September 17, 2007

Rules Docket Clerk

Office of the General Counsel

Department of Housing and Urban Development

451 South 7^th^ Street, SW

Room 10276

Washington DC 20410-0001

Dear Sirs:

**RE: Docket Number FR-4843-P-01**

**Use of Public Housing Capital and Operating Funds for Financing
Activities**

On July 18, 2007 the Department of Housing and Urban Development
published a proposed rule that would make changes in 24 CFR, Parts 905
and 990, to allow public housing authorities to use proceeds under
either the Capital Fund or Operating Fund programs for financing
activities. Agency activities that could be financed by pledging future
proceeds include the payments of debt service and customary financing
costs associated with the modernization and development of public
housing, as well as, public housing in mixed-finance development. Thank
you for providing this opportunity to comment on this proposed rule.

**Executive Summary**

While I greatly appreciate HUD's attempt at increasing the ability of
housing authorities to finance both new development activities and
redevelopment efforts, I believe it is a hollow effort as long as the
Operation Fund and Capital Fund are so severely under funded. How can we
expect housing authorities to pay for debt service when they are grossly
under funded according to figures contained in HUD's own reports
(Harvard and ABT)? It is particularly difficult for me to picture a
housing authority using its meager operating subsidy for debt service.

A second theme permeates the proposed rule -- PHAs are barely competent
children that need to be protected by Mother HUD. Let them mature. Give
them the ability to act on their own and then hold them accountable for
their actions. The historic paternalistic attitude HUD exudes is based
on the fact that HUD was always the financial source for bailing housing
authorities out. This is no longer the case and therefore HUD can relax
its oversight due to less risk to HUD itself. Let's simplify life, not
complicate it!

Finally, given HUD's support for PHAs engaging in private financing, it
is disheartening to look at the trend of both capital and operating
appropriations (both the Administration's proposal and the Congress'
final bill). Private lenders will not lend money in an uncertain arena.
As appropriations decrease, debt service --- while retaining appropriate
service levels to the residents --- become more problematic. **DECLINING
APPROPRIATIONS WILL KILL THESE PROGRAMS MORE QUICKLY THAN ANYTHING.**

**Overall Comments**

HUD says it will use PIC to determine compliance with Section 9(g)(3) of
the 1937 Act. I am afraid to rely on PIC data. It is still too deficient
and not reliable. A lot of time and effort has been invested in PIC, but
so far it is wasted.

The proposed rule limits loans to high performing and standard
performers and non-troubled on the financial PASS indicator. Why? Under
proper management, these agencies may need this tool the most.

The proposed rule says the "PHA must also provide independent reviews
satisfactory to HUD demonstrating the PHA\'s management capacity, the
reasonableness of the terms and conditions of the financing, and overall
feasibility of the venture." What is "satisfactory" to HUD? Can this be
clarified in the final rule? Personally, I think this phrase should be
removed.

Why can HUD make direct payments to creditors out of CFP, but not
operating subsidy? This should be correctable.

The proposed rule requires PHAs to use project-based accounting and
requires PHAs to submit audits on a project level in order to obtain
OFFP financing. What will this do to costs? Why are project level audits
required? While I can understand the PBA requirement, I suggest HUD
delete the project level audit requirement on the basis of practicality.

**Capital Fund Financing**

905.705(g) requires a physical needs assessment. How current must it be?
Can one prepared in 2007 for a financing at that time be reused in 2010
for another financing? The section goes on to state, "Based on the
physical needs assessment, the PHA must demonstrate its ability to
maintain its entire public housing portfolio in accordance with the
physical conditions standards prescribed by HUD." How is this possible
in light of HUD's acknowledgement that there is a \$22 billion backlog
of need? This needs to be modified, if not eliminated.

905.705(h)(4) precludes the use of financing on the Central Office Cost
Center and states "other than predevelopment costs, proceeds may not be
used to reimburse costs already incurred." I think both of these
prohibitions should be deleted from the final regulation. For reasons
amply discussed, I think CFP money statutorily should be made available
to the COCC. I think Congress will soon agree with this statement. HUD
should not regulate to deny what the statute grants. What are "costs
already incurred" that are not predevelopment costs? This phrase should
be eliminated.

905.705(j) requires all loans to be fully amortizing. This is important
and needs to be retained. However, this section goes on to state, "the
financing documents shall provide that no acceleration is permitted."
Will the marketplace accept this prohibition? It seems too broad to me.

905.705(l) requires PHAs to develop a prescribed plan concerning
construction management and financing controls. Is this required of
other HUD assisted properties? If not, why should it be required of
PHAs? Remember, if the deal sours, it is the PHA that suffers, not HUD
as in the old days.

905.705(p) requires PHAs to "submit a performance and evaluation report
on a quarterly basis within 30 days of the end of each quarter, as well
as annually in the PHA plan, until a Cost Certification has been
accepted by HUD." Why is this necessary? It's just another report when
HUD already can see progress from existing normal reports.

Section 905.715 of the proposed rule appropriately requires the PHA to
submit certain documents to HUD for review and approval. The problem is
that HUD moves much more slowly than does the commercial world in which
HUD is encouraging PHAs to operate. Therefore, I strongly urge a
requirement for a 30-day turnaround by HUD be inserted in the final
regulation or the submission is automatically deemed approved. Also,
there should be a 10 day required turnaround for HUD on determining the
completeness of submission packages.

**Operating Fund Financing**

As previously stated, this is a moot point as long as the operating
subsidy appropriation is prorated as extremely as it is today for
everyone except for the rare massive gainer under the new Harvard Cost
Study funding system. Accepting this FACT, here are some specific
suggestions.

Section 990.400(b) states: "subject to HUD approval, PHAs may pledge
operating cash flow from a project or excess cash from a project that
exceeds 3 months of operating expenses." I do not believe 3 months is
enough given the constant threat to operating appropriations, and
suggest this be changed to 6 months.

Section 990.405(a)(3) states: "the Capital Fund must be used first
before any financing from the Operating Fund." This is appropriate and
should be retained.

I believe no operating subsidy loans should be approved when PHAs are
operating with prorated operating subsidy. This is too dangerous. Also,
it may demonstrate to some that you can't use private money to
substitute for morally obligated public funds. They should only
supplement.

If loan payments are paid first as it is with CFFP, it could leave a PHA
with the inability to operate a property. Please clarify in the final
rule how this would work mechanically speaking.

Section 990.405(d) uses the phrase several times "except as otherwise
provided in the 1937 Act." What exceptions does this refer to?

Section 990.405(i)(4) says, "financing proceeds under this part may not
be used for administration or central office cost center costs (except
for mixed-finance projects), management improvements, or non-viable
projects, such as those subject to required conversion." This alone will
kill the program, especially the prohibition on using the proceeds to
administer them. I suggest you modify this to allow payment of
administrative expenses.

Section 990.405(j) states, "To be approved for financing activities
under the Operating Fund program, the PHA must demonstrate that the
project has sufficient resources to meet the financing obligations.
Generally, the project being financed must demonstrate debt service
coverage of 3.0. Additionally, each project must set aside, in a
restricted account, 12 months of debt service payments." This debt
coverage ratio will singularly kill the program. It is something that I
do not think any PHA can achieve. I am told that today's market
typically a debt coverage ratio of 1.05 to 1.25, no where near 3.0. THIS
IS WILD!

Section 990.405(l) restricts the term of all loans to 10 years and
disallows acceleration clauses. Why not allow the market to determine
the term of the loan and I question, once again, if the acceleration
clause restriction is acceptable to the marketplace, These should be
changed.

The reporting requirements mentioned above under the CFFP portion of the
proposed rule also apply to Section 990.405(r).

Finally, the HUD timeframes suggested above for the CFFP portion of the
proposed rule should be carried over to the operating fund portion of
the rule.

Thank you very much for considering these suggestions. I look forward to
seeing the final rule.

Sincerely yours,

Joseph G. Schiff