in 
conjunction with the project being deemed ineligible expenses. In 
determining the amount of information to be submitted by the PHA, HUD 
shall consider whether the documentation is required for HUD to carry 
out mandatory statutory, regulatory, or Executive order reviews; the 
quality of the PHA's past performance in implementing development 
projects under this subpart; the PHA's demonstrated administrative 
capability; and other program requirements. The development proposal 
shall include some or all of the following documentation, as deemed 
necessary by HUD.
    (1) Project description. A description of the proposed project, 
including:
    (i) Proposed development method (e.g., mixed-finance, new 
construction, acquisition with or without rehabilitation, turnkey, 
etc.), including the extent to which the PHA will use force account 
labor and use procured contractors. For new construction projects, the 
PHA must meet the program requirements contained in Sec.  905.602. For 
projects involving acquisition of existing properties less than 2 years 
old, the PHA must include an attestation from the PHA and the owner of 
the property that the property was not constructed with the intent that 
it would be sold to the PHA or, if it was constructed with the intent 
that it be sold to the PHA, that it was constructed in compliance with 
all applicable requirements (e.g., Davis Bacon wage rates, 
accessibility, etc.);
    (ii) Type of residents to occupy the units (e.g., family, elderly, 
persons with disabilities, or families that include persons with 
disabilities);
    (iii) Number and type of unit (detached, semidetached, row house, 
walkup, elevator), with bedroom count, broken out by public housing vs. 
nonpublic housing, if applicable;
    (iv) The type and size of nondwelling space, if applicable; and

[[Page 63791]]

    (v) Schematic drawings of the proposed buildings, unit plans, and 
additional information regarding plans and specifications, as needed by 
HUD to review the project.
    (2) Site information. An identification and description of the 
proposed site and neighborhood, a site plan, and a map of the 
neighborhood.
    (3) Participant description. Identification of participating 
parties and a description of the activities to be undertaken by each of 
the participating parties and the PHA; and the legal and business 
relationships between the PHA and each of the participating parties, as 
applicable.
    (4) Development project schedule. A schedule for the development 
project that includes each major stage of development, through and 
including the submission of an Actual Development Cost Certificate to 
HUD.
    (5) Accessibility. A PHA must provide sufficient information for 
HUD to determine that dwelling units and other public housing 
facilities meet accessibility requirements specified at Sec.  905.312 
of this part, including, but not limited to, the number, location, and 
bedroom size distribution of accessible dwelling units (see 24 CFR 8.32 
and 24 CFR part 40).
    (6) Project costs. (i) Budgets. To allow HUD to assess sources of 
funding and projected uses of funds, the PHA shall submit a project 
budget, in the form prescribed by HUD, reflecting the total permanent 
development budget for the project, including all sources and uses of 
funds, including hard and soft costs. The PHA shall also submit a 
budget for the construction period and a construction draw schedule 
showing the timing of construction financing contributions and 
disbursements. In addition, the PHA shall submit an independent 
construction cost estimate or actual construction contract that 
supports the permanent and construction budgets.
    (ii) TDC calculation. The PHA must submit a calculation of the TDC 
and HCC, subject to Sec.  905.314 of this part.
    (iii) Financing. A PHA must submit a detailed description of all 
financing necessary for the implementation of the project, specifying 
the sources and uses. In addition, HUD may require documents related to 
the financing (e.g., loan documents, partnership or operating 
agreement, regulatory and operating agreement, etc.) to be submitted in 
final draft form as part of the development proposal. Upon financial 
closing, HUD may also require final, executed copies of these documents 
to be submitted to HUD for final approval, per Sec.  905.612(b)(2) of 
this part.
    (A) Commitment of funds. Documents submitted pursuant to this 
section must irrevocably commit funds to the project. Irrevocability of 
funds means that binding legal documents--such as loan agreements, 
mortgages, deeds of trust, partnership agreements or operating 
agreements, or similar documents committing funds--have been executed 
by the applicable parties; though disbursement of such funds may be 
subject to meeting progress milestones, the absence of default, and/or 
other conditions generally consistent with similar non-public housing 
transactions. For projects involving revolving loan funds, the 
irrevocability of funds means that funds in an amount identified to HUD 
as the maximum revolving loan have been committed pursuant to legally 
binding documents; though disbursement of such funds may be subject to 
meeting progress milestones, the absence of default, and/or other 
conditions generally consistent with similar affordable housing 
transactions. The PHA must confirm the availability of each party's 
financing, the amount and source of financing committed to the proposal 
by the parties, and the irrevocability of those funds.
    (B) Irrevocability of funds. To ensure the irrevocable nature of 
the committed funds, the PHA shall review the legal documents 
committing such funds to ensure that the progress milestones and 
conditions precedent contained in such contracts are generally 
consistent with similar affordable housing transactions; that the PHA 
and/or its Owner Entity know of no impediments that would prevent the 
project from moving forward consistent with the project milestones and 
conditions precedent; and, after conducting sufficient due diligence, 
that such documents are properly executed by persons or entities 
legally authorized to bind the entity committing such funds.
    (C) Third-party documents. The PHA is not required to ensure the 
availability of funds by enforcing documents to which it is not a 
party.
    (D) Opinion of counsel. As part of the proposal, the PHA may 
certify as to the irrevocability of funds through the submission of an 
opinion of the PHA's counsel attesting that counsel has examined the 
availability of the participating parties' financing, and the amount 
and source of financing committed to the project by the participating 
parties, and has determined that such financing has been irrevocably 
committed, as defined in paragraph (a)(6)(iii)(A) of this section, and 
that such commitments are consistent with the project budget submitted 
under paragraph (a)(6)(i) of this section.
    (7) Operating pro-forma/Operating Fund methodology. To allow HUD to 
assess the financial feasibility of projects, PHAs shall submit a 10-
year operating pro-forma, including all assumptions, to assure that 
operating expenses do not exceed operating income. For mixed-finance 
development, the PHA must describe its methodology for providing and 
distributing operating subsidy to the Owner Entity for the public 
housing units.
    (8) Local Cooperation Agreement. A PHA may elect to exempt all 
public housing units in a mixed-finance project from the payment in 
lieu of taxes provisions under section 6(d) of the Act, 42 U.S.C. 
1437d(d), and from the finding of need and cooperative agreement 
provisions under sections 5(e)(1)(ii) and (e)(2) of the Act, 42 U.S.C. 
1437c(e)(1)(ii) and (e)(2), and instead subject units to local real 
estate taxes, but only if the PHA provides documentation from an 
authorized official of the local jurisdiction that development of the 
units is consistent with the jurisdiction's comprehensive housing 
affordability strategy. If the PHA does not elect this exemption, the 
Cooperation Agreement as provided in Sec.  905.602(a) is required and 
must be submitted.
    (9) Environmental requirements. The PHA must provide an approved 
Request for Release of Funds and environmental certification, submitted 
in accordance with 24 CFR part 58, or approval in accordance with 24 
CFR part 50. HUD will not approve a development proposal without the 
appropriate environmental approval.
    (10) Market analysis. For a mixed-finance development that includes 
nonpublic housing units, the PHA must include an analysis of the 
projected market for the proposed project.
    (11) Program income and fees. The PHA must provide information 
identifying fees to be paid to the PHA, the PHA's partner(s), the Owner 
Entity, and/or other participating parties identified by HUD and on the 
receipt and use of program income.
    (b) Additional HUD-requested information. PHAs are required to 
provide any additional information that HUD may need to assess the 
development proposal.


Sec.  905.608  Site acquisition proposal.

    (a) Submission. When a PHA determines that it is necessary to 
acquire vacant land for development of public housing through new

[[Page 63792]]

construction, using public housing funds, prior to submission and 
approval of a development proposal under Sec.  905.606 of this part, 
the PHA must submit an acquisition proposal to HUD for review and 
approval prior to acquisition. The acquisition proposal shall include 
the following:
    (b) Justification. A justification for acquiring property prior to 
development proposal submission and approval.
    (c) Description. A description of the property (i.e., the proposed 
site and/or project) to be acquired.
    (d) Project description; site and neighborhood standards. An 
identification and description of the proposed project, site plan, and 
neighborhood, together with information sufficient to enable HUD to 
determine that the proposed site meets the site and neighborhood 
standards at Sec.  905.602(d) of this part.
    (e) Zoning. Documentation that the proposed project is permitted by 
current zoning ordinances or regulations, or evidence to indicate that 
needed rezoning is likely and will not delay the project.
    (f) Appraisal. Documentation attesting that an appraisal of the 
proposed property by an independent, state certified appraiser has been 
conducted and that the acquisition is in compliance with Sec.  
905.308(b)(9) of this part. The purchase price of the site/property may 
not exceed the appraised value without HUD approval.
    (g) Schedule. A schedule of the activities to be carried out by the 
PHA.
    (h) Environmental assessment. An environmental review or request 
for HUD to perform the environmental review pursuant to Sec.  
905.308(b)(2) of this part.


Sec.  905.610  Technical processing.

    (a) Review. HUD shall review all development proposals and site 
acquisition proposals for compliance with the statutory, Executive 
order, and regulatory requirements applicable to the development of 
public housing and the project. HUD's review will evaluate whether the 
proposed sources and uses of funds are eligible and reasonable, and 
whether the financing and other documentation establish to HUD's 
satisfaction that the development is financially viable and structured 
so as to adequately protect the federal investment of funds in the 
development. For this purpose, HUD will consider the PHA's proposed 
methodology for allocating operating subsidies on behalf of the public 
housing units, the projected revenue to be generated by any nonpublic 
housing units in a mixed-finance development, and the 10-year operating 
pro forma and other information contained in the development proposal.
    (b) Subsidy layering analysis. After the PHA submits the 
documentation required under paragraph (a) of this section, HUD or its 
designee (e.g., the State Housing Finance Agency) shall carry out a 
subsidy layering analysis, pursuant to section 102(d) of the Department 
of Housing and Urban Development Reform Act of 1989 (42 U.S.C. 3545) 
(see 24 CFR part 4), to determine that the amount of assistance being 
provided for the development is not more than necessary to make the 
assisted activity feasible after taking into account the other 
governmental assistance.
    (c) Safe harbor standards. For mixed-finance projects, in order to 
expedite the mixed-finance review process and control costs, HUD may 
make available safe harbor and maximum fee ranges for a number of 
costs. If a project is at or below a safe harbor standard, no further 
review will be required by HUD. If a project is above a safe harbor 
standard, additional review by HUD will be necessary. In order to 
approve terms above the safe harbor, the PHA must demonstrate to HUD in 
writing that the negotiated terms are appropriate for the level of risk 
involved in the project, the scope of work, any specific circumstances 
of the development, and the local or national market for the services 
provided.
    (d) Approval. If HUD determines that a site acquisition proposal or 
a development proposal is approvable, HUD shall notify the PHA in 
writing of its approval. The HUD approval of a development proposal 
will include the appropriate form of ACC for signature. The PHA must 
execute the ACC and return it to HUD for execution. Until HUD approves 
a development proposal, a PHA may only expend public housing funds for 
predevelopment costs, as provided in Sec.  905.612 of this part.
    (e) Amendments to approved development proposals. HUD must approve 
any material change to an approved development proposal. HUD defines 
material change as:
    (1) A change in the number of public housing units;
    (2) A change in the number of bedrooms by an increase/decrease of 
more than 10 percent;
    (3) A change in cost or financing by an increase/decrease of more 
than 10 percent; or
    (4) A change in the site.


Sec.  905.612  Disbursement of Capital Funds--predevelopment costs.

    (a) Predevelopment costs. After a new development project has been 
included in the CFP 5-Year Action Plan that has been approved by the 
PHA Board of Commissioners and HUD, a PHA may use funding for 
predevelopment expenses. Predevelopment funds may be expended in 
accordance with the following requirements:
    (1) Predevelopment assistance may be used to pay for materials and 
services related to proposal development and project soft costs. It may 
also be used to pay for costs related to the demolition of units on a 
proposed site. Absent HUD approval, predevelopment assistance may not 
be used to pay for site work, installation of infrastructure, 
construction, or other hard costs related to a development.
    (2) For non-mixed-finance projects, predevelopment funding up to 5 
percent of the total amount of the public housing funds committed to a 
project does not require HUD approval. HUD shall determine on a case-
by-case basis that an amount greater than 5 percent may be drawn down 
by a PHA to pay for necessary and reasonable predevelopment costs, 
based upon a consideration of the nature and scope of activities 
proposed to be carried out by the PHA. Before a request for 
predevelopment assistance in excess of 5 percent may be approved, the 
PHA must provide to HUD information and documentation specified in 
Sec. Sec.  905.606 and 905.608 of this part, as HUD deems appropriate.
    (3) For mixed-finance projects, all funding for predevelopment 
costs must be reviewed and approved by HUD prior to expenditure.
    (4) The requirements in paragraph (b) of this section to disburse 
funds for mixed-financed projects in an approved ratio to other public 
and private funding do not apply to disbursement of predevelopment 
funds.
    (b) Standard drawdown requirements. (1) General. If HUD determines 
that the proposed development is approvable, it may execute with the 
PHA the applicable ACC Amendment to provide funds for the purposes and 
in the amounts approved by HUD. Upon approval of the development 
proposal and all necessary documentation evidencing and implementing 
the development plan, the PHA may disburse amounts as are necessary and 
consistent with the approved development proposal without further HUD 
approval, unless HUD determines that such approval is necessary. Once 
HUD approves the site acquisition proposal, the PHA may request funds

[[Page 63793]]

for acquisition activities. Each Capital Fund disbursement from HUD is 
deemed to be an attestation of compliance by the PHA with the 
requirements of this part, as prescribed in Sec.  905.106 of this part. 
If HUD determines that the PHA is in noncompliance with any provision 
of this part, the PHA may be subject to the sanctions in Sec.  905.800, 
subpart H, of this part.
    (2) Mixed-finance projects. For mixed-finance projects, prior to 
PHA disbursement of public housing funds, except predevelopment funds 
identified in paragraph (a) of this section, HUD may require a PHA to 
submit to HUD, for review and approval, copies of final, fully 
executed, and, where appropriate, recorded documents, submitted as part 
of the development proposal process. Upon completion of the project, 
the ratio of public housing funds to non-public housing funds for the 
overall project must remain as reflected in the executed documents. The 
ratio does not apply during the construction period.

Subpart G--Other Security Interests


Sec.  905.700  Other security interests.

    (a) The PHA may not pledge, mortgage, enter into a transaction that 
provides recourse to public housing assets, or otherwise grant a 
security interest in any public housing project, portion thereof, or 
other property of the PHA without the written approval of HUD.
    (b) The PHA shall submit the request in the form and manner 
prescribed by HUD.
    (c) HUD shall consider:
    (1) The ability of the PHA to complete the financing, the 
improvements, and repay the financing;
    (2) The reasonableness of the provisions in the proposal; or
    (3) Any other factors HUD deems appropriate.

Subpart H--Compliance, HUD Review, Penalties, and Sanctions


Sec.  905.800  Compliance.

    As provided in Sec.  905.106 of this part, PHAs or other owner/
management entities and their partners are required to comply with all 
applicable provisions of this part. Execution of the CF ACC Amendment 
received from the PHA, submissions required by this part, and 
disbursement of Capital Fund grants from HUD are individually and 
collectively deemed to be the PHA's certification that it is in 
compliance with the provisions of this part and all other Public 
Housing Program Requirements. Noncompliance with any provision of this 
part or other applicable requirements may subject the PHA and/or its 
partners to sanctions contained in Sec.  905.804 of this part.


Sec.  905.802  HUD review of PHA performance.

    (a) HUD determination. HUD shall review the PHA's performance in 
completing work in accordance with this part. HUD may make such other 
reviews when and as it determines necessary. When conducting such a 
review, HUD shall, at minimum, make the following determinations:
    (1) HUD shall determine whether the PHA has carried out its 
activities under this part in a timely manner and in accordance with 
its CFP 5-Year Action Plan and other applicable requirements.
    (2) HUD shall determine whether the PHA has a continuing capacity 
to carry out its Capital Fund activities in a timely manner.
    (3) HUD shall determine whether the PHA has accurately reported its 
obligation and expenditures in a timely manner.
    (4) HUD shall determine whether the PHA has accurately reported 
required building and unit data for the calculation of the formula.
    (5) HUD shall determine whether the PHA has obtained approval for 
any CFFP or OFFP proposal and any PHA development proposal.
    (b) [Reserved]


Sec.  905.804  Sanctions.

    (a) If at any time, HUD finds that a PHA has failed to comply 
substantially with any provision this part, HUD may impose one or a 
combination of sanctions, as it determines is necessary. Sanctions 
associated with failure to obligate or expend in a timely manner are 
specified at Sec.  905.306 of this part. Other possible sanctions that 
HUD may impose for noncompliance by the PHA include, but are not 
limited to, the following:
    (1) Issue a corrective action order, at any time, by notifying the 
PHA of the specific program requirements that the PHA has violated, and 
specifying that any of the corrective actions listed in this section 
must be taken. Any corrective action ordered by HUD shall become a 
condition of the CF ACC Amendment.
    (2) Require reimbursement from non-HUD sources.
    (3) Limit, withhold, reduce, or terminate Capital Fund or Operating 
Fund assistance.
    (4) Issue a Limited Denial of Participation or Debar responsible 
PHA officials, pursuant to 2 CFR parts 180 and 2424.
    (5) Withhold assistance to the PHA under section 8 of the Act, 42 
U.S.C. 1437f.
    (6) Declare a breach of the CF ACC with respect to some or all of 
the PHA's functions.
    (7) Take any other available corrective action or sanction as HUD 
deems necessary.
    (b) Right to appeal. Before taking any action described in 
paragraph (a) of this section, HUD shall notify the PHA of its finding 
and proposed action and provide to the PHA an opportunity, within a 
prescribed period of time, to present any arguments or additional facts 
and data concerning the finding and proposed action to HUD's Assistant 
Secretary for Public and Indian Housing.

PART 941--[REMOVED]

0
7. Under the authority of 42 U.S.C. 3535(d), remove part 941, 
consisting of Sec. Sec.  941.101-941.616.

PART 968--[REMOVED]

0
8. Under the authority of 42 U.S.C. 3535(d), remove part 968, 
consisting of Sec. Sec.  968.101-968.435.

PART 969--[REMOVED]

0
9. Under the authority of 42 U.S.C. 3535(d), remove part 969, 
consisting of Sec. Sec.  969.101-969.107.

    Dated: September 18, 2013.
Sandra B. Henriquez,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 2013-23230 Filed 10-23-13; 8:45 am]
BILLING CODE 4210-67-P