6511.02 REV-1

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CHAPTER 2. POLICIES GOVERNING DIVERSE CLOSEOUT TOPICS

This chapter describes several diverse topics relating to UDAG

Closeouts. Briefly, the chapter addresses the distinction

between UDAG program income and miscellaneous revenues; the

eligible uses of UDAG loan repayments and other payment funds;

the expanded role of HUD staff in the period between signing

the Closeout Agreement and issuing the Certificate of Completion;

and the provision of technical assistance by HUD staff.

2-1 PROGRAM INCOME AND MISCELLANEOUS REVENUES. This section sets forth

policies regarding the distinction between program income and

miscellaneous revenue funds received by the Recipient. A description

of each fund category and the differences between these categories

follow below.

A. Program Income. Program income consists of UDAG loan repayments,

as well as other payments and revenues received by the Recipient

either before 1) completion of UDAG-funded Recipient activities

or 2) execution of the Closeout Agreement. The key factor is the

year in which preliminary approval of the project occurred i.e.,

whether the project was funded 1) before or 2) during FY 1989.

The list of those projects funded during FY 1989 is included as

Appendix 7 of this Handbook.

1\. Projects Funded Before FY 1989. Any UDAG loan repayments or

other payments or revenues received and expended by the

Recipient before the completion of UDAG-funded Recipient

activities are classified as program income.

2\. Projects Funded During FY 1989. Regulatory revisions which

occurred in 1988 established a different time period for the

classification of loan repayments and other payments and

revenues received by the Recipient as program income.

Specifically, repayments or other payments to the Recipient

which are received and expended before the execution of a

Closeout Agreement are deemed program income.

In the early years of the UDAG program, the Grant Agreement

Rider to Sections 2.04, 9.01, 9.02 and 9.03 required any

program income funds generated to be escrowed until completion

of UDAG-funded Recipient activities. This requirement provided

a mechanism by which Line of Credit (previously Letter of

Credit) funds could be drawn down for eligible project activities

without first using the program income funds held in the escrow

account.

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2-1 7/91

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6511.02 REV-1

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Unlike program income stipulations under the CDBG program, UDAG

program income funds are not required to be disbursed before Line

of credit advances when the escrow provision set forth in the

Grant Agreement is in place.

Part 570 Applicability. Regardless of the year in which the

project received preliminary approval, if the Recipient expends

the escrowed funds when they are characterized as program income,

it may fund any activity which is eligible under Title I of the

Housing and Community Development Act of 1974, as amended. In

addition, these program income funds must be spent in accordance

with Part 570 of Title 24 Code of Federal Regulations.

The Part 570 requirements of Title 24 CFR include general

provisions, eligibility, grant administration and recordkeeping

procedures, and other program requirements such as labor and

environmental standards, relocation, displacement and acquisition

provisions, flood insurance, etc. These requirements also

encompass the criteria for meeting the national objectives set

forth in Part 570.208 of the CDBG regulations.

In short, the use of program income funds, since those funds are

subject to Part 570 requirements, is considerably more restrictive

than the use of miscellaneous revenues.

B. Convertibility of Program Income to Miscellaneous Revenues.

This section highlights a fundamental policy clarification with

respect to the different points at which program income funds

convert to miscellaneous revenues. The classification of these

funds changes at two different points, depending on whether the

project which generates these repayments was funded 1) before

FY 1989 or 2) during FY 1989.

1\. Projects Funded Before FY 1989. Any program income funds

which are a) received by the Recipient before completion of

UDAG-funded Recipient activities, b) held in an escrow

account, and c) not spent during the time period preceding the

completion of UDAG-funded Recipient activities do, in fact,

convert from program income to miscellaneous revenues once

completion of UDAG-funded Recipient activities has occurred.

The funds convert to miscellaneous revenues regardless of

whether a Closeout Agreement has been executed.

2\. Projects Funded During FY 1989. With the implementation

of the August 1988 regulations, repayment and other payment

funds remain program income until the Closeout Agreement is

executed. It is not until after the execution of the

Closeout Agreement that program income converts to

miscellaneous revenues for these projects.

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7/91 2-2

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6511.02 REV-1

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The revised Rider to Sections 2.04, 9.01, 9.02 and 9.03

included in Exhibit A to the Grant Agreements for these

projects reflects the different timing for the

convertibility of these funds.

C. Miscellaneous Revenues. Miscellaneous revenues are UDAG loan

repayments and other payments and revenues which are received

by the Recipient either 1) after completion of UDAG-funded

Recipient activities, for those projects funded before FY 1989

or 2) after execution of the Closeout Agreement, for those

projects approved during FY 1989.

1\. Projects Funded Before FY 1989. Prior to revisions introduced

by the August 29, 1988 UDAG regulations, for those projects

which were funded before FY 1989 and which are governed by the

provisions of the original Rider to Sections 2.04, 9.01, 9.02

and 9.03 in Exhibit A of the Grant Agreement, loan repayments

and other payments in the Recipient\'s escrow account \"convert\"

from program income to miscellaneous revenues at the point

when UDAG-funded Recipient activities are completed. This

holds true even if the Closeout Agreement is not executed

until significantly later.

Field Office staff should advise Recipients to note in their

records the point in time when UDAG-funded Recipient

Activities were completed.

2\. Projects Funded During FY 1989. With the implementation

of the August 1988 regulations, repayment and other payment

funds remain program income until the Closeout Agreement is

executed. It is not until after the execution of the Closeout

Agreement that program income converts to miscellaneous

revenues.

This change was reflected in a revision to the Grant

Agreement\'s Rider to Sections 2.04, 9.01, 9.02 and 9.03

included in the Grant Agreements for those projects funded

after the August 1988 regulations were published.

It is important to note, however, that while

miscellaneous revenue funds are not governed

by the Part 570 requirements which pertain to

program income, and which are discussed on

page 2-2 of this Handbook, the Recipient must

comply with the eligibility provisions of Part

570, if it uses miscellaneous revenues to fund

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2-3 7/91

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6511.02 REV-1

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activities which are ineligible for UDAG funding

but can otherwise be determined eligible under

24 CFR 570.203 or 570.204 of the CDBG regulations.

The charts at the end of this chapter describe such

activities.

2-2 Eligible Uses of Miscellaneous Revenues. The following section

discusses eligible uses of repayments and other payments received

by the Recipient after convertibility. These funds are considered

miscellaneous revenues.

A. Types of Eligible Uses. Activities eligible under Title I

of the 1974 Housing and Community Development Act are found

at Part 570 Subpart C of the CDBG regulations and Part 570

Subpart G of the UDAG regulations. Greater flexibility to

undertake certain other activities is also provided at Section

570.455(a) of the UDAG regulations, wherein UDAG funds are

permitted to be spent\"\...for any eligible activity specified

in Subpart C which supports economic recovery\" (underscoring

added).

The coupling of Subparts C and G of Part 570 results in a

broad array of development projects which the Recipient may

undertake with repayment and other funds classified as

miscellaneous revenues, particularly if the project can be

deemed to support economic recovery. Eligible uses, therefore,

can include new housing construction activities and working

capital and inventory financing, for example. New housing

construction is generally ineligible under CDBG rules, but

is eligible pursuant to UDAG regulations, while working

capital and inventory financing, which are both ineligible

uses of UDAG funds, can be determined eligible under either

Section 570.203 or Section 570.204 of the CDBG regulations.

The above policy regarding eligible activities is applicable

as well to the revised Rider provisions concerning

miscellaneous revenues received by the Recipient from projects

funded during FY 1989. Flexibility is preserved because the

Rider permits miscellaneous revenues to be spent on economic

development activities eligible under either Section 105(a)

of the 1974 Act or the UDAG program.

The charts beginning on page 2-8 of this Handbook illustrate

the types of activities for which the Recipient may spend

miscellaneous revenues. The lists are not all inclusive; see

the CDBG and UDAG regulations for more detailed provisions.

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7/91 2-4

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6511.02 REV-1

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B. Impact of New Legislation on Eligible Uses. On November 28,

1990, the Cranston-Gonzalez National Affordable Housing Act was

passed, which has impacts regarding Section 105(a) of Title I

of the 1974 HCD Act. Specifically, this legislation amended

Section 105(a)(17) of the HCD Act, which sets forth several

criteria in order to determine that the provision of CDBG funds

to assist private, for-profit entities in undertaking economic

development projects is an eligible activity.

The implication of this legislative change for miscellaneous

revenue funds generated from FY 1989 projects is that, if the

Recipient chooses to spend these miscellaneous revenues on

activities eligible under Section 105(a) of the HCD Act, and not

under the UDAG program, as the revised Rider language permits,

the project must meet one of the objectives noted in (A) through

\(F\) of Section 105(a)(17) to make the activity an eligible

use of miscellaneous revenue funds.

Furthermore, since any subsequent amendments to the

Cranston-Gonzalez Act or the passage of other legislation may

also modify Section 105(a) of the HCD Act, Recipients must be

aware of these prospective impacts and comply with all applicable

eligibility requirements of Section 105(a) which are in effect as

of the date of execution of the Closeout Agreement for each of

the 85 projects funded during FY 1989.

C. Title I \"Identity\" Regarding Miscellaneous Revenues. Compliance

with the appropriate Title I eligibility requirements governs

only the initial use of miscellaneous revenues. \"Reuse\" of

loan funds or expenditures through other recycling mechanisms

is not subject to the provisions of Title I eligibility which

are imposed on the \"first\" use of miscellaneous revenues.

D. Timely Reuse of Miscellaneous Revenues. All Closeout Agreements

executed after October 1, 1990 must include specific requirements

concerning the timely use of miscellaneous revenues. Unless

otherwise provided for by the Recipient in a detailed statement

submitted to HUD, which is included as part of the Annual Post

Grant Closeout Report, these specific requirements should

describe how and when the miscellaneous revenue funds are to

be used.

The provision instructing the Recipient regarding the timely

use of miscellaneous revenues, which must be incorporated

verbatim in the Closeout Agreement, is as follows;

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2-5 7/91

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6511.02 REV-1

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HUD requires you to use, and not accumulate,

miscellaneous revenues generated from this

project for eligible Title I activities in a

timely fashion. However, in the event that

you have a specific use for which you are

reserving or setting aside some or all of

your miscellaneous revenues, provide HUD with

a detailed description of how and when you

plan to use the funds.

2-3 Expanded Role of HUD Between Closeout Agreement and Certificate of

Completion.

A. Reservation of HUD Approval Authority. HUD Headquarters and

Field staff have additional post-closeout monitoring

responsibilities for those projects which are closed out after

October 1, 1990. Accordingly, commencing with those projects

which are closed out during Fiscal Year 1991, HUD must reserve

the right to approve certain closed-out project elements as part

of its ongoing project monitoring and provision of technical

assistance to Recipients. This is more fully discussed in

Chapter 3 paragraph 3-3 of this Handbook.

B. Approval Reservation Review. In the event any of the

situations, described fully in Chapter 3 of this Handbook,

arises after being reserved in the Closeout Agreement, the

Recipient must obtain HUD\'s approval regarding the contemplated

change(s).

After all prerequisites to closeout and all requirements set

forth in the Closeout Agreement have been accomplished, a

Certificate of Completion will be issued which will terminate

any further Federal interest or involvement in the project other

than the annual reporting requirements which will be set forth

in the Closeout Agreement.

2-4 Technical Assistance. HUD staff should be available to provide

ongoing technical assistance to Recipients, Developers and other

Participating Parties, as needed. The provision of technical

assistance is particularly important in light of the enlarged HUD

role and increased responsibilities in the post-closeout stages of a

project.

A. Outstanding Performance Obligations. HUD staff should

continue to provide advice and guidance to Recipients after

execution of the Closeout Agreement to facilitate the

realization of any pending performance requirements of the

project. These requirements typically include job generation,

collection

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7/91 2-6

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6511.02 REV-1

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of tax revenues and payments in lieu of taxes, an audit pursuant

to OMB Circular A-128, and any Pocket of Poverty requirements,

if applicable.

B. Reservation of Approval for Changes to Closed-Out Project

Elements. In addition to helping Recipients to accomplish the

obligations noted above, HUD has a more active technical

assistance and monitoring role in advising Recipients on

prospective changes to those project elements which have been

reserved in the Closeout Agreement. Both Field and Headquarters

staff will be important participants in the review and approval

process regarding selected revisions to the terms and conditions

of those projects closed out on or after October 1, 1990.

C. Timely Use of UDAG Repayments and Other Payments. HUD

Headquarters and Field Office staff have expanded technical

assistance responsibilities in advising Recipients on the

collection, management, and timely reuse of UDAG repayments and

other payments.

It may be helpful for HUD staff to ensure that Recipients,

when designing their systems and accounts, are mindful of the

convertibility of program income to miscellaneous revenues,

and the different points at which the convertibility occurs.

It is therefore advisable for Recipients to establish separate

tracking systems for each category of repayment or other

payments received.

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7/91

2-7

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6511.02 REV-1

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CHART 1

USES OF MISCELLANEOUS REVENUES

FOR UDAG GRANTS WITH PRELIMINARY

APPROVAL BEFORE FY 1989\*\*

Eligible Activities Under Title I

of the Housing and Community Development

Act of 1974, as Amended

SECTION 105 OF THE ACT

CDBG Eligible Activities

1\. Basic Activities 2. Eligible rehabilitation and

preservation activities

\- Acquisition

\- Privately owned buildings and

\- Disposition improvements for residential

purposes

\- Public facilities and

improvements - Low income public housing or

other publicly-owned residential

\- Clearance and demolition buildings

activities

\- Publicly-or-privately-owned

\- Public Services commercial or industrial buildings

limited to exterior and code

\- Code Enforcement violations

\- Payment of non-Federal share 3. Special economic development

activities

\- Urban renewal completion

See 24 CFR 570.203 of the

\- Relocation regulations for further

explanation.

\- Loss of rental income 4. Special activities by certain

subrecipients

\- Removal of architectural barriers

See 24 CFR 570.204 of the

\- Privately owned utilities regulations for further

explanation.

\- Interim assistance 5. Planning and environmental design

6\. Program administration

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\*\*The uses listed in this chart are not all inclusive. The chart
should

serve as a guide, but Recipients should be advised to look to the
statute

and regulations in addition to the Chart to determine activities that

could be eligible uses of miscellaneous revenues.

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7/91 2-8

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6511.02 REV-1

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SECTION 119 OF THE ACT

UDAG Eligible Activities

Economic Development activities which aid economic recovery and which
the

Secretary determines to be consistent with the purposes of Section 119

of the Act. Generally, UDAG funds may assist industrial, commercial

and housing projects where there is private investment.

\- Construction/permanent financing - Affixed capital equipment

\- Land acquisition - Parking facilities

\- Infrastructure - Interim expenses including

interest, taxes, insurance

\- Hard costs, including building

construction, rehabilitation, - Professional fees such as

tenant improvements and finishes legal, accounting, A&E,

leasing

UDAG Ineligible Activities

The following activities are ineligible under the UDAG program,

principally because program policy does not permit the use of UDAG funds

for these activities. Therefore, Recipients may not cite the UDAG
statute

and regulations as the basis of an eligibility determination for the

following uses of miscellaneous revenues.

\- Working capital and inventory

\- Reserve fund for operating deficit, debt service or interest reserve

\- Non-capital equipment (i.e., hand tools, office equipment)

\- Rolling stock (i.e., railroad cars or boats not permanently

moored, cars or moveable heavy equipment)

\- Free standing parking facility as the only project activity

\- Educational facilities

\- Gambling facilities, except on Indian reservations

\- Acquisition of existing assets without additional private

development activity

\- Payment of prior debt

\- Research and development activities

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2-9 7/91

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6511.02 REV-1

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CHART 2

USES OF MISCELLANEOUS REVENUES

FOR UDAG GRANTS WITH PRELIMINARY

APPROVAL DURING FY 1989\*\*

Eligible Activities Under Title I

of the Housing and Community Development

Act of 1974, as Amended:

SECTION 105 OF THE ACT

CDBG Eligible Activities

1\. Special economic development activities 2. Special activities by

certain subrecipients

See 24 CFR 570.203 of the regulations

for further explanation. See 24 CFR 570.204 of the

regulations for further

explanation.

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SECTION 119 OF THE ACT

UDAG Eligible Activities

Economic development activities which may be

assisted under the UDAG program.

See Chart #1, under UDAG Eligible

Activities

UDAG Ineligible Activities

The following activities are ineligible under the UDAG program,
principally

because program policy does not permit the use of UDAG funds for these

activities. Therefore, Recipients may not cite the UDAG statute and

regulations as the basis of an eligibility determination for the
following

uses of miscellaneous revenues.

\- Working capital and inventory

\- Reserve fund for operating deficit, debt service or interest

reserve

\- Non-capital equipment (i.e., hand tools, office

equipment)

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7/91 2-10

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6511.02 REV-1

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CHART 2 - Continued

\- Rolling stock (i.e., railroad cars or boats not permanently

moored, cars or moveable heavy equipment)

\- Free standing parking facility as the only project activity

\- Educational facilities

\- Gambling facilities, except on Indian reservations

\- Acquisition of existing assets without additional private

development activity

\- Payment of prior debt

\- Research and development activities

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\*\*The items listed in this chart are not all inclusive. The chart

should serve as a guide, but Recipients should be advised to look

to the statute and regulations in addition to the chart to determine

activities that could be eligible uses of miscellaneous revenues.

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\_

2-11 7/91