54200 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 891 

[Docket No. FR–4725–F–02] 

RIN 2502–AH83 

Mixed-Finance Development for 

Supportive Housing for the Elderly or 

Persons With Disabilities and Other 

Changes to 24 CFR Part 891 

AGENCY: Office of the Assistant 

Secretary for Housing-Federal Housing 

Commissioner, HUD. 

ACTION: Final rule. 

SUMMARY: This final rule implements 

statutory changes that enable the use of 

mixed-finance and for-profit 

participation in the Section 202 

Supportive Housing program for the 

elderly and the Section 811 Supportive 

Housing program for persons with 

disabilities, as well as makes other 

changes to those programs. The rule 

uses the mixed-finance development 

model to leverage the capital and 

expertise of the private developer 

community to create attractive and 

affordable supportive housing 

developments for the elderly and for 

persons with disabilities. In addition, 

the rule provides for the leveraging of 

low-income housing tax credits as well 

as other sources of funding. The rule 

sets standards for the participation of 

limited partner investors (who may be 

for-profit entities) in partnership with a 

sole-purpose nonprofit general partner; 

describes eligible fees and expenses; 

lays out the use of capital advances in 

the mixed-finance context; and covers 

other matters relevant to mixed-finance 

development of these projects. This 

final rule follows an interim rule 

published on December 1, 2003, and 

takes into consideration public 

comments on the interim rule. 

DATES: Effective Date: October 13, 2005. 

FOR FURTHER INFORMATION CONTACT: 

Willie Spearmon, Director, Office of 

Housing Assistance and Grant 

Administration, Department of Housing 

and Urban Development, 451 Seventh 

Street, SW., Washington, DC 20410– 

8000; telephone (202) 708–3000 (this is 

not a toll-free number). Hearing- or 

speech-impaired individuals may access 

this number through TTY by calling the 

toll-free Federal Information Relay 

Service at (800) 877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The American Homeownership and 

Economic Opportunity Act of 2000, 

Public Law 106–569 (AHEO Act), 

amended both the Section 202 

Supportive Housing program (Section 

202 program) for the elderly and the 

Section 811 Supportive Housing 

program (Section 811 program) for 

persons with disabilities. These 

amendments allow the participation of 

for-profit limited partnerships and the 

use of mixed-finance development 

methods. Section 831 of the AHEO Act 

further amended section 202(k)(4) of the 

Housing Act of 1959 (12 U.S.C 

1701q(k)(4)), to add a for-profit limited 

partnership to the existing statutory 

definition of ‘‘private nonprofit 

organization,’’ by stipulating that the 

sole general partner of one is a nonprofit 

organization meeting the requirements 

under 12 U.S.C. 1701q(k)(4)(A)–(C). 

Section 841 of the AHEO Act amended 

section 811(k)(6) of the National 

Affordable Housing Act (42 U.S.C. 

8013(k)(6)) to add a for-profit limited 

partnership to the definition of 

‘‘nonprofit organization,’’ by stipulating 

that the sole general partner of one is a 

nonprofit organization meeting the 

requirements of 42 U.S.C. 

8013(k)(6)(A)–(D). The statutory and/or 

regulatory requirements for the 

nonprofit organization include a 

nonprofit organizational structure, a 

governing board that includes the 

representation of the views of the 

community and is responsible for 

operating the development, and 

approval as to financial responsibility 

by HUD (see 12 U.S.C. 1701q(k)(4) and 

42 U.S.C. 8013(k)(6), as amended). 

Sections 832 and 842 of the AHEO Act 

(12 U.S.C. 1701q(h)(6) and 42 U.S.C. 

8011(h)(5), respectively) broadened the 

funding sources that may be used for 

amenities for, and the design and 

construction suitable for supportive 

housing for the elderly or persons with 

disabilities. Excess amenities may not 

be funded with the capital advance 

under either program, and, if other 

funds are used, the cost of such 

amenities is not taken into account in 

determining the amount of Federal 

assistance or the rent contribution of 

tenants. 

These sections also added language 

stating that ‘‘[N]otwithstanding any 

other provision of law, assistance 

amounts provided under this section 

may be treated as amounts not derived 

from a Federal grant.’’ (12 U.S.C. 

1701q(h)(6) and 42 U.S.C. 8013(h)(5)). 

‘‘Assistance amounts provided under 

this section’’ include capital advances. 

HUD does not consider capital advance 

funds to be grant funds. Significantly, 

24 CFR part 84 of HUD’s regulations 

codifies HUD’s uniform rules for grants 

to institutions of higher education, 

hospitals, and other nonprofit 

organizations. Section 84.2 of these 

regulations, in accordance with Office of 

Management and Budget’s (OMB’s) 

governmentwide circular A–110, 

‘‘Uniform Administrative Requirements 

for Grants and Agreements with 

Institutions of Higher Education, 

Hospitals, and Other Non-Profit 

Organizations’’ on which 24 CFR part 84 

is based (59 FR 47010, 47012), defines 

‘‘award’’ as ‘‘financial assistance that 

provides support or stimulation to 

accomplish a public purpose. Awards 

include grants and other agreements in 

the form of money or property in lieu 

of money, by HUD to an eligible 

recipient * * * the term does not 

include * * * capital advances under 

the Sections 202 and 811 programs.’’ 

Additionally, ‘‘recipient’’ is defined as 

‘‘an organization receiving financial 

assistance directly from HUD to carry 

out a project or program,’’ also in 

accordance with OMB’s circular (see 59 

FR 47013). However, consistent with 

HUD’s treatment of capital advances, 

the term ‘‘recipient’’ in 24 CFR 84.2 is 

specifically defined to exclude project 

owners that receive capital advances 

under the Section 202 and 811 

programs. Therefore, in its part 84 rule 

governing grants, HUD has 

distinguished capital advances from the 

grants covered by that part, and has 

treated capital advances in the same 

manner as mortgages insured or held by 

HUD. The added statutory language 

supports HUD’s treatment of capital 

advances. 

Sections 834 and 844 of the AHEO 

Act, 114 Stat. 3021–22 and 3023 

amended, respectively, 12 U.S.C. 

1701q(j) and 42 U.S.C. 8013(j), by 

adding a new paragraph to each statute 

relating to the use of project reserve 

accounts under the existing supportive 

housing for the elderly and persons with 

disabilities programs. Under these new 

sections, project reserves may be used to 

reduce the number of units by 

combining and retrofitting units that are 

obsolete or unmarketable, subject to 

HUD approval. 

Sections 835 and 845 of the AHEO 

Act amended section 202(h)(1) of the 

Housing Act of 1959 (12 U.S.C. 

1701q(h)(1)), and section 811(h)(1) of 

the National Affordable Housing Act (42 

U.S.C. 8031(h)(1)), respectively, by 

clarifying that commercial facilities for 

the benefit of residents of the project 

and the community in which the project 

is located, may be located and operated 

in a supportive housing project for the 

elderly or persons with disabilities. 

Such commercial facilities cannot be 

subsidized with Section 202 or Section 

811 funds. 

Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 54201 

Section 833 of the AHEO Act 

amended sections 202(b) and 202(h)(2) 

of the Housing Act of 1959 (12 U.S.C. 

1701q(b) and 1701q(h)(2)), by removing 

the limitation in the Section 202 

program that existing housing be 

acquired only from the Resolution Trust 

Corporation (RTC). Section 202 owners 

may now acquire property from other 

sources without the need for 

rehabilitation for use in supportive 

housing. In the case of Section 811, the 

statute does not limit acquisition to RTC 

properties (see 42 U.S.C. 8013(b)(2)). 

II. Changes Made at the Final Rule 

Stage 

In response to public comments, HUD 

has made some substantive changes to 

the December 1, 2003, interim rule (68 

FR 67316) in this final rule. 

A number of commenters opined that 

the interim rule was overly specific in 

its provisions in § 891.808 regarding the 

loan of the capital advance from the 

nonprofit organization to the 

partnership that functions as the mixedfinance owner, and that these 

requirements could interfere with the 

ability of mixed-finance developments 

to qualify for favorable treatment for 

Low Income Housing Tax Credit 

(LIHTC) purposes. In response, HUD has 

revised this section to merely provide 

that the sponsor may transfer the fund 

reservation directly to the mixedfinance owner. The parties are free, 

subject to compliance with legal 

requirements and HUD review, to 

structure this transaction in the way 

most appropriate for the development. 

In accordance with this less specific, 

more flexible approach, this final rule 

also removes § 891.828 of the interim 

rule, entitled ‘‘loan of capital advance 

funds to mixed-finance owner.’’ In 

addition, in accordance with the goal of 

offering participants increased 

flexibility, the definition of ‘‘mixedfinance owner’’ in § 891.805 is revised 

to state that the sponsor may also, as 

long as it meets the statutory and 

regulatory criteria, be the general 

partner of the owner, and § 891.808 is 

revised to take this possibility into 

account. 

A number of commenters stated that 

the cap on the amount of the 

developer’s fee in the interim rule (a 

maximum of nine percent of the total 

project replacement cost, with no more 

than eight percent of the capital advance 

payable toward the fee) was too strict, 

and that the interim rule was overly 

specific as to the costs that could be 

paid from the developer’s fee. In 

response, HUD is revising § 891.815 in 

this final rule to allow for developer’s 

fees up to the percentage of total project 

replacement costs allowed by the tax 

credit allocating agency in the state 

where the development is sited, up to a 

ceiling of 15 percent. The final rule 

removes the list of approved uses of the 

fee. The fee may be paid upfront or on 

a deferred basis, and may not be paid 

from capital advances or project rental 

assistance under the Section 202 or 

Section 811 program or tenant rents. 

A major change from the interim rule 

is that detailed firm commitment 

application, mixed-finance proposal, 

and evidentiary material submission 

requirements are being removed from 

the rule in response to comments that 

these sections were overly detailed and 

restrictive. Instead, HUD will provide 

separate program guidance on these 

requirements. Specifically, § 891.818 is 

simplified to a single sentence stating 

that the sponsor will submit the firm 

commitment application in a form 

required by HUD. Interim § 891.820 on 

the mixed-finance proposal is deleted 

from the rule in its entirety (elements of 

the mixed-finance proposal will be 

included along with the firm 

commitment application process in 

forthcoming program guidance). Interim 

§ 891.823 on HUD review and approval 

of the firm commitment application is 

simplified to state that HUD will review 

and may approve or disapprove the firm 

commitment application and the mixedfinance proposal. The provisions of 

§ 891.825 on submission of evidentiary 

materials are replaced by the more 

specific term ‘‘mixed-finance closing 

documents,’’ and the details in the 

interim rule will be moved to 

forthcoming program guidance. The 

final rule will specify that the mixedfinance closing documents must be 

submitted before the capital advance. 

In response to comments that the 

conflict and identity-of-interest 

provisions in the interim rule could 

cause problems for mixed-finance 

development, this final rule modifies 

those provisions. Where there is no 

FHA-insured or risk-sharing project, the 

conflict and identity-of-interest 

provisions in 24 CFR 891.130 will 

apply. However, where an FHA-insured 

or risk-sharing project is provided, the 

conflict and identity-of-interest policies 

that are used in the FHA program 

involved will instead apply, with the 

exception that the nonprofit general 

partner must continue to adhere to the 

provisions of § 891.130. The conflict-ofinterest provision is at § 891.832 of the 

final rule, along with a new crossreference that has been added in a new 

§ 891.130(c). 

The interim rule provided for a threemonth operating reserve at § 891.860. In 

response to comments, HUD is 

clarifying that this is a minimum, not a 

ceiling, by adding the words ‘‘at least’’

in this final rule. 

Discussion of the public comments 

received on the December 1, 2003, 

interim rule follows. 

III. Discussion of Public Comments 

The comment period for the interim 

rule closed on January 30, 2004. 

Seventeen commenters submitted 

comments during the comment period 

on a wide variety of issues related to the 

interim rule. The commenters included 

a variety of entities, including public 

housing authorities, housing finance 

agencies, and professional associations. 

A summary of the issues raised by the 

commenters follows, organized by 

regulatory section. 

Section-by-Section Summary of Public 

Comments 

Definition of Replacement Reserve 

Account (24 CFR 891.105) 

Comment: There is a conflict between 

the definition of replacement reserve 

account, which states that the funds in 

the account may be used for repairs, 

replacements, or capital improvements 

to the project, and another section, 

interim rule § 891.855, which limits the 

use of replacement reserves to Section 

202 or 811 units. The commenter would 

prefer to be able to use the replacement 

reserve for the general needs of the 

project, not just the Section 202 or 811 

units. 

HUD Response: Section 891.105 of the 

regulations requires that a replacement 

reserve account be established for the 

Section 202 or 811 units. Repairs to the 

Section 202 and 811 units are to be 

funded from this reserve account. 

Repairs to non-Section 202 or 811 units 

would be funded with other monies 

according to the financing and 

management structure for those units. 

Repairs to common elements would be 

prorated based on the percentage of 

Section 202 or 811 units. For example, 

if a building needed roof repairs 

(assuming the roof is a common 

element), and half the units were 

Section 202 or 811 units, half the repair 

money could be taken from the Section 

202 or 811 replacement reserve. The 

owner could then set up a separate 

repair or reserve for replacement 

account for the non-HUD units; the rule 

only requires a replacement reserve 

account for the HUD-funded units. 

Definitions of Mixed-Finance Owner 

and Nonprofit Organization (24 CFR 

891.805) 

Comment: A commenter asked 

whether the statutory inclusion of forVerDate Aug<18>2005 16:20 Sep 12, 2005 Jkt 205001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\13SER3.SGM 13SER3
54202 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

profit limited partnerships with a 

nonprofit general partner (see 12 U.S.C. 

1701q(k)(4) and 42 U.S.C. 8013(k)(6)) 

allows for limited liability companies 

(LLCs) in which the sole managing 

member is an eligible nonprofit 

corporation. This commenter states that 

in the HOPE VI program, LLCs and 

partnerships are treated equally. This 

commenter states that the statutory 

provision would appear to allow for an 

interpretation that an LLC is an eligible 

for-profit organization in its use of the 

phrase ‘‘or a corporation wholly owned 

and controlled by’’ an eligible nonprofit 

organization as part of the definition of 

‘‘private nonprofit organization.’’

Another commenter stated that an LLC 

should be included as a possible mixedfinance owner, and that more than one 

nonprofit general partner should be 

allowed within the definition of private 

nonprofit organization. Another 

commenter stated that the rule should 

allow LLCs as ownership entities, as the 

statute already permits LLCs, and that 

depending on state law and the 

preference of investors, LLCs are 

becoming more popular as the 

ownership entity in LIHTC projects. 

Another commenter stated that LLCs are 

often preferable for reasons of state law. 

Some commenters stated that the 

definition of ‘‘mixed-finance owner’’

should be expanded to include a forprofit limited partnership in which a 

for-profit affiliate of a private nonprofit 

organization is the sole general partner. 

These commenters stated that this is the 

preferred structure to comply with some 

states’ corporation laws and may be 

necessary to comply with local law and 

meet Internal Revenue Service (IRS) 

rules for LIHTC projects. 

HUD Response: The regulatory 

definition of ‘‘mixed-finance owner’’

follows the statutory requirements of the 

AHEO Act of 2001, including that there 

be a sole general partner meeting 

specified requirements, specifically, 

requirements related to being a 

nonprofit organization, and that the 

mixed-finance owner be a limited 

partnership. HUD believes that the 

statutory definition precludes the use of 

LLCs as the ownership entity or the 

general partner or the use of more than 

one general partner (see 12 U.S.C. 

1701q(k)(3) and (4) and 42 U.S.C. 

8013(k)(5) and (6)) . 

Comment: A commenter stated that 

the definition of ‘‘nonprofit 

organization’’ stated in the rule creates 

difficulties for regional and national 

nonprofit Section 202 and Section 811 

developers. The definitions require that 

the nonprofit have a governing board 

selected in a manner to ensure that there 

is significant representation of the views 

of the community in which the housing 

is located. The commenter stated that it 

is not practical to meet this test at the 

level of the parent organization or 

sponsor. HUD should clarify that the 

community representation requirements 

can be satisfied by the general partner 

of the project owner. 

HUD Response: As the preamble of 

the rule states, and the definition of 

eligible nonprofit and nonprofit 

organizations reference, the statutorily 

required requirement of representation 

of the views of the community in the 

Section 202 program (12 U.S.C. 

1701q(k)(4)(B)) can be fulfilled by the 

general partner. No further clarification 

is required. (See § 891.805 of this final 

rule, and §§ 891.205 and 891.305 of the 

202/811 program rules.) The governing 

body of the general partner must be 

selected in such a manner as to assure 

that there is significant representation of 

the community in which the housing is 

located, as required by §§ 891.205 and 

891.305. 

This commenter also stated that in its 

experience, the IRS has on policy 

grounds refused to confer tax-exempt 

status under section 501(c)(3) of the 

Internal Revenue Code for any entity 

serving as the general partner in a tax 

credit limited partnership. As a result, 

it will not be possible for the general 

partner entity to obtain its own section 

501(c)(3) tax exemption. 

HUD Response: The nature of the 

partnership structure is determined by 

the governing statute. HUD suggests that 

partnerships work with the IRS to 

determine how to structure their 

partnerships, within the statute and 

regulations, to obtain the maximum tax 

benefits available. 

Recipient of Fund Reservation 

(Preamble at 68 FR 67317 and 24 CFR 

891.808(a)) 

Comment: The requirement that the 

nonprofit general partner be created by 

a sponsor that has received a Section 

202 or 811 fund reservation is not based 

on the statute. As long as the nonprofit 

general partner meets the statutory 

criteria for a private nonprofit 

organization, or nonprofit organization, 

as applicable, that should be sufficient 

assurance that the mixed-finance owner 

is eligible. 

HUD Response: In accordance with 

this comment, HUD is revising this final 

rule to include the possibility that a 

sponsor that meets the statutory and 

regulatory requirements may either form 

an entity to act as the general partner of 

the single-purpose mixed finance 

owner, or itself be the general partner. 

Mixed-Finance Loan Terms (24 CFR 

891.808) 

Comment: The rule is overly specific 

in its direction with respect to loan 

terms for the capital advance, and 

should be more flexible. A commenter 

stated that the parties to the mixedfinance transaction should define the 

loan terms for the capital advance rather 

than the rule, and recommended that 

the rule be redrafted to permit each 

transaction to be structured to meet tax 

credit requirements as well as the 

requirements of that transaction, with 

HUD retaining the right to review, 

approve, or disapprove the financial 

structure. Another commenter stated 

that the requirement that the general 

partner be the party that loans the funds 

to the mixed-finance owner could 

adversely impact the allocation of 

LIHTCs to the investors. The rule 

should provide that the funds can be 

provided to the mixed-finance owner in 

accordance with the terms of the HUDapproved mixed-finance proposal. 

Another commenter stated that the rule 

should permit the funds to go directly 

to the sponsor, which would then lend 

them to the mixed-finance owner. 

HUD Response: HUD has revised this 

section to provide that the sponsor may 

transfer the fund reservation directly to 

the mixed-finance owner. The parties 

are free, subject to compliance with 

legal requirements and HUD review, to 

structure this transaction in the way 

most appropriate for the development. 

Comment: A number of commenters 

stated that the loan to the mixed-finance 

owner should be at the applicable 

federal rate (AFR), consistent with IRS 

tax credit law, rather than the Section 

202/811 rate. 

HUD Response: HUD has removed the 

specific interest rate provisions from 

this final rule. The parties are free, 

subject to compliance with legal 

requirements and HUD review, to 

structure this transaction in a way most 

appropriate for the development. 

Comment: The interim rule’s 

characterization of the loan from the 

general partner to the mixed-finance 

owner as non-repayable will jeopardize 

the treatment of the loan in an LIHTC 

transaction because it may not be 

considered a true debt. HUD should 

clarify whether the loan must be 

forgiven after 40 years of operation in 

compliance with HUD’s rules, and 

whether it must be non-amortizing. A 

possible solution might be interest-only 

payments for 40 years with a balloon 

payment of principal at the end. For 

similar reasons, two commenters stated 

that any ‘‘pass through’’ of HUD funds 

runs the risk of negative consequences 

Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 54203 

in an LIHTC transaction. A commenter 

stated that the repayment requirement 

in § 891.808(a) appears to be in conflict 

with preamble language stating that 

repayment is not required so long as the 

project remains available in accordance 

with the use restrictions (68 FR 67318). 

HUD Response: The interim rule 

stated that the loan from the general 

partner to the mixed-finance owner is a 

non-amortizing loan to be repaid within 

40 years. The non-repayment provision 

is a statutory provision that applies to 

the capital advance from HUD and 

repayment to HUD, and applies only so 

long as the use restrictions remain in 

effect for the entire period required. 

Comment: A commenter stated that 

the sentence reading ‘‘however, the 

number of section 202 or 811 units in 

the development funded with the 

capital advance must be not less than 

the number of units that could have 

been developed with the capital 

advance without the use of mixed 

funding sources.’’ The commenter stated 

that it is unlikely that capital advance 

funds will be ‘‘diluted’’ when combined 

with other financing. 

HUD Response: This language ensures 

that the capital advance is used for the 

number of units upon which the award 

was based. While, in most cases, HUD 

funds are used appropriately, HUD 

believes that this regulatory control is 

necessary to ensure the appropriate use 

of limited federal funds in all cases. 

Project Rental Assistance (891.810) 

Comment: Four commenters stated 

that project rental assistance should be 

characterized as rental assistance 

payments rather than as a federal grant. 

One commenter stated that few or no 

financings will be feasible unless and 

until the IRS makes a specific ruling 

that project rental assistance payments 

related to the Section 202 program are 

not federal grants with respect to a 

building or its operation, and asked that 

the IRS expedite such a ruling. One 

commenter stated that HUD should 

work with the IRS to clarify that project 

rental assistance will not be treated as 

federal grants to mixed-finance Section 

202 projects for tax credit purposes. 

This commenter stated that in the 

absence of such a clarification, rental 

assistance payments may cause a dollarfor-dollar reduction in the projects 

eligible basis for LIHTC purposes, with 

a resulting reduction in the amount of 

available tax credits. Also, without this 

clarification, project rental assistance 

payments may cause the rent due on the 

unit to exceed the IRS limitation on 

gross rent so that the unit will fail to 

qualify as a rent-restricted unit. This 

commenter also stated that such a ruling 

regarding project rental assistance is 

‘‘critical to prevent reductions in LIHTC 

eligible basis with respect to such 

assistance.’’

HUD Response: HUD believes that 

project rental assistance should not be 

treated as a Federal grant. Whether or 

not project rental assistance is to be 

treated as a Federal grant for LIHTC 

purposes is a determination that the IRS 

must make. HUD is in the process of 

discussing this matter with the IRS. 

Developer’s Fee (24 CFR 891.815) 

Comment: Some commenters objected 

to the limitation on the developer’s fee 

of nine percent of the total project 

replacement cost. A number of 

commenters suggested that the rule 

adopt HUD’s public housing mixedfinance cost control and safe harbor 

standards, which the commenter states 

provide for a safe harbor developer’s fee 

of nine percent of the project costs 

subject to a maximum developer’s fee 

up to 12 percent of the project costs. A 

commenter also stated: ‘‘We think that 

HUD should establish a maximum 

developer fee that can be paid from the 

Section 202/811 capital advance to be 

used for developer overhead and profit, 

but also provide for some flexibility and 

deference to state housing finance 

agencies in LIHTC transactions with 

respect to the amount of the developer 

fee and the uses to which such fees can 

be put when paid from other sources 

such as LIHTC equity.’’

Four commenters objected to limiting 

profit and overhead to six percent of 

construction cost. Two commenters 

stated that HUD could limit the amount 

of the fee paid from HUD funds, but 

should not limit the portion of the fee 

paid from other sources. Three 

commenters stated that because a 

mixed-finance developer will have to 

invest more equity and other guarantees 

to make projects feasible, ‘‘this arbitrary 

limitation on the amount of developer 

fees that are ordinarily available from 

other financing programs * * * should 

be removed from the rule.’’

Three commenters agreed, suggesting 

that the developer’s fee be in any 

amount allowed by the state tax credit 

allocating agency (which can be up to 

approximately 15 percent of the project 

cost), provided that no more than eight 

percent of the capital advance funds be 

used toward the fee. A commenter 

stated that the fee should be able to 

exceed 12 percent with the approval of 

the state housing finance agency, 

provided that the increased fee is 

justified by increased developer’s risk. 

These commenters also stated that there 

should be no limitations on the use of 

cash flow from the non-Section 202 or 

811 units so that it can be used to pay 

the deferred portion of the developer’s 

fee. Some commenters stated that any 

portion of the developer’s fee not 

required to cover the eligible uses of the 

fee should be made available to the 

nonprofit developer once the project has 

been completed, reasoning that the 

developer should not be penalized for 

any cost savings it achieves and that 

reserve accounts can still be adequately 

funded. Another commenter stated that, 

in order to maximize eligible basis and 

resulting LIHTC equity, there should be 

a developer’s fee higher than the interim 

rule allows, but within the higher limit 

of the LIHTC program. 

HUD Response: After consideration of 

these comments, HUD is amending the 

final rule to lift the cap on developer’s 

fees in Section 202 and 811 mixedfinance projects to the amount allowed 

by the state tax credit allocating agency 

of the state in which the project is sited, 

up to a ceiling of 15 percent of the total 

project replacement cost, payable from 

project sources other than capital 

advances, project rental assistance, or 

tenant rents. 

Comment: A commenter stated that 

the rule should explicitly allow the 

project sponsor to receive the 

developer’s fee. 

HUD Response: The developer’s fee 

would usually be paid to the project 

owner, and HUD plans to follow this 

practice in the mixed-finance program. 

Eligible Uses of Developer’s Fee (24 CFR 

891.815(c)) 

Comment: A commenter stated that 

the limitation on eligible uses of the 

developer’s fee may not work well in 

situations where there are LIHTCs and 

other sources of funding. Another 

commenter stated that the eligible uses 

of the developer’s fee differ from the 

definition of developer’s fee in the 

LIHTC program, and stated that the rule 

‘‘should acknowledge the validity of a 

fee for development efforts and also 

allow flexibility in use of other funding 

sources for these items.’’ Another 

commenter stated that ‘‘we are unclear 

as to why the description of eligible 

uses are considered to be part of the 

developer’s fee.’’ This commenter stated 

that most of these uses would be funded 

with the capital advance as part of the 

development budget. This is 

problematic for two reasons. First, the 

ability of the sponsor to recoup its 

overhead and costs is essential to its 

financial viability. Second, a 

developer’s fee is generally includable 

in the eligible basis of the project for 

LIHTC purposes, generating additional 

tax credit equity. To the extent that the 

fee be used for expenses already 

54204 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

included in the budget, and further 

requiring that any portion of the fee not 

so spent be placed in the replacement 

reserve account, the interim rule 

decreases the eligible tax basis. Two 

commenters stated that the local tax 

credit agency’s rules should apply to the 

uses of the fee. One commenter stated 

that the prescribed uses of the 

developer’s fee are ‘‘not realistic for 

mixed finance transactions.’’ Another 

commenter stated that more flexibility is 

needed on the allowed uses of the 

developer’s fee. Another commenter 

stated that the following items under 

§ 891.815(c)(1) of the interim rule are 

common development costs that should 

be paid out of the capital advance rather 

than the developer’s fee: 

§ 891.815(c)(1)(B), (F), (H), (I), (J), (K), 

(L), (M), and (N). 

A commenter questioned the 

prohibition on using the developer’s fee 

to pay attorney’s and architect’s fees 

‘‘above those contractually agreed to,’’

and stated that limits on these fees from 

the Section 202 program are quite 

restrictive and should be reviewed and 

potentially increased to reflect the 

greater complexity involved in a mixedfinance transaction, which may involve 

re-capitalization and reconfiguration of 

residential and commercial spaces. 

HUD Response: In accordance with 

the comments and to increase program 

flexibility, HUD is removing the specific 

list of eligible uses from this final rule. 

General Comments on the Firm 

Commitment Application (24 CFR 

891.818) 

Comment: Commenters stated that the 

regulation is not the best place for a long 

list of submission requirements and 

suggested that these requirements be 

placed in a handbook or other program 

guidance. Two commenters stated 

generally that HUD should develop 

streamlined submission requirements 

for mixed-finance transactions. 

HUD Response: In accordance with 

the comment, HUD is removing the 

detailed submission requirements and 

will provide separate program guidance 

on the particulars of these requirements. 

Although the language of § 891.818(a)(8) 

is being removed from the rule, owners 

are still obligated to comply with the 

design and construction requirements of 

the Fair Housing Act, and the 

accessibility requirements of section 504 

of the Rehabilitation Act of 1973. The 

architecture and engineering review 

includes an analysis of the project 

design to determine if it meets the 

design and construction standards of the 

Fair Housing Act and the accessibility 

requirements of section 504, as well as 

relevant design standards stated in 24 

CFR 891.120, 891.210, and 891.310. 

Specific Comments on the Firm 

Commitment Application (§ 891.818) 

Comment: A commenter stated that 

§ 891.818(a)(2), requiring submission of 

the organizational documents of the 

nonprofit organization and the mixedfinance owner, should be part of the 

evidentiary submission, since the 

investor limited partner, which is 

usually highly involved in the 

organizational documents of the mixedfinance owner, will probably not be 

selected until after there is a firm 

commitment. Two other commenters 

similarly stated that the details of the 

partnership might not be finished before 

there is a firm commitment. Another 

commenter stated that the rule should 

make clear that it is the initial 

partnership agreement that is required, 

not the agreement that is subject to 

negotiation with the investor. 

Alternatively, these documents could be 

submitted with the mixed-finance 

closing documents. 

One commenter stated, as to 

§ 891.818(a)(4), requiring a balance 

sheet showing that the mixed finance 

owner is adequately capitalized, that 

HUD should provide some guidance on 

how it will determine that the owner is 

adequately capitalized. Another 

commenter stated that HUD should 

accept a demand note as a means of 

establishing adequate capitalization. A 

commenter stated that, since most tax 

credit investors will not disburse tax 

credit equity until HUD has approved a 

drawdown of capital advance funds, the 

paragraph should be modified, perhaps 

to require a pro forma balance sheet as 

of the day of closing. One commenter 

stated that the capitalization 

requirement of § 891.818(a)(4) should be 

deleted because prior to outside 

investment, it is unlikely that the 

mixed-finance owner will be capitalized 

to any significant extent. 

A commenter stated that 

§ 891.818(a)(8) should state the form 

that the evidence of compliance with 

fair housing and accessibility standards 

should take. 

A commenter stated that the 

requirement for obtaining zoning 

approvals at the time of the firm 

commitment application 

(§ 891.818(a)(7)) may not be feasible in 

all cases. 

A commenter stated that a life cycle 

cost analysis (§ 891.818(a)(15)) is no 

longer required for HOPE VI projects, 

and stated that HUD should reconsider 

its utility for Section 202/811 projects. 

A commenter stated that because of 

the requirement to have a final 

contractor’s cost breakdown and 

analysis (§ 891.818(a)(18)), and the fact 

that it is impossible to secure a 

contractor’s bid for an unlimited period 

of time, there should be a time limit on 

HUD’s review of the firm commitment 

application, from submission to initial 

closing, such as 60 days. 

HUD Response: Pursuant to 

comments, HUD is removing from the 

final rule the various elements that 

commenters cited. HUD will be issuing 

program guidance that will deal with 

these issues, and will consider these 

comments in issuing this guidance. 

Regarding the issue of a time limit on 

HUD’s review of the firm commitment 

application, HUD will endeavor to 

process these applications in a timely 

manner but, because of the likely 

complexity and uniqueness of mixedfinance projects, HUD declines to adopt 

a time limit on its review. 

Mixed-Finance Proposal (§ 891.820) 

Comment: A commenter stated 

generally that the requirement of a full 

mixed-finance proposal is not 

necessary, and the firm commitment 

application should serve in lieu of a 

mixed-finance proposal. More thorough 

review of documents should be handled 

at the evidentiary stage. 

A commenter stated that experience 

in the public housing mixed-finance 

program shows that submission of all 

financing documents at the proposal 

stage (§ 891.820(b)) is not really 

practical. HUD should be provided with 

enough information about the financing 

to determine that the proposal is 

practical; however, the actual 

documentation of the financing should 

be part of the evidentiary package 

submission and not part of the proposal. 

Another commenter stated that such 

financing documents are duplicative of 

evidentiary requirements and also may 

not be available at the time of 

submission of the proposal. 

A commenter stated that the 

certifications and assurances of legal 

authority to enter into the mixedfinance arrangement required by 

§ 891.820(n) are not necessary with 

respect to the mixed-finance owner. The 

commenter stated that ‘‘it is unlikely 

that at the proposal stage, the mixedfinance owner will be formed and there 

is no need for a certification that the 

mixed-finance owner has authority 

under state and local law to develop the 

housing.’’ Another commenter stated 

that these certifications and assurances 

should be part of a streamlined process. 

A commenter stated that in 

§ 891.820(b), the next-to-last sentence, 

which requires official confirmation of 

the award of tax credits from the state 

Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 54205 

allocating agency if tax credits are being 

used, should be modified. The 

commenter stated that, with respect to 

a nine percent tax credit project, the 

rule should clarify that a copy of the 

allocating agency’s executed credit 

reservation contract will meet this 

requirement. For a four percent tax 

credit project using tax-exempt bonds, a 

credit reservation contract is not used. 

This commenter and one other stated 

that for these projects, the rule should 

clarify that a copy of the allocating 

agency’s executed IRC Section 42(m) 

letter will meet this requirement. 

A commenter stated that, because four 

percent credits can be derived from an 

issuance of tax-exempt bonds, rather 

than an award of tax credits, the rule be 

revised to add language reflecting that 

possibility, adding at the end of the 

current sentence the following: 

‘‘* * * or evidence of the issuance or 

intention to issue bonds on behalf of the 

project by the agency which will issue such 

bonds accompanied by a schedule 

illustrating the amount of credits that the 

project is expected to yield as a result of such 

bonds.’’

A commenter stated that the rule 

should clarify what constitutes a ‘‘firm 

and irrevocable financing commitment,’’

as most financing commitments have 

some contingencies, such as final 

review of due diligence, appraisal, and 

environmental studies, and final 

approval by the lender’s loan 

committee. Another commenter stated 

that HUD should accept funding 

commitments that are conditioned upon 

the actual certification of basis eligible 

costs per accepted four percent tax 

credit procedure. Another commenter 

similarly stated that conditions on 

financing commitments, including 

review of final plan specifications, 

review of environmental testing, and 

other typical due diligence items, 

typically are not satisfied at the stage 

when a firm commitment package is 

submitted to HUD. 

HUD Response: The rule is being 

streamlined so that these elements are 

being removed in favor of forthcoming 

program guidance that will combine 

elements of the firm commitment 

application and the mixed-finance 

proposal. HUD will consider the 

comments received in response to the 

interim rule in formulating its program 

guidance. 

HUD Review and Approval (§ 891.823) 

Comment: One commenter stated as 

to § 891.823(b)(1) that there is no reason 

for HUD to make a determination that 

the mixed-finance owner has the legal 

capacity to enter into all necessary 

contracts and agreements. While HUD 

may need to determine that the 

nonprofit organization has the legal 

capacity to participate in the 

transaction, there is no reason for this 

determination with respect to the 

mixed-finance owner. There are 

numerous checks in the closing process, 

including owner counsel opinions, that 

should provide sufficient assurance to 

HUD. 

This commenter also stated as to 

§ 891.823(b)(6) and (7) that these items 

(covenants and use restrictions, and 

state, local, and federal approvals and 

zoning changes or variances) should be 

submitted as part of the evidentiary 

review process and not the proposal 

process. Another commenter stated that 

the covenants and use restrictions are 

more appropriately part of the mixedfinance closing documents. 

HUD Response: Rather than 

attempting to provide every detail about 

HUD review and approval, the final rule 

states that HUD has the authority to 

review and approve or disapprove firm 

commitment applications. 

Mixed-Finance Closing Documents 

(§ 891.825) (‘‘Evidentiary Materials’’ in 

the Interim Rule) 

Comment: One commenter 

recommended streamlined evidentiary 

material requirements. Three 

commenters objected to the conflict-ofinterest provisions in § 891.825(a)(1)(ii), 

particularly the provision that the 

mixed-finance owner not be under the 

control of the persons or firms seeking 

to derive profit or gain from the mixedfinance owner. One of the commenters 

stated that this provision is at odds with 

the basic purpose of the mixed-finance 

rule, to bring for-profit entities into the 

Section 202/811 program to expand the 

affordable housing choices of the elderly 

and persons with disabilities. This 

broad prohibition on profit or gain by 

participants and investors is not a 

realistic position. This provision relates 

back to when the Section 202/811 

program was limited to nonprofit 

entities. HUD will have sufficient 

opportunity to review financing 

proposals and evidentiary documents to 

assure itself that the financing structure 

is reasonable. As to the same provision, 

another of these commenters stated that 

the rule should clarify that the limited 

partner will not be deemed to be 

controlling or directing the mixedfinance owner so long as the general 

partner has day-to-day decision-making 

authority and the limited partner’s 

control is limited to approval rights over 

major decisions. Another of these 

commenters stated that ‘‘the investor 

intends to derive profit from the 

transaction, and whether the investor 

controls or directs the partnership in the 

manner intended by the regulation 

would be impossible to determine 

* * *. In addition, to the extent the 

developer is permitted a profit, and the 

developer is the general partner, this 

requirement would also not be 

satisfied.’’ This commenter states that 

there is no similar requirement in the 

HOPE VI program, and HUD’s review of 

the proposal and mixed-finance closing 

documents should give sufficient 

assurance. 

A commenter stated as to 

§ 891.825(a)(3), requiring a deed or 

ground lease, that in some cases the 

mixed-finance owner may have already 

obtained a fee or leasehold interest in 

the property. This commenter stated 

that ‘‘it may be more helpful to delete 

any reference to a conveyance 

document.’’

Five commenters stated as to 

§ 891.825(a)(12), requiring a legal 

opinion that counsel has examined the 

financing and that such financing has 

been irrevocably committed for use in 

carrying out the project, that the rule 

should not require such a legal opinion. 

Three of these commenters stated that 

attorneys would not be able to opine 

that funds are ‘‘irrevocably committed’’

to the project. Another commenter 

similarly stated that the legal opinion 

should only address customary legal 

issues such as the legal existence of 

entities, execution of documents, and 

the enforceability of agreements, rather 

than financing and irrevocability of 

commitments. Another commenter 

agreed and further stated that ‘‘* * * 

many law firms do not permit their 

attorneys to give opinions regarding the 

priority of recorded documents. HUD 

should rely on the title policy to 

confirm the priority of the * * * 

Restrictive Covenants.’’

Two commenters stated that the noassignment clause in § 891.825(a)(13) 

could cause problems with the project, 

such as in the areas of enforceability of 

contract provisions and assurance of 

continued funding in the event of a 

default by the mixed-finance owner. 

A commenter objected to 

§ 891.825(a)(15)(ii), which requires the 

owner to comply with all deed 

restrictions, including an agreement not 

to dispose of the development without 

HUD’s prior written approval during the 

entire period that the assisted housing 

use restrictions remain in effect. The 

commenter states that this will preclude 

a lender from foreclosing on the project 

and thus effectively eliminate the ability 

to obtain private financing. The 

commenter suggests that the rule be 

clarified so that this restriction does not 

apply to lenders whose loans are 

54206 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

secured by the property and the ability 

to transfer the property upon 

foreclosure, as long as the property 

remains subject to the use restrictions. 

The regulations should also permit 

transfer of the property to a single-asset 

nonprofit entity upon expiration of the 

initial 15-year tax credit compliance 

period. 

Another commenter stated that the 

lender’s deed of trust securing bond 

financing (for a four percent LIHTC 

project) must be in a superior position 

to all other monetary liens on the 

property’s title. A commenter stated that 

the length of the use restrictions could 

cause serious underwriting issues for 

potential tax credit investors because it 

restricts the tenants to whom the units 

can be rented even if the necessary 

subsidies are not secured. This severely 

limits the investors’ ability to 

underwrite alternate scenarios. This 

commenter asked that HUD consider 

language that at least allows an owner 

out of this requirement if the rental 

assistance is not renewed. 

HUD Response: HUD plans to address 

the details of the mixed-finance closing 

documents (referred to as ‘‘evidentiary 

materials’’ in the interim rule) in 

separate program guidance. HUD will 

consider these comments in formulating 

that guidance. 

Regarding the comments on the use 

restrictions, use restrictions are required 

by statute (12 U.S.C. 1701q(d)) and 

cannot be eliminated. Regarding the 

comment on control by the limited 

partners, HUD is adding modified 

conflict and identity-of-interest 

provisions in § 891.832 of the final rule. 

Where a mixed-finance project has an 

FHA-insured or risk-sharing mortgage, 

rather than following the conflict and 

identity-of-interest provisions of 

§ 891.130, the conflict and identity-ofinterest provisions of the insured or 

risk-sharing housing program shall 

apply, except that the provisions of 

§ 891.130 shall continue to apply to the 

nonprofit general partner. A new 

§ 891.130(c) has been added to contain 

a clarifying cross-reference to § 891.832. 

Loan of Capital Advance Funds to 

Mixed-Finance Owner (§ 891.828) 

Comment: One commenter stated that 

the language from § 891.808 regarding 

the loan or pass-through of capital 

advance funds from the general partner 

to the mixed-finance owner should be 

repeated in this section. In addition, the 

loan on a mixed-finance project using 

nine percent LIHTC should be ‘‘allowed 

as a true debt obligation.’’

One commenter stated that rather 

than the nonprofit organization, the 

sponsor should execute the capital 

advance agreement and loan the capital 

advance funds to the mixed-finance 

owner. This commenter also stated that 

the Project Rental Assistance Contract 

(PRAC) should be executed by the 

mixed-finance owner, rather than the 

nonprofit organization, because the 

nonprofit organization is not technically 

the owner of the project. 

HUD Response: HUD has determined 

that the fund reservation may be 

transferred directly from the sponsor to 

the mixed-finance owner, and that the 

detailed loan or pass-through language 

should no longer be part of this rule. 

Regarding whether the loan is a ‘‘true 

debt obligation,’’ the rule leaves the 

parties free to structure the transaction 

in a manner that is beneficial to the 

project subject to HUD review and 

approval of the firm commitment 

application. HUD agrees that the mixedfinance owner will execute the capital 

advance agreement and the PRAC. 

However, the particulars of these 

elements will be outlined in separate 

program guidance rather than this rule 

in accordance with other comments, 

and so § 891.828 is being removed in 

this final rule. 

Comment: A commenter commented 

on the requirement in this section that 

the mixed-finance owner provide a note 

evidencing a non-amortizing loan of the 

capital advance funds for a period of not 

less than 40 years. The commenter 

stated that the loan should not be from 

the nonprofit organization serving as 

general partner to the mixed-finance 

owner, or from any party that is related 

to the nonprofit organization under IRS 

rules. This commenter also suggested 

that there be a definition for the term 

‘‘note.’’

HUD Response: The final rule is 

amended to be more flexible regarding 

the transfer of the capital advance funds 

to the mixed-finance owner and no 

longer contains the language to which 

the commenter is referring. As to the 

relationship between the general partner 

and the owner, HUD recommends that 

program participants work within the 

regulations to obtain the maximum tax 

benefits available, including favorable 

treatment for LIHTC purposes. HUD 

suggests that program participants 

consult with their attorneys and the IRS 

regarding how best to maximize these 

benefits. 

The term ‘‘note’’ is no longer being 

used in this context in this final rule, so 

a definition is not necessary. 

Drawdown (§ 891.830) 

Comment: This section requires that 

the capital advance be drawn down in 

an approved ratio to other funds, in 

accordance with a drawdown schedule. 

One commenter states that HUD should 

provide more flexibility in drawing 

down funds. For example, in some 

cases, it may be advantageous to draw 

down ‘‘soft’’ money first to minimize 

costs. Also, if faster drawdown of the 

capital advance allows deferral of some 

portion of the equity pay-in until 50 

percent completion, the transaction may 

benefit from increased equity. HUD has 

shown some flexibility in early pay-in of 

HOPE VI funds and should do the same 

here. Another commenter stated that 

HUD should permit delaying, into the 

calendar year following substantial 

completion, the drawdown of the HUD 

funds required to take out that portion 

of tax-exempt bonds used only for 

construction financing as required to 

meet the (IRS) 50 percent test (for four 

percent tax credit projects). 

HUD Response: The rule requires 

capital advance funds to be used for 

eligible costs actually incurred. Eligible 

costs are generally those referenced in 

the statutory sections on development 

cost limitations (12 U.S.C. 1701q(h) and 

42 U.S.C. 8013(h)). Capital advance 

funds may not be used to pay for a 

portion of bond funding, bridge 

financing, or as debt service for 

financing. While HUD generally expects 

the capital advance funds to be drawn 

down in a one-to-one ratio for eligible 

costs actually incurred, HUD may 

permit, on a case-by-case basis, some 

variance from the drawdown 

requirement as needed for the success of 

the project. Further clarification of the 

uses of the capital advance funds will be 

provided in forthcoming program 

guidance. 

Comment: A commenter stated that in 

certain bond-financed four percent 

LIHTC projects, bond proceeds are 

expended prior to other financing so 

that bond proceeds can be spent on the 

capitalized costs for the purpose of 

meeting certain legal requirements. 

There exists nothing in the interim rule 

that would preclude the use of the 

capital advance funds from being held 

and drawn down following the project’s 

completion to pay off a portion of the 

bonds. This commenter suggested 

clarification that capital advance funds 

may be used to pay bridge or 

construction financing. Another 

commenter stated that the rule should 

allow capital advance funds to be used 

to collateralize tax-exempt bonds. 

HUD Response: Capital advance funds 

may be used only for eligible expenses 

actually incurred. Eligible expenses are 

expenses of the types stated in 12 U.S.C. 

1701q(h) and 42 U.S.C. 8013(h), and do 

not include paying off bridge or 

construction financing, or repaying or 

collateralizing bonds. 

Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 54207 

Comment: Capital advances should be 

usable to pay construction debt used to 

finance costs actually incurred, and that 

the rule should add a clause to that 

effect at the end of § 891.830(c)(4). 

HUD Response: Capital advance funds 

must be used for eligible costs actually 

incurred, and may not be used to pay 

debt financing for costs actually 

incurred. The types of expenses that are 

eligible are the costs enumerated in 12 

U.S.C. 1701q(h) and 42 U.S.C. 8013(h). 

Comment: Construction lenders 

should have the right to exercise 

remedies to complete the project and to 

force the sponsor to use capital 

advances to repay loan advances made 

by the lender. The rule should also 

address the lien priority which may be 

required by housing finance agencies or 

private lenders that advance funds in 

excess of the capital advance. HOPE VI 

may provide some examples. 

HUD Response: It would not be 

legally permissible to permit the 

construction lender to advance funds 

that would be repayable from the capital 

advance or PRAC funds. Capital 

advance funds may be used for eligible 

expenses actually incurred. 

Furthermore, the use of capital advance 

or PRAC funds in the event of default 

is subject to statutory and regulatory 

limitations on the use of such funds and 

compliance with the capital advance 

agreement. 

Eligible Uses of Project Rental 

Assistance (§ 891.835) 

Comment: Interim § 891.835(b)(1) 

would prohibit project rental assistance 

from being used to pay debt service. 

One commenter stated that it would be 

beneficial if Section 202 rental 

assistance could be used to support 

debt. 

HUD Response: The statute requires 

project rental assistance to be used to 

pay the costs of units occupied by 

eligible families that are not met from 

project income (12 U.S.C. 1701q(c)(2)). 

The limitations on project rental 

assistance in the rule are consistent with 

the statutory requirements. 

Replacement Reserves (§§ 891.855, 

891.405(d)) 

Comment: One commenter stated that 

uses of the replacement reserves cannot 

be limited to the Section 202/811 units. 

There are many costs that will need to 

be incurred on a pro rata basis, such as 

roof repairs. Another commenter stated 

that income from the HUD units should 

be used to meet the replacement reserve 

requirement. 

HUD Response: In the case of repairs 

to common elements, the Section 202/ 

811 replacement reserve can be used on 

a pro rata basis based on the percentage 

of Section 202 or 811 units in the 

building whose common elements are 

being repaired. 

Comment: HUD should provide 

additional guidance to field offices so 

that the authority to retrofit obsolete 

units can be implemented. 

HUD Response: HUD does not believe 

additional formal guidance for field 

offices on using replacement reserves 

for retrofitting is needed at this time. 

HUD will address issues that arise in 

this regard on a case-by-case basis. If it 

should appear in the future that such 

guidance may be advisable, HUD may 

consider it at that time. 

Comment: Interim § 891.405(d) 

should recognize that in some cases 

retrofitting an obsolete unit may not be 

possible, and that conversion of an 

unmarketable unit to some other form of 

amenity would also be permitted. 

HUD Response: The idea behind this 

requirement is to use retrofitting to 

increase the supply of marketable units, 

such as by combining two unmarketable 

efficiencies into one, one-bedroom unit. 

Removing units entirely from the 

housing stock for other uses is not 

contemplated by this provision. 

Operating Reserve (§ 891.860) 

Comment: The proposed three-month 

operating reserve should be a minimum 

and that if the parties agree to establish 

a larger reserve out of tax credit equity 

or other sources they are free to do so. 

The mixed-finance owner should have 

the discretion to increase the operating 

reserve beyond three months. 

HUD Response: If there are funds 

available, the operating reserve may be 

larger than a three-month reserve. This 

provision has been revised in this final 

rule to provide in § 891.860 that the 

operating reserve must be sufficient for 

‘‘at least’’ three months. 

Comment: Income from the HUD 

units should be used to meet the 

operating reserve requirement. 

HUD Response: 24 CFR 891.860(b) 

states that project income can be used 

to fund the operating reserve account. 

However, as § 891.860(c) states, income 

derived from Section 202 or 811 units 

may be used only for operating expenses 

of those units. 

Comment: One commenter requested 

clarification as to why the rule limits 

funding the reserve to profits and tax 

credit equity. Although these are the 

most common sources of reserve 

funding, sponsors might find other 

sources of funding. Another commenter 

questioned the requirement of an 

operating reserve, stating that one is not 

required in the regular Section 202/811 

program; however, given the fact that 

this rule requires an operating reserve, 

the commenter stated that it wants 

clarification that project income usable 

for this purpose includes income from 

the Section 202 or 811 units. This 

commenter stated that such operating 

reserves should be available for the 

entire development, and § 891.835(b)(3), 

disallowing the use of project rental 

assistance for the creation of reserves for 

non-Section 202 or 811 units, should be 

removed. 

HUD Response: The rule permits the 

operating reserve to be funded with 

project income and tax credit equity, but 

imposes no limitation on other funds 

that may be used for the reserve. As to 

the issue of the usage of operating 

reserve, the Section 202 or 811 reserve 

account may be used only for the 202 

or 811 units. Project rental assistance is 

limited to payment for the costs of the 

Section 202 or 811 units. 

Maintenance as Supportive Housing 

Units for Elderly Persons or Persons 

With Disabilities (§ 891.863) 

Comment: One commenter stated that 

the requirement that the use restrictions 

for Section 202 and 811 projects be 

superior to any foreclosure will reduce 

the likelihood that conventional lenders 

will provide financing. This commenter 

states that, upon foreclosure, the use 

restriction should allow for higher 

income levels, such as moderate 

income. Another commenter stated that 

the nonprofit organization or other 

qualified nonprofit approved by HUD 

and others providing funding to the 

project should have the right of first 

refusal and option to purchase the 

property from the partnership, so long 

as the use restrictions remain in effect 

as required by this section. 

HUD Response: The use limitations 

are statutory, and hence required (12 

U.S.C. 1701q(d)(1) and 42 U.S.C. 

8013(e)(1)). According to statute, if the 

use restrictions do not remain in place 

for the full statutory period of 40 years, 

the capital advance becomes repayable 

to HUD. The final rule is revised to take 

into account the possibility of 

ownership changes or transfers during 

the 40-year use period. 

General and Miscellaneous Comments 

Comment: HUD should remain 

faithful to the congressional intent of 

the AHEO Act, which is to provide 

additional development options to 

increase the supply of affordable 

housing for elderly and disabled 

families. 

HUD Response: HUD believes that 

this final rule fulfills these objectives. 

Comment: The rule should have 

sufficient flexibility to accommodate the 

54208 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

real-world complexities of layeredsubsidy development deals. Because 

these transactions are likely to be 

extremely complicated, this commenter 

stated that HUD should appoint a 

contact person at Headquarters who 

would be responsible for providing field 

staff and the general public ‘‘clear, 

consistent, and timely guidance’’ on 

HUD’s mixed-finance development 

requirements. 

HUD Response: As explained 

elsewhere in this preamble, HUD has 

provided additional flexibility in this 

final rule. As to the issue of an agency 

contact, participants in the mixedfinance program, as in the regular 

Section 202 or Section 811 program, 

should work with their local HUD office 

staff. Local HUD offices can forward 

inquiries to Headquarters if necessary. 

Comment: HUD should eliminate the 

‘‘stand-alone bias’’ in the Section 202 

program. The commenter stated that 

under the interim rule, HUD funds can 

be combined with other funds only if 

the other funds are non-amortizing, and 

there is a condominium structure that 

provides a ‘‘firewall’’ for HUD funds. 

The commentator said this creates 

serious problems with developing 

mixed-use projects. Eliminating this 

bias would affect two kinds of projects: 

ones where the capital advance has not 

kept pace with the cost of development; 

and ones which are too small to be 

viable, or which propose to meet a 

greater need than the HUD subsidy 

allows. This commenter suggests that 

the rule allow HUD financing to be 

blended with other financing, and that 

HUD permit its capital advance funding 

to be subordinate to a bank or housing 

finance agency mortgage on the 

property. Similarly, three commenters 

stated that the rule assumes ‘‘that the 

funding sources for mixed-finance 

projects will be neatly divided between 

dwelling units funded by the Section 

202 Capital Advance and those dwelling 

units funded through other 

sources.* * *’’ However, according to 

the commenters, it is likely that the 

underwriting structure of certain 

projects will require the combining of 

several sources. This should be 

acceptable to HUD as long as the units 

in such a project are subject to the 

regulatory agreement for the entire 40- 

year period, and therefore regulations 

should make this explicit. 

HUD Response: HUD financing comes 

with statutory restrictions and hence 

regulatory ones designed to ensure the 

appropriate use of the funds according 

to statute and conflict of interest. The 

mixed-finance program allows the use 

of mixed funding sources; however, the 

federal funds still have to be treated in 

accordance with Federal requirements. 

Comment: One commenter states that 

there have been historic problems with 

combining other funding sources with 

Section 202 projects because of the long 

history of the Section 202 program being 

a stand-alone program and the small 

staff at HUD field offices. This 

commenter states that the underwriting 

for this program should be delegated to 

the state agency that is underwriting the 

project for the tax credit program. This 

is similar to the HOME program. If this 

is done, there should be agreement that 

the LIHTC regulations should prevail in 

the case of conflict with the Section 202 

regulations. 

HUD Response: HUD intends to retain 

the underwriting responsibilities for the 

program at this time. HUD will be 

competitively selecting proposals for 

this program in accordance with the 

Department of Housing and Urban 

Development Reform Act of 1989 

(Pub.L. 101–235, approved December 

15, 1989) (HUD Reform Act). Each year 

a notice of funding availability (NOFA) 

is published in the Federal Register 

specifying in detail all of the 

requirements that must be met by 

applicants for funding, in order to be 

selected for funding. These 

requirements include statutory and 

regulatory and program requirements 

that must be satisfied by all applicants, 

if selected for funding. Failure on HUD’s 

part to require compliance with all of 

these requirements would be a violation 

of the HUD Reform Act. Since requiring 

such compliance is HUD’s 

responsibility and within HUD’s 

expertise, HUD will retain the 

underwriting functions. 

In any case of conflict between LIHTC 

regulations and Section 202 regulations, 

the Section 202 regulations would 

prevail. Applicants desiring to develop 

Section 202 or 811 mixed finance 

projects must describe in their 

applications in general terms that they 

plan to develop a mixed finance project. 

It is the sole responsibility of the 

applicants to develop mixed finance 

projects that will be consistent both 

with their obligations under the 202 or 

811 NOFAs and the LIHTC regulations 

and requirements. Prior to developing 

their mixed finance proposals, 

applicants will have been competitively 

selected for 202 or 811 funding and will 

have accepted a letter obligating these 

funds and specifying conditions that 

must be satisfied. Under a prior year’s 

NOFAs, applicants unable to develop a 

mixed finance project were able to 

proceed with the 202 or 811 project, 

since no rating points were affected. In 

the FY 2004 and 2005 NOFAs, since 

points are awarded for the number of 

additional units to be provided through 

mixed finance, failure to proceed with 

the mixed finance proposal will result 

in loss of the 202 or 811 funds 

reservation. Any deviation from the 

Section 202 or 811 NOFA requirements 

in order to meet the LIHTC 

requirements would result in a violation 

of the HUD Reform Act. 

Comment: One commenter states that 

designation of the capital advance as a 

Federal grant is ‘‘likely,’’ which will 

cause it to be excluded from the eligible 

basis for LIHTC purposes. This 

commenter states that the capital 

advance should be specifically excluded 

from the definition of ‘‘Federal grant’’

under Section 42. Another commenter 

states that the ability of a capital grant 

to be forgiven by compliance with the 

use restrictions may result in it being 

treated as a grant for tax credit purposes. 

HUD Response: Both Sections 202 

and 811, as amended by the AHEO Act, 

contain a clause stating that amounts 

provided under these sections may be 

treated as amounts not derived from a 

Federal grant. 

Comment: The Section 202 program 

currently requires the sponsor to receive 

a property tax exemption from the local 

jurisdiction where the property is 

located. For mixed finance projects, the 

owners are for-profit entities in a legal 

sense, and therefore, in most cases, will 

not qualify for an exemption. In 

addition, contributions to local taxes 

may help combat negative perceptions 

of affordable housing. HUD should 

eliminate this requirement. 

HUD Response: If available, the 

sponsor should seek such an exemption; 

however, HUD will not refuse to enter 

into a firm commitment if the 

exemption cannot be obtained. 

Comment: Two-bedroom units should 

be allowed in elderly projects to expand 

the marketability and community 

feeling of elderly projects. 

HUD Response: Two-bedroom units 

will be permitted in mixed finance 

projects that propose additional units as 

long as the number of two-bedroom 

units comprise no more than 10 percent 

of the total units in the project and are 

limited to the additional units. Under 24 

CFR 891.210, the Section 202 units for 

the residents are required to be no larger 

than one-bedroom units. 

Comment: Section 202 units and tax 

credit units should target different 

income groups. This commenter states 

that the rule should limit Section 202 

units to those with incomes under 30 

percent of the area median income, and 

tax credit units to those earning 30 to 60 

percent of the area median income. 

However, this commenter stated that 

Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 54209 

this distinction is not necessary for the 

Section 811 program because the market 

is different. 

HUD Response: All statutorily eligible 

applicants are legally entitled to apply 

and participate equally in the program. 

Comment: One commenter stated that 

the interim rule allows LIHTCs to be 

used only for additional units and not 

to provide gap financing. ‘‘This ruling 

clearly does not aid in the development 

of more housing for the elderly, the sole 

purpose of the ruling when 202 program 

funds are not adequate to bring a 

development to completion. Why would 

a developer choose to build more units 

when the fund reservation for the initial 

units is not adequate?’’ This commenter 

stated that due to shortfalls in the 

existing programs, it is necessary to use 

LIHTCs for gap financing to complete 

projects. 

Another commenter read the interim 

rule as allowing LIHTCs to be used for 

gap financing and wrote in support of 

that approach. 

HUD Response: As long as the 

number of assisted units is consistent 

with the capital advance, equity from 

tax credits in a mixed-finance project 

may be used to provide additional units, 

gap financing, or a mix of additional 

units and financing. 

IV. Findings and Certifications 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 (2 U.S.C. 1531–

1538) (UMRA) establishes requirements 

for federal agencies to assess the effects 

of their regulatory actions on state, 

local, and tribal governments and the 

private sector. This rule does not 

impose any federal mandate on any 

state, local, or tribal government or the 

private sector within the meaning of 

UMRA. 

Environmental Impact 

A Finding of No Significant Impact 

with respect to the environment was 

made at the interim rule stage in 

accordance with HUD regulations at 24 

CFR part 50, which implement section 

102(2)(C) of the National Environmental 

Policy Act of 1969 (42 U.S.C. 4332). 

That Finding of No Significant Impact 

remains applicable to this rule and is 

available for public inspection between 

the hours of 8 a.m. and 5 p.m. weekdays 

in the Regulations Division, Office of 

General Counsel, Room 10276, 

Department of Housing and Urban 

Development, 451 Seventh Street, SW., 

Washington, DC 20410–0500. Due to 

security measures at the HUD 

Headquarters building, please schedule 

an appointment to review the docket file 

by calling the Regulations Division at 

(202) 708–3055 (this is not a toll-free 

number). 

Impact on Small Entities 

The Secretary, in accordance with the 

Regulatory Flexibility Act (5 U.S.C. 

605(b)), has reviewed and approved this 

rule and in so doing certifies that this 

rule would not have a significant 

economic impact on a substantial 

number of small entities. The program 

will provide capital advances to private 

nonprofit organizations and nonprofit 

consumer cooperatives to expand the 

supply of supportive housing for the 

elderly and to nonprofit organizations to 

expand the supply of supportive 

housing for persons with disabilities. 

Private for-profit entities may also 

participate in the mixed-finance aspect 

of producing such housing. Although 

small and private entities may 

participate in the program, the rule does 

not impose any legal requirement or 

mandate upon them and, accordingly, 

will not have a significant impact on 

them. 

Federalism Impact 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits, to the extent 

practicable and permitted by law, an 

agency from promulgating a regulation 

that has federalism implications and 

either imposes substantial direct 

compliance costs on state and local 

governments and is not required by 

statute, or preempts state law, unless the 

relevant requirements of section 6 of the 

Executive Order are met. This rule does 

not have federalism implications and 

does not impose substantial direct 

compliance costs on state and local 

governments or preempt state law 

within the meaning of the Executive 

Order. 

Executive Order 12866, Regulatory 

Planning and Review 

The Office of Management and Budget 

(OMB) reviewed this rule under 

Executive Order 12866 (entitled 

‘‘Regulatory Planning and Review’’). 

OMB determined that this rule is a 

‘‘significant regulatory action,’’ as 

defined in section 3(f) of the Order 

(although not economically significant, 

as provided in section 3(f)(1) of the 

Order). Any changes made to the rule 

subsequent to its submission to OMB 

are identified in the docket file, which 

is available for public inspection in the 

Regulations Division, Room 10276, 

Department of Housing and Urban 

Development, 451 Seventh Street, SW., 

Washington, DC 20410–0500. Due to 

security measures at the HUD 

Headquarters building, please schedule 

an appointment to review the docket file 

by calling the Regulations Division at 

(202) 708–3055 (this is not a toll-free 

number). 

List of Subjects in 24 CFR Part 891 

Aged, Civil rights, Grant programs—

housing and community development, 

Individuals with disabilities, Loan 

programs—housing and community 

development, Low and moderate 

income housing, Mental health 

programs, Rent subsidies, Reporting and 

recordkeeping requirements. 

The catalogue of Federal domestic 

assistance numbers for the programs in 

this rule are: 14.157 and 14.181. 

■ For the reasons discussed in this 

preamble, HUD amends 24 CFR part 891 

as follows: 

PART 891—SUPPORTIVE HOUSING 

FOR THE ELDERLY AND PERSONS 

WITH DISABILITIES 

■ 1. The authority citation for part 891 

continues to read as follows: 

Authority: 12 U.S.C. 1701q; 42 U.S.C. 

1437f, 3535(d), and 8013. 

Subpart A—General Program 

Requirements 

■ 2. Amend 24 CFR 891.105 by revising 

the definition of ‘‘Replacement reserve 

account’’ to read as follows: 

§ 891.105 Definitions. 

* * * * * 

Replacement reserve account means a 

project account into which funds are 

deposited, which may be used only with 

the approval of the Secretary for repairs, 

replacement, capital improvements to 

the section 202 or section 811 units, and 

retrofitting to reduce the number of 

units as provided by 24 CFR 891.405(d). 

* * * * * 

■ 3. Amend 24 CFR 891.130 to add a 

new paragraph (c) to read as follows: 

§ 891.130 Prohibited relationships. 

* * * * * 

(c) Mixed-finance projects. Section 

891.832 of this part applies to mixedfinance projects for the elderly and for 

persons with disabilities. 

■ 4. Amend 24 CFR 891.170 by revising 

paragraph (b) to read as follows: 

§ 891.170 Repayment of capital advance. 

* * * * * 

(b) The transfer of physical and 

financial assets of any project under this 

part is prohibited, unless HUD gives 

prior written approval. Approval for 

transfer will not be granted unless HUD 

determines that the transfer to a private 

nonprofit corporation, consumer 

54210 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

cooperative (under the Section 202 

Program), a nonprofit organization 

(under the Section 811 Program), or an 

organization meeting the definition of 

‘‘mixed-finance owner’’ in § 891.805 of 

this part, is part of a transaction that 

will ensure the continued operation of 

the project for not less than 40 years 

(from the date of original closing) in a 

manner that will provide rental housing 

for very low-income elderly persons or 

persons with disabilities, as applicable, 

on terms at least as advantageous to 

existing and future tenants as the terms 

required by the original capital advance. 

Subpart B—202 Supportive Housing 

for the Elderly 

■ 5. Amend 24 CFR 891.205 by revising 

the definition of ‘‘acquisition’’ to read as 

follows: 

§ 891.205 Definitions. 

* * * * * 

Acquisition means the purchase of (or 

otherwise obtaining title to) existing 

housing and related facilities to be used 

as supportive housing for the elderly. 

Subpart C—Section 811 Supportive 

Housing for Persons with Disabilities 

■ 6. Amend 24 CFR 891.305 by revising 

the definition of ‘‘acquisition’’ to read as 

follows: 

§ 891.305 Definitions. 

* * * * * 

Acquisition means the purchase of (or 

otherwise obtaining title to) existing 

housing and related facilities to be used 

as supportive housing for persons with 

disabilities. 

* * * * * 

■ 7. Revise subpart F to read as follows: 

Subpart F—For-Profit Limited Partnerships 

and Mixed-Finance Development for 

Supportive Housing for the Elderly or 

Persons with Disabilities 

Sec. 

891.800 Purpose. 

891.802 Applicability of other provisions. 

891.805 Definitions. 

891.808 Capital advance funds. 

891.809 Limitations on capital advance 

funds. 

891.810 Project rental assistance. 

891.813 Eligible uses for assistance 

provided under this subpart. 

891.815 Mixed-finance developer’s fee. 

891.818 Firm commitment application. 

891.820 Civil rights requirements. 

891.823 HUD review and approval. 

891.825 Mixed-finance closing documents. 

891.830 Drawdown. 

891.832 Prohibited relationships. 

891.833 Monitoring and review. 

891.835 Eligible uses of project rental 

assistance. 

891.840 Site and neighborhood standards. 

891.848 Project design and cost standards. 

891.853 Development cost limits. 

891.855 Replacement reserves. 

891.860 Operating reserves. 

891.863 Maintenance as supportive housing 

units for elderly persons and persons 

with disabilities. 

891.865 Sanctions. 

Subpart F—For-Profit Limited 

Partnerships and Mixed-Finance 

Development for Supportive Housing 

for the Elderly or Persons with 

Disabilities 

§ 891.800 Purpose. 

The purpose of this subpart is to 

establish rules allowing for, and 

regulating the participation of, for-profit 

limited partnerships, of which the sole 

general partner is a Nonprofit 

Organization meeting the requirements 

of 12 U.S.C. 1701q(k)(4) or 42 U.S.C. 

8032(k)(6), in the development of 

housing for the elderly and persons with 

disabilities using mixed-finance 

development methods. These rules are 

intended to develop more supportive 

housing for the elderly and persons with 

disabilities by allowing the use of 

federal assistance, private capital and 

expertise, and low-income housing tax 

credits. 

§ 891.802 Applicability of other provisions. 

The provisions of 24 CFR part 891, 

subparts A through D, apply to this 

subpart F unless otherwise stated. 

§ 891.805 Definitions. 

In addition to the definitions at 

§ 891.105, the following definitions 

apply to this subpart: 

Mixed-finance owner, for the purpose 

of the mixed-finance development of 

housing under this subpart, means a 

single-purpose, for-profit limited 

partnership of which a Private 

Nonprofit Organization with a 501(c)(3) 

or 501(c)(4) tax exemption (in the case 

of supportive housing for the elderly), or 

a Nonprofit Organization with a 

501(c)(3) tax exemption (in the case of 

supportive housing for the disabled) is 

the sole general partner. The purpose of 

the mixed-finance owner must include 

the promotion of the welfare of the 

elderly or persons with disabilities, as 

appropriate. 

Private Nonprofit Organization (in the 

case of supportive housing for the 

elderly) or Nonprofit Organization (in 

the case of supportive housing for 

persons with disabilities) (for the 

purposes of this subpart, both types of 

organizations are referred to as 

‘‘Nonprofit Organization’’), for the 

purpose of this subpart, means any 

institution or foundation (and includes 

a corporation wholly owned and 

controlled by an organization meeting 

the requirements of this section): 

(1) In the case of supportive housing 

for the elderly, that meets the 

requirements of the definition of 

‘‘private nonprofit organization’’ found 

in § 891.205 of this title; or 

(2) In the case of supportive housing 

for persons with disabilities, that meets 

the requirements of the definition of 

‘‘nonprofit organization’’ in § 891.305 of 

this title; and that 

(3) Is the general partner of a for-profit 

limited partnership, if the Nonprofit 

Organization meets the requirements of 

this definition and owns at least onehundredth of one percent of the 

partnership assets. If the project will 

include units financed with the use of 

federal Low-Income Housing Tax 

Credits and the organization is a limited 

partnership, the limited partnership 

must meet the requirements of section 

42 of the IRS code, including the 

requirements of section 42(h)(5). The 

general partner may also be the sponsor 

so long as it meets the requirements of 

this rule for sponsors and general 

partners. 

§ 891.808 Capital advance funds. 

(a) HUD is authorized to provide 

capital advance funds to expand the 

supply of supportive housing for the 

elderly and persons with disabilities in 

accordance with the rules and 

regulations of the Section 202 and 

Section 811 supportive housing 

programs. For mixed-finance projects, 

HUD provides a capital advance funds 

reservation to the sponsor, which 

transfers the fund reservation to the 

mixed-finance owner meeting the 

requirements of this subpart. The 

sponsor may transfer the fund 

reservation directly to the owner or to 

the general partner of the owner, or the 

sponsor may be the general partner of 

the mixed-finance owner if the sponsor 

meets the applicable statutory and 

regulatory requirements. 

(b) Developments built with mixedfinance funds may combine Section 202 

or Section 811 units with other units, 

which may or may not benefit from 

federal assistance. The number of 

Section 202 or Section 811 supportive 

housing units must not be less than the 

number specified in the agreement letter 

for a capital advance. In the case of a 

Section 811 mixed-finance project, the 

additional units cannot cause the 

project to exceed the applicable Section 

811 project size limit if they will also 

house persons with disabilities. 

Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 54211 

§ 891.809 Limitations on capital advance 

funds. 

Capital advances are not available in 

connection with: 

(a) Acquisition of facilities currently 

owned and operated by the sponsor as 

housing for the elderly, except with 

rehabilitation as defined in 24 CFR 

891.105; 

(b) The financing or refinancing of 

federally assisted or insured projects; 

(c) Facilities currently owned and 

operated by the sponsor as housing for 

persons with disabilities, except with 

rehabilitation as defined in 24 CFR 

891.105; or 

(d) Units in Section 202 direct loan 

projects previously refinanced under the 

provisions of section 811 of the 

American Homeownership and 

Economic Opportunity Act of 2000, 12 

U.S.C. 1701q note. 

§ 891.810 Project rental assistance. 

Project Rental Assistance is defined in 

§ 891.105. Project Rental Assistance is 

provided for operating costs, not 

covered by tenant contributions, 

attributable to the number of units 

funded by capital advances under the 

Section 202 and Section 811 supportive 

housing programs, subject to the 

provisions of 24 CFR 891.445. The 

sponsor of a mixed-finance 

development must obtain the necessary 

funds from a source other than project 

rental assistance funds for operating 

costs related to non-202 or -811 units. 

§ 891.813 Eligible uses for assistance 

provided under this subpart. 

(a) Assistance under this subpart may 

be used to finance the construction, 

reconstruction, or rehabilitation of a 

structure or a portion of a structure; or 

the acquisition of a structure to be used 

as supportive housing for the elderly; or 

the acquisition of housing to be used as 

supportive housing for persons with 

disabilities. Such assistance may also 

cover the cost of real property 

acquisition, site improvement, 

conversion, demolition, relocation, and 

other expenses that the Secretary 

determines are necessary to expand the 

supply of supportive housing for the 

elderly and persons with disabilities. 

(b) Assistance under this subpart may 

not be used for excess amenities, as 

stated in 24 CFR 891.120(c). Such 

amenities may be included in a mixedfinance development only if: 

(1) The amenities are not financed 

with funds provided under the Section 

202 or Section 811 program; 

(2) The amenities are not maintained 

and operated with Section 202 or 811 

funds; 

(3) The amenities are designed with 

appropriate safeguards for the residents’

health and safety; and 

(4) The assisted residents are not 

required to use, participate in, or pay a 

fee for the use or maintenance of the 

amenities, although they are permitted 

to do so voluntarily. Any fee charged for 

the use, maintenance, or access to 

amenities by residents must be 

reasonable and affordable for all 

residents of the development. 

(c) Notwithstanding any other 

provision of this section, §§ 891.220 and 

891.315 on ‘‘prohibited facilities’’ apply 

to mixed-finance projects containing 

units assisted under section 202 or 811. 

§ 891.815 Mixed-finance developer’s fee. 

(a) Mixed-finance developer’s fee. A 

mixed-finance developer may include, 

on an up-front or deferral basis, or a 

combination of both, a fee to cover 

reasonable profit and overhead costs. 

(b) Mixed-finance developer’s fee cap. 

No mixed-finance developer’s fee may 

be a greater percentage of the total 

project replacement costs than the 

percentage allowed by the state housing 

finance agency or other tax credit 

allocating agency in the state in which 

the mixed-finance development is sited. 

In no event may the mixed-finance 

developer’s fee exceed 15 percent of the 

total project replacement cost. 

(c) Sources of mixed-finance 

developer’s fee. The mixed-finance 

developer’s fee may be paid from project 

income or project sources of funding 

other than Section 202 or 811 capital 

advances, project rental assistance, or 

tenant rents. 

§ 891.818 Firm commitment application. 

The sponsor will submit the firm 

commitment application including the 

mixed-finance proposal in a form 

described by HUD. 

§ 891.820 Civil rights requirements. 

The mixed-finance development must 

comply with the following: all fair 

housing and accessibility requirements, 

including the design and construction 

requirements of the Fair Housing Act; 

the requirements of section 504 of the 

Rehabilitation Act of 1973; accessibility 

requirements, project standards, and site 

and neighborhood standards under 24 

CFR 891.120, 891.125, 891.210, 891.310, 

and 891.320, as applicable; and 24 CFR 

8.4(b)(5), which prohibits the selection 

of a site or location which has the 

purpose or effect of excluding persons 

with disabilities from federally assisted 

programs or activities. 

§ 891.823 HUD review and approval. 

HUD will review and may approve or 

disapprove the firm commitment 

application and mixed finance proposal. 

§ 891.825 Mixed-finance closing 

documents. 

The mixed-finance owner must 

submit the mixed-finance closing 

documents in the form prescribed by 

HUD. The materials shall be submitted 

after the firm commitment has been 

issued and prior to capital advance 

closing. 

§ 891.830 Drawdown. 

(a) Upon its approval of the executed 

mixed-finance closing documents and 

other documents submitted and upon 

determining that such documents are 

satisfactory, and after the capital 

advance closing, HUD may approve the 

drawdown of capital advance funds in 

accordance with the HUD-approved 

drawdown schedule. 

(b) The capital advance funds may be 

drawn down only in an approved ratio 

to other funds, in accordance with a 

drawdown schedule approved by HUD. 

The mixed-finance owner shall certify, 

in a form prescribed by HUD, prior to 

the initial drawdown of capital advance 

funds, that they will not draw down 

more capital advance funds than 

necessary to meet the pro rata share of 

the development costs for the 202 or 811 

supportive housing units. The mixedfinance owner shall draw down capital 

advance funds only when payment is 

due and after inspection and acceptance 

of work covered by the drawdown. 

(c) Each drawdown of funds 

constitutes a certification by the mixedfinance owner that: 

(1) All the representations and 

warranties submitted in accordance 

with this subpart continue to be valid, 

true, and in full force and effect; 

(2) All parties are in compliance with 

their obligations pursuant to this 

subpart, which, by their terms, are 

applicable at the time of the drawdown 

of funds; 

(3) All conditions precedent to the 

drawdown of the funds by the mixedfinance owner have been satisfied; 

(4) The capital advance funds drawn 

down will be used only for eligible costs 

actually incurred in accordance with the 

provisions of this subpart and the 

approved mixed-finance project, which 

include the types of costs stated in 12 

U.S.C. 1701q(h), and 42 U.S.C. 8013(h), 

and do not include paying off bridge or 

construction financing, or repaying or 

collateralizing bonds; and 

(5) The amount of the drawdown is 

consistent with the ratio of 202 or 811 

supportive housing units to other units. 

54212 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

§ 891.832 Prohibited relationships. 

Section 891.130 applies, except that 

in the mixed-finance program only, in 

FHA-insured or risk-sharing projects 

under this rule, the conflict-of-interest 

and identity-of-interest rules applicable 

to the FHA program apply. In the case 

of FHA insured or risk-sharing projects, 

the nonprofit general partner must 

continue to adhere to the provisions of 

§ 891.130. 

§ 891.833 Monitoring and review. 

HUD shall monitor and review the 

development during the construction 

and operational phases in accordance 

with the requirements that HUD 

prescribes. In order for units assisted 

under the 202 and 811 programs to 

continue to receive project rental 

assistance, they must be operated in 

accordance with all contractual 

agreements among the parties and other 

HUD regulations and requirements. It is 

the responsibility of the mixed-finance 

owner and Nonprofit Organization to 

ensure compliance with the preceding 

sentence. 

§ 891.835 Eligible uses of project rental 

assistance. 

(a) Section 202 or 811 project rental 

assistance may be used to pay the 

necessary and reasonable operating 

costs, as defined in 24 CFR 891.105 and 

approved by HUD, not met from project 

income and attributed to Section 202 or 

811 supportive housing units. Operating 

cost standards under 24 CFR 891.150 

apply to developments under this part. 

(b) Section 202 or 811 project rental 

assistance may not be used to pay for: 

(1) Debt service on construction or 

permanent financing, or any refinancing 

thereof, for any units in the 

development, including the 202 or 811 

supportive housing units; 

(2) Cash flow distributions to owners; 

or 

(3) Creation of reserves for non-202 or 

-811 units. 

(c) HUD-approved operating costs 

attributable to common areas or to the 

development as a whole, such as 

groundskeeping costs and general 

administrative costs, may be paid from 

project rental assistance on a pro-rata 

basis according to the percentage of 202 

or 811 supportive housing units as 

compared to the total number of units. 

§ 891.840 Site and neighborhood 

standards. 

For section 202 or 811 mixed-finance 

developments, the site and 

neighborhood standards described at 

§ 891.125 and § 891.320 apply to the 

entire mixed-finance development. 

§ 891.848 Project design and cost 

standards. 

The project design and cost standards 

at § 891.120 apply to mixed-finance 

developments under this subpart. 

Sections 891.220 and 891.315 on 

prohibited facilities shall apply to 

mixed-finance developments under this 

subpart. 

§ 891.853 Development cost limits. 

The Development Cost Limits for 

development activities, as established at 

§ 891.140, apply to Section 202 or 811 

supportive housing units in mixedfinance developments under this 

subpart. 

§ 891.855 Replacement reserves. 

(a) The mixed-finance owner shall 

establish and maintain a replacement 

reserve account for Section 202 or 811 

supportive housing units. This account 

must meet all the requirements of 24 

CFR 891.405. 

(b) The mixed-finance owner may 

obtain a disbursement from the reserve 

only if the funds will be used to pay for 

capital replacement costs for the Section 

202 or 811 supportive housing units in 

the mixed-finance development and in 

accordance with the terms of the 

regulatory and operating agreement. In 

the case of repairs to common elements, 

the Section 202/811 replacement reserve 

can be used on a pro rata basis based on 

the percentage of Section 202 or 811 

units in the building whose common 

elements are being repaired. In the event 

of a disposition of the mixed-finance 

development, or the dissolution of the 

owner, any Section 202 or 811 funds 

remaining in the replacement reserve 

account must remain dedicated to the 

Section 202 or 811 supportive housing 

units to ensure their long-term viability, 

or as otherwise agreed by HUD. 

(c) Subject to HUD’s approval, 

reserves may be used to reduce the 

number of Section 202 or 811 dwelling 

units in the development for the 

purpose of retrofitting units that are 

obsolete or unmarketable. 

§ 891.860 Operating reserves. 

(a) The mixed-finance owner shall 

maintain an operating reserve account 

in an amount sufficient to cover the 

operating expenses of the development 

for at least a three-month period. 

(b) Project income, project rental 

assistance, tenant rents, and tax credit 

equity may be used to fund the 

operating reserve account. 

(c) Amounts derived from Section 202 

or 811 (e.g., project income, project 

rental assistance, and tenant rents) in 

operating reserve accounts may only be 

used for the operating expenses of the 

202 or 811 units. 

§ 891.863 Maintenance as supportive 

housing units for elderly persons and 

persons with disabilities. 

(a) The mixed-finance owner must 

develop and continue to operate the 

same number of supportive housing 

units for elderly persons or persons with 

disabilities, as stated in the use 

agreement or other document 

establishing the number of assisted 

units, for a 40-year period. 

(b) If a mixed-finance development 

proposal provides that the Section 202 

or 811 supportive housing units will be 

floating units, the mixed-finance owner 

must operate the HUD-approved 

percentage of Section 202 or 811 

supportive housing units, and maintain 

the percentage distribution of bedroom 

sizes of Section 202 or 811 supportive 

housing units for the entire term of the 

very low-income use restrictions on the 

development. Any foreclosure, sale, or 

other transfer of the development must 

be subject to a covenant running with 

the land requiring the continued 

adherence to the very low-income use 

restrictions for the Section 202 or 811 

supportive housing units. 

(c) The owner must ensure that 

Section 202 or 811 supportive housing 

units in the development are and 

continue to be comparable to unassisted 

units in terms of location, size, 

appearance, and amenities. If due to a 

change in the partnership structure it 

becomes necessary to establish a new 

owner partnership or to transfer the 

supportive housing project, the new or 

revised owner must be a single-purpose 

entity and the use restrictions must 

remain in effect as provided above. 

§ 891.865 Sanctions. 

In the event that Section 202 or 811 

supportive housing units are not 

developed and operated in accordance 

with all applicable federal requirements, 

HUD may impose sanctions on the 

participating parties and seek legal or 

equitable relief in enforcing all 

requirements under Section 202, the 

Housing Act of 1959, or Section 811 of 

the National Affordable Housing Act, all 

implementing regulations and 

requirements and contractual 

obligations under the mixed-finance 

documents. 

Dated: August 22, 2005. 

Brian D. Montgomery, 

Assistant Secretary for Housing-Federal 

Housing Commissioner. 

[FR Doc. 05–18036 Filed 9–12–05; 8:45 am] 

BILLING CODE 4210–27–P