1922 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

Office of the Assistant Secretary for

Community Planning and

Development

24 CFR Part 570

[Docket No. R–94–1729; FR–3474–F–02]

RIN 2506–AB53

Community Development Block Grant

Program Economic Development

Guidelines

AGENCY: Office of the Assistant

Secretary for Community Planning and

Development, HUD.

ACTION: Final rule and guidelines.

SUMMARY: This rule establishes

guidelines to assist Community

Development Block Grant (CDBG)

recipients in evaluating and selecting

economic development activities for

assistance with CDBG funds. The

guidelines deal with project costs and

financial requirements and with the

public benefit provided by such

activities. This rule also makes certain

other changes to facilitate the use of

CDBG funds for economic development

objectives.

EFFECTIVE DATE: February 6, 1995.

FOR FURTHER INFORMATION CONTACT:

James R. Broughman, Director, Office of

Block Grant Assistance, Room 7286, 451

Seventh Street, SW, Washington, DC

20410. Telephone: (202) 708–3587;

TDD: (202) 708–2565. (These are not

toll-free numbers.)

SUPPLEMENTARY INFORMATION: One of the

Department of Housing and Urban

Development’s (HUD’s) expressed goals

is to provide an economic lift for

distressed cities. Toward this end, HUD

has embarked on a course designed to

make the Community Development

Block Grant (CDBG) program a

potentially major contributor to the

provision of jobs, especially for lowincome persons residing in our poorest

areas. To accomplish this goal, the

Department recognizes that it will need

to change both the perception and the

reality concerning the usefulness of

CDBG for economic development

objectives.

Section 806 of the Housing and

Community Development Act of 1992

(the 1992 Act) requires the Secretary to

establish, by regulation, guidelines to

assist CDBG recipients to evaluate and

select economic development activities

for assistance with CDBG funds. The

1992 Act also made further changes in

the CDBG program affecting the use of

funds for economic development

activities, particularly those carried out

under the national objective of

benefiting low- and moderate-income

persons through the creation or

retention of jobs. These changes

necessitate revisions to the CDBG

regulations. HUD has also determined

that it is appropriate to take this

opportunity to make certain other

changes to the regulations to facilitate

the use of CDBG funds for economic

development objectives. These changes

are designed to reduce the

administrative burden on grantees

while, at the same time, focusing efforts

on assisting the residents of low- and

moderate-income neighborhoods.

A proposed rule regarding these

issues was published on May 31, 1994,

at 59 FR 28175. The rule gave the public

30 days in which to submit comments.

Fifty-one comments were received, and

many of the comments were extensive.

The following types and numbers of

commenters were represented: 14 local

government agencies, 7 state agencies,

12 national associations, 7 development

organizations, 1 regional planning

agency, 3 private citizens, and 7 HUD

Field staff.

Applicability of This Rule to the State

CDBG Program

Separate regulatory language for the

Entitlement and State CDBG programs is

contained in this rule. This preamble

generally discusses the changes for the

two programs together, with differences

between the requirements for the two

programs noted. Overall, such

differences have been kept to a

minimum.

The State CDBG program regulations

do not contain an explanatory list of

eligible activities, and relatively few

terms are defined in regulation. The

changes to §§ 570.201, 570.203, 570.204,

570.500 and 570.506 (and the

accompanying preamble discussions

thereof) are thus not applicable to the

State CDBG program, as there are no

comparable sections in the State

regulations. In interpreting the list of

eligible activities found in Section 105

of the Housing and Community

Development Act of 1974, as amended,

states may use the Entitlement

regulations as interpretive guidance.

Applicability of This Rule to the HUDAdministered Small Cities and Insular

Areas CDBG Programs

Portions of the Entitlement CDBG

Program regulations are incorporated by

reference into the regulations for the

HUD-Administered Small Cities

program and the Insular Areas CDBG

program. Thus, the changes to the

Entitlement regulations also apply to the

HUD-Administered Small Cities and

Insular Areas programs. Further

clarification will be provided (such as

through annual Notices of Funding

Availability or other instructions) for

those programs, particularly regarding

applications proposing a limited

number of activities subject to the

public benefit guidelines.

Applicability of This Rule to the Indian

CDBG Program

It has been determined by the Office

of Native American Programs that this

regulation will not be applicable to the

Indian Community Development Block

Grant (ICDBG) program. The nature of

the ICDBG program is so separate and

distinct from the Entitlement or the

State and Small Cities program that it is

in the best interest of the ICDBG to

address these issues separately. A

specific rule will be proposed at a later

date to address the needs of the Indian

Tribes and Alaskan Native Villages

served by the ICDBG program to comply

with the requirements of the Housing

and Community Development Act of

1992.

Summary of Public Comments and

HUD Responses

Assistance for Microenterprises

Issue. Three commenters requested

that the maximum number of employees

permitted in order for a business to be

considered a microenterprise be

increased. (2 local government agencies

and 1 state agency)

Response. The term

‘‘microenterprise’’ is defined by Section

807(c)(2) of the 1992 Act as a

‘‘commercial enterprise that has five or

fewer employees, one or more of whom

owns the enterprise.’’ With this

statutory limitation, the maximum

number of employees cannot be

increased.

Issue. Four commenters requested

further clarification of the definition of

a microenterprise. Issues raised

included: whether the limitation on the

number of employees applies to actual

persons or full-time-equivalent

positions; the scope of the term

‘‘commercial’’; and the length of time a

CDBG-assisted microenterprise must

remain within the five-employee

maximum. (2 national associations, 1

state agency, and 1 private citizen)

Response. The Department interprets

the statutory language regarding the size

limitations for a microenterprise as

referring to number of actual persons

employed by the business, including the

owner(s).

As noted above, the statutory

definition of a microenterprise describes
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1923

such a business as a ‘‘commercial

enterprise. . . .’’ The Department does

not believe that it was Congress’ intent

to construe the term ‘‘commercial’’ so

narrowly in this instance that it would

encompass only retail businesses.

Rather, the HUD interprets this term

broadly to mean any ‘‘entity engaged in

commerce,’’ subject to the size

limitations further imposed by the

statutory definition of a microenterprise.

Definitions of the terms

‘‘microenterprise’’ and ‘‘small business’’

are being incorporated into the CDBG

regulations at § 570.3 in this final rule.

In regard to the length of time a

CDBG-assisted microenterprise must

remain within these size limitations, the

same general rule that applies to other

CDBG activities would also apply to

microenterprise assistance. That is, the

size limitation applies only at the time

the CDBG assistance is provided. There

may often be the expectation that, in the

future, the business will grow beyond

five employees; that expectation should

not block assistance to a currently

qualified microenterprise. A grantee

need not track the size of the business

throughout the term of any CDBG loan

received, as the commenters feared

might be the case. However, it should be

noted that when CDBG assistance is

provided on an ongoing basis, as may

often be the case for ‘‘general support’’

activities, such assistance ceases to

qualify under the microenterprise

eligibility category at the point when the

business grows beyond the fiveemployee size limitation. Further

assistance to the business after that time

must qualify under other existing

eligibility categories.

Issue. Two commenters requested that

HUD further define the term ‘‘persons

developing microenterprises.’’ (1 state

agency and 1 private citizen)

Response. HUD agrees that it is useful

to include such a definition in the

regulations. Thus, a new paragraph

§ 570.201(o)(3) has been added to this

final rule to provide such a definition.

Generally, the term ‘‘persons developing

microenterprises’’ is defined as persons

who have expressed interest and who

are, or after an initial screening process

are expected to be, actively working

toward developing businesses, each of

which is expected to be a

microenterprise at the time it is formed.

It should be noted that HUD does not

expect that all such persons will

actually start a microenterprise; some

‘‘fallout’’ is expected. However, patterns

of excessive ‘‘fallout’’ rates in a grantee’s

microenterprise activities may cause

HUD to question whether such activities

truly serve ‘‘persons developing

microenterprises.’’

Issue. Two commenters requested that

HUD revise the regulations to permit

‘‘general support’’ services to also be

provided, outside of the public service

cap, to businesses larger than

microenterprises. (1 state agency and 1

national association)

Response. The Department cannot

accommodate the requested change.

Flexibility to provide such services

outside the public service category is

only statutorily provided for

microenterprise assistance carried out

under Section 105(a)(23) of the Housing

and Community Development Act of

1974, as amended, and, to a less direct

extent, qualified activities carried out

under Section 105(a)(15) of the Act

(§ 570.204 of the Entitlement

regulations). As noted above, the statute

also imposes the five-employee size

limitation on microenterprises.

Issue. Seven commenters requested

that HUD clarify various aspects of the

‘‘general support’’ portion of the

microenterprise eligibility provision.

Issues raised included: whether there

were any circumstances in which such

support activities would be considered

public service activities; whether

‘‘general support’’ could be provided to

employees of microenterprises who are

not part-owners; whether ‘‘general

support’’ included costs related to the

delivery of microenterprise assistance;

and whether the entities providing

assistance under this category would be

those most attuned to the special needs

of microenterprises. (1 local government

agency, 3 national associations, 2

development organizations, and 1

private citizen)

Response. As noted above, the statute

limits the instances in which ‘‘general

support’’ services may be provided to

businesses outside the public service

eligibility category. In any

circumstances which fall outside the

specified instances, the provision of

such support services would need to

qualify as public service activities.

Under the microenterprise eligibility

provision, the statute limits the direct

provision of ‘‘general support’’ to

‘‘owners of microenterprises and

persons developing microenterprises.’’

Thus, ‘‘general support’’ cannot be

provided directly to employees of

microenterprises who are not partowners. However, there may often be

other ways of structuring the activity to

achieve essentially the same end result.

For example, financial assistance may

be provided to the microenterprise

owner under § 570.201(o)(1)(i) to permit

the owner to provide certain benefits to

his/her employees if that can be shown

to assist in the ‘‘development,

stabilization, or expansion’’ of the

microenterprise. Alternatively, the

extent of financial assistance provided

to the microenterprise owner for the

capital needs of the business could be

sized taking into account the owner’s

cost of providing such benefits for his/

her employees.

The term ‘‘general support’’ as it is

used in the statute and

§ 570.201(o)(1)(iii) is not intended to

specifically include the activity

administrator’s cost of delivering

microenterprise assistance to owners of

microenterprises and persons

developing them. As with any CDBG

activity, it is recognized that there are

various necessary costs associated with

carrying out a microenterprise

assistance activity. As the commenters

note, these may include the costs of

outreach and screening, curriculum

development, coordination with other

agencies, formation and management of

peer lending groups, and certain staff

training and development. As with any

other CDBG activity, such costs directly

related to carrying out the

microenterprise assistance activity are

considered eligible as part of that

activity, without being categorized as

‘‘general support.’’ Such ‘‘activity

delivery’’ costs are not considered to be

general administrative costs that would

be subject to the 20 percent cap.

In regard to the nature of the entities

carrying out activities under this

eligibility category and their familiarity

with the needs of microenterprises,

HUD has interpreted the statutory

provision as broadly as possible in

developing this rule. This should permit

grantees significant flexibility in

determining how, and by whom,

microenterprise assistance activities

should be carried out, based on local

needs and priorities. The specific

selection of service providers is a matter

of local discretion.

Issue. Four commenters

recommended that some form of

‘‘appropriate’’ test be required for

microenterprise assistance carried out

under the new eligibility category or

that the rule include some language

stating that such assistance must be

reasonable and necessary. (2 local

government agencies, 1 state agency,

and 1 HUD Field staff person)

Response. As noted in the preamble to

the proposed rule, this new

microenterprise eligibility category was

added to the Act as a new Section

105(a)(23). This new paragraph of the

statute does not contain any

requirement that assistance for such

activities be determined to be

‘‘appropriate.’’ In addition, this new

paragraph is not included among those

eligibility categories listed as covered by
1924 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

the economic development ‘‘guidelines’’

to be established pursuant to the new

Section 105(e) of the statute, as added

by Section 806(a) of the 1992 Act. HUD

does not believe that adding any

regulatory requirements to this

eligibility category that are not required

by statute is warranted. As with any

other CDBG activity, however, grantees

are free to develop more restrictive local

policies as they feel are appropriate to

meeting their local needs and objectives.

Also, pursuant to §§ 570.200(a)(5) and

570.502 of the CDBG regulations, all

costs incurred for CDBG assisted

activities must be in conformance with

the applicable uniform administrative

requirements. This includes the

requirement that the costs be necessary

and reasonable for the proper and

efficient administration of the program.

Thus, HUD does not believe it is

necessary to include any special

language in this regard in § 570.201(o).

Issue. A concern was raised over the

fact that no revision to the Section 108

Loan Guarantee regulations at § 570.703

was proposed to reflect the addition of

microenterprise assistance as a separate

eligibility category. (1 HUD Field staff

person)

Response. Activities eligible for

assistance under the Section 108 Loan

Guarantee program are specifically

delineated at Section 108(a) of the Act.

While the 1992 Act added the separate

microenterprise eligibility category as a

new Section 105(a)(23) of the statute, no

reference to this new paragraph was

added to Section 108(a) of the statute.

Thus, this eligibility category is not

directly eligible for assistance using

Section 108 Loan Guarantees. However,

the provision of direct assistance to

microenterprises has long been, and

continues to be, eligible as a special

economic development activity under

Section 105(a)(17) of the Act

(§ 570.203(b) of the Entitlement

regulations). Section 105(a)(17) is

included at Section 108(a) among the

list of activities eligible for Loan

Guarantee assistance under that section.

Therefore, grantees may use Section 108

Loan Guarantees to directly assist

microenterprises, subject to the

statutorily required ‘‘appropriateness’’

determination and coverage under the

economic development ‘‘guidelines’’

(established in this final rule as a new

§ 570.209 of the Entitlement regulations

and additions to § 570.482 of the State

regulations). These ‘‘guidelines’’ take

into account the special needs and

limitations arising from the size of such

businesses assisted under § 570.203(b)

as required by the new Section 105(g)(1)

of the statute (as added by Section

807(c)(1) of the 1992 Act).

Issue. One commenter asked whether

(or how) certain assistance to in-home

day care providers might be eligible

under the proposed § 570.201(o) or

§ 570.203. The commenter noted that

day care is often provided by people

within their own homes. Improvements

to the house may be necessary or

beneficial to the provision of day care

services. The existing regulations do not

provide guidance as to whether

improvements to a residence in this case

should be classified as rehabilitation or

as assistance to a business.

Response. The Department agrees that

this issue is not clear in the existing

regulations; the addition of the

microenterprise assistance eligibility

section further muddies the issue, as

many home day care providers might

also qualify as a microenterprise.

Situations in which businesses are

operated from a residence are not

limited to day care provision. To

address this comment, the Department

has revised § 570.202 (eligible

rehabilitation activities) of the

Entitlement regulations. With this

revision, certain situations in which

physical improvements to a residence

are undertaken to benefit a business

operated therein may be classified as

housing rehabilitation.

Ensuring That Economic Development

Projects Minimize Displacement

Issue. Section 907(a) of the National

Affordable Housing Act of 1990

amended Section 105(a)(17) of the

statute to require, in part, that economic

development projects assisted under

this provision must minimize, to the

extent practicable, displacement of

existing businesses and jobs in

neighborhoods. The proposed rule

implemented this provision by

amending § 570.203 of the Entitlement

regulations with language on

displacement that was identical to that

contained in the statute. Six

commenters addressed this issue, and

several of them recommended that

further guidance be provided. However,

few specific recommendations were

received. (3 national associations, 1

local government agency, 1 private

citizen, and 1 HUD Field staff person)

Response. HUD has determined that it

is most appropriate to leave the final

rule provision as proposed on this issue.

Within the parameters of the statutory

language, grantees will have flexibility

to demonstrate compliance with this

requirement as appropriate for their

circumstances. One possible way in

which a grantee could demonstrate

compliance with this requirement is by

conducting an analysis for each covered

economic development project to

determine that any displacement of

existing businesses and jobs that is

likely to occur as a result of the

economic development project, both in

the neighborhood in which the project

is located and in other surrounding

neighborhoods, is justifiable given an

examination of possible alternatives.

Additional Changes to § 570.203,

Special Economic Development

Activities

Issue. A total of eight commenters

addressed the new paragraph (c) that

was proposed to be added to § 570.203

of the Entitlement regulations to

specifically address items that may be

considered activity delivery costs in

conjunction with special economic

development activities assisted under

this section. The Department’s principal

purpose in proposing the addition of

this paragraph was to permit certain job

training and placement activities in

direct conjunction with otherwise

assisted CDBG special economic

development activities to be considered

part of the ‘‘delivery cost’’ of those

special economic development

activities. All eight commenters

supported this general concept, but five

of them requested modification or

clarification of the provision. The

recommended modifications included:

extending this provision to include

construction jobs created as part of

CDBG projects; extending it to include

all ‘‘CDBG-eligible’’ economic

development projects rather than just

actual ‘‘CDBG-assisted’’ projects;

limiting the job training and placement

activities permitted under this provision

to actual low- and moderate-income

persons; and reclassifying the outreach

and monitoring portions of this

provision as general administrative

costs subject to the 20 percent cap.

Clarification was also requested as to

whether there were any circumstances

where the job training activities

discussed would still be considered a

public service. (3 local government

agencies, 3 national associations, and 2

development organizations)

Response. HUD has determined that it

is not appropriate to extend the

coverage of this provision to include job

training for construction jobs created as

part of all CDBG projects in general.

This new economic development

services provision specifically applies

only to activities qualifying as special

economic development activities under

the CDBG program. Costs for training

and apprenticeship programs directly

related to the construction for these

activities can generally be considered to

be covered under this provision. Costs

of such programs for other types of
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1925

CDBG projects can often be considered

as activity delivery costs of the

respective projects to which they

pertain.

In regard to the comment that the

proposed provision should be extended

to include all ‘‘CDBG-eligible’’

economic development projects rather

than just otherwise ‘‘CDBG-assisted’’

projects, the Department has determined

that this recommendation has merit.

Under the CDBG program, grant funds

may be used to assist an activity ‘‘in

whole or in part,’’ as noted at

§ 570.200(a) of the Entitlement

regulations. There are many cases in

which ‘‘activity delivery’’ costs are the

only portion of an activity’s overall

costs that are paid for with CDBG funds.

Thus, § 570.203(c) has been revised in

this final rule to reflect the

recommended change. In order to

qualify under this provision, job

training and placement activities must

still constitute activity delivery costs for

an economic development project that

would otherwise be eligible for further

assistance under § 570.203. HUD

considers this to permit such training

activities only where the grantee has an

agreement with a specific business(es)

to actually employ the person(s) trained.

This provision does not authorize

programs that will merely create a

‘‘pool’’ of trained persons from which a

business(es) may possibly hire. (Such

activities must continue to qualify as

public service activities under

§ 570.201(e) of the Entitlement

regulations unless they meet the

requirements of the new § 570.201(o) or

§ 570.204.) It should also be noted that

the use of CDBG funds for activity

delivery costs qualifying under

§ 570.203(c) constitutes CDBG

assistance to the related economic

development project, regardless of the

funding sources for any other portion of

the project. Thus, that project becomes

subject to all applicable CDBG

requirements, including national

objective and public benefit

requirements.

In regard to the comment that the job

training and placement activities

permitted under this provision should

be limited to actual low- and moderateincome persons, the Department has

decided not to adopt this

recommendation. Such a proposal

confuses the distinction between

eligibility and national objective

requirements. As activity delivery costs,

job training and placement activities

carried out under § 570.203(c) are

considered part of the economic

development project to which they

relate. Thus, they are generally

considered to qualify under the same

national objective as that economic

development project. Such CDBG

special economic development activities

can qualify under a variety of national

objective provisions; they are not

limited to creating or retaining jobs for

low- and moderate-income persons.

This comment has raised an issue,

however, that HUD found to merit

further consideration. Under existing

regulations, with very few exceptions,

the majority of persons benefiting from

a CDBG-assisted activity must be lowand moderate-income persons. HUD is

aware of various proposals under which

certain entities have indicated a

willingness to train low- and moderateincome persons for jobs and/or provide

such persons with other employment

opportunities, but these entities cannot

agree that 51 percent of all assisted

persons will be low or moderate

income. HUD believes that such

proposals can often provide valuable

opportunities for employment of lowand moderate-income persons and that

a way should be found to permit CDBG

funds to assist such efforts. Thus, HUD

is amending the low- and moderateincome limited clientele national

objective requirements in this final rule

[with a new § 570.208(a)(2)(iv) in the

Entitlement regulations and a new

§ 570.483(b)(2)(v) in the State

regulations] to authorize the use of

CDBG funds for such activities that

provide training and/or other

employment support services in limited

circumstances. This provision is

discussed more fully in detail in the

national objective portion of this

preamble.

There also appears to be some general

confusion regarding what can be

considered as activity delivery costs and

what must be classified as general

administration subject to the 20 percent

cap. Apart from the job training and

placement activities discussed above,

most of the remaining types of activities

delineated in the proposed § 570.203(c)

are already considered to be activity

delivery costs eligible under the

currently-existing § 570.203. The

proposed new paragraph only provides

a more specific statement of this point.

One commenter specifically took issue

with the outreach and monitoring

portions of this provision, arguing that

such activities should be considered

part of general administration. HUD

agrees that ‘‘monitoring’’ should be

considered a general administration

activity, and thus, that term has been

deleted from the new § 570.203(c) in

this final rule. However, reasonable

outreach efforts by grantees to obtain

applicants for available assistance and

the direct management of resulting

activities are routinely considered part

of the delivery cost of such activities.

The commenter compares the above

type of outreach and marketing efforts to

activities designed to help inform lowincome residents about CDBG. If that

reference is to activities that are

designed to make residents generally

aware of the CDBG program and how

they may participate in determining

what types of activities the community

funds, such a comparison is imprecise.

Rather, the type of outreach and

marketing efforts included under the

new § 570.203(c) would be comparable

to activities designed to make residents

aware of how they could apply for

assistance under specific activities, such

as a housing rehabilitation program.

Special Activities by Community-Based

Development Organizations (CBDOs)—

§ 570.204 (Section 105(a)(15) of the

Act)

Issue. Six commenters addressed the

eligible activities and project definition

sections of the proposed rule changes at

§ 570.204 (a) and (b). Most of these

commenters requested clarification of

the proposed definitions and discussion

of eligible activities. (2 national

associations, 1 local government agency,

1 private individual, and 2 HUD Field

staff persons)

Response. HUD has not accepted the

recommendation from one national

association to add language to the

beginning of § 570.204(a) to specifically

state that the recipient may provide

CDBG funds to a subrecipient under this

section ‘‘if permitted by state or local

law.’’ Compliance with applicable state

or local laws is a requirement for

recipients in carrying out all CDBG

activities; thus, there is no need to make

a special statement here.

In response to the various requests for

clarification of the definitions for the

projects made eligible by Section

105(a)(15) of the Act, HUD has made

minor changes to those definitions

included in § 570.204(a) (1), (2), and (3)

in this final rule. For the definition of

a ‘‘community economic development

project,’’ this includes a cross-reference

to the Consolidated Plan rule at 24 CFR

91.1(a)(1)(iii), which describes the types

of activities HUD generally considers to

aid in ‘‘expanding economic

opportunities,’’ which is part of the

primary objective of the CDBG program

as delineated at Section 101(c)(1) of the

Act. The definition also notes the

general conditions under which the

construction or rehabilitation of housing

may be included as part of a

‘‘community economic development

project.’’
1926 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

One commenter, a private citizen,

raised a question as to whether a

‘‘project’’ qualifying under § 570.204

included only activities for which there

is funding committed and which are

occurring now or whether it could

include proposed future activities for

which no funding has yet been secured.

HUD has determined that specific limits

on the scope of a project cannot easily

be prescribed in this regard. Thus, it has

not been addressed in the text of this

final rule. HUD expects recipients to use

a plausible interpretation of the term

‘‘project’’ and only include activities

that are to be carried out within a

reasonable period of time. Such an

interpretation should at least exclude

activities which have not yet received

necessary conceptual approvals from

the local government.

HUD has also revised the reference to

permitted services under § 570.204. Two

commenters, a private citizen and a

HUD Field staff person, requested

clarification of this provision. Also,

under a similar expansion of service

activities as part of the new

microenterprise eligibility category at

§ 570.201(o), one of those same

commenters raised a concern about

potential abuse of the expanded

flexibility if the requirements were not

clearly defined. HUD has reconsidered

the proposed provision and has

determined that it is appropriate to limit

the type of services that may be

excluded from the public service cap by

qualifying under this section to those (1)

that are specifically designed to increase

economic opportunities by supporting

the development of permanent jobs, or

(2) services of any type carried out

under this section pursuant to a strategy

approved by HUD under the provisions

of § 91.215(e). To reflect this change, the

proposed paragraph § 570.204(a)(5) has

been deleted, the proposed paragraph

§ 570.204(b)(2) has been renumbered to

(b)(3), and a new paragraph

§ 570.204(b)(2) has been added to this

final rule. In the State program

regulations, proposed § 570.482(c)(2)

has been deleted, and a new paragraph

§ 570.482(d) has been added to discuss

the eligibility of employment-related

services and microenterprise support

services.

Issue. One commenter recommended

that the Department consider the

eligible project carried out by the

qualified organization under § 570.204

to be a single eligible activity instead of

‘‘only a loose grouping of other eligible

activities.’’ The commenter recommends

that this approach be reflected

throughout the regulations, including

national objective requirements, the

economic development guidelines, and

record keeping requirements. (1 HUD

Field staff person)

Response. In regard to eligibility

requirements under § 570.204, it already

is the overall project that is assessed to

determine if it qualifies as one of the

three types of projects authorized by

this section. Problems arise when trying

to apply this approach for assessing

compliance with national objective

requirements, economic development

guidelines, and other applicable

requirements, however, because of

statutory requirements that must be

applied to specific types of activities

that may be part of the qualified project.

For example, Section 105(c)(3) of the

Act limits the manner in which any

housing activities may be considered to

benefit low- and moderate-income

persons. Also, Section 105(e) of the Act,

as added by Section 806(a) of the 1992

Act, subjects economic development

activities to compliance with the public

benefit requirements. Beyond such

statutory restrictions, the Department

also believes that requiring detailed

information on what the organization is

actually doing with the CDBG funds

helps ensure accountability to both the

local citizens and HUD. However, HUD

has determined that the commenter’s

recommendation does have a certain

degree of merit. Thus, HUD has made

certain changes to the CDBG regulations

in this final rule to ease grantees’

burden in tracking national objective

compliance for certain activities that

may qualify for eligibility under this

category. These changes are discussed

further in the respective national

objective portions of this preamble.

Issue. In regard to the types of entities

that qualify under § 570.204, one

commenter noted that such entities are

commonly referred to by practitioners as

‘‘community-based development

organizations (CBDOs)’’ or ‘‘community

development corporations (CDCs).’’ (1

national association)

Response. HUD has determined that is

appropriate, in adopting a single generic

name for the entities that may qualify

under § 570.204, to use a name that is

commonly understood by practitioners.

It was also apparent from various

comments that the proposed rule’s use

of the term ‘‘local development

corporations (LDCs)’’ in this regard

caused some confusion with some

commenters thinking HUD was

‘‘picking’’ one of the entities in the

current rule over the others. Use of the

‘‘CDC’’ term noted by the above

commenter could create confusion with

existing entities funded under other

Federal programs. Therefore, to reduce

confusion, the term ‘‘community-based

development organization (CBDO)’’ is

now used in this final rule as the

generic term to describe all entities that

may qualify under § 570.204.

Issue. Five commenters addressed the

proposed revision to the definition of

the term ‘‘subrecipient’’ at § 570.500(c).

The proposed revision was intended

only to expand that current provision to

include for-profit entities that are now

specifically authorized by statute to

carry out microenterprise assistance

activities under the new eligibility

provision implemented in this final rule

by a new § 570.201(o) in the Entitlement

regulations [Section 105(a)(23) of the

Act]. Most of the commenters

recommended that HUD not consider

any entities carrying out activities under

the new microenterprise category as

‘‘subrecipients’’ but rather as ‘‘end

beneficiaries.’’ These commenters also

requested a similar change in

classification for entities receiving

CDBG assistance under § 570.204 of the

Entitlement regulations [Section

105(a)(15) of the Act]. Other

commenters asked only for a

clarification of the proposed revision to

§ 570.500(c). (1 local government

agency, 1 development organization,

and 3 HUD Field staff persons)

Response. The comments regarding

entities carrying out activities under the

new microenterprise category will be

discussed later in this preamble in

further discussion of the revision to

§ 570.500(c) in this final rule. This

specific section will only respond to

these comments as they relate to entities

receiving CDBG assistance under

§ 570.204 of the Entitlement regulations

(Section 105(a)(15) of the Act). The

Department has re-examined the status

of these entities within the context of

the statutory language at Section

105(a)(15). This section of the statute

authorizes the provision of CDBG

assistance to certain qualified entities to

carry out specific types of projects.

Upon review, HUD has determined that

the comments questioning the status of

these entities as subrecipients have

merit. The Department has determined

that, similar to for-profit businesses

carrying out economic development

projects, the entities carrying out

qualified activities under § 570.204

(Section 105(a)(15) of the Act) can be

considered not to be an intermediary

organization in the grant assistance

chain acting for the grantee, but rather

as being specifically eligible to receive

CDBG assistance itself. While these

entities are not true ‘‘end beneficiaries’’

as the commenters argue (that term

applies to the persons served by the

activities), they are not strictly

intermediaries either. Thus, the

Department has determined that such
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1927

eligible entities carrying out qualified

activities under this section will no

longer be considered as subrecipients

under the CDBG program. In this final

rule, § 570.500(c) has been amended, in

part, to reflect this change.

Issue. Two commenters addressed the

general jurisdictional limitations for

organizations qualifying under this

section as proposed at § 570.204(c)(1)(i).

One of these, a national association,

recommended that these regulations

mirror the Community Housing

Development Organization (CHDO)

requirements which permit an entity to

operate in a rural ‘‘multi-county area

(but not a whole state).’’ The other

commenter, a local government agency,

recommended that the proposed

regulatory language be amended to read:

‘‘. . . primarily within an identified

geographic area of operation within the

jurisdiction of the recipient. . . .’’ The

commenter argues that this would

permit an organization with a successful

track record to share its experience by

consulting or entering into a joint

venture to support a project in other

areas. (1 national association and 1 local

government agency)

Response. HUD has determined not to

accept the ‘‘multi-county’’

recommendation because maintaining

local community control of a

organization qualifying under § 570.204

is crucial. Also, it should be noted that

truly rural organizations would not be

subject to these regulatory restrictions

anyway. This is because Section 807(f)

of the 1992 Act expanded the list of

organizations eligible to carry out

activities in nonentitlement areas under

Section 105(a)(15) of the Housing and

Community Development Act of 1974,

as amended. ‘‘Nonprofit organizations

serving the development needs of the

communities of nonentitlement areas’’

now qualify under Section 105(a)(15) of

the Act. Since the State CDBG program

regulations contain no listing of eligible

activities, no regulatory language is

needed to implement that change.

In regard to the second comment

above regarding jurisdictional

limitations, the Department agrees with

the commenter’s reasoning and has

revised § 570.204(c)(1)(i) to reflect the

recommended language in this final

rule. In this regard, however, HUD does

note that it interprets the term

‘‘primarily’’ as it is used in this section

to mean that most of the organization’s

projects are located, funds are used, and

staff time is expended on a project or

projects within the identified

geographic area of operation and that

outside projects are largely incidental to

the organization’s activities and

purposes.

Issue. One commenter recommended

that HUD provide a definition for the

term ‘‘particular attention’’ as it is used

in the new § 570.204(c)(1)(ii) regarding

addressing the needs of low- and

moderate-income persons. (1 national

association)

Response. The ‘‘particular attention’’

language as used in the above-noted

section comes from those statutes that

have been referenced for several years in

the CDBG regulations at § 570.204(c)(3)

defining local development

corporations. The Department is not

aware of any significant problems with

conflicting interpretations of this

language, which is the commenter’s

stated concern. Thus, the rule has not

been modified to include a formal

definition of this term. In general, HUD

would expect the charter, bylaws, etc.,

of the CBDO to reflect a commitment to

meeting the needs of low- and

moderate-income persons.

Issue. In reference to the new

§ 570.204(c)(1)(iii), another commenter

expressed ‘‘serious reservations’’ about

allowing for-profit organizations to

qualify under this section of the

regulations. (1 development

organization)

Response. The statute at Section

105(a)(15) and the CDBG regulations at

§ 570.204 have long permitted for-profit

organizations under this section with

the inclusion of Small Business

Investment Companies. The rule now

includes only a clearer statement of

what already is permitted. The rule does

provide a stipulation that any monetary

profits to a CBDO’s shareholders or

members must be only incidental to its

operations.

Issue. Four commenters addressed the

board structure requirements under

§ 570.204(c)(1)(iv). Concerns raised

included an objection to excluding

organizations composed solely of

institutional members from qualifying

under this section and comments both

for and against the inclusion of business

owners in defining permitted board

structures. One of the commenters also

recommended that HUD permit the lowand moderate-income presumptions

added by the 1992 Act to be used under

this section in determining whether a

sufficient percentage of board members

are low- and moderate-income persons.

(1 local government agency, 2

development organizations, and 1

national association)

Response. HUD has determined that

all of the comments regarding the

inclusion of institutions and business

owners on the boards of qualifying

CBDOs have some merit. Thus, the

Department has refined the

requirements at § 570.204(c)(1)(iv) in

this final rule to permit consideration of

both institutional board members and

business owners, but only to the extent

that the entities that they represent are

both located in and serve the CBDO’s

geographic area of operation. In regard

to the comment about permitting the

presumption of low- and moderateincome residents status under this

section, it is noted that the

presumptions at Section 105(c)(4) of the

HCD Act, as added by Section 806(e) of

the 1992 Act, apply only to activities

qualifying under the national objective

of job creation or retention for low- and

moderate-income persons. Permitting

them to be used in determining

compliance with the board structure

requirements of this section would

include too broad of a spectrum of

organizations to qualify under this

provision. Thus, the Department has

rejected this comment.

Issue. Three commenters addressed

the proposed § 570.204(c)(2) that

provided further ways in which an

organization might qualify as an eligible

CBDO under this section. These

commenters requested clarification of

when this paragraph would apply, and

two of the commenters specifically

requested that HUD expand the

jurisdictional restrictions imposed on

CHDOs, as designated by the HOME

program, qualifying under this

paragraph. (1 national association, 1

development organization, and 1 HUD

Field staff person)

Response. HUD’s intent in the

proposed § 570.204(c)(2) was to give

organizations that did not meet the

general qualification requirements of

(c)(1) certain additional ways of

qualifying as a CBDO under this section

of the CDBG regulations. It was not

intended that qualifying organizations

would have to meet both (c) (1) and (2);

an entity can qualify under either

standard. HUD has revised the

introductory language to § 570.204(c)(2)

in this final rule to clarify that intent.

An understanding of this approach is

critical in assessing the requirements

that a CHDO under the HOME program

must meet in order to qualify under

§ 570.204 of the CDBG Entitlement

regulations. A CHDO qualifying under

the HOME program may or may not

meet the general qualification

requirements for a CBDO under the

CDBG Entitlement program, as

delineated at § 570.204(c)(1) of this final

rule. If a CHDO meets those

requirements, it may have an area of

operation as large as the jurisdiction of

the recipient, just as any other qualified

CBDO. The more restrictive

jurisdictional limits at

§ 570.204(c)(2)(iii) are only applicable to
1928 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

CHDOs that cannot meet the general

CDBG Entitlement qualification

requirements for CBDOs. An example of

such an entity would be a CHDO that

meets only the minimum HOME

percentage requirement for low- and

moderate-income persons on its board

(33 percent) and cannot show that it has

sufficient types of representatives on

that board to meet the 51 percent

standard delineated in

§ 570.204(c)(1)(iv).

In assessing the comments on this

issue, HUD has determined that it is

appropriate to provide organizations

with an additional alternative for

qualifying as a CBDO under this section

of the CDBG regulations. Thus, in this

final rule, HUD has added a new

§ 570.204(c)(3) under which an

organization that does not qualify under

either § 570.204(c) (1) or (2) may also be

determined to qualify as an eligible

entity under this section if the grantee

demonstrates to the satisfaction of HUD,

through the provision of information

regarding the organization’s charter and

by-laws, that the organization is

sufficiently similar in purpose, function,

and scope to those entities qualifying

under the above-referenced paragraphs.

The Department intends to have this

determination made at the HUD Field

Office level.

Also in this regard, it should be noted

that HUD expects that many Community

Development Financial Institutions

meeting the criteria in Title I, Subtitle

A of the Riegle Community

Development and Regulatory

Improvement Act of 1994 (P. L. 103–

325, enacted September 23, 1994) will

qualify as CBDOs under § 570.204 of the

CDBG Entitlement regulations. The

above-referenced subtitle comprises the

Community Development Banking and

Financial Institutions Act. The purpose

of this subtitle is to create a Community

Development Financial Institutions

Fund to promote economic

revitalization and community

development through investment in,

and assistance to, CDFIs, including

enhancing the liquidity of such

institutions. The CDFI Fund is to be a

wholly-owned Government corporation

that will not be affiliated with any other

agency of the Federal Government. In

this final rule, HUD is adding to the

Entitlement regulations a definition of

the term CDFI that references the abovenoted new legislation. A CDFI is

generally defined at Section 103 of that

Act as an entity that (i) has a primary

mission of promoting community

development; (ii) serves an investment

area or a targeted population; (iii)

provides development services in

conjunction with equity investments or

loans, directly or through a subsidiary

or affiliate; (iv) maintains accountability

to residents of its investment area or

targeted population; and (v) is not a

government agency or instrumentality.

An ‘‘investment area’’ is defined as an

area that either (i) meets objective

criteria of economic distress developed

by the Fund and has significant unmet

needs for loans or equity investments; or

(ii) is located in a designated

Empowerment Zone or Enterprise

Community. These CDFI criteria are

similar to those now set forth in

§ 570.204(c).

It should again be noted that the

requirements of § 570.204 only apply to

the qualification of CBDOs serving

Entitlement jurisdictions under the

CDBG program. As discussed earlier in

this preamble, Section 807(f) of the 1992

Act expanded the list of organizations

eligible to carry out activities in

nonentitlement areas under Section

105(a)(15) of the HCD Act. Any

nonprofit organization serving the

development needs of nonentitlement

areas now qualifies under Section

105(a)(15) of the Act for the State CDBG

program.

Issue. One commenter also

recommended that HUD allow a limited

partnership in which the managing

general partner is an eligible CBDO to

qualify under § 570.204. The commenter

argues that the use of low-income tax

credits (LITCs) necessitates a limited

partnership structure and that adding

the limited partnership itself as a

qualifying entity would remove the

necessity of having two levels of

contracts—one between the grantee and

the CBDO and one between that CBDO

and the limited partnership. (1 local

government agency)

Response. Limited partnerships are

single purpose entities which exist to

syndicate and develop one project. It

would be difficult to construe the

definitions of the statutorily eligible

entities to include limited partnerships.

Thus, HUD has decided against

expressly adding a provision to the

regulations to include the type of

limited partnership described by the

commenter. However, in cases in which

the activities of an LIHTC limited

partnership are controlled by a

§ 570.204 qualified entity, usually by

that entity either serving as the general

partner of the limited partnership or

establishing such an entity as a

subsidiary, the Department has accepted

that CDBG assistance may be provided

by the § 570.204 qualified entity to the

limited partnership for the purpose of

carrying out all or part of the eligible

project. The Department will continue

to explore ways of removing

unnecessary administrative burdens for

such projects.

Issue. Specifically in regard to

qualified entities in nonentitlement

areas, one commenter (a state agency)

took issue with the discussion of such

entities contained in the preamble to the

proposed rule. The state agency

disagreed with HUD’s statutory

interpretation that the term ‘‘nonprofit

organizations serving the development

needs of communities in nonentitlement areas’’ excludes units of

general local government. This

interpretation, according to the state,

would restrict the use of CDBG funds by

certain State-sanctioned local entities.

Response. The Department has chosen

not to accept this comment. The

preamble to the proposed rule noted

that a public nonprofit organization

which meets Internal Revenue Service

requirements for nonprofit status may

qualify under Section 105(a)(15) of the

Act. The Department does not define a

number of terms (‘‘neighborhood

revitalization project’’, ‘‘community

economic development project’’,

‘‘energy conservation project’’, ‘‘carrying

out an activity’’) which are significant to

the discussion of CBDOs above, in order

to give States maximum flexibility to

implement Section 105(a)(15) within the

context of their particular situations.

National Objective Standards for Lowand Moderate-Income Area Benefit

Activities

Issue. A total of seven commenters

addressed the proposed revisions to

§ 570.208(a)(1)(i) of the Entitlement

regulations and § 570.483(b)(1)(i) of the

State regulations dealing with activities

qualifying under the national objective

of benefiting low- and moderate-income

persons as area benefit activities. This

revision relates specifically to a

proposed presumption of compliance

for special economic development

activities that may be carried out under

§ 570.203 [Sections 105(a) (14) and (17)

of the HCD Act] by a community

development financial institution

(CDFI) meeting certain criteria.

Concerns raised by the commenters

included statements both for and against

the proposed presumption; requests for

clarification of the types of entities that

would qualify as CDFIs; and requests for

revisions to the ‘‘primarily residential’’

and other aspects of the regulation. (1

local government agency, 1 state agency,

1 development organization, 1 national

association, 1 private citizen, and 2

HUD Field staff persons)

Response. Supporting the

development and growth of CDFIs can

be a critical component in the

comprehensive revitalization of
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1929

distressed neighborhoods because they

often address the financing needs of

these areas that are otherwise unmet.

Existing CDFIs have demonstrated their

ability to identify and respond to

community needs for equity

investments, loans, and development

services. Thus, HUD has decided to

include a modified version of the

proposed presumption in this final rule.

First, it is important to define the

types of entities that may qualify as

CDFIs, as some of the commenters

noted. As noted earlier in this preamble,

HUD is herein adding to the CDBG

regulations a definition of the term CDFI

that references the Title I, Subtitle A of

the Riegle Community Development and

Regulatory Improvement Act of 1994 (P.

L. 103–325, enacted September 23,

1994). Secondly, HUD has determined

that it is more appropriate to create

separate paragraphs in § 570.208 of the

Entitlement regulations and § 570.483 of

the State regulations to reflect the

options that may be used for activities

carried out by certain CDFIs, rather than

to simply include the proposed

presumption in § 570.208(a)(1)(i) and

§ 570.483(b)(1). Thus, in this final rule,

HUD has added new paragraphs under

the ‘‘additional criteria’’ section of the

national objective requirements at

§ 570.208(d)(6) of the Entitlement

regulations and § 570.483(e)(4) of the

State regulations to list the options that

may be used for CDBG activities carried

out by any CDFI whose charter limits its

investment area to a primarily

residential area consisting of at least 51

percent low- and moderate-income

persons. The new paragraphs

§ 507.208(d)(6)(i) and § 570.483(e)(4)(i)

cross reference with additional new

paragraphs § 570.208(a)(1)(v) and

§ 570.483(b)(1)(iv) of the Entitlement

and State regulations, respectively.

Pursuant to these paragraphs, job

creation or retention activities carried

out by CDFIs meeting the above criteria

may be presumed to meet the low- and

moderate-income area benefit criteria. It

should be noted that with the area

benefit presumption applied in this

manner, the ‘‘exception criteria’’ for

Entitlement communities cannot be

used in this regard. Thus, in order to

take advantage of the area benefit

presumption, the CDFI’s investment

area must be at least 51 percent lowand moderate-income regardless of the

community’s usual area benefit

threshold requirement.

HUD has determined that it is also

appropriate to offer a similar benefit for

job creation or retention activities

carried out under certain other

circumstances. Thus, in this final rule,

HUD has also added § 570.208(d)(5) in

the Entitlement regulations, which is

cross-referenced in § 570.208(a)(1)(v).

Under this provision, job creation or

retention activities undertaken in an

area pursuant to a HUD-approved

economic revitalization strategy

developed in accordance with the

authority of § 91.215(e) of the

Consolidated Plan final rule may be

presumed to meet the low- and

moderate-income area benefit criteria. It

should be noted that in order to reduce

the potential for abuse of this provision,

HUD is limiting this form of area benefit

presumption to areas that are primarily

residential and contain a percentage of

low- and moderate-income residents

that is no less than the percentage

computed by HUD pursuant to

§ 570.208(a)(1)(ii) but in no event less

than 51 percent. This means that the

required low- and moderate-income

percentage for the area may be

significantly higher than that which the

community generally uses for its area

benefit activities. For those

communities that generally use the

‘‘exception criteria,’’ the required lowand moderate-income percentage for

this area benefit presumption is 51

percent. For a community that generally

is required to meet 51 percent for

regular area benefit activities, the

required low- and moderate-income

percentage for this area benefit

presumption is that percentage level of

low- and moderate-income persons in

the last census block group in the

community’s highest quartile of block

groups ranked in order of proportion of

low- and moderate-income persons, as

computed by HUD pursuant to

§ 570.208(a)(1)(ii).

The Department will develop

guidelines for determining when

grantees should be authorized to take

advantage of the benefits of this

economic revitalization strategy area

approach. These guidelines will be

distributed to both grantees and HUD

Field Office staff.

In developing this approach for the

Entitlement program, the Department

became aware of significant issues

concerning how the economic

revitalization strategy provision might

be applied to the State program.

Therefore, the Department is not

implementing comparable regulation

language for the State program at this

time. In order to gain public comment,

the economic revitalization strategy area

concept for states will be the subject of

a future proposed rule. In the meantime,

the Department welcomes any

comments or suggestions on how the

economic revitalization strategy area

approach might be applied to the State

CDBG program.

Two commenters expressed concern

about the requirement in

§ 570.208(a)(1)(i) that limits the use of

the low- and moderate-income area

benefit provision in general to only

those activities that serve areas that are

‘‘primarily residential.’’ It should be

noted this requirement is a longstanding provision of the CDBG

regulations and has served the program

well. Thus, HUD has decided not to

make any changes to that requirement in

this final rule. One of the commenters,

a HUD Field staff person, recommended

that a specific exception to the

‘‘primarily residential’’ requirement be

made for projects qualifying under

§ 570.204 of the Entitlement regulations

[Section 105(a)(15) of the HCD Act]

because the types of projects made

eligible under that section, including

‘‘neighborhood revitalization’’ and

‘‘community economic development,’’

appear to lend themselves to an areawide benefit test. Such a change has not

been incorporated into this final rule.

The activities most often carried out

under § 570.204 [Section 105(a)(15)]

involve the provision of housing, and

Section 105(c)(3) of the HCD Act

specifically precludes the use of a lowand moderate-income area benefit

national objective claim for such

activities. However, in recognition of

the merit of the recommendation, HUD

has made certain changes in this final

rule to ease grantees’ burden in tracking

low- and moderate-income national

objective compliance for housing

activities in certain areas. These changes

are more fully discussed later in this

preamble.

One commenter, a national

association, expressed support for a

supposed ‘‘revision to permit area

benefit . . . without requiring that the

area be defined in terms of census tracts

or other official boundaries.’’ The

commenter appears to misunderstand

current requirements. While the CDBG

regulations do require entitlement

grantees to use, to the greatest extent

feasible, the most recently available

decennial census data to support the

low- and moderate-income character of

the area (and § 570.208(a)(1)(iv) has

been modified to incorporate a reference

to the new § 570.208(a)(1)(v) in this

regard), there is no current requirement

that the service area be defined along

census tract or other official boundaries.

The language included in this regard in

§ 570.208(a)(1)(i) (for Entitlements) and

§ 570.483(b)(1) (for States) in the

proposed rule is unchanged from

current requirements.
1930 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

National Objective Compliance by

Microenterprise Assistance Activities

Issue. A total of 15 commenters

addressed the proposed new

§ 570.208(a)(2)(iii) to be added to the

Entitlement regulations and the

proposed new § 570.483(b)(2)(iv) to be

added to the State regulations to

specifically provide the limited clientele

national objective option for activities

qualifying under the new

microenterprise assistance eligibility

category. Many of these commenters

specifically supported the provision,

and a few specifically opposed it.

Various commenters requested revisions

to or clarification of certain aspects of

the provision, most of which related to

the manner in which jobs created by

such activities would be considered (2

local government agencies, 3 state

agencies, 4 national associations, 4

development organizations, 1 private

citizen, and 1 HUD Field staff person).

Response. As discussed in the

preamble to the proposed rule, activities

carried out under the new

microenterprise eligibility category are

not statutorily subject to the same lowand moderate income national objective

limitations as are generally applicable to

special economic development activities

carried out under § 570.203 [and

Sections 105(a)(14) & (17) of the HCD

Act]. Thus, the low- and moderateincome limited clientele method of

meeting a national objective becomes an

option for activities carried out under

the new microenterprise eligibility

category. While many commenters

specifically supported the subject

proposed provision, a few commenters

specifically opposed it, particularly the

fact that only 51 percent of the owners

of microenterprises and persons

developing them would be required to

be low- and moderate-income persons.

Thus, there would be the potential to

permit sizable numbers of non-low- and

moderate-income persons to receive

financial assistance to develop a forprofit business. HUD has found these

arguments to be compelling. Thus, the

Department has revised the subject

limited clientele provision in this final

rule to restrict its use to qualify only

those assisted owners of

microenterprises and persons

developing microenterprises who are

low- and moderate-income persons.

This change should not be a significant

issue for many of the microenterprise

activities assisted under the CDBG

program. Many such programs are

designed to provide a means to help

disadvantaged persons become more

economically self-sufficient and are thus

often targeted to persons who meet

income qualification criteria at least as

restrictive as the CDBG definition of low

and moderate income. Also, to allow for

some continuity of service to a low- or

moderate-income person initially

assisted under a microenterprise activity

who later may no longer meet the

income guidelines after the

microenterprise actually becomes

operational, the Department has

retained the option that permits, for

purposes of meeting this national

objective requirement, any person

determined to be of low or moderate

income to be presumed to continue to

qualify as such for up to a three-year

period before that person would have to

requalify. The language in this final rule

also clarifies that under this new limited

clientele provision, it is only owners of

microenterprises and persons

developing microenterprises that are

considered for national objective

purposes and not employees of such

businesses who are not part-owners.

While the new limited clientele

provision has been restricted to only

low- and moderate-income persons,

activities qualifying under the new

microenterprise eligibility category that

may serve non-low- and moderateincome entrepreneurs may still be

assisted under the criteria for creation

and/or retention of jobs principally for

low- and moderate-income persons.

Under that national objective claim, all

employees of a microenterprise,

including the owner(s), are considered,

and a grantee can use the new

presumptions added by Section 806(e)

of the 1992 Act for determining a

person’s status as a low- or moderateincome person, as implemented in this

final rule at § 570.208(a)(4) of the

Entitlement regulations and

§ 570.483(b)(4) of the State regulations.

These presumptions cannot be used

under the new limited clientele

provision because the 1992 Act added

them as a new Section 105(c)(4) of the

HCD Act which refers only to activities

qualifying under the national objective

of job creation or retention for low- and

moderate-income persons.

One commenter asked that HUD

specifically name examples of low- and

moderate-income clientele. Certain such

examples that apply to all activities

benefiting low- and moderate-income

persons are included in § 570.506(b) of

the Entitlement regulations.

Two commenters requested

clarification as to whether HUD’s

proposing the limited clientele

provision for microenterprise assistance

activities means that ‘‘cost per job’’

created will not be a primary

consideration in the evaluation of a

CDBG-funded microenterprise program.

‘‘Cost per job’’ is not a primary HUD

consideration for any microenterprise

assistance activities carried out under

the new separate microenterprise

eligibility category. Such a calculation

only comes into play in the public

benefit standards (established elsewhere

in this final rule), which are not

statutorily applicable to activities

carried out under the new

microenterprise eligibility category. As

with any CDBG activity, however,

grantees have the flexibility to add

additional local criteria for activity

evaluation. Also, given the general

requirement that all costs charged to the

CDBG program must be necessary and

reasonable for the proper and efficient

administration of the program, HUD

expects grantees to consider cost in

relation to results for all activities and

to take steps to curb unusually high

costs.

National Objective Compliance for

Employment Support Activities

As delineated earlier in this preamble

under the discussion of the new

§ 570.203(c) economic development

services provision in the Entitlement

regulations, HUD is aware of various

proposals under which certain entities

have indicated a willingness to train

low- and moderate-income persons for

jobs and/or provide such persons with

other employment opportunities, but

these entities cannot agree that 51

percent of all assisted persons will be

low- or moderate-income. HUD believes

that such proposals can often provide

valuable opportunities for employment

of low- and moderate-income persons

and that a way should be found to

permit CDBG funds to assist such

efforts. Thus, HUD is amending the lowand moderate-income limited clientele

national objective requirements in this

final rule [with a new § 570.208(a)(2)(iv)

in the Entitlement regulations and a

new § 570.483(b)(2)(v) in the State

regulations] to authorize the use of

CDBG funds for such activities that

provide training and/or other

employment support services in limited

circumstances. In order to qualify under

this provision, CDBG assistance for the

project must be limited to the provision

of such training and/or supportive

services; the percentage of the total

project cost borne by CDBG may not

exceed the percentage of all persons

assisted who are low or moderate

income. HUD has included this

provision under the limited clientele

category rather than the job creation or

retention national objective category

because while such use of CDBG funds

solely for job training and/or supportive

services can often be considered to
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1931

‘‘involve employment’’ of low- and

moderate-income persons (reference

Section 105(c)(1) of the Act), they

cannot generally be considered to

directly ‘‘create’’ or ‘‘retain’’ jobs as

those terms are used in the CDBG

regulations.

National Objective Standards for Lowand Moderate-Income Housing

Activities

As noted under the low- and

moderate-income area benefit

discussion earlier in this preamble,

HUD has added in this final rule new

paragraphs § 570.208(d)(5) and (6) in the

Entitlement regulations and

§ 570.483(e)(4) in the State regulations.

These paragraphs lay out various

national objective options for activities

undertaken in certain lower-income

areas either by a CDFI or (in Entitlement

communities) pursuant to a HUDapproved economic revitalization

strategy. Paragraph (ii) of each of these

new sections refers to housing activities

carried out under these circumstances,

and they are cross referenced in

§ 570.208(a)(3) in the Entitlement

regulations and § 570.483(b)(3) in the

State regulations in this final rule. As

noted earlier, Section 105(c)(3) of the

Act limits the manner in which housing

activities may be considered to benefit

low- and moderate-income persons, and

it precludes the use of an area benefit

claim for such activities. As an

alternative, the new provisions in this

final rule permit all housing activities

carried out under the delineated limited

circumstances to be grouped together

and considered as a single structure for

purposes of complying with the lowand moderate-income housing national

objective requirements. (For example, a

grantee providing rehabilitation

assistance to 10 single-family housing

units in such an area could classify all

10 units as meeting the low- and

moderate-income benefit national

objective if at least six of the units were

occupied by low- and moderate-income

persons.) For the calculation of the

overall low- and moderate-income

benefit level of a grantee’s CDBG

program, such housing is still subject to

the limitation on benefit to low- and

moderate-income persons relative to

activity costs, pursuant to

§ 570.200(a)(3)(iv) of the Entitlement

regulations and § 570.484(b)(4) of the

State regulations.

National Objective Standards for

Benefiting Low- and Moderate-Income

Persons Through the Creation or

Retention of Jobs

Presumptions Added by 1992 Act

Issue. A total of 19 commenters

addressed the general manner in which

HUD proposed to implement the

presumptions for determining an

employee’s status as a low- and

moderate-income person that were

added to the HCD Act as a new Section

105(c)(4) by Section 806(e) of the 1992

Act for job creation and retention

activities. Of the total number of

commenters, 11 clearly indicated their

support for the proposed change, and

five stated their opposition. Most of the

support comments were based on the

reduced burden and ‘‘less intrusive’’

means for determining the low- and

moderate-income status of employees.

Most of the comments opposing the

proposed change referenced the fact that

the proposed rule used only the

minimum test for Empowerment Zone

and Enterprise Community census tract.

Concern was particularly expressed that

there was no reference to the ‘‘pervasive

poverty, unemployment, and general

distress’’ requirement for Empowerment

Zone and Enterprise Communities. (6

local government agencies, 6 national

associations, 1 state agency, 3

development organizations, 2 private

citizens, and 1 HUD Field staff person)

Response. After a thorough review of

all of the above comments and the

applicable statutory references at Title

XIII, Chapter I, Subchapter C, Part I of

the Omnibus Budget Reconciliation Act

of 1993 regarding the eligibility criteria

for Empowerment Zones and Enterprise

Communities, HUD has determined that

the presumptions added by the 1992 Act

should be implemented in a more

stringent manner than was set forth in

the proposed rule. The Department

particularly agrees with those

commenters who noted that the

‘‘pervasive poverty, unemployment, and

general distress’’ eligibility requirement

for Empowerment Zone and Enterprise

Communities should be reflected in the

implementation of the subject low- and

moderate-income presumptions for job

creation and retention activities under

the CDBG program. Thus, a new

paragraph § 570.208(a)(4)(v) of the

Entitlement regulations and a new

paragraph § 570.483(b)(4)(v) of the State

regulations have been added to define

the requirements a census tract (or block

numbering area) must meet in order to

qualify for the presumptions added by

the 1992 Act. Under these provisions, a

census tract must, in part, demonstrate

pervasive poverty and general distress

by meeting at least one of three

delineated standards. Two of these

standards relate to the poverty levels in

the various block groups comprising the

census tract. The third standard

provides a grantee with the option of

requesting a determination from HUD

that a census tract meets the

‘‘pervasive’’ test based on other

objectively determinable signs of

general distress. The Department

intends to have the subject

determinations made at the HUD Field

Office level.

A conforming change to the new

§ 570.506(b)(7) of the Entitlement

regulations regarding records that need

to be maintained for the subject

presumptions is also included in the

final rule.

Issue. A total of 10 commenters

responded to HUD’s specific request for

comment as to whether tighter

presumption standards should be

established for census tracts that

comprise or include any part of a

community’s central business district

(CBD), as discussed in the

Empowerment Zone and Enterprise

Community legislation. Six of the

commenters wanted no special

standards for CBDs. Four of the

commenters argued that there must be

tighter standards for such areas given

the statutory eligibility criteria for

Empowerment Zones and Enterprise

Communities (4 local government

agencies, 3 national associations, 1

development organization, and 2 private

citizens).

Response. After a thorough review of

all of the above comments and the

applicable statutory references, HUD

has determined that tighter presumption

standards must be established for CBDs.

The statutory arguments are compelling.

Thus, in the new paragraph

§ 570.208(a)(4)(v) of the Entitlement

regulations and a new paragraph

§ 570.483(b)(4)(v) of the State

regulations added by this final rule,

HUD has included language similar to

that which appears in the

Empowerment Zone and Enterprise

Community regulations regarding this

issue, establishing a 30 percent poverty

standard for any census tract that

includes any portion of a CBD (as that

term is used in the most recent Census

of Retail Trade).

Issue. Two commenters recommended

that HUD revise the proposed rule

language to include census tracts that

qualify for Empowerment Zone or

Enterprise Community eligibility under

that program’s special rules relating to

the determination of poverty rates for

census tracts with small populations,

particularly those tracts that are more
1932 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

than 75 percent zoned for commercial or

industrial use (1 local government

agency and 1 development

organization).

Response. HUD has determined that it

is not appropriate to revise the

regulations implementing the CDBG

presumptions to include such tracts in

general. While the Empowerment Zone/

Enterprise Community legislation does

permit these tracts to be considered as

passing the minimum poverty tests, this

is done mainly in the context of

qualifying the tract as part of an overall

area to be designated. Because the CDBG

presumptions apply only on an

individual census tract basis, the

Department has determined that

including such tracts without limitation

would unduly broaden the scope of the

subject presumptions. However, it is

recognized that many federally

designated Empowerment Zones and

Enterprise Communities could include

such census tracts. Thus, the new

paragraph § 570.208(a)(4)(v) of the

Entitlement regulations and a new

paragraph § 570.483(b)(4)(v) of the State

regulations added in this final rule to

implement the CDBG presumptions

permit any census tract that is part of a

federally designated Empowerment

Zone or Enterprise Community to

qualify for the CDBG presumption

regardless of whether it meets the other

general criteria delineated in the

regulation.

Issue. Several commenters raised

other concerns that relate to the

statutory bases for the subject

presumptions of a person’s low- and

moderate-income status for CDBG

activities carried out under the national

objective of job creation or retention.

Issues raised included: concerns

regarding the use of census tract data

instead of block group or

‘‘neighborhood’’ data; a

recommendation to permit communities

to use data obtained through a survey;

questions as to why one of the

presumptions only applied to the

residence of the employee while the

other applied to either the employee’s

residence or the location of the assisted

business; and concerns about the

interpretation of the terms ‘‘assisted

business’’ and ‘‘job under

consideration’’ as used in the proposed

rule, as opposed to the term ‘‘assisted

activity’’ as used in the Act (4 national

associations and 1 private citizen).

Response. Section 105(c)(4) of the

Act, as added by Section 806(e) of the

1992 Act, which expressly authorizes

the subject low- and moderate-income

presumptions for job creation and

retention activities, specifically refers to

‘‘census tracts.’’ Thus, overall tract data

must be used in determining these

presumptions. In regard to the

presumption that is determined by the

tract meeting what Section 105(c)(4)

calls ‘‘Federal enterprise zone eligibility

criteria,’’ it is noted that the

Empowerment Zone/Enterprise

Community legislation requires poverty

rates to be determined using the most

recent decennial census data available.

Thus, this requirement is carried over

into a new paragraph § 570.208(a)(4)(v)

of the Entitlement regulations and a new

paragraph § 570.483(b)(4)(v) of the State

regulations added in this final rule to

implement the related CDBG

presumption. The other CDBG

presumption, which is based on the

low- and moderate-income character of

the census tract in which an employee

resides, does not carry with it the

specific requirement that the most

recent decennial census data available

must be used. Thus, while HUD expects

grantees to follow the general CDBG rule

of using such census data to the fullest

extent feasible, it would be possible for

a grantee to conduct a survey to support

a census tract’s qualification for that

presumption. However, given the

statutory ‘‘census tract’’ language noted

above, the area for which such a survey

would be undertaken must coincide

with the census tract boundary. It is

further noted that this latter

presumption only applies to a census

tract in which an employee resides and

not to the location of the assisted

economic development project because

of the statutory language in Section

105(c)(4).

In expressing concern over the

possible interpretation of the terms

‘‘assisted business’’ and ‘‘job under

consideration,’’ as used in the

regulations implementing the broader

presumption, one commenter gave two

examples. First, the commenter states

that assistance to a ‘‘branch office’’

located in a qualified tract should be

able to use the presumption resulting

from ‘‘Federal enterprise zone eligibility

criteria’’ even if the business’ principal

office is located elsewhere. This is

entirely consistent with the language

included in the new paragraph

§ 570.208(a)(4)(iv) of the Entitlement

regulations and the new paragraph

§ 570.483(b)(4)(iv) of the State

regulations. In using the term ‘‘assisted

business’’ in those portions of the rule,

HUD does not intend to imply that the

business’ main office or corporate

headquarters must be located in a

qualified tract in order to use the

presumption. The regulatory language is

designed to provide sufficient

restrictions to prohibit businesses from

establishing only a ‘‘shell’’ office to

make use of the location presumption

while the actual activity being assisted

is in fact being carried out elsewhere.

Assistance to legitimate ‘‘branch

offices’’ is not restricted under the

regulatory language. As a second

example, the commenter states that a

‘‘job training center or small business

assistance office’’ should be able to use

the presumption even though such a

facility ‘‘helps people who do not yet

have businesses nor specific ‘jobs under

consideration’.’’ It is not clear how this

second example would be able to use

the presumption given the statutory

language at Section 105(c)(4). Based on

that provision, the new presumptions

can only be used for activities qualifying

under the national objective of job

creation or retention for low- and

moderate-income persons. Job training

centers or business assistance offices

such as those which appear to be

described in the commenter’s second

example generally would not qualify

under that national objective and would

thus not be able to use the presumption.

Issue. Two commenters raised

questions about how the subject

presumptions would be implemented.

The first question relates to whether the

presumptions based on an employee’s

residence could be used together with

the traditional way of documenting an

employee as a low- or moderate-income

person in order to meet the overall 51

percent low- and moderate-income

requirement for jobs created or retained

by a particular assisted business. One of

the commenters also asked what

documentation HUD will require to

verify that jobs are created when the

presumption on the basis of the location

of the business is used. (1 state agency

and 1 private citizen)

Response. In regard to the first

question, it is entirely permissible for a

grantee, in a single activity, to combine

counting employees presumed to be

low- and moderate-income persons on

the basis of their residence with those

employees documented as being such

persons under more traditional means.

Any concerns that this could possibly

lead to the company and/or the grantee

being accused of ‘‘singling out certain

individuals’’ for requests for income

information (as one of the commenters

states), is as unfounded as the ‘‘privacy’’

concerns certain persons have raised for

several years in discussions of this

section of the CDBG regulations. In

regard to the second question, a grantee

qualifying a business based on its

location must still obtain sufficient

documentation to demonstrate that jobs

are actually created or retained by the

activity. This documentation would be
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1933

similar to that which the grantee

currently receives for such activities,

with the exception that any employee

income information would be omitted.

Issue. Two commenters recommended

that the final rule contain language

which would make it easy for low- and

moderate-income people to challenge an

‘‘unwarranted presumption.’’ They

recommend that HUD reiterate the

regulatory ‘‘substantial evidence to the

contrary’’ language in this section of the

regulations and add wording that would

encourage residents to submit

challenges and direct HUD to quickly

respond to such challenges. (1 national

association and 1 development

organization)

Response. HUD cannot accommodate

this recommendation. The subject

presumptions of a person’s low- and

moderate-income status for job creation

or retention activities is specifically

authorized by statute. It does not matter

if the presumption appears

‘‘unwarranted’’ in a specific case; if the

activity meets the requirements

delineated in Section 105(c)(4) of the

Act, it is entitled to use the

presumption. There is a distinct

difference between these presumptions

and those that are HUD has otherwise

established only on a regulatory basis

under the limited clientele standards.

Job Creation or Retention by Public

Infrastructure Improvements

The Department proposed another

amendment to § 570.208(a)(4) of the

CDBG Entitlement regulations and

§ 570.483(b)(4) of the State regulations

concerning the requirements for

demonstrating national objective

compliance by CDBG-assisted

infrastructure improvements. Eight

entities commented on this proposed

change: 4 states, 2 national associations,

one HUD staff person and one citizen.

Nearly all commenters supported HUD’s

efforts to provide more flexibility in this

area. Several comments suggested

specific revisions to HUD’s proposal.

Issue. Communities often over-design

public facilities to accommodate future

growth; this frequently makes sense for

the community. However, CDBG funds

should only be used to pay costs

associated with the capacity needed by

presently-identified businesses, or else

the grantee should track future job

creation for three years.

Response. The Department has chosen

not to accept this suggestion. As noted

in the preamble to the proposed rule,

the Department proposed shortening the

three-year tracking period to one year

because it has received numerous

comments from states that the existing

State CDBG regulations are unduly

burdensome. The Department believes it

would be cumbersome for HUD staff to

attempt to identify and prorate

construction costs associated with

current vs. future capacity needs; this

could place HUD staff in the role of

second-guessing grantees’ engineering

reports.

Issue. Two commenters requested that

projected, rather than actual, job

creation/retention be compared to the

$10,000 CDBG cost-per-job threshold.

Because grantees cannot be completely

certain how many jobs will actually be

created, there may be instances where

the projected cost per job is less than

$10,000, but the actual cost per job is

over $10,000.

Response. The Department concurs

with these comments. The Department

is concerned that grantees might

intentionally overstate the projected

number of jobs so as to take advantage

of the less stringent requirements for

projects whose per-job cost is less than

$10,000. However, it is impossible for

job creation or retention estimates to be

100% accurate. As the proposed

regulations are worded, a grantee could

be retroactively held responsible for

tracking a wider universe of businesses

for job creation/retention if the actual

cost per job was over $10,000, even

though the projected cost per job was

under $10,000. In the final regulations,

references to actual vs. projected job

creation/retention have been eliminated.

Instead, the regulations refer to jobs ‘‘to

be created or retained.’’

In the regulations on public benefit

documentation, the Department

indicates that, where a grantee shows a

pattern of substantial variation between

projected and actual benefits received, a

grantee will be expected to take actions

to improve the accuracy of its

projections. The Department has not

included comparable language in this

section. If, for purposes of this section,

a grantee’s projections show a pattern of

substantial variation from actual job

creation/retention, the Department will

expect grantees to take steps to improve

the accuracy of their projections.

Issue. One commenter recommended

that, rather than requiring grantees to

conduct an assessment of businesses in

the service area of the public facility or

improvement, the rule should require an

‘‘appropriate’’ review for public

improvement projects undertaken to

create or retain jobs.

Response. The Department does not

accept this comment, for two reasons.

This suggestion confuses requirements

for meeting a national objective with

requirements for demonstrating the

eligibility of an activity. Equally

significant is that the new statutory

requirements regarding evaluating and

selecting economic development

projects effectively replace the

‘‘appropriate’’ determinations

previously required. The Guidelines for

Evaluating Project Costs and Financial

Requirements are not applicable to

public improvement projects; a grantee

may choose to develop guidelines for

evaluating public improvement projects

if it wishes. The Department has chosen

to apply the public Benefit standards

only to those public improvement

projects (undertaken to create or retain

jobs) for which the projected cost per

job is $10,000 or more.

Issue. HUD should restrict the use of

CDBG funds in situations where

economic development infrastructure

activities cross privately-owned

property. This would be construed as a

potential windfall to the private

property owner or company.

Response. The Department has chosen

not to accept this recommendation.

HUD is unaware of any evidence that

this is a significant problem in the

CDBG program. As the commenter

acknowledges, states and localities have

legal mechanisms to govern hookup

access to public utilities.

Issue. One commenter noted that the

proposed Entitlement and State

regulation language differs regarding

businesses with which agreements must

be signed; the commenter prefers the

language in the proposed State CDBG

regulation.

Response. The Department has

revised the relevant sections [which are

now § 570.483(b)(4)(vi)(F) and

§ 570.208(a)(4)(vi)(F) to provide greater

consistency between the two

paragraphs. In revamping this section of

the regulations, the Department has

eliminated references to agreements

with businesses.

Issue. Two states urged the

Department to delete portions of the

proposed regulations: the requirement

for conducting an assessment of

businesses in the service area of the

public facility or improvement; the

requirement that job creation should be

tracked for each business until the

business’ job creation/retention

obligation is fulfilled; and, where the

cost per job is $10,000 or more, applying

the time period for tracking businesses

to just the business(es) with signed

agreements for which the improvement

is undertaken.

Response. Based on relevant statutory

language in the Housing and

Community Development Act, the

Department disagrees with the

implication that documentation

regarding national objectives should

cease once the originally-projected
1934 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

number of jobs has been created.

Furthermore, these recommendations

would eliminate the distinction in

requirements between activities in

which the cost per job is $10,000 or

more and those in which the cost per

job is under $10,000. Based on the data

from the State CDBG program, the

$10,000 per job created/retained

threshold appears to be significantly

above the median costs for public

facility/improvement projects of this

sort; few projects should thus be subject

to the stricter requirements. The

Department believes that stricter

requirements are appropriate for

projects costing $10,000 per job or more,

because less public benefit is being

obtained per CDBG dollar expended.

However, the Department has taken

seriously the underlying desire for

simplicity, and as a result has worked

to streamline this section of the

regulations. Eliminated in the final

regulations is the requirement that the

recipient undertake an assessment of all

businesses in the service area of the

public facility/improvement to

determine which businesses may create/

retain jobs as a result of the public

facility/improvement. Grantees are

cautioned, however, that should the

CDBG per-job cost of the project be

$10,000 or more, the recipient must still

aggregate jobs created/retained by all

businesses which locate or expand in

the service area of the public

improvement/facility. Grantees will

thus need some mechanism for

identifying such businesses.

Issue. One state requested that the

proposed public improvement-job

creation requirements for the State

program be made retroactively

applicable to projects funded by states

after December 9, 1992. That was the

effective date of the current State CDBG

regulations, in which the existing

requirements concerning public

improvement-job creation activities

were first effected.

Response. A recent U.S. Supreme

Court decision casts uncertainty on the

constitutionality of retroactive

rulemaking. The Department feels an

attempt to provide some retroactive

flexibility through the rule-making

process could be legally problematic.

States may, as always, request a waiver

of the existing regulations for individual

cases.

Other Job Creation/Retention Issues

Issue. One commenter raised a

concern regarding the provision at the

new § 570.208(a)(4)(vi)(B) of the

Entitlement regulations which permits

the aggregation of jobs for loan funds

administered by a subrecipient where

CDBG pays only for the staff and

overhead and loans are made

exclusively from non-CDBG funds. The

commenter recommended that HUD

change the phrase ‘‘. . . jobs created by

all the businesses receiving loans during

each program year’’ to ‘‘. . . jobs

projected by all the businesses receiving

. . .’’ This recommendation is based on

the claim that during the early years of

a program’s operation, ‘‘few jobs may

actually have been created, even though

many loans have been ‘committed.’ ’’ (1

private citizen)

Response. The commenter appears to

misunderstand the subject provision.

The regulation does not measure the

number of jobs actually created in each

program year. Instead, it measures all

the jobs created as a result of the CDBG

assistance by all the businesses that

receive loans in each program year,

regardless of when the jobs are actually

created.

In developing this final rule, HUD has

pursued additional job aggregation

options in consideration of the many

comments received in support of less

burdensome job tracking. Also, in

considering the comments on the public

benefit standards, HUD has determined

that it is appropriate to offer certain

flexibility for activities that serve

important national interests. Thus, in

this final rule, HUD is delineating three

additional instances under which jobs

created or retained may be aggregated

for purposes of determining compliance

with national objective requirements.

Aggregation of jobs is now also

permitted for (1) activities providing

technical assistance to for-profit

businesses; (2) activities meeting the

criteria in the public benefit standards

at § 570.209(b)(2)(v) of the Entitlement

regulations and § 570.482(f)(3)(v) of the

State regulations; and (3) for activities

carried out by a CDFI. To reflect this,

§ 570.208(a)(4)(vi) of the Entitlement

regulations and § 570.483(b)(4)(vi) of the

State regulations have been amended. In

this regard, it should also be noted new

paragraphs § 570.208(d)(7) and

§ 570.483(e)(5), added to the Entitlement

and State regulations respectively,

require that for an activity that may

meet the standards for more than one of

these options, the grantee may elect

only one option under which to qualify

the activity. No ‘‘double counting’’ is

permitted. Issue. One commenter raised a

concern regarding the requirement

regarding the criteria now at

§ 570.208(a)(4)(iii) and § 570.483(b)(4)

making jobs ‘‘available to’’ low- and

moderate-income persons, particularly

the ‘‘no special skills’’ requirement

unless the business agrees to hire

unqualified people and then provide

training. The commenters argues that

HUD should not ‘‘presume’’ that lowand moderate-income persons have no

education because many such persons

may have a community college or

vocational technical education and still

be underemployed or poorly paid

because of various factors. The

commenter also notes that in certain

cases, the jobs to be created by an

assisted activity will not actually be

created for a year or more, which would

provide time for necessary training

before the business completes its hiring

process. (1 national association)

Response. The reference requirement

is important to ensure that no special

skill or education requirements form a

barrier to low- and moderate-income

persons being considered for the jobs

under the ‘‘available to’’ option under

§ 570.208(a)(4). If a community knows

that there is a pool of more skilled lowand moderate-income persons available,

it can always choose to demonstrate

compliance with the national objective

requirement under the ‘‘held by’’ option

where skill level is not considered. The

new low- and moderate-income

presumptions should also make it easier

for grantees to use the ‘‘held by’’ option.

In regard to the issue of the timing of the

training versus hiring, the Department

wants to ensure that any training

claimed under the new ‘‘economic

development services’’ provision at

§ 570.203(c) of the Entitlement

regulations and § 570.482(d) of the State

regulations is limited to persons whom

the respective business has actually

agreed to employ and not to include

training just to provide a general ‘‘pool’’

of persons from which a business may

possibly hire. This is important in

distinguishing ‘‘economic development

services’’ that qualify as part of the

‘‘delivery costs’’ of a related economic

development project from more generic

public service activities that qualify

under § 570.201(e) of the Entitlement

regulations. It is noted that under this

final rule, activities qualifying under

either of these eligibility categories can

also take advantage of the new low- and

moderate-income limited clientele

option at § 570.208(a)(2)(iv) of the

Entitlement regulations and

§ 570.483(b)(2)(v) of the State

regulations in certain circumstances.

Request for Comment on Certain Other

Job Creation/Retention Issues Not

Contained in the Proposed Rule

In addition to a discussion of specific

regulatory revisions, the preamble to the

May 31, 1994, proposed rule also

contained a specific request for public

comment on certain other issues which

HUD is examining in an attempt to
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1935

determine whether further changes

should be proposed regarding the

national objective standards for

benefiting low- and moderate-income

persons through the creation or

retention of jobs. These issues included:

(1) whether any further low- and

moderate-income presumptions should

be made for job creation or retention

activities; (2) whether any modification

should be made to the CDBG job

retention requirement to document that

jobs claimed as being retained would

actually be lost without the CDBG

assistance; and (3) whether any

modification should be made to the

requirement in job retention activities

that, except for some allowance for jobs

that may become available through

turnover, the low- and moderate-income

standards are applied at the time the

assistance is provided, which is while

the employees still have the income

from the jobs that they are subject to

lose. (Please refer to the preamble to the

proposed rule published in the Federal

Register on May 31, 1994, for a more

complete discussion of these issues.)

A sizable amount of public comment

in response to these issues was received.

Many of the comments offered

interesting suggestions, and HUD will

be publishing an additional proposed

rule in response to some of the

recommendations provided. Such items

must go through the proposed

rulemaking process in order to provide

the general public with an opportunity

to comment on them before they would

be published for effect. The public

comments received on these issues

based on the request contained in the

preamble to the May 31, 1994, proposed

rule will be discussed fully in the

preamble to the new proposed rule.

National Objective Standards for

Addressing Slums or Blight on an Area

Basis

The proposed rule included a revision

to § 570.208(b)(1)(ii) of the Entitlement

regulations and § 570.483(c)(1)(ii) of the

State regulations. This proposal would

allow designated slum/blighted areas to

qualify under the slum/blight national

objective if the area exhibited pervasive

economic disinvestment in the form of

high turnover or vacancy rates in

previously occupied commercial or

industrial buildings.

In addition, the Department sought

comment on whether instances of

environmental contamination should be

considered as evidence of blighting

conditions. No specific regulatory

language was proposed in that area,

however.

The Department received valuable

input on both topics relating to the

slum/blight national objective. As a

result, the Department has decided to

propose additions to the slum/blight

criteria to accommodate environmental

contamination, and to revise its initially

proposed criteria regarding pervasive

economic disinvestment. The existing

regulations would be significantly

restructured to accommodate these

changes.

The Department has decided to

publish a new set of proposed

regulations dealing with the slum/blight

national objectives. The comments

received by the Department on slum/

blight issues will be discussed in the

preamble to those new proposed

regulations.

Guidelines for Evaluating and Selecting

Economic Development Activities for

CDBG Assistance

The proposed rule contained language

implementing section 806(a) of the 1992

Act at a proposed new § 570.209 in the

Entitlement regulations and additions to

§ 570.482 in the State regulations. The

proposed regulations described

guidelines for evaluating certain

economic development activities

assisted with CDBG funds. These

guidelines consist of two parts:

guidelines and objectives for evaluating

project costs and financial requirements,

the use of which are not mandatory, and

public benefit standards, which are

mandatory.

Numerous comments were received

on various aspects of this section of the

proposed regulations. The comments

can be categorized into groups of issues,

and will be discussed by category of

issue.

Underwriting Guidelines—General

The proposed rule described HUD’s

Guidelines and Objectives for

Evaluating Project Costs and Financial

Requirements (the ‘‘underwriting

guidelines’’); the proposed guidelines

themselves were published as a separate

Federal Register notice on the same

day. Sixteen commenters commented on

HUD’s proposed Guidelines and

Objectives for Evaluating Project Costs

and Financial Requirements: 5 local

governments, 4 national associations, 2

States, 3 HUD Field Office staffs, one

citizen and one business development

entity. Four commenters expressed

overall support for the approach

proposed to be taken by the Department

in implementing the requirements of the

1992 Act.

Issue. Three commenters stated that

the underwriting guidelines themselves

should be included in the text of the

regulations, rather than in a separate

Federal Register notice. By not being

part of the regulations themselves,

commenters felt that the guidelines

would be more easily overlooked or

forgotten about in future years.

Response. These issues were carefully

considered by the Department in

developing the proposed rule. The rule

stated that the use of the underwriting

guidelines proposed at § 570.209(a) and

§ 570.482(e) is not mandatory. To

further demonstrate this point, the

specific elements of the underwriting

guidelines were not included within the

text of the proposed rule itself. Instead,

they were proposed to be published in

a concurrent but separate Federal

Register notice. Outweighing the

conmmenters’ concerns is the fact that,

while Congress directed that the

guidelines be published by regulation,

the use of the underwriting guidelines is

not mandatory. To publish non-binding

guidance within a set of otherwise

binding regulations would be

contradictory and confusing. In

disseminating information on the final

regulations, the Department will take

steps to include the guidelines along

with the final regulations, to help

ensure that the Federal Register notice

does not get overlooked.

Issue. Three widely divergent

comments were received regarding the

applicability of the underwriting

guidelines to microenterprise and small

business assistance programs. One

commenter argued that ‘‘appropriate

determinations’’ should not be required

on a loan-by-loan basis for

microenterprise activities, but could be

addressed by overall program design.

Another argued that the underwriting

guidelines should apply to

microenterprise assistance activities, so

that communities will have a stronger

regulatory framework upon which to

develop their own guidelines for

evaluating microenterprise loans. A

third commenter stated that small

businesses which do not qualify as

microenterprises should be given some

relief from the underwriting criteria and

financial documentation requirements.

Response. The 1992 Act specifies that

HUD is to develop guidelines for

evaluating and selecting economic

development activities funded under

sections 105(a) (14), (15) and (17) of the

Act. Microenterprise assistance

activities were made separately eligible

under the new § 105(a)(23) of the 1992

Act, and thus were not subjected to the

underwriting guidelines by Congress.

The Department feels it is inappropriate

to extend coverage of the underwriting

guidelines to programs which provide

assistance exclusively to

microenterprises and which are eligible

under § 105(a)(23). Grantees may
1936 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

develop their own underwriting

guidelines for the evaluation of

microenterprise assistance programs.

However, if a grantee designs a program

to provide assistance to both

microenterprises and other small

businesses, the public benefit standards

and underwriting guidelines apply to

the entire program, and grantees will be

expected to evaluate each instance of

assistance individually. Regarding the

third comment, both the proposed and

the final regulations state that different

levels of review and financial

documentation are appropriate for

different sizes of projects and

businesses; grantees are encouraged to

develop guidelines which take into

consideration the size of the business

being assisted.

From the first of these comments, as

well as from several comments

addressed elsewhere in this preamble, it

is clear that the relationship between

the financial guidelines, the public

benefit standards and the ‘‘appropriate

determination’’ requirements (which the

Department has heretofore relied on) is

not understood. In the 1987 ‘‘Stokvis

Memo’’ and in the 1992 ‘‘Kondratas

Memo’’, the Department outlined its

policy for implementing the statutory

requirement that assistance to private

for-profit entities must be ‘‘appropriate

to carry out an economic development

project’’. The Department believes that

the new underwriting guidelines and

public benefit standards, taken together,

effectively comprise a methodology for

determining that such assistance is

appropriate, and supplant the

previously-required ‘‘appropriate

determinations’’.

It is important to note that the

financial and public benefit standards

cover a wider range of activities than

did the ‘‘appropriate determinations’’,

including all economic development

activities funded under sections 105(a)

(14) and (15) of the Act. Grantees are

encouraged to develop guidelines to

cover the evaluation and selection of

other types of economic development

activities, beyond those statutorily

required. However, HUD will not

evaluate or enforce locally-developed

guidelines covering economic

development activities other than those

described in the regulations.

Issue. Three commenters expressed

apprehension about a statement

contained in the preamble to the

proposed regulations. The Department

noted that, in cases where an activity

receiving CDBG financial assistance

fails to meet other applicable program

requirements, such as the public benefit

standards or the national objective

requirements, HUD will consider the

extent to which the recipient conducted

prudent underwriting in determining

appropriate sanctions to be imposed on

the recipient for such noncompliance.

Commenters questioned the consistency

of this statement with statutory

language, felt this represented a

‘‘gotcha’’ mentality by HUD, and opened

the door to HUD ‘‘second-guessing’’

grantees’ underwriting decisions.

Response. Commenters are correct in

noting that the Department is prohibited

from basing a determination of project

ineligibility on the failure of a project to

meet the objectives of the underwriting

guidelines. The Department will not

monitor grantees’ projects for

compliance with HUD’s underwriting

guidelines. The proposed underwriting

guidelines also state, however, that the

Department expects that grantees will

engage in some form of underwriting of

projects, regardless of whether or not a

grantee adopts HUD’s guidelines. The

intent of the preamble statement was

not to suggest that HUD would ‘‘secondguess’’ local underwriting guidelines or

decisions about specific projects

pursuant to them. When the Department

discovers cases of noncompliance with

other program requirements (such as

national objectives or eligibility), it has

flexibility to determine the appropriate

action to resolve the noncompliance. In

cases of noncompliance with other

program requirements, the Department

reserves the right to examine whether

the grantee conducted any underwriting

on the activity in question. If a grantee

performed no underwriting whatsoever

(or purely perfunctory underwriting) on

a project that fails, the Department may

look to see whether even rudimentary

underwriting would have disclosed to

the grantee that the project was likely to

fall into noncompliance. Similarly, the

Department will also consider whether

a grantee’s underwriting disclosed that

a project was likely to fail, but the

grantee chose to fund the project

anyway for reasons unrelated to

underwriting decisions.

Issue. One HUD staff person inquired

about the relationship between the

public benefit standards and the

underwriting guidelines. The

commenter asked what HUD would do

in a case where a grantee followed

established underwriting guidelines, yet

knowingly chose to fund a project

which exceeded the public benefit

standards (particularly the individual

activity standards).

Response. Having complied with a

grantee’s underwriting standards would

not recuse this project from failure to

meet the regulatory requirements for

public benefit. In such a situation, the

Department may still consider the

extent to which underwriting was

performed in assessing what corrective

action is appropriate to resolve the

noncompliance.

Issue. One correspondent requested

clarification or examples of what is

meant by the statement that guidelines

also apply to ‘‘activities carried out

under the authority of § 570.204 that

would otherwise be eligible under

§ 570.203.’’

Response. The Department’s position

is, and has been, that all activities

involving assistance to a for-profit

business are subject to the same

requirements (including the

underwriting guidelines, the public

benefit standards, and the previouslyrequired ‘‘appropriate determinations’’).

Provision of CDBG assistance to a forprofit business through a non-profit

subrecipient does not exempt such an

activity from the underwriting

guidelines or public benefit standards.

In the final regulations, this principle is

clarified and illustrated with an

example.

Issue. Three commenters raised

questions about the treatment of nonfinancial or indirect assistance to

businesses in the underwriting

guidelines. Two commenters felt that by

not specifically addressing the level of

underwriting documentation needed for

technical assistance activities, the

proposed regulations imply that the

same degree of analysis is required for

technical assistance to a business as for

direct financial assistance. Two

commenters also urged the department

to accept yearly aggregation of technical

assistance activities for demonstrating

compliance with national objectives.

Response. The Department concurs

with the comments regarding technical

assistance activities. The underwriting

guidelines published today specifically

mention that different levels of

underwriting documentation may be

appropriate for technical assistance

activities, given the nature and dollar

value of assistance being provided to

businesses. The Department has also

added a provision to the national

objectives requirements for low- and

moderate-income benefit, to allow job

creation/retention to be aggregated for

technical assistance activities.

Certain indirect forms of assistance to

business, such as land acquisition or

certain public improvement projects, are

not statutorily subject to the

underwriting guidelines. The

Department believes that, while not

mandatory, grantees should evaluate all

forms of assistance to businesses, to

ensure that the project represents an

appropriate use of the grantee’s funds.

Grantees are encouraged to develop
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1937

underwriting guidelines which include

other economic development activities

beyond those subject to the regulations.

Issue. Several comments were

received on the wording of several of

the objectives in the guidelines. These

comments generally spring from the

commenters’ professional opinions on

the desirable design features or

outcomes of individual programs.

Response. Because the underwriting

guidelines are not mandatory, the

Department has chosen not to adopt

most of these suggestions. Commenters

are encouraged to incorporate their

ideas into their local guidelines.

Public Benefit Standards

HUD heard from 20 different

commenters on the public benefit

standards (and how they would be

applied) in the proposed regulations: 3

local governments, 2 states, 8 national

associations, 2 development

organizations, one citizen and 4 HUD

staff. Comments on public benefit fell

into four categories of concern: the

overall approach and terminology used;

the individual activity standards;

activities providing insufficient public

benefit; and the aggregate standards.

While numerous questions and

concerns were raised, individual

commenters also expressed general

support for various aspects of the

proposed approach to public benefit: the

concept of aggregating public benefit;

the flexibility provided by multiple

approaches to measuring public benefit;

and the concept of allowing certain

categories of activities to be excluded

from the aggregate dollar standards.

It was also very clear that many

commenters did not understand the

relationship among the different public

benefit standards. Confusion was also

expressed about the meaning of various

terms used in the proposed regulations,

which apparently added to confusion

over the relationships among the

standards. To overcome this confusion,

the Department has substantially

rewritten and reorganized the final

regulations sections on public benefit.

Overall Approach and Terminology

Issue. Three different commenters

asked for clarification of various terms

such as ‘‘tests’’, ‘‘criteria’’, ‘‘portfolio’’

and ‘‘obligated’’. One asked what

constituted an ‘‘activity’’ for purposes of

aggregation: an individual loan? All

activity in one particular loan program

run by a grantee? Would a grantee with

10 different programs subject to the

public benefit standards develop 10

aggregate numbers, or one? Another

asked for confirmation that the public

benefit measurement period differs from

the time period in which job creation/

retention is measured for national

objectives documentation.

Response. In the final regulation, the

Department has attempted to use more

precise wording. The term ‘‘obligated’’

here has the same meaning as it does

elsewhere in the CDBG program—a

formal commitment of funds to fund a

specific activity, such as a signed

contract with a business, or written

notification of loan approval. The term

‘‘test’’ has been replaced with

‘‘standard’’; each numerical measure by

which activities are judged

(individually or in aggregate) is a

standard. Use of the term ‘‘portfolio’’

has been avoided in discussing the

aggregate standards. Use of the term

‘‘criteria’’ is limited to describing the

‘‘important national interests’’ activities

which may be excluded from the

aggregate standards.

The comment regarding the

measurement period for public benefit

vs. national objectives is correct. For

most covered activities designed to

create/retain jobs, each provision of

assistance to a business is judged

separately for whether it meets a

national objective; each business is

discretely tracked for job creation/

retention until the business has fulfilled

its jobs commitment. In contrast, public

benefit for any given business is judged

at the time assistance is first obligated

to the business; the levels of public

benefit determined at the time funds are

obligated are then aggregated for all

instances of assistance provided by a

grantee through all covered activities.

(The period of time over which

activities are aggregated varies among

the Entitlement, State, Insular and HUDAdministered CDBG programs.) Thus,

for any given business, job creation/

retention is primarily measured

prospectively for public benefit and

retrospectively for national objectives

purposes. (However, this explanation

does not apply universally; as the

regulations note, certain types of

activities may be aggregated differently.

In addition, grantees are to keep

comparative documentation on the

projected vs. actual public benefit from

projects.)

Issue. A number of commenters

voiced various objections to the overall

approach to public benefit: the proposed

standards are arbitrary and simplistic,

and invite ‘‘second-guessing’’ of projects

by HUD; more study is needed in this

area before specific standards are

proposed; the standards focus too much

on the cost per job and assume that

more jobs per CDBG dollar is a more

important outcome than job quality; the

standards ignore present or future

values of assistance provided; the

standards focus too much on individual

activities, ignoring overall program

outcomes; the standards focus too much

on aggregate benefits, ignoring

individual activities.

Response. As discussed in the

preamble to the proposed regulations,

the Department considered all of these

issues in developing the proposed

public benefit standards. More

sophisticated measurement systems

involve greater complexity, and may

increase the documentation burden on

grantees and/or reduce flexibility. The

Department strives to effect a system

which is flexible enough to encompass

the great variety of individual programs

and individual activities which exist

across the CDBG program, and yet

ensures at least some modicum of

public benefit will be obtained from any

given activity. The Department has

made revisions to the public benefit

standards in response to comments, but

has chosen not to radically change the

overall approach.

Issue. Two commenters (including

one state) suggested that each

community (or the state) be allowed to

establish its own public benefit

standards; HUD could then monitor

communities or states for compliance

with their standards.

Response. The Department believes

these suggestions are inconsistent with

the statute. The 1992 Act specified that

HUD is to develop, by regulation,

guidelines to ensure that public benefit

is appropriate relative to the amount of

CDBG assistance provided. The

commenters’ approach could increase,

not decrease, grantee complaints about

HUD ‘‘second guessing’’ local decisions.

Individual Activity Standards

Issue. Five commenters opined that

the proposed $100,000-per-job

individual activity standard is much too

high to ensure reasonable public benefit

for any given activity; various figures

between $12,000 and $50,000 were

suggested as replacements. On the other

hand, one commenter expressed

concern that the $100,000 standard

could preclude use of CDBG funds for

massive real estate redevelopment

projects or capital-intensive industrial

projects; other public benefits from such

projects may well justify the

expenditure of CDBG funds even when

the cost per job is high.

Response. After weighing these

arguments, the Department has decided

to lower the individual activity per-job

standard to $50,000. This should still

provide flexibility to undertake vitally

important projects with high capital

costs per job created or retained;
1938 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

grantees may request a waiver of

regulations for projects which would

exceed this level. The ‘‘CDBG cost per

job’’ and the ‘‘CDBG cost per low- and

moderate-income person served’’

standards are designed to establish

absolute upper limits for what HUD

would consider to be reasonable on an

individual project basis. Grantees are

free to set lower per-job maximums for

their own projects, if they wish.

Another example of high-cost projects

which the Department has become

aware of is the removal of

environmental contaminants as part of a

redevelopment project. The use of

CDBG funds for such ‘‘brownfields

remediation’’ activities is of growing

interest among grantees. Projects of this

nature can present high costs relative to

the amount of public benefit as defined

in these regulations. However, grantees

may have additional flexibility in

structuring the use of CDBG funds to

treat environmental conditions. For

example, publicly-owned land may be

cleaned up before title is transferred to

a private owner. In this way, the

environmental remediation activity

would not be subject to the public

benefit standards.

Issue. Two commenters opined that

the proposed $1,000 per area-resident

standard is similarly too high to ensure

reasonable public benefit; one

recommended $50 instead.

Response. The Department has

decided to leave the per-area-resident

standard as proposed. A lower figure

could hinder economic development

activities in small communities or

sparsely-populated rural areas. Grantees

are free to set lower per-area-resident

maximums for their own projects, if

they wish.

‘‘Insufficient Public Benefit’’ Activities

The proposed regulations contained a

list of activities for which HUD believes

insufficient public benefit is derived;

these activities would therefore not be

eligible for CDBG assistance. Six

comments were received on this list of

activities (one each from a citizen, a

local government, a national association

and a HUD staff person, and two from

states). Three commenters suggested

additional activities to be added to the

list of activities, two commenters

objected to the inclusion of one activity

on the list, and two commenters

requested clarification of language.

Issue. Use of grant funds for projects

that will directly compete with existing

businesses should be prohibited.

Response. The Department believes

this proposal would severely restrict

grantees’ use of CDBG funds for

economic development and would

handcuff the Department’s efforts to

make CDBG a more flexible funding

resource. There is nothing which would

prevent individual grantees from

adopting such a policy, if they wish.

Issue. Gaming facilities (whether on

or off Indian Reservations) should also

be made ineligible.

Response. The Department has

considered this issue in the past and has

decided not to pursue it.

Issue. Job Pirating (the use of CDBG

funds to move a business from one

community to another, with no net

expansion of activity) is a waste of

taxpayers’ money and should be

determined to be an ineligible activity.

Response. The Department has

studied the problem of job piracy a

number of times in the past, but has not

taken action to prohibit this activity.

Determining whether a business is

relocating principally because of the

CDBG assistance, or because of other

reasons, is a particularly intractable

problem in attempting to define job

piracy. Recently, Congress has shown

interest in legislating on this issue. The

Department has therefore decided to

defer action on the issue of job piracy

until it is clear what action might be

taken in authorizing legislation.

Issue. Three commenters opposed

including the acquisition of land for

which no specific use has been

determined on the list of ‘‘insufficient

public benefit’’ activities. Commenters

argued that this would eliminate future

economic development activities, and

that forcing grantees to prematurely

identify the use of land drives up the

development cost. One commenter

suggested that HUD require land

acquisition to meet a national objective

within two years of the expenditure of

funds.

Response. The Department does not

find the arguments for removing this

activity from the list to be convincing.

The Department is aware of a number of

situations in which land has been

purchased using CDBG funds with no

specific use in mind, and in which the

Department later determined that no

national objective was ever met by the

acquisition. In the Department’s

opinion, ‘‘landbanking’’ with CDBG

funds does not provide any public

benefit. It should be noted that the

proposed regulation would not prohibit

the construction of speculative

buildings for which no tenant has been

identified; nor does it mean that a

specific occupant must be identified

before land can be purchased. However,

a grantee should at least be able to

identify the intended use of the property

(such as for a shopping center or office

building). That does not mean, however,

that grantees could satisfy the regulatory

intent simply by identifying just any

vaguely described proposed use. The

language has been revised slightly in the

final regulations to refer to ‘‘acquisition

of land for which the specific use has

not been identified’’.

Issue. One commenter requested

specific examples of types of privatelyowned recreational facilities serving a

predominantly-higher income clientele

which might be determined ineligible

under the proposed regulations.

Concerning another activity on the list,

this commenter also noted that the

proposed language would not prevent

the provision of assistance to a

‘‘corporate shell’’ or another corporate

entity established by the same owner(s)

of a business which is the subject of

unresolved findings.

Response. The Department has chosen

not to try to develop such a list of

recreational facilities, as that list might

be misinterpreted as all-encompassing;

furthermore, a comparison of the

recreational benefits vs. other benefit to

low- and moderate-income persons

must of necessity be done on a case-bycase basis. The Department concurs

with the second comment; the final

regulations have been revised to include

other businesses owned by the same

owner(s). The final rule also makes

minor clarifying revisions to several of

the other ‘‘insufficient public benefit’’

activities.

Aggregate Activity Standards

Issue. Three commenters argued that

the aggregate standards are too complex,

and so should be eliminated. Some

commenters feared that grantees may

focus only on the individual activity

standards and overlook the aggregate

standards; the human tendency will be

to fund high-profile, high-cost-perbenefit projects first and ‘‘make it up

later’’ with smaller projects. Another

commenter expressed concern that for

low-volume economic development

programs, the individual and aggregate

standards would effectively be the same;

if a grantee does one loan early in a year

with a per-job cost over $35,000 and

then ends up making no other loans, the

grantee automatically fails the aggregate

standard.

Response. To reinforce the

significance of the aggregate public

standards, the regulations concerning

public benefit have been re-ordered to

discuss the aggregate standards first. It

is not the Department’s intent to unduly

penalize low-volume economic

development programs for

noncompliance by one or two loans.

However, in evaluating projects for

possible funding, all grantees are well
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1939

advised to consider their historical

levels of economic development activity

to ensure that the aggregate standards

will be met. It should be noted that

HUD’s decision to lower the individual

activity standard for job creation/

retention from $100,000 to $50,000

should reduce the possibility that

grantees will fail the aggregate standard

because they funded very high cost-perjob projects early in the year.

Issue. One commenter argued that the

$35,000 per-job aggregate standard is too

high to ensure reasonable public benefit;

several alternative standards in the

range of $5,000–$10,000 per job were

recommended instead.

Response. The Department has chosen

not to accept this recommendation. This

commenter also raised other objections

to HUD’s proposed method for assessing

public benefit; taken together, their

comments argue for a much more

rigorous approach to economic

development funding, which would

reduce grantee flexibility.

Issue. One commenter argued in favor

of either eliminating the $350 per lowand moderate-income area resident

standard, or at least raising it to $500.

Response. The Department has

decided to retain the proposed $350

figure.

Issue. One HUD staff person

questioned how public benefit would be

measured in the aggregate under the

HUD-Administered Small Cities CDBG

program, given that many grantees have

revolving loan funds funded with

program income from previous grants.

Response. The Department agrees that

the proposed regulations do not

adequately address this issue. In the

final Entitlement regulations,

§ 570.209(b)(2) has been revised to

address aggregate public benefit in the

HUD-Administered Small Cities and

Insular Areas CDBG programs.

Issue. Four comments were received

on the list of ‘‘important national

interest’’ activities. Two commenters

felt that more than 75% of a grantee’s

funds should be used for such

‘‘important national interest’’ activities

in order to meet the alternate aggregate

standard. One commenter felt the

criteria were so broadly written as to

allow virtually all activities to qualify,

and particularly objected to four of the

proposed criteria [(E), (F), (H), (L)] as

inappropriate. Another questioned why

microenterprise assistance activities

[(G)] were included on the list, when

microenterprise assistance activities

funded under § 105(a)(23) of the Act are

not subject to the public benefit

standards. One commenter favored

keeping the percentage of funds

requirement at 75%.

Response. In developing final

regulations, the Department has

substantially revised the concept that

certain activities can be excluded from

the $35,000 per-job or $350 per-arearesident aggregate standards. The 75%

provision has been eliminated as an

alternate to the aggregate dollar

standards. Instead, grantees may, at

their option, exclude individual

‘‘important national interest’’ activities

from the aggregate standards. The list of

‘‘important national interest’’ activities

which can be excluded from the

aggregate standards has also been

revised. Proposed criterion (G) has been

eliminated, and proposed criteria (A)

and (B) have been combined. Two new

criteria [(L) and (M)] have been added

to the Entitlement program final rule;

these criteria provide additional

flexibility in support of the new

‘‘economic revitalization strategy area’’

approach to demonstrating national

objectives compliance. (This approach

is discussed under ‘‘Low and Moderate

Income Area Benefit Activities’’ above;

as noted there, the approach is being

implemented in the Entitlement

program only at this time.) The

remaining criteria are now more

narrowly defined to better target

assistance to certain population groups.

One significant effect of these changes

to the ‘‘important national interest’’

activities is worth noting. All activities

which do not meet one of these

‘‘important national interest’’ criteria

must be subject to the aggregate dollar

standards.

Issue. Two commenters expressed

concern about the relationship of the

aggregate standards to the Section 108

Loan Guarantee Program. Concern is

expressed that the $35,000 per-job

aggregate standard will hinder grantees’

use of the Section 108 Loan Guarantee

program; Section 108 projects are often

big projects which could overwhelm the

aggregate average. If an expenditure of

CDBG funds is required several years

down the line to cover a default, the

grantee’s aggregate level of public

benefit would suddenly become skewed

too late for a grantee to make

adjustments.

Response. It is acknowledged that

certain large Section 108 projects might

have a high cost per job; however, the

Department believes Section 108

projects should be treated consistently

with other CDBG-funded projects. The

Department has revised the

requirements applying to the ‘‘important

national interests’’ activities listed in

the final rule; grantees may now, at their

option, exclude activities meeting these

criteria from the aggregate standards.

The Department believes many Section

108 projects could meet one or more of

these criteria. Grantees may also request

a waiver of the regulations for

individual activities which may not

meet the public benefit requirements.

Concerning an unexpected skewing of

aggregate benefit resulting from a

default, grantees should consider the

possibility of a default when deciding

whether to fund proposed projects.

Issue. One commenter suggested that

economic development services

activities funded under proposed

§ 570.203(c) of the Entitlement

regulations be excluded from the public

benefit standards, either categorically or

at the grantee’s option.

Response. The Department does not

believe it possible to exempt this type

of economic development activity from

the public benefit standards, given the

statutory language mandating the

development of public benefit standards

for activities qualifying under this

authority.

The Department has added language

to the discussion of public benefit

which clarifies how to apply the

individual and aggregate standards to

activities which provide job training, job

placement and other employment

support services. Except for

microenterprise assistance activities

eligible under § 105(a)(23) of the Act,

many such activities will be subject to

the public benefit standards because

they are undertaken pursuant to

Sections 105(a)(14), (15) or (17) of the

Act. For purposes of the individual and

aggregate public benefit standards only,

the jobs which such services involve are

counted as jobs created or retained. (See

also the preamble discussion of national

objectives for further information on

these activities.)

Public Benefit Standards—

Documentation of Benefit

Five commenters (two states and three

national associations) offered comments

on proposed paragraphs 570.209(d) and

570.482(e)(6). Comments fell into two

groups: those concerned about what

constitutes a substantial difference in

actual versus projected benefits; and

those concerned about what sanctions

the Department might take where actual

benefits were found to be substantially

less than projected benefits. One of the

comments expressed general support for

the approach to allow adjustment to the

projection process.

Issue. One commenter felt that if a

grantee re-evaluates an amended

project, it should be held accountable to

its amended projections, not to its initial

projections. The commenter

recommended that the regulations
1940 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

should refer to ‘‘initial or amended

projections’’.

Response. The Department concurs

with this point; the final regulations

discuss benefits in terms of benefits

‘‘anticipated when the CDBG assistance

was obligated.’’ This is intended to

include situations in which projections

are revised because of changes in a

project which a grantee agrees to allow.

Issue. One commenter recommended

that grantees’ records concerning the

amount of public benefit derived from

projects be made available to the public

at no cost. This commenter also

recommended that Entitlement grantees’

Grantee Performance Reports should

contain information on differences

between projected and actual public

benefits from projects.

Response. Existing requirement

concerning the availability of

documents to the public (such as the

CDBG citizen participation

requirements) already cover the

commenter’s first concern. The

Department will take under advisement

the suggestion concerning reporting of

benefits, at such time in the future that

reporting requirements are revised.

Issue. One commenter expressed the

opinion that if a grantee shows a pattern

of substantial differences between

projected and actual benefits, over

perhaps a two year period, HUD should

impose a two-year moratorium on the

offending activity for that grantee.

Response. The Department does not

accept this recommendation, as it is

inconsistent with existing CDBG

regulations concerning sanctions for

noncompliance. The Department

opposes the concept of developing

different, prescribed sanctions for

different categories of noncompliance.

Issue. One commenter expressed

concern over the proposal that the

Department might hold a grantee to

more stringent public benefit standards

in the future when the Department

found a grantee to have failed the public

benefit standards. The commenter

recommended that the Department not

take such action unless a grantee failed

the standards for two consecutive years,

so as not to punish a grantee which

might do only one project in a year and

have that one project prove

unsuccessful.

Response. While the Department

agrees that low-volume economic

development programs should not be

unduly penalized for the failure of one

project, the Department considers it

inappropriate to identify a specific time

period over which to measure success or

failure. The final regulations have been

revised to discuss situations in which ‘‘a

pattern of substantial variation’’ occurs.

Issue. Two states expressed concern

about proposed language requiring a

state to ‘‘take all actions reasonably

within its control’’ to improve a unit of

local government’s public benefit

projections, when actual results vary

substantially from initial projections.

This language was seen as imprecise,

and calls into question just what actions

are within a state’s (versus the local

government’s) control to rectify the

problem. One state expressed concern

that HUD might sanction a state even

after the state took all actions available

to it to correct a problem. The other

state, while recognizing HUD’s oversight

role, felt it inappropriate for HUD to

second-guess a state’s actions, as only

the state can impose on itself those

actions necessary to resolve the problem

at the local level.

Response. These comments, as well as

those discussed previously, clearly

indicate concern by grantees over what

sanctions the Department might take

against a grantee, and over what locallevel actions are ‘‘enough’’ to address a

problem. The Department concurs up to

a point with the states’ comments. The

intended meaning of this paragraph was

that if local governments’ results

disclose a pattern of inaccurately

projecting pubic benefits, then the state

should take actions to insure that

localities improve projection accuracy;

if a state were to do little or nothing to

correct the problems, then HUD could

impose stricter standards upon a state.

Similarly, if an Entitlement grantee

demonstrates that its projection process

is inaccurate, it should take steps to

improve the accuracy of its projections;

if local efforts to resolve the problem

were ineffective or nonexistent, then

HUD could impose stricter public

benefit standards upon the grantee.

HUD does not intend that problems by

one state recipient should be cause for

sanctions against an entire state’s

program.

HUD does not consider it useful to

attempt to define what actions are

‘‘reasonably within the grantee’s

control’’, as every situation would

involve a judgement call as to what

could or should be done. The concept

of deferring entirely to a state’s

judgement about what actions could or

should be taken (against a state grant

recipient) is impractical, given HUD’s

statutory mandate to determine

grantees’ compliance.

The paragraphs on documentation

have been revised to respond to all the

above comments, and to provide greater

clarity of meaning. In addition,

§ 570.482(f)(6) of the final State

regulations clarifies HUD’s expectations

upon states concerning local

governments’ performance.

Amendments to Projects After

Determinations

Four commenters (three local

governments and one national

association) commented on the

paragraphs concerning amendments to

projects after a funding decision has

been reached.

Issue. Three commenters questioned

as imprecise HUD’s use of the term

‘‘material change’’ in referring to

situations in which a grantee should

reevaluate a project (after committing

funding to it) because of changes in the

project. One commenter felt the

proposed wording implied that

reanalysis would be required for any

change, which would in their opinion

be overkill. Another commenter

suggested use of the term ‘‘substantial

change’’, which is used in the existing

Entitlement regulations to describe

situations in which the Final Statement

must be amended.

Response. It is not the Department’s

intent that any change in a project

should necessitate its complete

reevaluation. Minor changes, such as

the shifting of small dollar amounts

among budget categories, or a onemonth extension to the construction

period, probably would not affect the

underlying assumptions upon which a

grantee decided to assist the project.

However, if the project changes to the

extent that the revised project would be

very different in its scope, public

benefit, total cost or CDBG cost

(compared to the project as initially

approved by the grantee), the

Department believes that the project

should be reexamined under the public

benefit and underwriting guidelines. A

grantee should confirm whether it still

wishes to participate in the project,

whether the costs and benefits of the

project are still reasonable, and whether

the amount of public benefit is still

reasonable given the amount of

assistance being provided.

In the final regulations, these

paragraphs have been rewritten to state

that a project should be reevaluated if

the project changes to the extent that ‘‘a

significant amendment to the contract

(with the business) is appropriate.’’ The

use of the term ‘‘substantial’’ was

avoided, as some might attempt to apply

the same concept of ‘‘substantial’’ as

used concerning Final Statement

amendments—a borrowing of concepts

which the Department feels is not

appropriate or relevant. The Department

has chosen not to define what

constitutes a ‘‘significant amendment’’,

nor to define the types of changes which
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1941

would call for reevaluation. Grantees are

strongly encouraged, in developing their

guidelines, to define what they will

consider to be ‘‘significant changes’’,

and to identify how they will reevaluate

projects.

Issue. One commenter objected to the

example provided at the end of the

paragraph concerning a situation in

which total project costs change. In this

example, the Department suggested that

if total project costs decreased, it would

be appropriate to reduce the amount of

CDBG assistance to the project. The

commenter felt that this implies that

any reduction in total project cost

should automatically result in a

comparable reduction in the amount of

CDBG assistance, which may not be

practical. The commenter recommended

eliminating the example.

Response. The Department concurs

with the basic point that it may not

always be appropriate to reduce the

amount of CDBG assistance in such

cases. The example has been retained in

the final rule, but has been modified to

state that ‘‘it may be appropriate’’ to

reduce the amount of CDBG assistance.

The final regulation also notes that

when a project is amended to receive

additional CDBG assistance, the project

as amended must still comply with the

public benefit standards.

Modification to the Definition of

Subrecipient Related to

Microenterprise Assistance Activities

Issue. As noted earlier under the

CBDO discussion regarding § 570.204 of

the Entitlement regulations (Section

105(a)(15) of the Act), five commenters

addressed the proposed revision to the

definition of the term ‘‘subrecipient’’ at

§ 570.500(c) to expand that provision to

include for-profit entities that are now

specifically authorized by statute to

carry out microenterprise assistance

activities under the new eligibility

provision implemented in this final rule

by a new § 570.201(o) in the Entitlement

regulations [Section 105(a)(23) of the

Act]. Most of the commenters

recommended that HUD not consider

any entities carrying out activities under

the new microenterprise category as

‘‘subrecipients’’ but rather as ‘‘end

beneficiaries.’’ These commenters also

requested a similar change in

classification for entities receiving

CDBG assistance under § 570.204 of the

Entitlement regulations [Section

105(a)(15) of the Act]. Other

commenters asked only for a

clarification of the proposed revision to

§ 570.500(c). (1 local government

agency, 1 development organization,

and 3 HUD Field staff persons)

Response. The new Section 105(a)(23)

of the Act authorizes ‘‘the provision of

assistance to public and private

organizations, agencies, and other

entities (including nonprofit and forprofit entities) to enable such entities to

facilitate economic development’’ by

providing various forms of assistance to

owners of microenterprises and persons

developing microenterprises. The

Department interprets this provision to

mean that any such entities beyond the

grantee itself are to serve as

intermediaries in the grant assistance

chain rather than being considered

beneficiaries in and of themselves.

Thus, the Department considers such

organizations to be subrecipients under

the CDBG program. The existing

definition of the term ‘‘subrecipient’’ at

§ 570.500(c) of the CDBG Entitlement

regulations is being revised in this final

rule only to include a specific reference

to the for-profit entities now authorized

to carry out microenterprise assistance

activities. (Nonprofit entities carrying

out such activities are already covered

by the existing definition of a

‘‘subrecipient.’’) The language in the

proposed change to § 570.500(c) has

been revised, however, to clarify the

Department’s intent.

Other Issues Regarding Income

Documentation

Issue. One commenter recommended

that HUD take this opportunity to clarify

what is meant by a ‘‘verifiable

certification’’ as the term is used in

§ 570.506(b). The commenter asks

whether this term implies that a sample

of the certifications should be verified.

(1 private citizen)

Response. HUD does not believe that

this issue need be further specified in

the text of the regulation itself.

However, as guidance for grantees, it

should be noted that, over time, HUD

does expect that some sample of such

certifications would be verified by the

grantee or subrecipient, as applicable.

This verification is important to

maintaining program accountability and

integrity.

Issue. One commenter raised concerns

about the burden of keeping family size

and income data for job creation or

retention activities. As another option,

the commenter recommended that HUD

only look at the wages of the individual

employee and compare that figure

against the income limits for one-person

households. (1 development

organization)

Response. HUD cannot accept this

recommendation. First, the proposal is

not consistent with the general statutory

definition of a low- and moderateincome person as being a member of a

low- and moderate-income family.

Secondly, the proposal’s use of the

wages of a created job as the basis for

determining a person’s income status

runs counter to CDBG program

requirements. To be counted toward

compliance with low- and moderateincome national objective compliance, a

person need only be low- and moderateincome at the time the CDBG assistance

is provided, i.e., for a created job, at the

time he or she is hired. The CDBG

program does not and should not

impose any requirement that the person

would have to stay low- and moderateincome based on the wages of the

created job. Finally, it should be noted

that presumptions added by the 1992

Act for determining whether a person is

considered low- and moderate-income

for job creation or retention activities, as

implemented in this final rule, should

significantly reduce the burden

described by the commenter.

Issue. One commenter stated that, in

regard to the State CDBG program, it is

good that HUD is consulting and

negotiating with States on record

keeping issue, but the commenter

complained that the number of States

being consulted was too small. The

commenter argued that HUD should

negotiate record keeping requirements

with each and every State because since

they represent such broad and varied

regions. (1 state agency)

Response. It is not logistically

possible for HUD to negotiate with each

and every State before issuing record

keeping regulations for the State CDBG

program. HUD is still negotiating with a

sample of States and is hoping to devise

certain minimum record keeping

standards for States that will be

accepted on a consensus basis.

Other Issues Not Specifically

Addressed in the Proposed Rule

A number of comments were received

on issues not specifically addressed in

the proposed regulations, but which

were seen (by commenters) as having

significant bearing on the use of CDBG

funds for economic development

activity.

Issue. Two commenters (both local

governments) requested that the

Department address the issue of using

CDBG funds for economic development

activities on military bases which are

being closed.

Response. The Department does not

see the reuse or redevelopment of closed

military bases as an activity per se, but

rather a goal which CDBG funds can be

used to address. The Department

believes the current regulations

concerning eligibility and national

objectives, along with these revised
1942 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

regulations, give communities

considerable flexibility to carry out a

broad range of economic development

activities, including those on former

military bases.

Issue. Six commenters (3 national

associations, 2 states and one local

government) identified other Federal

requirements as major inhibitors to the

use of CDBG for economic development

(particularly for microenterprise

assistance), and asked the Department to

examine ways to streamline these other

requirements. Specifically identified

were environmental review procedures,

program income requirements, and the

Davis-Bacon Wage Rate Act.

Response. HUD acknowledges that

these areas are the source of frequent

complaints. However, as some

commenters noted, the underlying bases

for many of the regulatory requirements

in these areas are statutory, and thus lie

beyond HUD’s span of control. HUD is

willing to explore ways in which

regulations governing these other

federal requirements might be made

more amenable to the use of CDBG

funds for economic development.

In particular, the Department realizes

that CDBG regulations governing the use

of CDBG program income must be

revised to include 1992 changes to the

Act. Issues concerning program income

will be dealt with more

comprehensively in separate future rulemaking. In the meantime, and in

response to these comments, the

Department has identified three

incremental changes which can be made

regarding program income, and has

included them in this final rule.

1. The 1992 State CDBG program

regulations included a provision

excluding from the definition of

program income an amount of up to

$10,000 per year per state grant

recipient. This provision was consistent

with 1992 amendments to the Act,

which permitted the Secretary to

exclude from program requirements

amounts of program income that are

determined to be so small that

compliance with requirements would

place an unreasonable administrative

burden on units of local government.

During the past two years, a number of

states have commented to HUD that

many of their grant recipients regularly

receive over $10,000 per year in

program income; thus, at its present

level, this exclusion provision is of little

or no benefit to state grant recipients.

Since state grant award amounts are

typically smaller than the average yearly

entitlement grant amount, state grant

recipients typically receive less program

per year than entitlement grantees. The

problem noted by states is likely to be

equally or more problematic for

entitlement grantees.

The Department has determined that

$25,000 is a more appropriate level at

which to set the yearly exclusion

amount. These final regulations also

extend the exclusion provision to the

Entitlement program for the first time.

In a separate rulemaking, the

Department is also adding the exclusion

provision to the HUD-Administered

Small Cities program regulations.

2. The existing definition of program

income includes revenue generated by

activities carried out with the proceeds

from loans guaranteed under Section

108. Such revenue is now treated as

program income even if the guaranteed

loan is repaid with non-CDBG funds.

Such revenue is treated as program

income notwithstanding that it is

required to be pledged to the repayment

of the Section 108 loan. The final rule

excludes from the definition of program

income certain amounts generated by

activities financed by Section 108 loans,

to the extent that non-CDBG funds are

used to repay the loan. Activities which

can qualify for this exclusion are those

meeting the criteria at § 570.209(b)(2)(v)

or § 570.482(f)(3)(v) (the ‘‘important

national interest’’ activities), and those

carried out in conjunction with an

Economic Development Initiative grant

in an area determined by the

Department to meet the eligibility

requirements for Urban Empowerment

Zone designation.

Any revenue generated by activities

financed with Section 108 loan

guarantees which is not defined as

program income would be

miscellaneous revenue. In addition, any

amounts in debt service accounts that

were funded with non-CDBG funds (e.g.

Section 108 funds and monies provided

by the assisted business) that remain

after full and final repayment of the

guaranteed loan would also be

considered miscellaneous revenue.

3. As discussed earlier under the

heading of Community-Based

Development Organizations, the

Department has substantially revised

the requirements governing activities

funded under § 105(a)(15) of the Act

(and § 570.204 of the Entitlement

regulations). As a result of those

changes, the department has determined

that amounts generated by such

activities can also be excluded from the

requirements governing the use of

program income.

Because § 105(a)(15) of the Act

differentiates between the types of

eligible entities in entitlement

jurisdictions and nonentitled areas, this

change has been effected by different

means for the Entitlement and State

CDBG programs. Section 570.500(c) of

the Entitlement regulations, which

defines the term ‘‘subrecipient’’, has

been revised; entities described in

§ 570.204(c) [which implements

§ 105(a)(15) of the Act], are no longer

defined as subrecipients. As noted

previously, the term ‘‘subrecipient’’ is

not defined in the State CDBG program.

Section 570.489(e) of the State rule

(which comprises program income

requirements) has been revised to

exclude from the definition of program

income amounts generated by

§ 105(a)(15) activities. States are

expected to ensure that any such

activities are indeed carried out by an

entity pursuant to § 105(a)(15).

It should be noted that this exclusion

does not cover situations in which a

grantee provides CDBG assistance to one

of these entities in the form of a loan.

Any repayments of principal or interest

from the entity to the grantee for such

a loan would be considered to be CDBG

program income, regardless of the

source of the funds used for repayment.

Issue. Numerous commenters noted

that HUD needs to provide additional

training for grantees and HUD Field

Office staff to ensure uniform

understanding, interpretation and

implementation of the revised

regulations. HUD should also go beyond

formal training to provide other

mechanisms (such as national

conferences, development of model

programs, resource guidebooks and

computer bulletin boards) for sharing

information on economic development

activities. Areas in which certain

commenters were particularly interested

in seeing greater information-sharing

included: related federal initiatives such

as welfare reform and Empowerment

Zones/Enterprise Communities; sharing

of model programs; microenterprise

assistance programs; use of ‘‘first

source’’ agreements for job creation

activities; and combining CDBG with

other federal economic development

resources.

Response. The Department

acknowledges the importance of

training on new regulations, and is

planning to provide training to both

grantees and HUD Field Office staff

once these regulations are effective.

HUD is also developing a CDBG

economic development reference

manual which will include model

programs. The Department’s

Consolidated Technical Assistance

initiative, which is already being

implemented, should also result in

additional training opportunities on

economic development issues.

The Department plans to develop

guidelines by which those communities
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1943

demonstrating the best performance in

the area of economic development may

be identified. These guidelines will be

distributed to both grantees and HUD

Field Office staff. The Department will

also identify administrative mechanisms

through which additional relief may be

provided to communities with the best

economic development performance

records.

Relationship to Section 3 Economic

Opportunity Requirements

Recipients of CDBG funds must also

comply with the requirements of

Section 3 of the Housing and Urban

Development Act of 1968 (Section 3), as

amended by Section 915 of the 1992

Act. Section 3 requires that, to the

greatest extent feasible, and consistent

with existing Federal, State and local

laws and regulations, employment and

other economic opportunities arising in

connection with CDBG assistance to any

Section 3 covered project are given to

low- and very low-income persons

residing within the metropolitan area

(or nonmetropolitan county) in which

the project is located. For the CDBG

program, Section 3 covered projects

include housing rehabilitation, housing

construction, and other public

construction. The Section 3

requirements apply to training,

employment and contracting

opportunities arising in connection with

a covered project, as well as job (or

other opportunities) which may be

retained or created as a result of the

project. An interim rule implementing

the 1992 amendments to Section 3 was

published by the Department in the

Federal Register on June 30, 1994, and

it became effective August 1, 1994.

Other Matters

Executive Order 12612, Federalism

The General Counsel, as the

Designated Official under section 6(a) of

Executive Order 12612, Federalism, has

determined that the policies in this rule

do not have Federalism implications

when implemented and, thus, are not

subject to review under the Order.

Nothing in the rule implies any

preemption of State or local law, nor

does any provision of the rule disturb

the existing relationship between the

Federal Government and State and local

governments.

Executive Order 12606, the Family

The General Counsel, as the

designated Official under Executive

Order 12606, has determined that this

rule does not have potential significant

impact on family formation,

maintenance, and general well-being,

and, thus, is not subject to review under

the Order.

Environmental Finding

A Finding of No Significant Impact

with regard to the environment has been

made in accordance with HUD

regulations in 24 CFR part 50, which

implement section 102(2)(C) of the

National Environmental Policy Act of

1969, 42 U.S.C. 4321. The Finding of No

Significant Impact is available for public

inspection between 7:30 a.m. and 5:30

p.m. weekdays in the Office of the Rules

Docket Clerk, Room 10276, 451 Seventh

Street, SW., Washington, DC 20410.

Regulatory Flexibility

Under the Regulatory Flexibility Act

(5 U.S.C. 605(b)), the Secretary by his

approval of publication of this rule

hereby certifies that this rule does not

have a significant economic impact on

a substantial number of small entities.

The rule does not affect the amount of

funds provided in the CDBG program,

but rather modifies and updates

program administration and procedural

requirements to comport with recently

enacted legislation.

Semiannual Agenda

This rule was listed as item 1848 in

the Department’s Semiannual Agenda of

Regulations published on November 14,

1994 (59 FR 57632, 57664) under

Executive Order 12866 and the

Regulatory Flexibility Act.

Catalog of Federal Domestic Assistance

The Community Development Block

Grant Program is listed in the Catalog of

Federal Domestic Assistance under the

following numbers: Entitlements—

14.218, HUD-administered Small

Cities—14.219, Indian—14.223, Insular

Areas—14.225, State’s Program—14.228.

List of Subjects in 24 CFR Part 570

Administrative practice and

procedure, American Samoa,

Community development block grants,

Grant programs—education, Grant

programs—housing and community

development, Guam, Indians, Lead

poisoning, Loan programs—housing and

community development, Low and

moderate income housing, New

communities, Northern Mariana Islands,

Pacific Islands Trust Territory, Pockets

of poverty, Puerto Rico, Reporting and

recordkeeping requirements, Small

cities, Student aid, Virgin Islands.

Accordingly, 24 CFR part 570,

subparts A, C, I, and J, are amended as

follows:

PART 570—COMMUNITY

DEVELOPMENT BLOCK GRANTS

1. The authority citation for 24 CFR

part 570 continues to read as follows:

Authority: 42 U.S.C. 3535(d) and 5300–

5320.

Subpart A—General Provisions

2. In § 570.3, definitions for

‘‘Community Development Financial

Institution’’, ‘‘Microenterprise’’, and

‘‘Small business’’, are added in

alphabetical order to read as follows:

§ 570.3 Definitions.

* * * * *

Community Development Financial

Institution has the same meaning as

used in the Community Development

Banking and Financial Institutions Act

of 1994 (12 U.S.C. 4701 note).

* * * * *

Microenterprise means a business that

has five or fewer employees, one or

more of whom owns the enterprise.

* * * * *

Small business means a business that

meets the criteria set forth in section

3(a) of the Small Business Act (15 U.S.C.

631, 636, 637).

* * * * *

Subpart C—Eligible Activities

3. In § 570.200, paragraph (e) is

revised to read as follows:

§ 570.200 General policies.

* * * * *

(e) Recipient determinations required

as a condition of eligibility. In several

instances under this subpart, the

eligibility of an activity depends on a

special local determination. Recipients

shall maintain documentation of all

such determinations. A written

determination is required for any

activity carried out under the authority

of §§ 570.201(f), 570.202(b)(3), 570.204,

570.206(f), and 570.209.

* * * * *

4. In § 570.201, paragraph (o) is added

to read as follows:

§ 570.201 Basic eligible activities.

* * * * *

(o)(1) The provision of assistance

either through the recipient directly or

through public and private

organizations, agencies, and other

subrecipients (including nonprofit and

for-profit subrecipients) to facilitate

economic development by:

(i) Providing credit, including, but not

limited to, grants, loans, loan

guarantees, and other forms of financial

support, for the establishment,
1944 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

stabilization, and expansion of

microenterprises;

(ii) Providing technical assistance,

advice, and business support services to

owners of microenterprises and persons

developing microenterprises; and

(iii) Providing general support,

including, but not limited to, peer

support programs, counseling, child

care, transportation, and other similar

services, to owners of microenterprises

and persons developing

microenterprises.

(2) Services provided this paragraph

(o) shall not be subject to the restrictions

on public services contained in

paragraph (e) of this section.

(3) For purposes of this paragraph (o),

‘‘persons developing microenterprises’’

means such persons who have

expressed interest and who are, or after

an initial screening process are expected

to be, actively working toward

developing businesses, each of which is

expected to be a microenterprise at the

time it is formed.

5. In § 570.202, paragraph (a)(1) is

revised to read as follows:

§ 570.202 Eligible rehabilitation and

preservation activities.

(a) * * *

(1) Privately owned buildings and

improvements for residential purposes;

improvements to a single-family

residential property which is also used

as a place of business, which are

required in order to operate the

business, need not be considered to be

rehabilitation of a commercial or

industrial building, if the improvements

also provide general benefit to the

residential occupants of the building;

* * * * *

6. Section 570.203 is amended by

revising the introductory text and

paragraph (b), and by adding a new

paragraph (c), to read as follows:

§ 570.203 Special economic development

activities.

A recipient may use CDBG funds for

special economic development activities

in addition to other activities authorized

in this subpart which may be carried out

as part of an economic development

project. Guidelines for selecting

activities to assist under this paragraph

are provided at § 570.209. The recipient

must ensure that the appropriate level of

public benefit will be derived pursuant

to those guidelines before obligating

funds under this authority. Special

activities authorized under this section

do not include assistance for the

construction of new housing. Special

economic development activities

include:

* * * * *

(b) The provision of assistance to a

private for-profit business, including,

but not limited to, grants, loans, loan

guarantees, interest supplements,

technical assistance, and other forms of

support, for any activity where the

assistance is appropriate to carry out an

economic development project,

excluding those described as ineligible

in § 570.207(a). In selecting businesses

to assist under this authority, the

recipient shall minimize, to the extent

practicable, displacement of existing

businesses and jobs in neighborhoods.

(c) Economic development services in

connection with activities eligible under

this section, including, but not limited

to, outreach efforts to market available

forms of assistance; screening of

applicants; reviewing and underwriting

applications for assistance; preparation

of all necessary agreements;

management of assisted activities; and

the screening, referral, and placement of

applicants for employment

opportunities generated by CDBGeligible economic development

activities, including the costs of

providing necessary training for persons

filling those positions.

7. Section 570.204 is revised to read

as follows:

§ 570.204 Special activities by CommunityBased Development Organizations

(CBDOs).

(a) Eligible activities. The recipient

may provide CDBG funds as grants or

loans to any CBDO qualified under this

section to carry out a neighborhood

revitalization, community economic

development, or energy conservation

project. The funded project activities

may include those listed as eligible

under this subpart, and, except as

described in paragraph (b) of this

section, activities not otherwise listed as

eligible under this subpart. For purposes

of qualifying as a project under

paragraphs (a)(1), (a)(2), and (a)(3) of

this section, the funded activity or

activities may be considered either

alone or in concert with other project

activities either being carried out or for

which funding has been committed. For

purposes of this section:

(1) Neighborhood revitalization

project includes activities of sufficient

size and scope to have an impact on the

decline of a geographic location within

the jurisdiction of a unit of general local

government (but not the entire

jurisdiction) designated in

comprehensive plans, ordinances, or

other local documents as a

neighborhood, village, or similar

geographical designation; or the entire

jurisdiction of a unit of general local

government which is under 25,000

population;

(2) Community economic

development project includes activities

that increase economic opportunity,

principally for persons of low- and

moderate-income, or that stimulate or

retain businesses or permanent jobs,

including projects that include one or

more such activities that are clearly

needed to address a lack of affordable

housing accessible to existing or

planned jobs and those activities

specified at 24 CFR 91.1(a)(1)(iii);

(3) Energy conservation project

includes activities that address energy

conservation, principally for the benefit

of the residents of the recipient’s

jurisdiction; and

(4) To carry out a project means that

the CBDO undertakes the funded

activities directly or through contract

with an entity other than the grantee, or

through the provision of financial

assistance for activities in which it

retains a direct and controlling

involvement and responsibilities.

(b) Ineligible activities.

Notwithstanding that CBDOs may carry

out activities that are not otherwise

eligible under this subpart, this section

does not authorize:

(1) Carrying out an activity described

as ineligible in § 570.207(a);

(2) Carrying out public services that

do not meet the requirements of

§ 570.201(e), except that:

(i) Services carried out under this

section that are specifically designed to

increase economic opportunities

through job training and placement and

other employment support services,

including, but not limited to, peer

support programs, counseling, child

care, transportation, and other similar

services; and

(ii) Services of any type carried out

under this section pursuant to a strategy

approved by HUD under the provisions

of 24 CFR 91.215(e) shall not be subject

to the limitations in § 570.201(e)(1) or

(2), as applicable;

(3) Providing assistance to activities

that would otherwise be eligible under

§ 570.203 that do not meet the

requirements of § 570.209; or

(4) Carrying out an activity that would

otherwise be eligible under § 570.205 or

§ 570.206, but that would result in the

recipient’s exceeding the spending

limitation in § 570.200(g).

(c) Eligible CBDOs. (1) A CBDO

qualifying under this section is an

organization which has the following

characteristics:

(i) Is an association or corporation

organized under State or local law to

engage in community development

activities (which may include housing
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1945

and economic development activities)

primarily within an identified

geographic area of operation within the

jurisdiction of the recipient, or in the

case of an urban county, the jurisdiction

of the county; and

(ii) Has as its primary purpose the

improvement of the physical, economic

or social environment of its geographic

area of operation by addressing one or

more critical problems of the area, with

particular attention to the needs of

persons of low and moderate income;

and

(iii) May be either non-profit or forprofit, provided any monetary profits to

its shareholders or members must be

only incidental to its operations; and

(iv) Maintains at least 51 percent of its

governing body’s membership for lowand moderate-income residents of its

geographic area of operation, owners or

senior officers of private establishments

and other institutions located in and

serving its geographic area of operation,

or representatives of low- and moderateincome neighborhood organizations

located in its geographic area of

operation; and

(v) Is not an agency or instrumentality

of the recipient and does not permit

more than one-third of the membership

of its governing body to be appointed

by, or to consist of, elected or other

public officials or employees or officials

of an ineligible entity (even though such

persons may be otherwise qualified

under paragraph (c)(1)(iv) of this

section); and

(vi) Except as otherwise authorized in

paragraph (c)(1)(v) of this section,

requires the members of its governing

body to be nominated and approved by

the general membership of the

organization, or by its permanent

governing body; and

(vii) Is not subject to requirements

under which its assets revert to the

recipient upon dissolution; and

(viii) Is free to contract for goods and

services from vendors of its own

choosing.

(2) A CBDO that does not meet the

criteria in paragraph (c)(1) of this

section may also qualify as an eligible

entity under this section if it meets one

of the following requirements:

(i) Is an entity organized pursuant to

section 301(d) of the Small Business

Investment Act of 1958 (15 U.S.C.

681(d)), including those which are profit

making; or

(ii) Is an SBA approved Section 501

State Development Company or Section

502 Local Development Company, or an

SBA Certified Section 503 Company

under the Small Business Investment

Act of 1958, as amended; or

(iii) Is a Community Housing

Development Organization (CHDO)

under 24 CFR 92.2, designated as a

CHDO by the HOME Investment

Partnerships program participating

jurisdiction, with a geographic area of

operation of no more than one

neighborhood, and has received HOME

funds under 24 CFR 92.300 or is

expected to receive HOME funds as

described in and documented in

accordance with 24 CFR 92.300(e).

(3) A CBDO that does not qualify

under paragraphs (c) (1) or (2) of this

section may also be determined to

qualify as an eligible entity under this

section if the recipient demonstrates to

the satisfaction of HUD, through the

provision of information regarding the

organization’s charter and by-laws, that

the organization is sufficiently similar

in purpose, function, and scope to those

entities qualifying under paragraphs (c)

(1) or (2) of this section.

8. Section 570.207 is amended by

revising paragraphs (b) introductory text

and (b)(3)(iii) to read as follows:

§ 570.207 Ineligible activities.

* * * * *

(b) The following activites may not be

assisted with CDBG funds unless

authorized under provisions of

§ 570.203 or as otherwise specifically

noted herein or when carried out by a

entity under the provisions of § 570.204.

* * * * *

(3) * * *

(iii) When carried out by an entity

pursuant to § 570.204(a);

* * * * *

9. Section 570.208 is amended by:

a. Revising the paragraph heading of

paragraph (a), revising paragraph

(a)(1)(i), the first sentence in paragraph

(a)(1)(iv), and adding a new paragraph

(a)(1)(v);

b. Revising paragraph (a)(2)(i)

introductory text and by adding new

paragraphs (a)(2)(iii) and (a)(2)(iv);

c. Revising the introductory text of

paragraph (a)(3);

d. Revising paragraph (a)(4); and

e. Adding new paragraphs (d)(5),

(d)(6), and (d)(7), to read as follows:

§ 570.208 Criteria for national objectives.

* * * * *

(a) Activities benefiting low- and

moderate-income persons.

* * * * *

(1) Area benefit activities. (i) An

activity, the benefits of which are

available to all the residents in a

particular area, where at least 51 percent

of the residents are low and moderate

income persons. Such an area need not

be coterminous with census tracts or

other officially recognized boundaries

but must be the entire area served by the

activity. An activity that serves an area

that is not primarily residential in

character shall not qualify under this

criterion.

* * * * *

(iv) In determining whether there is a

sufficiently large percentage of low and

moderate income persons residing in

the area served by an activity to qualify

under paragraphs (a)(1)(i), (ii), or (v) of

this section, the most recently available

decennial census information shall be

used to the fullest extent feasible,

together with the Section 8 income

limits that would have applied at the

time the income information was

collected by the Census Bureau. * * *

(v) Activities meeting the

requirements of paragraph (d)(5)(i) of

this section may be considered to

qualify under this paragraph, provided

that the area covered by the strategy is

primarily residential and contains a

percentage of low- and moderateincome residents that is no less than the

percentage computed by HUD pursuant

to paragraph (a)(1)(ii) of this section but

in no event less than 51 percent.

Activities meeting the requirements of

paragraph (d)(6)(i) of this section may

also be considered to qualify under

paragraph (a)(1) of this section.

(2) Limited clientele activities. (i) An

activity which benefits a limited

clientele, at least 51 percent of whom

are low- or moderate-income persons.

(The following kinds of activities may

not qualify under paragraph (a)(2) of

this section: activities, the benefits of

which are available to all the residents

of an area; activities involving the

acquisition, construction or

rehabilitation of property for housing; or

activities where the benefit to low- and

moderate-income persons to be

considered is the creation or retention of

jobs, except as provided in paragraph

(a)(2)(iv) of this section.) To qualify

under paragraph (a)(2) of this section,

the activity must meet one of the

following tests:

* * * * *

(iii) A microenterprise assistance

activity carried out in accordance with

the provisions of § 570.201(o) with

respect to those owners of

microenterprises and persons

developing microenterprises assisted

under the activity during each program

year who are low- and moderate-income

persons. For purposes of this paragraph,

persons determined to be low and

moderate income may be presumed to

continue to qualify as such for up to a

three-year period.
1946 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

(iv) An activity designed to provide

job training and placement and/or other

employment support services,

including, but not limited to, peer

support programs, counseling, child

care, transportation, and other similar

services, in which the percentage of

low- and moderate-income persons

assisted is less than 51 percent may

qualify under this paragraph in the

following limited circumstance:

(A) In such cases where such training

or provision of supportive services

assists business(es), the only use of

CDBG assistance for the project is to

provide the job training and/or

supportive services; and

(B) The proportion of the total cost of

the project borne by CDBG funds is no

greater than the proportion of the total

number of persons assisted who are low

or moderate income.

(3) Housing activities. An eligible

activity carried out for the purpose of

providing or improving permanent

residential structures which, upon

completion, will be occupied by lowand moderate-income households. This

would include, but not necessarily be

limited to, the acquisition or

rehabilitation of property, conversion of

non-residential structures, and new

housing construction. If the structure

contains two dwelling units, at least one

must be so occupied, and if the

structure contains more than two

dwelling units, at least 51 percent of the

units must be so occupied. Where two

or more rental buildings being assisted

are or will be located on the same or

contiguous properties, and the buildings

will be under common ownership and

management, the grouped buildings

may be considered for this purpose as

a single structure. Where housing

activities being assisted meet the

requirements of paragraph § 570.208

(d)(5)(ii) or (d)(6)(ii) of this section, all

such housing may also be considered for

this purpose as a single structure. For

rental housing, occupancy by low and

moderate income households must be at

affordable rents to qualify under this

criterion. The recipient shall adopt and

make public its standards for

determining ‘‘affordable rents’’ for this

purpose. The following shall also

qualify under this criterion:

* * * * *

(4) Job creation or retention activities.

An activity designed to create or retain

permanent jobs where at least 51

percent of the jobs, computed on a full

time equivalent basis, involve the

employment of low- and moderateincome persons. To qualify under this

paragraph, the activity must meet the

following criteria:

(i) For an activity that creates jobs, the

recipient must document that at least 51

percent of the jobs will be held by, or

will be available to, low- and moderateincome persons.

(ii) For an activity that retains jobs,

the recipient must document that the

jobs would actually be lost without the

CDBG assistance and that either or both

of the following conditions apply with

respect to at least 51 percent of the jobs

at the time the CDBG assistance is

provided:

(A) The job is known to be held by a

low- or moderate-income person; or

(B) The job can reasonably be

expected to turn over within the

following two years and that steps will

be taken to ensure that it will be filled

by, or made available to, a low- or

moderate-income person upon turnover.

(iii) Jobs that are not held or filled by

a low- or moderate-income person may

be considered to be available to lowand moderate-income persons for these

purposes only if:

(A) Special skills that can only be

acquired with substantial training or

work experience or education beyond

high school are not a prerequisite to fill

such jobs, or the business agrees to hire

unqualified persons and provide

training; and

(B) The recipient and the assisted

business take actions to ensure that lowand moderate-income persons receive

first consideration for filling such jobs.

(iv) For purposes of determining

whether a job is held by or made

available to a low- or moderate-income

person, the person may be presumed to

be a low- or moderate-income person if:

(A) He/she resides within a census

tract (or block numbering area) that

either:

(1) Meets the requirements of

paragraph (a)(4)(v) of this section; or

(2) Has at least 70 percent of its

residents who are low- and moderateincome persons; or

(B) The assisted business is located

within a census tract (or block

numbering area) that meets the

requirements of paragraph (a)(4)(v) of

this section and the job under

consideration is to be located within

that census tract.

(v) A census tract (or block numbering

area) qualifies for the presumptions

permitted under paragraphs

(a)(4)(iv)(A)(1) and (B) of this section if

it is either part of a Federally-designated

Empowerment Zone or Enterprise

Community or meets the following

criteria:

(A) It has a poverty rate of at least 20

percent as determined by the most

recently available decennial census

information;

(B) It does not include any portion of

a central business district, as this term

is used in the most recent Census of

Retail Trade, unless the tract has a

poverty rate of at least 30 percent as

determined by the most recently

available decennial census information;

and

(C) It evidences pervasive poverty and

general distress by meeting at least one

of the following standards:

(1) All block groups in the census

tract have poverty rates of at least 20

percent;

(2) The specific activity being

undertaken is located in a block group

that has a poverty rate of at least 20

percent; or

(3) Upon the written request of the

recipient, HUD determines that the

census tract exhibits other objectively

determinable signs of general distress

such as high incidence of crime,

narcotics use, homelessness, abandoned

housing, and deteriorated infrastructure

or substantial population decline.

(vi) As a general rule, each assisted

business shall be considered to be a

separate activity for purposes of

determining whether the activity

qualifies under this paragraph, except:

(A) In certain cases such as where

CDBG funds are used to acquire,

develop or improve a real property (e.g.,

a business incubator or an industrial

park) the requirement may be met by

measuring jobs in the aggregate for all

the businesses which locate on the

property, provided such businesses are

not otherwise assisted by CDBG funds.

(B) Where CDBG funds are used to

pay for the staff and overhead costs of

a subrecipient making loans to

businesses exclusively from non-CDBG

funds, this requirement may be met by

aggregating the jobs created by all of the

businesses receiving loans during each

program year.

(C) Where CDBG funds are used by a

recipient or subrecipient to provide

technical assistance to businesses, this

requirement may be met by aggregating

the jobs created or retained by all of the

businesses receiving technical

assistance during each program year.

(D) Where CDBG funds are used for

activities meeting the criteria listed at

§ 570.209(b)(2)(v), this requirement may

be met by aggregating the jobs created or

retained by all businesses for which

CDBG assistance is obligated for such

activities during the program year,

except as provided at paragraph (d)(7) of

this section.

(E) Where CDBG funds are used by a

Community Development Financial

Institution to carry out activities for the

purpose of creating or retaining jobs,

this requirement may be met by
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1947

aggregating the jobs created or retained

by all businesses for which CDBG

assistance is obligated for such activities

during the program year, except as

provided at paragraph (d)(7) of this

section.

(F) Where CDBG funds are used for

public facilities or improvements which

will result in the creation or retention of

jobs by more than one business, this

requirement may be met by aggregating

the jobs created or retained by all such

businesses as a result of the public

facility or improvement.

(1) Where the public facility or

improvement is undertaken principally

for the benefit of one or more particular

businesses, but where other businesses

might also benefit from the assisted

activity, the requirement may be met by

aggregating only the jobs created or

retained by those businesses for which

the facility/improvement is principally

undertaken, provided that the cost (in

CDBG funds) for the facility/

improvement is less than $10,000 per

permanent full-time equivalent job to be

created or retained by those businesses.

(2) In any case where the cost per job

to be created or retained (as determined

under paragraph (a)(4)(v)(C)(1) of this

section) is $10,000 or more, the

requirement must be met by aggregating

the jobs created or retained as a result

of the public facility or improvement by

all businesses in the service area of the

facility/improvement. This aggregation

must include businesses which, as a

result of the public facility/

improvement, locate or expand in the

service area of the facility/improvement

between the date the recipient identifies

the activity in its final statement and the

date one year after the physical

completion of the facility/improvement.

In addition, the assisted activity must

comply with the public benefit

standards at § 570.209(b).

* * * * *

(d) * * *

(5) Where the grantee has elected to

prepare an area revitalization strategy

pursuant to the authority of § 91.215(e)

of this title and HUD has approved the

strategy, the grantee may also elect the

following options:

(i) Activities undertaken pursuant to

the strategy for the purpose of creating

or retaining jobs may, at the option of

the grantee, be considered to meet the

requirements of this paragraph under

the criteria at paragraph (a)(1)(v) of this

section in lieu of the criteria at

paragraph (a)(4) of this section; and

(ii) All housing activities in the area

for which, pursuant to the strategy,

CDBG assistance is obligated during the

program year may be considered to be

a single structure for purposes of

applying the criteria at paragraph (a)(3)

of this section.

(6) Where CDBG-assisted activities are

carried out by a Community

Development Financial Institution

whose charter limits its investment area

to a primarily residential area consisting

of at least 51 percent low- and

moderate-income persons, the grantee

may also elect the following options:

(i) Activities carried out by the

Community Development Financial

Institution for the purpose of creating or

retaining jobs may, at the option of the

grantee, be considered to meet the

requirements of this paragraph under

the criteria at paragraph (a)(1)(v) of this

section in lieu of the criteria at

paragraph (a)(4) of this section; and

(ii) All housing activities for which

the Community Development Financial

Institution obligates CDBG assistance

during the program year may be

considered to be a single structure for

purposes of applying the criteria at

paragraph (a)(3) of this section.

(7) Where an activity meeting the

criteria at § 570.209(b)(2)(v) may also

meet the requirements of either

paragraph (d)(5)(i) or (d)(6)(i) of this

section, the grantee may elect to qualify

the activity under either the area benefit

criteria at paragraph (a)(1)(v) of this

section or the job aggregation criteria at

paragraph (a)(4)(vi)(D) of this section,

but not both. Where an activity may

meet the job aggregation criteria at both

paragraphs (a)(4)(vi) (D) and (E) of this

section, the grantee may elect to qualify

the activity under either criterion, but

not both.

10. A new § 570.209 is added to

subpart C to read as follows:

§ 570.209 Guidelines for evaluating and

selecting economic development projects.

The following guidelines are provided

to assist the recipient to evaluate and

select activities to be carried out for

economic development purposes.

Specifically, these guidelines are

applicable to activities that are eligible

for CDBG assistance under § 570.203.

These guidelines also apply to activities

carried out under the authority of

§ 570.204 that would otherwise be

eligible under § 570.203, were it not for

the involvement of a Community-Based

Development Organization (CBDO).

(This would include activities where a

CBDO makes loans to for-profit

businesses.) These guidelines are

composed of two components:

guidelines for evaluating project costs

and financial requirements; and

standards for evaluating public benefit.

The standards for evaluating public

benefit are mandatory, but the

guidelines for evaluating projects costs

and financial requirements are not.

(a) Guidelines and Objectives for

Evaluating Project Costs and Financial

Requirements. HUD has developed

guidelines that are designed to provide

the recipient with a framework for

financially underwriting and selecting

CDBG-assisted economic development

projects which are financially viable

and will make the most effective use of

the CDBG funds. These guidelines, also

referred to as the underwriting

guidelines, are published as appendix A

to this part. The use of the underwriting

guidelines published by HUD is not

mandatory. However, grantees electing

not to use these guidelines would be

expected to conduct basic financial

underwriting prior to the provision of

CDBG financial assistance to a for-profit

business. Where appropriate, HUD’s

underwriting guidelines recognize that

different levels of review are

appropriate to take into account

differences in the size and scope of a

proposed project, and in the case of a

microenterprise or other small business

to take into account the differences in

the capacity and level of sophistication

among businesses of differing sizes.

Recipients are encouraged, when they

develop their own programs and

underwriting criteria, to also take these

factors into account. The objectives of

the underwriting guidelines are to

ensure:

(1) That project costs are reasonable;

(2) That all sources of project

financing are committed;

(3) That to the extent practicable,

CDBG funds are not substituted for nonFederal financial support;

(4) That the project is financially

feasible;

(5) That to the extent practicable, the

return on the owner’s equity investment

will not be unreasonably high; and

(6) That to the extent practicable,

CDBG funds are disbursed on a pro rata

basis with other finances provided to

the project.

(b) Standards for Evaluating Public

Benefit. The grantee is responsible for

making sure that at least a minimum

level of public benefit is obtained from

the expenditure of CDBG funds under

the categories of eligibility governed by

these guidelines. The standards set forth

below identify the types of public

benefit that will be recognized for this

purpose and the minimum level of each

that must be obtained for the amount of

CDBG funds used. Unlike the guidelines

for project costs and financial

requirements covered under paragraph

(a) of this section, the use of the

standards for public benefit is

mandatory. Certain public facilities and
1948 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

improvements eligible under

§ 570.201(c) of the regulations, which

are undertaken for economic

development purposes, are also subject

to these standards, as specified in

§ 570.208(a)(4)(vi)(D)(2).

(1) Standards for activities in the

aggregate. Activities covered by these

guidelines must, in the aggregate, either:

(i) Create or retain at least one fulltime equivalent, permanent job per

$35,000 of CDBG funds used; or

(ii) Provide goods or services to

residents of an area, such that the

number of low- and moderate-income

persons residing in the areas served by

the assisted businesses amounts to at

least one low- and moderate-income

person per $350 of CDBG funds used.

(2) Applying the aggregate standards.

(i) A metropolitan city or an urban

county shall apply the aggregate

standards under paragraph (b)(1) of this

section to all applicable activities for

which CDBG funds are first obligated

within each single CDBG program year,

without regard to the source year of the

funds used for the activities. A grantee

under the HUD-Administered Small

Cities or Insular Areas CDBG programs

shall apply the aggregate standards

under paragraph (b)(1) of this section to

all funds obligated for applicable

activities from a given grant; program

income obligated for applicable

activities will, for these purposes, be

aggregated with the most recent open

grant. For any time period in which a

community has no open HUDAdministered or Insular Areas grants,

the aggregate standards shall be applied

to all applicable activities for which

program income is obligated during that

period.

(ii) The grantee shall apply the

aggregate standards to the number of

jobs to be created/retained, or to the

number of persons residing in the area

served (as applicable), as determined at

the time funds are obligated to

activities.

(iii) Where an activity is expected

both to create or retain jobs and to

provide goods or services to residents of

an area, the grantee may elect to count

the activity under either the jobs

standard or the area residents standard,

but not both.

(iv) Where CDBG assistance for an

activity is limited to job training and

placement and/or other employment

support services, the jobs assisted with

CDBG funds shall be considered to be

created or retained jobs for the purposes

of applying the aggregate standards.

(v) Any activity subject to these

guidelines which meets one or more of

the following criteria may, at the

grantee’s option, be excluded from the

aggregate standards described in

paragraph (b)(1) of this section:

(A) Provides jobs exclusively for

unemployed persons or participants in

one or more of the following programs:

(1) Jobs Training Partnership Act

(JTPA);

(2) Jobs Opportunities for Basic Skills

(JOBS); or

(3) Aid to Families with Dependent

Children (AFDC);

(B) Provides jobs predominantly for

residents of Public and Indian Housing

units;

(C) Provides jobs predominantly for

homeless persons;

(D) Provides jobs predominantly for

low-skilled, low- and moderate-income

persons, where the business agrees to

provide clear opportunities for

promotion and economic advancement,

such as through the provision of

training;

(E) Provides jobs predominantly for

persons residing within a census tract

(or block numbering area) that has at

least 20 percent of its residents who are

in poverty;

(F) Provides assistance to business(es)

that operate(s) within a census tract (or

block numbering area) that has at least

20 percent of its residents who are in

poverty;

(G) Stabilizes or revitalizes a

neighborhood that has at least 70

percent of its residents who are lowand moderate-income;

(H) Provides assistance to a

Community Development Financial

Institution that serve an area that is

predominantly low- and moderateincome persons;

(I) Provides assistance to a

Community-Based Development

Organization serving a neighborhood

that has at least 70 percent of its

residents who are low- and moderateincome;

(J) Provides employment

opportunities that are an integral

component of a project designed to

promote spatial deconcentration of lowand moderate-income and minority

persons;

(K) With prior HUD approval,

provides substantial benefit to lowincome persons through other

innovative approaches;

(L) Provides services to the residents

of an area pursuant to a strategy

approved by HUD under the provisions

of § 91.215(e) of this title;

(M) Creates or retains jobs through

businesses assisted in an area pursuant

to a strategy approved by HUD under

the provisions of § 91.215(e) of this title.

(3) Standards for individual activities.

Any activity subject to these guidelines

which falls into one or more of the

following categories will be considered

by HUD to provide insufficient public

benefit, and therefore may under no

circumstances be assisted with CDBG

funds:

(i) The amount of CDBG assistance

exceeds either of the following, as

applicable:

(A) $50,000 per full-time equivalent,

permanent job created or retained; or

(B) $1,000 per low- and moderateincome person to which goods or

services are provided by the activity.

(ii) The activity consists of or includes

any of the following:

(A) General promotion of the

community as a whole (as opposed to

the promotion of specific areas and

programs);

(B) Assistance to professional sports

teams;

(C) Assistance to privately-owned

recreational facilities that serve a

predominantly higher-income clientele,

where the recreational benefit to users

or members clearly outweighs

employment or other benefits to lowand moderate-income persons;

(D) Acquisition of land for which the

specific proposed use has not yet been

identified; and

(E) Assistance to a for-profit business

while that business or any other

business owned by the same person(s)

or entity(ies) is the subject of unresolved

findings of noncompliance relating to

previous CDBG assistance provided by

the recipient.

(4) Applying the individual activity

standards. (i) Where an activity is

expected both to create or retain jobs

and to provide goods or services to

residents of an area, it will be

disqualified only if the amount of CDBG

assistance exceeds both of the amounts

in paragraph (b)(3)(i) of this section.

(ii) The individual activity standards

in paragraph (b)(3)(i) of this section

shall be applied to the number of jobs

to be created or retained, or to the

number of persons residing in the area

served (as applicable), as determined at

the time funds are obligated to

activities.

(iii) Where CDBG assistance for an

activity is limited to job training and

placement and/or other employment

support services, the jobs assisted with

CDBG funds shall be considered to be

created or retained jobs for the purposes

of applying the individual activity

standards in paragraph (b)(3)(i) of this

section.

(c) Amendments to economic

development projects after review

determinations. If, after the grantee

enters into a contract to provide

assistance to a project, the scope or

financial elements of the project change
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1949

to the extent that a significant contract

amendment is appropriate, the project

should be reevaluated under these and

the recipient’s guidelines. (This would

include, for example, situations where

the business requests a change in the

amount or terms of assistance being

provided, or an extension to the loan

payment period required in the

contract.) If a reevaluation of the project

indicates that the financial elements and

public benefit to be derived have also

substantially changed, then the

recipient should make appropriate

adjustments in the amount, type, terms

or conditions of CDBG assistance which

has been offered, to reflect the impact of

the substantial change. (For example, if

a change in the project elements results

in a substantial reduction of the total

project costs, it may be appropriate for

the recipient to reduce the amount of

total CDBG assistance.) If the amount of

CDBG assistance provided to the project

is increased, the amended project must

still comply with the public benefit

standards under paragraph (b) of this

section.

(d) Documentation. The grantee must

maintain sufficient records to

demonstrate the level of public benefit,

based on the above standards, that is

actually achieved upon completion of

the CDBG-assisted economic

development activity(ies) and how that

compares to the level of such benefit

anticipated when the CDBG assistance

was obligated. If the grantee’s actual

results show a pattern of substantial

variation from anticipated results, the

grantee is expected to take all actions

reasonably within its control to improve

the accuracy of its projections. If the

actual results demonstrate that the

recipient has failed the public benefit

standards, HUD may require the

recipient to meet more stringent

standards in future years as appropriate.

Subpart I—State Community

Development Block Grant Program

11. Section 570.482 is amended by

adding paragraphs (c), (d), (e), (f), and

(g) to read as follows:

§ 570.482 Eligible activities.

* * * * *

(c) Provision of Assistance for

Microenterprise Development.

Microenterprise development activities

eligible under Section 105(a)(23) of the

Housing and Community Development

Act of 1974 (the Act), as amended, (42

U.S.C. 5301 et seq.) may be carried out

either through the recipient directly or

through public and private

organizations, agencies, and other

subrecipients (including nonprofit and

for-profit subrecipients).

(d) Provision of Public Services. The

following activities shall not be subject

to the restrictions on public services

under Section 105(a)(8) of the Housing

and Community Development Act of

1974, as amended:

(1) Support services provided under

Section 105(a)(23) of the Housing and

Community Development Act of 1974,

as amended, and paragraph (c) of this

section; and

(2) Services carried out under the

provisions of Section 105(a)(15) of the

Housing and Community Development

Act of 1974, as amended, that are

specifically designed to increase

economic opportunities through job

training and placement and other

employment support services,

including, but not limited to, peer

support programs, counseling, child

care, transportation, and other similar

services.

(e) Guidelines and Objectives for

Evaluating Project Costs and Financial

Requirements—(1) Applicability. The

following guidelines, also referred to as

the underwriting guidelines, are

provided to assist the recipient to

evaluate and select activities to be

carried out for economic development

purposes. Specifically, these guidelines

are applicable to activities that are

eligible for CDBG assistance under

section 105(a)(17) of the Act, economic

development activities eligible under

section 105(a)(14) of the Act, and

activities that are part of a community

economic development project eligible

under section 105(a)(15) of the Act. The

use of the underwriting guidelines

published by HUD is not mandatory.

However, states electing not to use these

guidelines would be expected to ensure

that the state or units of general local

government conduct basic financial

underwriting prior to the provision of

CDBG financial assistance to a for-profit

business.

(2) Objectives. The underwriting

guidelines are designed to provide the

recipient with a framework for

financially underwriting and selecting

CDBG-assisted economic development

projects which are financially viable

and will make the most effective use of

the CDBG funds. Where appropriate,

HUD’s underwriting guidelines

recognize that different levels of review

are appropriate to take into account

differences in the size and scope of a

proposed project, and in the case of a

microenterprise or other small business

to take into account the differences in

the capacity and level of sophistication

among businesses of differing sizes.

Recipients are encouraged, when they

develop their own programs and

underwriting criteria, to also take these

factors into account. These underwriting

guidelines are published as appendix A

to this part. The objectives of the

underwriting guidelines are to ensure:

(i) That project costs are reasonable;

(ii) That all sources of project

financing are committed;

(iii) That to the extent practicable,

CDBG funds are not substituted for nonFederal financial support;

(iv) That the project is financially

feasible;

(v) That to the extent practicable, the

return on the owner’s equity investment

will not be unreasonably high; and

(vi) That to the extent practicable,

CDBG funds are disbursed on a pro rata

basis with other finances provided to

the project.

(f) Standards for Evaluating Public

Benefit. (1) Purpose and Applicability.

The grantee is responsible for making

sure that at least a minimum level of

public benefit is obtained from the

expenditure of CDBG funds under the

categories of eligibility governed by

these standards. The standards set forth

below identify the types of public

benefit that will be recognized for this

purpose and the minimum level of each

that must be obtained for the amount of

CDBG funds used. These standards are

applicable to activities that are eligible

for CDBG assistance under section

105(a)(17) of the Act, economic

development activities eligible under

section 105(a)(14) of the Act, and

activities that are part of a community

economic development project eligible

under section 105(a)(15) of the Act.

Certain public facilities and

improvements eligible under Section

105(a)(2) of the Act, which are

undertaken for economic development

purposes, are also subject to these

standards, as specified in

§ 570.483(b)(4)(vi)(F)(2). Unlike the

guidelines for project costs and financial

requirements covered under paragraph

(a) of this section, the use of the

standards for public benefit is

mandatory.

(2) Standards for activities in the

aggregate. Activities covered by these

standards must, in the aggregate, either:

(i) Create or retain at least one fulltime equivalent, permanent job per

$35,000 of CDBG funds used; or

(ii) Provide goods or services to

residents of an area, such that the

number of low- and moderate-income

persons residing in the areas served by

the assisted businesses amounts to at

least one low- and moderate-income

person per $350 of CDBG funds used.

(3) Applying the aggregate standards.

(i) A state shall apply the aggregate
1950 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

standards under paragraph (e)(2) of this

section to all funds distributed for

applicable activities from each annual

grant. This includes the amount of the

annual grant, any funds reallocated by

HUD to the state, any program income

distributed by the state and any

guaranteed loan funds made under the

provisions of subpart M of this part

covered in the method of distribution in

the final statement for a given annual

grant year.

(ii) The grantee shall apply the

aggregate standards to the number of

jobs to be created/retained, or to the

number of persons residing in the area

served (as applicable), as determined at

the time funds are obligated to

activities.

(iii) Where an activity is expected

both to create or retain jobs and to

provide goods or services to residents of

an area, the grantee may elect to count

the activity under either the jobs

standard or the area residents standard,

but not both.

(iv) Where CDBG assistance for an

activity is limited to job training and

placement and/or other employment

support services, the jobs assisted with

CDBG funds shall be considered to be

created or retained jobs for the purposes

of applying the aggregate standards.

(v) Any activity subject to these

standards which meets one or more of

the following criteria may, at the

grantee’s option, be excluded from the

aggregate standards described in

paragraph (f)(2) of this section:

(A) Provides jobs exclusively for

unemployed persons or participants in

one or more of the following programs:

(1) Jobs Training Partnership Act

(JTPA);

(2) Jobs Opportunities for Basic Skills

(JOBS); or

(3) Aid to Families with Dependent

Children (AFDC);

(B) Provides jobs predominantly for

residents of Public and Indian Housing

units;

(C) Provides jobs predominantly for

homeless persons;

(D) Provides jobs predominantly for

low-skilled, low- and moderate-income

persons, where the business agrees to

provide clear opportunities for

promotion and economic advancement,

such as through the provision of

training;

(E) Provides jobs predominantly for

persons residing within a census tract

(or block numbering area) that has at

least 20 percent of its residents who are

in poverty;

(F) Provides assistance to business(es)

that operate(s) within a census tract (or

block numbering area) that has at least

20 percent of its residents who are in

poverty;

(G) Stabilizes or revitalizes a

neighborhood income that has at least

70 percent of its residents who are lowand moderate-income;

(H) Provides assistance to a

Community Development Financial

Institution (as defined in the

Community Development Banking and

Financial Institutions Act of 1994, (12

U.S.C. 4701 note)) serving an area that

has at least 70 percent of its residents

who are low- and moderate-income;

(I) Provides assistance to an

organization eligible to carry out

activities under section 105(a)(15) of the

Act serving an area that has at least 70

percent of its residents who are lowand moderate-income;

(J) Provides employment

opportunities that are an integral

component of a project designed to

promote spatial deconcentration of lowand moderate-income and minority

persons;

(K) With prior HUD approval,

provides substantial benefit to lowincome persons through other

innovative approaches.

(4) Standards for individual activities.

Any activity subject to these standards

which falls into one or more of the

following categories will be considered

by HUD to provide insufficient public

benefit, and therefore may under no

circumstances be assisted with CDBG

funds:

(i) The amount of CDBG assistance

exceeds either of the following, as

applicable:

(A) $50,000 per full-time equivalent,

permanent job created or retained; or

(B) $1,000 per low- and moderateincome person to which goods or

services are provided by the activity.

(ii) The activity consists of or includes

any of the following:

(A) General promotion of the

community as a whole (as opposed to

the promotion of specific areas and

programs);

(B) Assistance to professional sports

teams;

(C) Assistance to privately-owned

recreational facilities that serve a

predominantly higher-income clientele,

where the recreational benefit to users

or members clearly outweighs

employment or other benefits to lowand moderate-income persons;

(D) Acquisition of land for which the

specific proposed use has not yet been

identified; and

(E) Assistance to a for-profit business

while that business or any other

business owned by the same person(s)

or entity(ies) is the subject of unresolved

findings of noncompliance relating to

previous CDBG assistance provided by

the recipient.

(5) Applying the individual activity

standards. (i) Where an activity is

expected both to create or retain jobs

and to provide goods or services to

residents of an area, it will be

disqualified only if the amount of CDBG

assistance exceeds both of the amounts

in paragraph (f)(4)(i) of this section.

(ii) The individual activity tests in

paragraph (f)(4)(i) of this section shall be

applied to the number of jobs to be

created or retained, or to the number of

persons residing in the area served (as

applicable), as determined at the time

funds are obligated to activities.

(iii) Where CDBG assistance for an

activity is limited to job training and

placement and/or other employment

support services, the jobs assisted with

CDBG funds shall be considered to be

created or retained jobs for the purposes

of applying the individual activity

standards in paragraph (f)(4)(i) of this

section.

(6) Documentation. The state and its

grant recipients must maintain

sufficient records to demonstrate the

level of public benefit, based on the

above standards, that is actually

achieved upon completion of the CDBGassisted economic development

activity(ies) and how that compares to

the level of such benefit anticipated

when the CDBG assistance was

obligated. If a state grant recipient’s

actual results show a pattern of

substantial variation from anticipated

results, the state and its recipient are

expected to take those actions

reasonably within their respective

control to improve the accuracy of the

projections. If the actual results

demonstrate that the state has failed the

public benefit standards, HUD may

require the state to meet more stringent

standards in future years as appropriate.

(g) Amendments to economic

development projects after review

determinations. If, after the grantee

enters into a contract to provide

assistance to a project, the scope or

financial elements of the project change

to the extent that a significant contract

amendment is appropriate, the project

should be reevaluated under these and

the recipient’s guidelines. (This would

include, for example, situations where

the business requests a change in the

amount or terms of assistance being

provided, or an extension to the loan

payment period required in the

contract.) If a reevaluation of the project

indicates that the financial elements and

public benefit to be derived have also

substantially changed, then the

recipient should make appropriate

adjustments in the amount, type, terms
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1951

or conditions of CDBG assistance which

has been offered, to reflect the impact of

the substantial change. (For example, if

a change in the project elements results

in a substantial reduction of the total

project costs, it may be appropriate for

the recipient to reduce the amount of

total CDBG assistance.) If the amount of

CDBG assistance provided to the project

is increased, the amended project must

still comply with the public benefit

standards under paragraph (f) of this

section.

12. Section 570.483 is amended by:

a. Revising the section heading;

b. Adding a new paragraph (b)(1)(iv):

c. Revising paragraph (b)(2)(i)(C), and

adding new paragraphs (b)(2)(iv) and

(b)(2)(v);

d. Revising paragraph (b)(3)

introductory text;

e. Redesignating paragraph (b)(4)(iv)

as (b)(4)(vi), and by adding new

paragraphs (b)(4)(iv) and (v);

f. Revising newly designated

paragraph (b)(4)(vi)(B);

g. Redesignating newly designated

paragraph (b)(4)(vi)(c) as paragraph

(b)(4)(vi)(F) and revising it;

h. Adding new paragraphs

(b)(4)(vi)(C), (D) and (E); and

i. Adding new paragraphs (e)(4) and

(5), to read as follows:

§ 570.483 Criteria for national objectives.

* * * * *

(b) * * *

(1) * * *

(iv) Activities meeting the

requirements of paragraph (e)(4)(i) of

this section may also be considered to

qualify under this paragraph (b).

(2) * * *

(i) * * *

(C) Activities where the benefit to

low- and moderate-income persons to be

considered is the creation or retention of

jobs, except as provided in paragraph

(b)(2)(v) of this section.

* * * * *

(iv) A microenterprise assistance

activity (carried out in accordance with

the provisions of Section 105(a)(23) of

the Act or § 570.482(c) and limited to

microenterprises) with respect to those

owners of microenterprises and persons

developing microenterprises assisted

under the activity who are low- and

moderate-income persons. For purposes

of this paragraph, persons determined to

be low and moderate income may be

presumed to continue to qualify as such

for up to a three-year period.

(v) An activity designed to provide job

training and placement and/or other

employment support services,

including, but not limited to, peer

support programs, counseling, child

care, transportation, and other similar

services, in which the percentage of

low- and moderate-income persons

assisted is less than 51 percent may

qualify under this paragraph in the

following limited circumstances:

(A) In such cases where such training

or provision of supportive services is an

integrally-related component of a larger

project, the only use of CDBG assistance

for the project is to provide the job

training and/or supportive services; and

(B) The proportion of the total cost of

the project borne by CDBG funds is no

greater than the proportion of the total

number of persons assisted who are low

or moderate income.

(3) Housing activities. An eligible

activity carried out for the purpose of

providing or improving permanent

residential structures which, upon

completion, will be occupied by lowand moderate-income households. This

would include, but not necessarily be

limited to, the acquisition or

rehabilitation of property, conversion of

non-residential structures, and new

housing construction. If the structure

contains two dwelling units, at least one

must be so occupied, and if the

structure contains more than two

dwelling units, at least 51 percent of the

units must be so occupied. Where two

or more rental buildings being assisted

are or will be located on the same or

contiguous properties, and the buildings

will be under common ownership and

management, the grouped buildings

may be considered for this purpose as

a single structure. Where housing

activities being assisted meet the

requirements of paragraph (e)(4)(ii) of

this section, all such housing may also

be considered for this purpose as a

single structure. For rental housing,

occupancy by low and moderate income

households must be at affordable rents

to qualify under this criterion. The

recipient shall adopt and make public

its standards for determining

‘‘affordable rents’’ for this purpose. The

following shall also qualify under this

criterion:

* * * * *

(4) * * *

(iv) For purposes of determining

whether a job is held by or made

available to a low- or moderate-income

person, the person may be presumed to

be a low- or moderate-income person if:

(A) He/she resides within a census

tract (or block numbering area) that

either:

(1) Meets the requirements of

paragraph (b)(4)(v) of this section; or

(2) Has at least 70 percent of its

residents who are low- and moderateincome persons; or

(B) The assisted business is located

within a census tract (or block

numbering area) that meets the

requirements of paragraph (b)(4)(v) of

this section and the job under

consideration is to be located within

that census tract.

(v) A census tract (or block numbering

area) qualifies for the presumptions

permitted under paragraphs (b)(4)(iv)

(A)(1) and (B) of this section if it is

either part of a Federally-designated

Empowerment Zone or Enterprise

Community or meets the following

criteria:

(A) It has a poverty rate of at least 20

percent as determined by the most

recently available decennial census

information;

(B) It does not include any portion of

a central business district, as this term

is used in the most recent Census of

Retail Trade, unless the tract has a

poverty rate of at least 30 percent as

determined by the most recently

available decennial census information;

and

(C) It evidences pervasive poverty and

general distress by meeting at least one

of the following standards:

(1) All block groups in the census

tract have poverty rates of at least 20

percent;

(2) The specific activity being

undertaken is located in a block group

that has a poverty rate of at least 20

percent; or

(3) Upon the written request of the

recipient, HUD determines that the

census tract exhibits other objectively

determinable signs of general distress

such as high incidence of crime,

narcotics use, homelessness, abandoned

housing, and deteriorated infrastructure

or substantial population decline.

(vi) * * *

(B) Where CDBG funds are used to

pay for the staff and overhead costs of

a subrecipient specified in section

105(a)(15) of the Act making loans to

businesses exclusively from non-CDBG

funds, this requirement may be met by

aggregating the jobs created by all of the

businesses receiving loans during any

one-year period.

(C) Where CDBG funds are used by a

recipient or subrecipient to provide

technical assistance to businesses, this

requirement may be met by aggregating

the jobs created or retained by all of the

businesses receiving technical

assistance during any one-year period.

(D) Where CDBG funds are used for

activities meeting the criteria listed at

§ 570.482(f)(3)(v), this requirement may

be met by aggregating the jobs created or

retained by all businesses for which

CDBG assistance is obligated for such

activities during any one-year period,

except as provided at paragraph (e)(5) of

this section.
1952 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

(E) Where CDBG funds are used by a

Community Development Financial

Institution to carry out activities for the

purpose of creating or retaining jobs,

this requirement may be met by

aggregating the jobs created or retained

by all businesses for which CDBG

assistance is obligated for such activities

during any one-year period, except as

provided at paragraph (e)(5) of this

section.

(F) Where CDBG funds are used for

public facilities or improvements which

will result in the creation or retention of

jobs by more than one business, this

requirement may be met by aggregating

the jobs created or retained by all such

businesses as a result of the public

facility or improvement.

(1) Where the public facility or

improvement is undertaken principally

for the benefit of one or more particular

businesses, but where other businesses

might also benefit from the assisted

activity, the requirement may be met by

aggregating only the jobs created or

retained by those businesses for which

the facility/improvement is principally

undertaken, provided that the cost (in

CDBG funds) for the facility/

improvement is less than $10,000 per

permanent full-time equivalent job to be

created or retained by those businesses.

(2) In any case where the cost per job

to be created or retained (as determined

under paragraph (b)(4)(iii)(C)(1) of this

section) is $10,000 or more, the

requirement must be met by aggregating

the jobs created or retained as a result

of the public facility or improvement by

all businesses in the service area of the

facility/improvement. This aggregation

must include businesses which, as a

result of the public facility/

improvement, locate or expand in the

service area of the public facility/

improvement between the date the state

awards the CDBG funds to the recipient

and the date one year after the physical

completion of the public facility/

improvement. In addition, the assisted

activity must comply with the public

benefit standards at § 570.482(e).

* * * * *

(e) * * *

(4) Where CDBG-assisted activities are

carried out by a Community

Development Financial Institution

whose charter limits its investment area

to a primarily residential area consisting

of at least 51 percent low- and

moderate-income persons, the unit of

general local government may also elect

the following options:

(i) Activities carried out by the

Community Development Financial

Institution for the purpose of creating or

retaining jobs may, at the option of the

unit of general local government, be

considered to meet the requirements of

this paragraph under the criteria at

paragraph (b)(1)(iv) of this section in

lieu of the criteria at paragraph (b)(4) of

this section; and

(ii) All housing activities for which

the Community Development Financial

Institution obligates CDBG assistance

during any one-year period may be

considered to be a single structure for

purposes of applying the criteria at

paragraph (b)(3) of this section.

(5) Where an activity meeting the

criteria at § 570.482(f)(3)(v) also meets

the requirements at paragraph (e)(4)(i) of

this section, the unit of general local

government may elect to qualify the

activity under either the area benefit

criteria at paragraph (b)(1)(iv) of this

section or the job aggregation criteria at

paragraph (b)(4)(vi)(D) of this section,

but not both. Where an activity may

meet the job aggregation criteria at both

paragraphs (b)(4)(vi) (D) and (E) of this

section, the unit of general local

government may elect to qualify the

activity under either criterion, but not

both.

* * * * *

13. Section 570.489 is amended by:

a. Revising paragraph (e)(1)

introductory text;

b. Redesignating paragraph (e)(2) as

paragraph (e)(3); and

c. Adding a new paragraph (e)(2), to

read as follows:

§ 570.489 Program administrative

requirements.

* * * * *

(e) Program income. (1) For the

purposes of this subpart, ‘‘program

income’’ is defined as gross income

received by a state, a unit of general

local government or a subrecipient of a

unit of general local government that

was generated from the use of CDBG

funds, except as provided in paragraph

(e)(2) of this section. When income is

generated by an activity that is only

partially assisted with CDBG funds, the

income shall be prorated to reflect the

percentage of CDBG funds used (e.g., a

single loan supported by CDBG funds

and other funds; a single parcel of land

purchased with CDBG funds and other

funds). Program income includes, but is

not limited to, the following:

* * * * *

(2) ‘‘Program income’’ does not

include the following:

(i) The total amount of funds which

is less than $25,000 received in a single

year that is retained by a unit of general

local government and its subrecipients;

(ii) Amounts generated by activities

eligible under section 105(a)(15) of the

Act and carried out by an entity under

the authority of section 105(a)(15) of the

Act;

(iii) Amounts generated by activities

that are financed by a loan guaranteed

under Section 108 of the Act and meet

one or more of the public benefit criteria

specified at § 570.482(f)(3)(v) or are

carried out in conjunction with a grant

under Section 108(q) of the Act in an

area determined by HUD to meet the

eligibility requirements for designation

as an Urban Empowerment Zone

pursuant to 24 CFR part 597, subpart B.

Such exclusion shall not apply if CDBG

funds are used to repay the guaranteed

loan. When such a guaranteed loan is

partially repaid with CDBG funds, the

amount generated shall be prorated to

reflect the percentage of CDBG funds

used. Amounts generated by activities

financed with loans guaranteed under

Section 108 of the Act which are not

defined as program income shall be

treated as miscellaneous revenue and

shall not be subject to any of the

requirements of this part. However,

such treatment shall not affect the right

of the Secretary to require the Section

108 borrower to pledge such amounts as

security for the guaranteed loan. The

determination whether such amounts

shall constitute program income shall be

governed by the provisions of the

contract required at § 570.705(b)(1).

* * * * *

Subpart J—Grant Administration

14. Section 570.500 is amended by

revising paragraph (a) introductory text;

by adding a new paragraph (a)(4); and

by revising paragraph (c); to read as

follows:

§ 570.500 Definitions.

* * * * *

(a) Program income means gross

income received by the recipient or a

subrecipient directly generated from the

use of CDBG funds, except as provided

in paragraph (a)(4) of this section.

* * * * *

(4) Program income does not include:

(i) Any income received in a single

program year by the recipient and all its

subrecipients if the total amount of such

income does not exceed $25,000; and

(ii) Amounts generated by activities

that are financed by a loan guaranteed

under Section 108 of the Act and meet

one or more of the public benefit criteria

specified at § 570.209(b)(2)(v) or are

carried out in conjunction with a grant

under Section 108(q) in an area

determined by HUD to meet the

eligibility requirements for designation

as an Urban Empowerment Zone

pursuant to 24 CFR part 597, subpart B.

Such exclusion shall not apply if CDBG
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations 1953

funds are used to repay the guaranteed

loan. When such a guaranteed loan is

partially repaid with CDBG funds, the

amount generated shall be prorated to

reflect the percentage of CDBG funds

used. Amounts generated by activities

financed with loans guaranteed under

Section 108 which are not defined as

program income shall be treated as

miscellaneous revenue and shall not be

subject to any of the requirements of

this Part. However, such treatment shall

not affect the right of the Secretary to

require the Section 108 borrower to

pledge such amounts as security for the

guaranteed loan. The determination

whether such amounts shall constitute

program income shall be governed by

the provisions of the contract required

at § 570.705(b)(1).

* * * * *

(c) Subrecipient means a public or

private nonprofit agency, authority or

organization, or a for-profit entity

authorized under § 570.201(o), receiving

CDBG funds from the recipient to

undertake activities eligible for such

assistance under Subpart C of this part.

The term excludes an entity receiving

CDBG funds from the recipient under

the authority of § 570.204. The term

includes a public agency designated by

a metropolitan city or urban county to

receive a loan guarantee under Subpart

M of this part, but does not include

contractors providing supplies,

equipment, construction or services

subject to the procurement requirements

in 24 CFR 85.36 or in Attachment O of

OMB Circular A–110, as applicable.

15. Section 570.506 is amended by

revising paragraph (b) introductory text;

by removing the semicolon at the end of

paragraph (b)(2)(iii) and adding a period

in its place; by redesignating paragraphs

(b)(7) through (b)(11) as paragraphs

(b)(8) through (b)(12), respectively; by

adding a new paragraph (b)(7); and by

revising paragraph (c), to read as

follows:

§ 570.506 Records to be maintained.

* * * * *

(b) Records demonstrating that each

activity undertaken meets one of the

criteria set forth in § 570.208. (Where

information on income by family size is

required, the recipient may substitute

evidence establishing that the person

assisted qualifies under another

program having income qualification

criteria at least as restrictive as that used

in the definitions of ‘‘low and moderate

income person’’ and ‘‘low and moderate

income household’’ (as applicable) at

§ 570.3, such as Job Training

Partnership Act (JTPA) and welfare

programs; or the recipient may

substitute evidence that the assisted

person is homeless; or the recipient may

substitute a copy of a verifiable

certification from the assisted person

that his or her family income does not

exceed the applicable income limit

established in accordance with § 570.3;

or the recipient may substitute a notice

that the assisted person is a referral from

a state, county or local employment

agency or other entity that agrees to

refer individuals it determines to be low

and moderate income persons based on

HUD’s criteria and agrees to maintain

documentation supporting these

determinations.) Such records shall

include the following information:

* * * * *

(7) For purposes of documenting,

pursuant to paragraphs (b)(5)(i)(B),

(b)(5)(ii)(C), (b)(6)(iii) or (b)(6)(v) of this

section, that the person for whom a job

was either filled by or made available to

a low- or moderate-income person based

upon the census tract where the person

resides or in which the business is

located, the recipient, in lieu of

maintaining records showing the

person’s family size and income, may

substitute records showing either the

person’s address at the time the

determination of income status was

made or the address of the business

providing the job, as applicable, the

census tract in which that address was

located, the percent of persons residing

in that tract who either are in poverty

or who are low- and moderate-income,

as applicable, the data source used for

determining the percentage, and a

description of the pervasive poverty and

general distress in the census tract in

sufficient detail to demonstrate how the

census tract met the criteria in

§ 570.208(a)(4)(v), as applicable.

* * * * *

(c) Records which demonstrate that

the recipient has made the

determinations required as a condition

of eligibility of certain activities, as

prescribed in §§ 570.201(f), 570.201(i),

570.202(b)(3), 570.203(b), 570.204(a),

570.206(f), and 570.209.

* * * * *

16. Appendix A is added to part 570

to read as follows:

Appendix A to Part 570—Guidelines and

Objectives for Evaluating Project Costs and

Financial Requirements

I. Guidelines and Objectives for Evaluating

Project Costs and Financial Requirements.

HUD has developed the following guidelines

that are designed to provide the recipient

with a framework for financially

underwriting and selecting CDBG-assisted

economic development projects which are

financially viable and will make the most

effective use of the CDBG funds. The use of

these underwriting guidelines as published

by HUD is not mandatory. However, grantees

electing not to use these underwriting

guidelines would be expected to conduct

basic financial underwriting prior to the

provision of CDBG financial assistance to a

for-profit business. States electing not to use

these underwriting guidelines would be

expected to ensure that the state or units of

general local government conduct basic

financial underwriting prior to the provision

of CDBG financial assistance to a for-profit

business.

II. Where appropriate, HUD’s underwriting

guidelines recognize that different levels of

review are appropriate to take into account

differences in the size and scope of a

proposed project, and in the case of a

microenterprise or other small business to

take into account the differences in the

capacity and level of sophistication among

businesses of differing sizes.

III. Recipients are encouraged, when they

develop their own programs and

underwriting criteria, to also take these

factors into account. For example, a recipient

administering a program providing only

technical assistance to small businesses

might choose to apply underwriting

guidelines to the technical assistance

program as a whole, rather than to each

instance of assistance to a business. Given

the nature and dollar value of such a

program, a recipient might choose to limit its

evaluation to factors such as the extent of

need for this type of assistance by the target

group of businesses and the extent to which

this type of assistance is already available.

IV. The objectives of the underwriting

guidelines are to ensure:

(1) that project costs are reasonable;

(2) that all sources of project financing are

committed;

(3) that to the extent practicable, CDBG

funds are not substituted for non-Federal

financial support;

(4) that the project is financially feasible;

(5) that to the extent practicable, the return

on the owner’s equity investment will not be

unreasonably high; and

(6) that to the extent practicable, CDBG

funds are disbursed on a pro rata basis with

other finances provided to the project.

i. Project costs are reasonable. i. Reviewing

costs for reasonableness is important. It will

help the recipient avoid providing either too

much or too little CDBG assistance for the

proposed project. Therefore, it is suggested

that the grantee obtain a breakdown of all

project costs and that each cost element

making up the project be reviewed for

reasonableness. The amount of time and

resources the recipient expends evaluating

the reasonableness of a cost element should

be commensurate with its cost. For example,

it would be appropriate for an experienced

reviewer looking at a cost element of less

than $10,000 to judge the reasonableness of

that cost based upon his or her knowledge

and common sense. For a cost element in

excess of $10,000, it would be more

appropriate for the reviewer to compare the

cost element with a third-party, fair-market

price quotation for that cost element. Thirdparty price quotations may also be used by

a reviewer to help determine the

reasonableness of cost elements below

$10,000 when the reviewer evaluates projects
1954 Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules and Regulations

infrequently or if the reviewer is less

experienced in cost estimations. If a recipient

does not use third-party price quotations to

verify cost elements, then the recipient

would need to conduct its own cost analysis

using appropriate cost estimating manuals or

services.

ii. The recipient should pay particular

attention to any cost element of the project

that will be carried out through a non-armslength transaction. A non-arms-length

transaction occurs when the entity

implementing the CDBG assisted activity

procures goods or services from itself or from

another party with whom there is a financial

interest or family relationship. If abused,

non-arms-length transactions misrepresent

the true cost of the project.

2. Commitment of all project sources of

financing. The recipient should review all

projected sources of financing necessary to

carry out the economic development project.

This is to ensure that time and effort is not

wasted on assessing a proposal that is not

able to proceed. To the extent practicable,

prior to the commitment of CDBG funds to

the project, the recipient should verify that:

sufficient sources of funds have been

identified to finance the project; all

participating parties providing those funds

have affirmed their intention to make the

funds available; and the participating parties

have the financial capacity to provide the

funds.

3. Avoid substitution of CDBG funds for

non-Federal financial support. i. The

recipient should review the economic

development project to ensure that, to the

extent practicable, CDBG funds will not be

used to substantially reduce the amount of

non-Federal financial support for the activity.

This will help the recipient to make the most

efficient use of its CDBG funds for economic

development. To reach this determination,

the recipient’s reviewer would conduct a

financial underwriting analysis of the project,

including reviews of appropriate projections

of revenues, expenses, debt service and

returns on equity investments in the project.

The extent of this review should be

appropriate for the size and complexity of the

project and should use industry standards for

similar projects, taking into account the

unique factors of the project such as risk and

location.

ii. Because of the high cost of underwriting

and processing loans, many private financial

lenders do not finance commercial projects

that are less than $100,000. A recipient

should familiarize itself with the lending

practices of the financial institutions in its

community. If the project’s total cost is one

that would normally fall within the range

that financial institutions participate, then

the recipient should normally determine the

following:

A. Private debt financing—whether or not

the participating private, for-profit business

(or other entity having an equity interest) has

applied for private debt financing from a

commercial lending institution and whether

that institution has completed all of its

financial underwriting and loan approval

actions resulting in either a firm commitment

of its funds or a decision not to participate

in the project; and

B. Equity participation—whether or not the

degree of equity participation is reasonable

given general industry standards for rates of

return on equity for similar projects with

similar risks and given the financial capacity

of the entrepreneur(s) to make additional

financial investments.

iii. If the recipient is assisting a

microenterprise owned by a low- or

moderate-income person(s), in conducting its

review under this paragraph, the recipient

might only need to determine that nonFederal sources of financing are not available

(at terms appropriate for such financing) in

the community to serve the low- or moderateincome entrepreneur.

4. Financial feasibility of the project. i. The

public benefit a grantee expects to derive

from the CDBG assisted project (the subject

of separate regulatory standards) will not

materialize if the project is not financially

feasible. To determine if there is a reasonable

chance for the project’s success, the recipient

should evaluate the financial viability of the

project. A project would be considered

financially viable if all of the assumptions

about the project’s market share, sales levels,

growth potential, projections of revenue,

project expenses and debt service (including

repayment of the CDBG assistance if

appropriate) were determined to be realistic

and met the project’s break-even point

(which is generally the point at which all

revenues are equal to all expenses). Generally

speaking, an economic development project

that does not reach this break-even point over

time is not financially feasible. The following

should be noted in this regard:

A. some projects make provisions for a

negative cash flow in the early years of the

project while space is being leased up or

sales volume built up, but the project’s

projections should take these factors into

account and provide sources of financing for

such negative cash flow; and

B. it is expected that a financially viable

project will also project sufficient revenues to

provide a reasonable return on equity

investment. The recipient should carefully

examine any project that is not economically

able to provide a reasonable return on equity

investment. Under such circumstances, a

business may be overstating its real equity

investment (actual costs of the project may be

overstated as well), or it may be overstating

some of the project’s operating expenses in

the expectation that the difference will be

taken out as profits, or the business may be

overly pessimistic in its market share and

revenue projections and has downplayed its

profits.

ii. In addition to the financial underwriting

reviews carried out earlier, the recipient

should evaluate the experience and capacity

of the assisted business owners to manage an

assisted business to achieve the projections.

Based upon its analysis of these factors, the

recipient should identify those elements, if

any, that pose the greatest risks contributing

to the project’s lack of financial feasibility.

5. Return on equity investment. To the

extent practicable, the CDBG assisted activity

should provide not more than a reasonable

return on investment to the owner of the

assisted activity. This will help ensure that

the grantee is able to maximize the use of its

CDBG funds for its economic development

objectives. However, care should also be

taken to avoid the situation where the owner

is likely to receive too small a return on his/

her investment, so that his/her motivation

remains high to pursue the business with

vigor. The amount, type and terms of the

CDBG assistance should be adjusted to allow

the owner a reasonable return on his/her

investment given industry rates of return for

that investment, local conditions and the risk

of the project.

6. Disbursement of CDBG funds on a pro

rata basis. To the extent practicable, CDBG

funds used to finance economic development

activities should be disbursed on a pro rata

basis with other funding sources. Recipients

should be guided by the principle of not

placing CDBG funds at significantly greater

risk than non-CDBG funds. This will help

avoid the situation where it is learned that

a problem has developed that will block the

completion of the project, even though all or

most of the CDBG funds going in to the

project have already been expended. When

this happens, a recipient may be put in a

position of having to provide additional

financing to complete the project or watch

the potential loss of its funds if the project

is not able to be completed. When the

recipient determines that it is not practicable

to disburse CDBG funds on a pro rata basis,

the recipient should consider taking other

steps to safeguard CDBG funds in the event

of a default, such as insisting on securitizing

assets of the project.

Dated: December 22, 1994.

Mark C. Gordon,

General Deputy Assistant Secretary for

Community Planning and Development.

[FR Doc. 94–32151 Filed 12–29–94; 4:33 pm]

BILLING CODE 4210–29–P