`[Federal Register Volume 77, Number 60 (Wednesday, March 28, 2012)]
[Proposed Rules]
[Pages 18723-18731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7316]



[[Page 18723]]

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 891

[Docket No. FR-5167-P-01]
RIN 2502-AI67


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

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would amend HUD's regulations governing the 
Section 202 Supportive Housing for the Elderly Program (Section 202) 
and the Section 811 Supportive Housing for Persons with Disabilities 
Program (Section 811), by streamlining the requirements for mixed-
finance Section 202 and Section 811 developments. This rule would 
streamline the requirements for mixed-finance developments by removing 
restrictions on the portions of developments not funded through capital 
advances, thereby lifting barriers on participation in the development 
of the projects, and eliminating burdensome funding requirements. These 
proposed amendments would attract private capital and the expertise of 
the private developer community to create attractive and affordable 
supportive housing developments for the elderly and for persons with 
disabilities. HUD is also taking this opportunity to improve and bring 
up to date certain regulations governing all Section 202 and Section 
811 developments. These changes will permit broader flexibility in the 
design of Section 202/811 units, extend the duration of the 
availability of capital advance funds, and make a technical correction.
    This proposed rule is the first part of a larger regulatory effort 
to reform the Section 202 and Section 811 programs, which will include 
implementation of the changes made to these programs by the Frank 
Melville Supportive Housing Investment Act of 2010 and the Section 202 
Supportive Housing for the Elderly Act of 2010. A subsequent rule, 
which will focus on the statutory changes, is expected to be published 
later in 2012.

DATES: Comment Due Date: May 29, 2012.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, 451 7th Street SW., Room 10276, Department of Housing and 
Urban Development, Washington, DC 20410-0500. Communications must refer 
to the above docket number and title. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street SW., Room 10276, 
Washington, DC 20410-0001.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule. No Facsimile Comments. Facsimile (FAX) comments are not 
acceptable.

    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number via TTY by calling the Federal Relay Service at 
1-800-877-8339. Copies of all comments submitted are available for 
inspection and downloading at www.regulations.gov.

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

SUPPLEMENTARY INFORMATION:

I. Background

    The Section 202 and Section 811 programs were established to allow 
very low-income elderly persons and persons with disabilities the 
opportunity to live with dignity by providing affordable rental housing 
offering a range of supportive services to meet the needs of these 
populations. By providing capital advance and project rental assistance 
to nonprofit developers seeking to build and maintain supportive 
housing for very low-income elderly persons and persons with 
disabilities, the Section 202 and Section 811 programs have proven to 
be examples of effective partnerships between the Federal Government 
and nongovernmental entities to achieve a common mission.
    The American Homeownership and Economic Opportunity Act of 2000 
(Pub. L. 106-569, 114 Stat. 2944, approved December 27, 2000) (AHEO 
Act) amended the authorizing statutes for the Section 202 program 
(Section 202 of the Housing Act of 1959 (12 U.S.C. 1701q)) and the 
Section 811 program (Section 811 of the Cranston-Gonzalez National 
Affordable Housing Act of 1990 (42 U.S.C. 8013)) to allow for the 
participation of for-profit limited partnerships in the ownership of 
Section 202 and Section 811 supportive housing, which helped facilitate 
the use of low-income housing tax credits and mixed-finance methods to 
infuse private capital into Section 202 and Section 811 developments. 
An interim rule establishing the Section 202/811 mixed-finance program 
and implementing the AHEO Act, was published on December 1, 2003 (68 FR 
67316). HUD followed publication of the interim rule with a final rule, 
published on September 13, 2005 (70 FR 54200), that took into account 
the comments received on the interim rule.
    Current economic conditions have reduced the availability of 
private financing for the development of supportive housing. In order 
to attract needed private capital, HUD has determined that amendments 
to the regulations governing the Section 202 and Section 811 programs 
are needed to further streamline the mixed-finance development process 
for supportive housing for the elderly and persons with disabilities. 
While the existing regulations applicable to mixed-finance developments 
have facilitated the

[[Page 18724]]

creation of approximately 1,017 mixed-finance units, they also, in 
certain circumstances, limit project sponsors from accessing private 
sector capital and expertise. The changes proposed in this rule will 
provide mixed-finance owners with more options, better facilitate the 
use of low-income housing tax credits, and attract other private 
funding. Moreover, the changes will promote the construction of 
supportive housing developments that include additional non-Section 
202/811-supported units for the elderly and persons with disabilities.
    The Section 202 Supportive Housing for the Elderly Act of 2010 
(Pub. L. 111-372) (Section 202 Act of 2010) and the Frank Melville 
Supportive Housing Investment Act of 2010 (Pub. L. 111-374) (Melville 
Act) were both signed into law on January 4, 2011 (collectively, the 
Acts), and amended the authorizing statutes for Section 202 and Section 
811, respectively. While additional regulatory changes will be 
necessary to implement these Acts, HUD is taking this opportunity to 
update the definitions of ``private nonprofit organizations'' to 
conform to the Acts, as these definitions directly impact the mixed-
finance program. The Section 202 Act of 2010 and the Melville Act 
provide a much-needed foundation for practical improvements to the 
Section 202 and Section 811 programs. The regulatory amendments 
proposed in this rule build upon the Acts from the 111th Congress to 
further modernize the operation of Section 202 and Section 811 in the 
mixed-finance context.

II. This Proposed Rule

    This proposed rule would amend both the general section of HUD's 
regulations governing the Section 202 and Section 811 programs that are 
codified in 24 CFR part 891, and the sections in part 891 specifically 
governing the mixed-finance program. This rule would allow broader 
participation by the private development community in the financing of 
Section 202 and Section 811 mixed-finance developments. The proposed 
amendments to the regulations would also remove some of the financial 
restraints on developers in the mixed-finance context by allowing more 
flexibility in the drawdown of capital advance funds and noncapital 
advance funds. In addition, because mixed-finance developments have 
units that are funded via a capital advance by HUD and rental 
assistance through the Section 202 and Section 811 programs as well as 
units that are non-Section 202/811 supported, the changes would permit 
mixed-finance developers to have more flexibility in bringing in 
private capital by eliminating restrictions in regard to the non-
capital advance units.
    In terms of the regulations governing all Section 202 and Section 
811 developments, regardless of the source of the financing, this rule 
would alter the definition sections to improve the clarity of the 
regulations, permit broader flexibility in the design of Section 202/
811 units, extend the duration of the availability of capital advance 
funds, and make a technical correction.
    This rule would also make conforming changes to the definition 
sections contained in part 891 to reflect the amendments to the Section 
202 Act of 2010 and the Melville Act.

Definitions

    1. Private nonprofit organizations. The Section 202 Act of 2010 and 
the Melville Act altered the definition of ``private nonprofit 
organization.'' This rule would amend the regulations found at 
Sec. Sec.  891.205, 891.305, and 891.805 in order to conform to the 
statutory changes. Among other changes, the Section 202 Act of 2010 
gives HUD the authority, in the case of a nonprofit organization 
sponsoring multiple developments, to determine the criteria for 
transferring the responsibilities of a single-entity nonprofit owner of 
an individual development to the governing board of the sponsor that is 
the sponsoring organization of multiple developments. These changes 
will be codified in Sec.  891.205.
    An additional change made by the Section 202 Act of 2010 is that 
the definition will now include for-profit limited partnerships of 
which the sole general partner is a for-profit corporation or a limited 
liability company that is wholly owned and controlled by one or more 
nonprofit organizations. Prior to this amendment, the sole general 
partner could only be a nonprofit organization or a for-profit 
corporation wholly owned and controlled by a single nonprofit 
organization. The extension of the type of for-profit limited 
partnership that may participate in Section 202 developments will be 
codified in Sec.  891.805.
    In the case of Section 811, the Melville Act changes the heading of 
the definition of ``nonprofit organization'' to ``private nonprofit 
organization.'' This change in nomenclature will be codified in Sec.  
891.305. However, the substance of this definition in Sec.  891.305 
will not be changed, as the additional change made by the Melville Act 
to the definition of ``private nonprofit organization'' will be 
codified in Sec.  891.805.
    In addition, the Melville Act deleted the clause ``wholly owned 
and'' and simply requires that a corporation be ``owned and 
controlled'' by a nonprofit organization. However, the Melville Act 
does not extend the definition to include limited liability companies. 
This change will be codified in the definition of ``Private nonprofit 
organization'' in Sec.  891.805.
    2. Instrumentality of a public body. This rule also proposes 
amending the definitions of ``owner'' and ``sponsor'' in Sec.  891.205 
to permit an owner or sponsor of a section 202 development to be an 
``instrumentality of a public body.'' A public body would still be 
prohibited from being an owner or sponsor, as a public body cannot, by 
definition, be considered a private nonprofit organization, but HUD has 
determined that, as long as an entity otherwise meets the criteria of 
ownership or sponsorship, the regulation is too prescriptive. By 
eliminating this restriction, HUD is expanding the number of private 
nonprofit organizations who will be able to participate in the 
development of section 202 projects.
    3. Single-purpose/single-asset. In addition, the definitions of 
``owner'' in Sec. Sec.  891.205, 891.305, and 891.805, as well as the 
definition of ``mixed-finance owner'' will be amended to add the 
qualification that the owner be a single-asset entity. The definition 
currently requires the owner to be a single-purpose entity. HUD 
proposes to replace the term ``single-purpose'' with ``single-asset.'' 
The definitions of ``owner'' and ``mixed-finance owner'' already 
require that an owner's purpose must include the promotion of the 
elderly or persons with disabilities, as appropriate, and a strict 
interpretation of the term ``single-purpose'' limits the flexibility of 
owners, especially in the mixed-finance context. In the past, the terms 
``single-purpose'' and ``single-asset'' have been used interchangeably; 
however, the proposed change in the regulations will more accurately 
reflect the type of ownership required for a Section 202 or Section 811 
development. A single-asset entity will be defined in Sec.  891.105 as 
an entity in which the mortgaged property is the only asset of the 
owner and that has no more than one owner. This definition will apply 
to the definitions of ``owner'' and ``mixed-finance owner'' in 
Sec. Sec.  891.205, 891.305, and 891.805.
    4. Repairs and rehabilitation. HUD proposes to add new definitions 
in Sec.  891.105 in order to provide more targeted definitions based on 
the condition of the building being developed under Section 202 or 
Section 811. While the current regulation groups

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all types of rehabilitation into one category, HUD proposes to provide 
separate definitions for ``repairs, renovations, and improvements'' and 
``substantial rehabilitation.'' ``Substantial rehabilitation'' will be 
defined as improvements to a property that is in a deteriorated or 
substandard condition that endangers the health, safety, or well-being 
of the residents. Substantial rehabilitation does not include cosmetic 
improvements and must meet one of the following criteria:
    a. The cost of repairs, replacements, and improvements exceeds the 
greater of 15 percent of the estimated property replacement cost after 
completion of all repairs, replacements, and improvements, or $6,500 
per unit in repairs, replacements, and improvements to rehabilitate the 
project to a useful life of 55 years, or
    b. Two or more major building components are being substantially 
replaced. Additions are permitted in substantial rehabilitation 
projects, but the costs for the additions of new units (not building 
component additions) are not included in the eligibility test. 
``Repairs, replacements, and improvements'' are basically anything 
other than substantial rehabilitation and may include cosmetic repairs. 
The amount of investment per unit must be below $6,500 per unit. HUD 
recognizes that factors such as the state of the housing market and 
inflation may require an alteration of this amount, and this proposed 
rule provides that the amount may be adjusted by HUD after advance 
notice and the opportunity for public comment.
    Specific solicitation of comment. The minimum investment of $6,500 
is a threshold amount used in almost all if not all of HUD's 
multifamily programs and is an amount familiar to participants in these 
programs. HUD recognizes that this dollar amount and the minimum useful 
life of 55 years have been in place for many years, and seeks public 
comment on whether these thresholds remain a reasonable minimum 
investment amount in today's housing market. Additionally, as provided 
in this rule and cognizant of the rapid changes that can occur in the 
housing market, HUD proposes for the rule to adjust this amount, but 
only after providing advance notice through Federal Register 
publication and the opportunity for comment.

Project Design and Cost Standards/Eligible Uses for Assistance

    1. Requirements applicable to all Section 202 and Section 811 
developments. HUD proposes to make several changes to the regulations 
in Sec.  891.120 governing project design and cost standards applicable 
to all Section 202 and Section 811 developments. These changes are 
intended to bring HUD's regulations up to date, as Sec.  891.120 
contains provisions that were held over from the predecessor direct 
loan program from the 1980s. The first change updates Sec.  891.120(a), 
by providing a reference to the Minimum Property Standards as codified 
in regulation. The current regulation was promulgated before the 
codification of the current Minimum Property Standards in 24 CFR part 
200 subpart S, and this rule proposes to cross-reference such subpart.
    The second change updates Sec.  891.120(c) to reflect the fact that 
many items formerly thought to be ``excess amenities'' are now standard 
requirements in today's housing market. The current regulation requires 
that Section 202 and Section 811 developments be of ``modest design'' 
and prohibits the use of capital advance or project rental assistance 
to pay for the installation and continued operation of atriums, bowling 
alleys, swimming pools, saunas, Jacuzzis, balconies, and decks on 
individual units, and dishwashers, trash compactors, and washers and 
dryers in individual units. HUD will retain the restriction on use of 
HUD funds for atriums, bowling alleys, swimming pools, saunas, and 
jacuzzis, while permitting the use of capital advance and project 
assistance funds for balconies and decks, dishwashers, trash 
compactors, and washers and dryers for individual units. Lifting these 
restrictions not only brings HUD in line with the standards of the 
housing market, since they are no longer seen as ``excessive 
amenities,'' but also recognizes that the quality of life can be 
increased by permitting such items.
    Lastly, HUD proposes to amend Sec.  891.120(d) regarding smoke 
detectors to bring the provision up to current standards, by requiring 
that smoke detectors and alarm devices be installed in accordance with 
standards and criteria acceptable to HUD for the protection of 
occupants in any dwelling or facility bedroom or other primary sleeping 
area.
    2. Mixed-finance developments. Both Sec.  891.813(c) (``Eligible 
uses for assistance provided under this subpart'') and Sec.  891.848 
(``Project design and cost standards'') provide that the restrictions 
contained in Sec. Sec.  891.220 and 891.315 regarding prohibited 
facilities apply to mixed-finance developments. Under current 
regulations, Sec.  891.220 prohibits the presence of facilities for 
infirmaries, nursing stations, or spaces for overnight care in Section 
202 developments. Section 891.315 prohibits the presence of 
infirmaries, nursing stations, spaces for medical treatment or physical 
therapy, or padded rooms, even if paid by sources other than the HUD 
capital advance and project rental assistance contract for Section 811 
developments.
    HUD has determined that these restrictions of Sec.  891.220 prevent 
the development of supportive housing for the elderly when the cost to 
develop and operate these types of facilities is being funded by other 
sources, and that restrictions on prohibited facilities in Section 202 
mixed-finance developments should apply only to the capital advance-
funded portion, and not to the entire development. The removal of these 
restrictions for Section 202 mixed-finance developments assures that 
HUD-financed developments are capable of having medical facilities and 
service spaces that may be necessary for ongoing occupancy of frail 
elderly. Inclusion of these Section 202 facilities will keep these 
projects competitive with those in the private sector, and assure 
continued building occupancy and the financial viability of these 
projects.
    However, HUD recognizes the importance of maintaining the 
restrictions on prohibited facilities for Section 811 developments for 
both capital advance and non-capital advance portions of the project. 
HUD is committed to preventing the isolation of persons with 
disabilities that might occur should medical facilities be contained in 
Section 811 developments.
    In order to provide owners with needed flexibility in the design of 
the non-capital advance portion of the mixed-finance Section 202 
development, HUD proposes amending paragraph (b) of Sec.  891.813, 
which currently applies only to amenities, to make the provisions of 
paragraph (b) of Sec.  891.813 applicable to both amenities and 
``prohibited facilities'' in Section 202 mixed-finance developments. 
This would permit otherwise prohibited Section 202 facilities, provided 
that: (1) The facilities are not financed with funds made available 
under Section 202; (2) the facilities are not maintained and operated 
with funds made available under Section 202; (3) the facilities are 
designed with appropriate safeguards for the residents' health and 
safety; and (4) the assisted residents are not required to use, 
participate in, or pay a fee for the use or maintenance of the 
facilities, although they are permitted to do so voluntarily. Any fee 
charged for the use of the facilities must be reasonable and affordable 
for all residents of the development. The exception on prohibited 
facilities in

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paragraph (b) of Sec.  891.813 would not extend to Section 811 mixed-
finance developments.
    In addition, HUD proposes to amend paragraph (c) of Sec.  891.813 
by removing the references to Section 202 and the prohibited facilities 
provisions found in Sec.  891.220, while maintaining the current 
applicability of Sec.  891.315 to Section 811 mixed-finance 
developments.
    Section 891.848 regarding project design and cost standards would 
be amended to reflect the changes being made to paragraphs (b) and (c) 
of Sec.  891.813 by stating that the provisions regarding prohibited 
facilities contained in Sec.  891.220 do not apply to mixed-finance 
developments, subject to the restrictions of paragraph (b) of Sec.  
891.813. The current statement in Sec.  891.848 regarding the inclusion 
of prohibited facilities in Section 811 mixed-finance developments, as 
set forth in Sec.  891.315, would remain the same. HUD proposes to 
amend Sec.  891.848 further by stating that while mixed-finance 
developments must comply with the project design and cost standards 
contained in Sec.  891.120, the requirements regarding amenities 
specified in paragraph (c) of Sec.  891.120 do not apply, subject to 
the restrictions in paragraph (b) of Sec.  891.813. This would not be a 
substantive change to current regulations. Paragraph (b) of Sec.  
891.813 already states that the restrictions on amenities in paragraph 
(c) of Sec.  891.120 do not apply to mixed-finance developments, 
provided that certain conditions are met, and this proposed rule would 
make Sec. Sec.  891.813(b) and 891.848 consistent.

Prohibited Relationships

    HUD's regulations at 24 CFR 891.130 specify prohibited 
relationships in the provision of capital advances under the Section 
202 and Section 811 programs. In general, officers and board members of 
either the owner or the sponsor of the development are prohibited from 
having any financial interest in a contract with the owner or any firm 
that has a contract with the owner, and which would create a conflict 
of interest. In addition, Sec.  891.130 prohibits an identity of 
interest between the sponsor or owner and any development team member 
or between development team members, for 2 years after closing.
    Management contracts, supportive services contracts, and developer 
or consultant contracts between the owner and sponsor or the sponsor's 
nonprofit affiliate are exempted from the conflict-of-interest 
provisions, provided that no more than two persons salaried by the 
sponsor or management affiliate serve as nonvoting directors on the 
owner's board of directors. In order to provide more flexibility in the 
financing of Section 202 and Section 811 developments, HUD proposes 
amending Sec.  891.130(a)(2) to include an additional provision to the 
conflict-of-interest section that will exempt contracts for the sale of 
land between an owner and the sponsor or the sponsor's nonprofit 
affiliate.
    In addition to broadening the exceptions to the conflict-of-
interest rules, HUD proposes to amend Sec.  891.832, which sets forth 
that mixed-finance projects are subject to the conflict-of-interest and 
identity-of-interest provisions, by stating that the requirements of 
paragraph (b) of Sec.  891.130 regarding identity of interest do not 
apply in the mixed-finance context, while maintaining the applicability 
of the conflict-of-interest provisions in paragraph (a) of Sec.  
891.130. HUD has determined that the current identity-of-interest 
prohibitions limit the involvement of the private development community 
in the Section 202 and Section 811 mixed-finance program.
    To correspond to the proposed amendment to Sec.  891.832, HUD 
proposes removing paragraph (c) of Sec.  891.130, which states that the 
provisions regarding prohibited relationships contained in Sec.  
891.130(a)-(b) apply to mixed-finance developments. Altering paragraph 
(c) of Sec.  891.130 along with Sec.  891.832 would make the 
regulations consistent.

Audit Requirements

    Section 891.160 currently states that nonprofit organizations 
receiving assistance under the Section 202 and Section 811 programs are 
subject to the audit requirements in 24 CFR part 45. In 1996, HUD 
regulations were streamlined and some passages in the CFR, including 24 
CFR part 45, were removed. Part 45 no longer exists, and HUD is 
correcting the citation in Sec.  891.160 to refer to the correct 
portion of the CFR regarding audit requirements (24 CFR 5.107). This is 
a technical correction and will not alter the current audit 
requirements for nonprofit organizations receiving assistance under the 
Section 202 and Section 811 programs.

Duration of Capital Advance

    Section 891.165, governing the duration of the availability of 
capital advance funds, currently limits the duration of the fund 
reservations for the capital advances to 18 months from the date of 
issuance of the fund reservation award with limited exceptions of up to 
24 months, as approved by HUD on a case-by-case basis. HUD proposes to 
extend the duration of availability to 24 months in all cases, with the 
option of extending this period to 36 months, at HUD's discretion. 
Currently, owners often request waivers of this provision, and by 
extending the fund reservation period, HUD will be reducing the burden 
placed on owners who must apply for an extension and support the review 
of the waiver. Rather than spending time on this administrative 
requirement, owners can focus on the projects to ensure that projects 
reach initial closing and start construction within 24 months. The 
intent is to also encourage participation in the mixed-finance program, 
which normally requires additional time to reach initial closing.

Repayment of Capital Advance

    In mixed-finance transactions in which HUD is one of many sources 
of funding, questions have arisen regarding the extent of HUD's 
interest in the supportive housing project. To address these questions, 
this rule provides that HUD's requirements applicable to capital 
advance units are not applicable to non-202/811 supported units in the 
project. Section 891.170 states that the transfer of physical or 
financial assets of a Section 202 or Section 811 development is not 
permitted unless HUD determines that the transfer is part of a 
transaction that will ensure ``the continued operation of the project'' 
for at least 40 years in a manner that will provide low-income housing 
for the elderly or persons with disabilities. This proposed rule will 
change the phrase ``the continued operation of the project'' to ``the 
continued operation of the capital advance units.'' This will have the 
effect of clarifying that HUD's regulatory authority over Section 202 
and Section 811 developments to ensure that the units will provide 
rental housing for very low-income elderly persons or persons with 
disabilities extends only to units funded through capital advances or 
assisted by funds made available under the Section 202 and Section 811 
programs.
    HUD does not require that the non-202/811 supported units in a 
mixed-finance Section 202 or Section 811 development be rented to very 
low-income elderly persons or persons with disabilities. Explicitly 
limiting the scope of HUD's regulatory oversight in mixed-finance 
developments to capital advance and supported units should eliminate 
any uncertainty among other lien holders with respect to the operation 
of non-202/811 supported units.

[[Page 18727]]

Drawdowns

    Section 891.830 describes the drawdown procedures for the capital 
advance and non-capital advance funds. In some instances, this 
regulatory section lacks needed flexibility. HUD has processed several 
waiver requests because the regulation does not include a procedure for 
the release of capital advance financing upon completion of a project. 
The proposed amendment will have the effect of permitting mixed-finance 
developers to use low-income housing tax credits more effectively. 
Following promulgation of a final rule after the notice and comment 
procedure for this proposed rule is completed, HUD will issue further 
processing instructions on the release of capital advance financing 
upon completion of a development as it relates to low-income housing 
tax credits.
    Rather than grant additional regulatory waivers, HUD proposes to 
permit the release of capital advance funds upon completion of the 
project, by eliminating detailed requirements from the drawdown 
regulation. In particular, HUD proposes to amend Sec.  891.830(b) to 
permit non-capital advance funds to be disbursed before the drawdown of 
capital advance funds to increase the developer's flexibility in 
financing the project, and this amendment would allow this flexibility 
to be worked out between the developer and HUD in formulating a 
drawdown schedule. Despite the changes to this section, developers will 
still be prohibited from using capital advance funds for ineligible 
costs, such as debt service on the financing.
    Section 891.830(c)(4) currently prohibits the use of funds for 
paying off bridge or construction financing, or repaying or 
collateralizing bonds. HUD proposes to amend this provision by 
permitting the use of funds for these purposes, provided that the funds 
are used to pay off bridge or construction financing, or repaying or 
collateralizing bonds only for the portion of such financing or bonds 
that was used for capital advance units, permitting broader flexibility 
in a mixed-finance owner's use of financing and bonds. Many fixed 
transactions rely on 4 percent low-income housing tax credits paired 
with tax-exempt bonds. In these transactions, at least 51 percent of 
the qualified cost of construction must be bond-financed. Accordingly, 
the Section 202 funds cannot be used in lieu of the bonds and must 
instead be used as a ``take-out source.''

III. 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 the Executive Order 
(although not an economically significant regulatory action, as 
provided under section 3(f)(1) of the Order).
    As noted earlier in this preamble, the Section 202 Act of 2010 and 
the Melville Act made several changes to the Sections 202 and 811 
programs. The majority of the changes made by these two acts that 
require regulatory change will be implemented through separate 
rulemaking. However, this proposed rule begins the process of amending 
the Supportive Housing Program regulations to expand flexibility for 
owners and sponsors by, for example, broadening the definition of 
private nonprofit organizations, as well as the definition of eligible 
participants to include a broader range of nonprofit organizations.
    Only one change proposed by this rule represents a new requirement 
for program participants. The proposed rule requires owners to provide 
a smoke detector and alarm in every bedroom or primary sleeping area 
that they own. Though this requirement is being added to the program 
regulations, it is already a requirement in most local codes and, 
therefore, does not reflect a significant cost that would result from 
this rulemaking.
    The rule proposes to remove the existing prohibition on funding 
certain amenities and funding Section 202 and Section 811 developments 
that include health-care facilities. The removal of the prohibition on 
certain amenities allows for funding units that contain dishwashers, 
trash compactors, and washers and dryers, as well as units that have 
patios or balconies attached. With respect to health-care facilities, 
the existing regulations have a blanket prohibition against including 
health-care facilities within the developments as a safeguard against 
the institutionalization of the elderly and disabled residents. This 
rule does not propose to require program participants to include these 
amenities or health-care facilities in the developments. Rather, this 
rule proposes only to remove the prohibition for funding units that 
have these amenities or developments that have such facilities. The 
proposed rule does not allow for health-care facilities to be financed 
by HUD funds, and use of the facilities must be voluntary for the 
residents of the projects.
    HUD funds can be used for units that contain or are attached to the 
previously prohibited amenities, but there is no requirement that units 
provide these amenities, and providing these amenities is unlikely to 
increase costs to the program. The amenities are fairly standard in 
today's apartments and will benefit the residents of program units and 
make these units more attractive and capable of attracting and 
retaining tenants. The wider range of allowable amenities is likely to 
also have the benefit of combating discrimination by reducing the 
potential for program units and their residents to be easily singled 
out within a mixed-finance development.
    The voluntary nature of funding units with such amenities or 
developments that contain health-care facilities makes it difficult to 
predict the impact of these changes on future Section 202 and 811 
units, since these two programs together produce only a few hundred 
developments a year (193 in 2008 and 170 in 2009). Consequently, the 
overall economic impact from these proposed limited changes in 
development and unit configuration is expected to be small.
    The proposed rule also provides benefits from improving government 
processes. For example, extending the time of availability of capital 
advance funds from 18 to 24 months should limit the number of waivers 
that HUD traditionally processes for these programs as developers 
regularly exceed the 18 month time frame. The program regulations 
providing for the 18-month time frame were issued in 1996, and these 
regulations no longer reflect the additional time often needed by 
developers to obtain the requisite permits and approvals from local 
authorities. In Fiscal Year 2010, HUD processed 49 such waivers, and, 
in what

[[Page 18728]]

has been described as a time-consuming, case-specific process, 33 
percent of the waivers under the program were processed that year.
    The remaining changes in the proposed rule are definitional and 
offer participants greater flexibility and clarity within the program 
at no obvious cost to the program or participants. Although this rule, 
as noted earlier, does not propose to implement the key changes from 
the Section 202 Act of 2010 and the Melville Act, the Congressional 
Budget Office (CBO) found no significant intergovernmental and private 
sector impacts in its analysis of the bills prior to enactment.
    The docket file is available for public inspection in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 
20410-0500. Due to security measures at the HUD Headquarters building, 
please schedule an appointment to review the docket file by calling the 
Regulations Division at 202-708-3055 (this is not a toll-free number).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
In the mixed-finance context, this proposed rule would amend HUD's 
Section 202 and 811 program regulations governing capital advances, 
for-profit limited partnerships, and mixed-finance development methods 
to facilitate the development and availability of housing for the 
elderly and persons with disabilities. The proposed regulatory 
amendments would not impose any additional regulatory burdens on 
entities participating in these programs. To the contrary and as more 
fully explained above in this preamble, the proposed amendments would 
streamline requirements, reduce requests for regulatory waivers, and 
increase flexibility in mixed-financed developments in order to attract 
private capital and expertise to the construction of supportive housing 
for the elderly and persons with disabilities. The proposed regulatory 
changes would also streamline the use of low-income tax credits, as 
well as the obtaining of funding from other sources. National, 
regional, and local developers utilize the mixed-finance program and 
will save time and gain efficiency from no longer having to request 
regulatory waivers.
    In the context of the applicability of this rule to all Section 202 
and 811 developments, this rule would reduce regulatory burden by 
extending the time period for the availability of capital advances and 
increase flexibility by permitting developers to utilize capital 
advance and project rental assistance funds to install and operate 
amenities that are now commonly found in market-rate units and that 
assist in improving the lives of the elderly and persons with 
disabilities. Accordingly, the undersigned certifies that this rule 
will not have a significant economic impact on a substantial number of 
small entities.
    Notwithstanding HUD's determination that this rule will not have a 
significant effect on a substantial number of small entities, HUD 
specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Environmental Impact

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

Executive Order 13132, Federalism

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

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This proposed rule does 
not impose any federal mandates on any state, local, or tribal 
governments, or on the private sector, within the meaning of UMRA.

Catalogue of Federal Domestic Assistance

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

List of Subjects in 24 CFR Part 891

    Aged, Grant programs--housing and community development, 
Individuals with disabilities, Loan programs--housing and community 
development, Rent subsidies, Reporting and recordkeeping requirements.

    Accordingly, for the reasons discussed in the preamble, HUD 
proposes to amend 24 CFR part 891 as follows:

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

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

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

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


Sec.  891.105  Definitions.

    The following definitions apply, as appropriate, throughout this 
part. Other terms with definitions unique to the particular program are 
defined in Sec. Sec.  891.205, 891.305, 891.505, and 891.805, as 
applicable.
    Acquisition with or without repair means the purchase of existing 
housing and related facilities.
* * * * *
    Repairs, replacements, and improvements means the improvement of 
the condition of a property, in a condition acceptable to HUD. Repairs 
may vary in degree from minor reconstruction to the cure of 
accumulation of deferred maintenance. Cosmetic improvements alone may

[[Page 18729]]

qualify under this definition. Repair may also include renovation, 
alteration, or remodeling for the conversion or adaptation of 
structurally sound property to the design and condition required under 
this part, or the repair or replacement of major building systems or 
components in danger of failure. Repairs, replacements, and 
improvements of an existing structure may be up to $6,500 per dwelling 
unit (or such other amount to be specified by HUD through notice and 
comment) of the estimated development cost to rehabilitate the project 
to a useful life of 55 years.
* * * * *
    Single-asset entity, for the purpose of this subpart, means an 
entity in which the mortgaged property is the only asset of the owner, 
and there may not be more than one owner.
* * * * *
    Substantial rehabilitation means the improvement of the condition 
of a property from deteriorated and substandard to a condition 
acceptable to HUD. Substandard or deteriorated properties are those 
which do not provide safe and adequate shelter, and in their present 
condition endanger the health, safety, or well-being of the occupants. 
Substantial rehabilitation may vary in degree from gutting and 
extensive reconstruction to the cure of substantial accumulation of 
deferred maintenance. Cosmetic improvements alone do not qualify as 
substantial rehabilitation under this definition. Substantial 
rehabilitation may also include renovation, alteration, or remodeling 
for the conversion or adaptation of structurally sound property to the 
design and condition required for use under this part, or the repair or 
replacement of major building systems or components in danger of 
failure. Substantial rehabilitation must meet one of the following 
criteria: (a) The cost of repairs, replacements, and improvements 
exceeds the greater of 15% of the estimated property replacement cost 
after completion of all repairs, replacements, and improvements, or 
$6,500 per dwelling unit (or such other amount to be specified by HUD 
through notice and comment) to substantially rehabilitate the project 
to a useful life of 55 years; or (b) Two or more major building 
components are being substantially replaced. Additions are permitted in 
substantial rehabilitation projects, but the costs for the additions of 
new units (not building component additions) are not included in the 
eligibility test.
* * * * *
    3. In Sec.  891.120, revise paragraphs (a), (c), and (d) to read as 
follows:


Sec.  891.120  Project design and cost standards.

* * * * *
    (a) Property standards. Projects under this part must comply with 
HUD Minimum Property Standards as set forth in 24 CFR part 200, subpart 
S.
* * * * *
    (c) Restrictions on amenities. Projects must be modest in design. 
Amenities not eligible for HUD funding include atriums, bowling alleys, 
swimming pools, saunas, and jacuzzis. Sponsors may include certain 
excess amenities, but they must pay for them from sources other than 
the Section 202 or 811 capital advance. They must also pay for the 
continuing operating costs associated with any excess amenities from 
sources other than the Section 202 or 811 project rental assistance 
contract.
    (d) Smoke detectors. Smoke detectors and alarm devices must be 
installed in accordance with standards and criteria acceptable to HUD 
for the protection of occupants in any dwelling or facility bedroom or 
other primary sleeping area.
* * * * *
    4. In Sec.  891.130:
    a. Revise paragraph (a)(2)(ii) by removing the word ``and'' that 
follows the semicolon after paragraph (a)(2)(ii);
    b. Revise paragraph (a)(2)(iii) by removing the period at the end 
and replacing it with a semicolon, and adding the word ``and'' after 
the semicolon;
    c. Add a new paragraph (a)(2)(iv); and
    d. Remove paragraph (c) to read as follows:


Sec.  891.130  Prohibited relationships.

* * * * *
    (a) * * *
    (2) * * *
    (iv) Contracts for the sale of land.
* * * * *
    5. Revise Sec.  891.160 to read as follows:


Sec.  891.160  Audit requirements.

    Nonprofit organizations receiving assistance under this part are 
subject to the audit requirements of 24 CFR 5.107.
    6. Revise Sec.  891.165 to read as follows:


Sec.  891.165  Duration of capital advance.

    (a) The duration of the fund reservation for a capital advance with 
construction advances is 24 months from the date of initial closing. 
This duration can be up to 36 months, as approved by HUD on a case-by-
case basis.
    (b) The duration of the fund reservation for projects that elect 
not to receive any capital advance before construction completion is 24 
months from the date of issuance of the award letter to the start of 
construction. This duration can be up to 36 months, as approved by HUD 
on a case-by-case basis.
    7. In Sec.  891.170, revise paragraph (b) to read as follows:


Sec.  891.170  Repayment of capital advance.

* * * * *
    (b) Transfer of assets. The transfer of physical and financial 
assets of any project under this part is prohibited, unless HUD gives 
prior written approval. Approval for transfer will not be granted 
unless HUD determines that the transfer to a private nonprofit 
corporation, consumer cooperative (under the Section 202 Program), a 
private nonprofit organization (under the Section 811 Program), or an 
organization meeting the definition of ``mixed-finance owner'' in Sec.  
891.805, is part of a transaction that will ensure the continued 
operation of the capital advance units for not less than 40 years (from 
the date of original closing) in a manner that will provide rental 
housing for very low-income elderly persons or persons with 
disabilities, as applicable, on terms at least as advantageous to 
existing and future tenants as the terms required by the original 
capital advance.
    8. In Sec.  891.205, revise the definitions of ``Owner,'' ``Private 
nonprofit organization,'' and paragraph (3) of the definition of 
``Sponsor'' to read as follows:


Sec.  891.205  Definitions.

* * * * *
    Owner means a single-asset private nonprofit organization that may 
be established by the Sponsor that will receive a capital advance and 
project rental assistance payments to develop and operate supportive 
housing for the elderly as its legal owner. Owner does not mean public 
body. The purposes of the Owner must include the promotion of the 
welfare of the elderly. The Owner may not be controlled by or be under 
the direction of persons or firms seeking to derive profit or gain 
therefrom.
* * * * *
    Private nonprofit organization means any incorporated private 
institution or foundation:
    (1) No part of the net earnings of which inures to the benefit of 
any member, founder, contributor, or individual;
    (2) That has a governing board:
    (i) The membership of which is selected in a manner to assure that 
there is significant representation of the views of the community in 
which such housing is located; and

[[Page 18730]]

    (ii) Which is responsible for the operation of the housing assisted 
under this section, except that, in the case of a nonprofit 
organization that is the sponsoring organization of multiple housing 
projects assisted under this section, HUD may determine the criteria or 
conditions under which financial, compliance, and other administrative 
responsibilities exercised by a single-entity private nonprofit 
organization that is the owner corporation of an individual housing 
project may be shared or transferred to the governing board of such 
sponsoring organization; and
    (3) Which is approved by HUD as to financial responsibility.
* * * * *
    Sponsor * * *
    (3) That is approved by the Secretary as to administrative and 
financial capacity and responsibility. The term Sponsor does not mean a 
public body.
* * * * *
    9. In Sec.  891.305, revise the heading of the definition of 
``Nonprofit organization'' to read ``Private nonprofit organization'' 
and relocate in correct alphabetical order, and revise the first 
sentence of the definition of ``Owner'' to read as follows:


Sec.  891.305  Definitions.

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


Sec.  891.805  Definitions.

    In addition to the definitions at Sec. Sec.  891.105, 891.205, and 
891.305, the following definitions apply to this subpart:
    Mixed-finance owner, for the purpose of the mixed-finance 
development of housing under this part, means a single-asset, for-
profit limited partnership of which a private nonprofit organization is 
the sole general partner. The purpose of the mixed-finance owner must 
include the promotion of the welfare of the elderly or persons with 
disabilities, as appropriate.
    Private nonprofit organization, for the purpose of this subpart, 
means:
    (1) In the case of supportive housing for the elderly:
    (i) An organization that meets the requirements of the definition 
of ``private nonprofit organization'' in Sec.  891.205; and
    (ii) A for-profit limited partnership, the sole general partner of 
which owns at least one-hundredth of one percent of the partnership 
assets whereby the sole general partner is either: An organization 
meeting the requirements of Sec.  891.205; or a for-profit corporation 
wholly owned and controlled by one or more organizations meeting the 
requirements of Sec.  891.205; or a limited liability company wholly 
owned and controlled by one or more organizations meeting the 
requirements of Sec.  891.205. If the project will include units 
financed with the use of federal Low-Income Housing Tax Credits and the 
organization is a limited partnership, the requirements of section 42 
of the IRS code, including the requirements of section 42(h)(5), apply. 
The general partner may also be the sponsor, so long as it meets the 
requirements of this part for sponsors and general partners.
    (2) In the case of supportive housing for persons with 
disabilities:
    (i) An organization that meets the requirements of the definition 
of ``private nonprofit organization'' in Sec.  891.305; and
    (ii) A for-profit limited partnership, the sole general partner of 
which owns at least one-hundredth of one percent of the partnership 
assets whereby the sole general partner is either: An organization 
meeting the requirements of Sec.  891.305 or a corporation owned and 
controlled by an organization meeting the requirements of Sec.  
891.305. If the project will include units financed with the use of 
federal Low-Income Housing Tax Credits and the organization is a 
limited partnership, the requirements of section 42 of the IRS code, 
including the requirements of section 42(h)(5), apply. The general 
partner may also be the sponsor, so long as it meets the requirements 
of this part for sponsors and general partners.
    11. In Sec.  891.813, revise paragraphs (b) and (c) to read as 
follows:


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

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


Sec.  891.830  Drawdown.

* * * * *
    (b) Non-capital advance funds may be disbursed before capital 
advance proceeds or the capital advance funds may be drawn down in an 
approved ratio to other funds, in accordance with a drawdown schedule 
approved by HUD.
    (c) * * *
    (4) The capital advance funds drawn down will be used only for 
eligible costs actually incurred in accordance with the provisions of 
this subpart and the approved mixed-finance project, which include 
costs stated in 12 U.S.C. 1701q(h) and 42 U.S.C. 8013(h). Capital 
advance funds may be used for paying off bridge or construction 
financing, or repaying or collateralizing bonds, but only for the 
portion of such financing or bonds that was used for capital advance 
units;
* * * * *
    13. Revise Sec.  891.832 to read as follows:


Sec.  891.832  Prohibited relationships.

    (a) Paragraph (a) of Sec.  891.130, describing conflicts of 
interest, applies to mixed finance developments.
    (b) Paragraph (b) of Sec.  891.130, describing identity of 
interest, does not apply to mixed-finance developments.
    14. Revise Sec.  891.848 to read as follows:


Sec.  891.848  Project design and cost standards.

    (a) The project design and cost standards at Sec.  891.120 apply to 
mixed-finance developments under this subpart, with the exception of 
Sec.  891.120(c), subject to the provisions of Sec.  891.813(b).

[[Page 18731]]

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

    Dated: March 2, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2012-7316 Filed 3-27-12; 8:45 am]
BILLING CODE 4210-67-P`