[Federal Register Volume 75, Number 203 (Thursday, October 21, 2010)]
[Rules and Regulations]
[Pages 65198-65212]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-26404]



[[Page 65197]]

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Part IV





Department of Housing and Urban Development





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24 CFR Part 905



Use of Public Housing Capital Funds for Financing Activities; Final 
Rule

Federal Register / Vol. 75 , No. 203 / Thursday, October 21, 2010 / 
Rules and Regulations

[[Page 65198]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 905

[Docket No. FR-4843-F-02]
RIN 2577-AC49


Use of Public Housing Capital Funds for Financing Activities

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Final rule.

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SUMMARY: This final rule implements a program to allow public housing 
agencies (PHAs) to use proceeds of their Capital Fund program for 
financing activities, including payment of debt service and housing 
development and modernization activities. A PHA may grant a security 
interest in future Capital Fund grants, subject to the appropriation of 
those funds by Congress. This final rule follows a July 18, 2007, 
proposed rule that addressed the use of public housing Capital Funds 
and Operating Funds for financing activities, and takes into 
consideration the public comments received on that rule.
    This final rule addresses only the use of public housing Capital 
Funds for financing activities. Given the public comment received on 
the proposed rule, HUD determined that further consideration must be 
given to HUD's proposal for use of operating funds for financing 
activities. The final rule makes changes to the proposed rule in 
response to public comments, including a streamlined approval process 
for standard and high-performing PHAs that have borrowings against 
their Capital Funds within certain limits, or that propose to use their 
Capital Fund financing proceeds in a mixed-finance development. The 
final rule, also in response to comment, provides greater specificity 
than the proposed rule with respect to submission requirements for 
requests for Capital Fund financing transactions.

DATES: Effective date: December 20, 2010.

FOR FURTHER INFORMATION CONTACT: Jeffrey Riddel, Director, Office of 
Capital Improvements, Office of Public and Indian Housing, Department 
of Housing and Urban Development, 451 7th Street, SW., Washington, DC 
20410-8000; telephone number 202-708-1640, extension 4999 (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

    Section 9 of the U.S. Housing Act of 1937 (1937 Act) (42 U.S.C. 
1437g) states that Capital Funds can be used for activities including 
``development, financing, and modernization'' (see 42 U.S.C. 
1437g(d)(1)(A)). Section 30 of the 1937 Act provides that HUD may 
authorize a PHA to mortgage or otherwise grant a security interest in 
any public housing project or other property of the PHA upon such terms 
and conditions as the Secretary may prescribe. (See 42 U.S.C. 1437g(g), 
which sets limitations on the use of Capital Funds.)
    Under section 9(g)(3)(A) of the 1937 Act (42 U.S.C. 
1437g(g)(3)(A)), Capital Funds may not be used for new construction of 
housing units if such construction would result in a net increase from 
the number of public housing units owned, assisted, or operated by the 
PHA on October 1, 1999. There are two exceptions to this statutory 
requirement. First, section 9(g)(3)(B) of the 1937 Act (42 U.S.C. 
1437g(g)(3)(B)) provides an exception for units that are affordable for 
low-income families in excess of this limitation, but the Capital Fund 
formula shall not provide additional funding for the specific purpose 
of construction and operation of housing in excess of this limitation. 
Second, section 9(g)(3)(C) of the 1937 Act (42 U.S.C. 1437g(g)(3)(C)) 
provides an exception to the Capital Fund formula limitation for the 
operation and modernization of mixed-finance housing, or housing that 
otherwise leverages significant other investment, if the estimated cost 
of the useful life of the project is less than the estimated cost of 
providing tenant-based section 8 assistance for the same period of 
time.
    In any financing transaction that involves pledges of future 
appropriations of Capital Funds, the Antideficiency Act (31 U.S.C. 
1431) applies. The Antideficiency Act states, in relevant part, as 
follows: ``An officer or employee of the United States Government or of 
the District of Columbia government may not make or authorize an 
expenditure or obligation exceeding an amount available in an 
appropriation or fund for the expenditure or obligation; involve either 
government in a contract or obligation for the payment of money before 
an appropriation is made unless authorized by law. * * * ''
    Because funds cannot be obligated in advance of an appropriation 
being made, any financing commitments based on Capital Fund 
expenditures over a period of years must explicitly be made subject to 
the availability of appropriated funds.
    More detailed information regarding the background of this 
rulemaking, including HUD's initial proposal, can be found in the 
preamble of the proposed rule published on July 18, 2007, at 72 FR 
39546-39547.

II. This Final Rule

    As noted in the ``Summary'' of this final rule, the proposed rule 
published on July 18, 2007, addressed the use of both public housing 
Capital Funds and Operating Funds for financing activities; this final 
rule proceeds to promulgate regulations for the Capital Fund Financing 
Program (CFFP) only. Public comments raised issues on the Operating 
Fund Financing Program (OFFP) component of the July 18, 2007, proposed 
rule, such that HUD determined further consideration must be given to 
those comments before promulgating final regulations on the OFFP 
component. HUD, however, is ready to proceed with issuing final 
regulations for the Capital Fund component of the July 18, 2007, 
proposed rule.
    Some of the key changes made to the CFFP component at this final 
rule stage include the following:
    <bullet> The entire section is recodified as subpart E of part 905, 
and section numbers redesignated accordingly, so that, for example, 
proposed Sec.  905.700 is in this final rule Sec.  905.500.
    <bullet> This final rule permits PHAs to pledge up to 100 percent 
of their replacement housing factor (RHF) funds for debt service, 
provided that such pledge constitutes no more than 50 percent of the 
PHA's combined future Capital Funds (i.e., formula funds and RHF 
funds). Acceleration of Capital Fund-financed debt is allowed, but only 
with HUD approval. HUD will allow PHAs to pledge 100 percent of their 
RHF due, in part, to the fact that the maximum term that PHAs can 
underwrite RHF for is 10 years, which is the maximum period of time a 
PHA can receive a tier of RHF. This is half the maximum term of 20 
years permitted where PHAs pledge Capital Fund formula funds for the 
payment of debt service, and therefore considerably more conservative. 
The 50 percent cap is being established to limit the amount of RHF 
funds that PHAs can pledge. This limitation will be triggered for those 
PHAs where RHF makes up such a significant portion of their overall 
Capital Fund that the pledge will cause the total amount pledged to 
exceed 50

[[Page 65199]]

percent of the PHA's combined future Capital Funds and RHF funds. The 
table below provides examples of the potential impact of the 50 percent 
cap.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Max debt
                                                                                                        service                     Debt
                                                                 Capital                    Total         from         Debt       service
                                                                   fund      RHF grants    capital      capital      service        from      Total debt
                                                                 formula                 fund grants  fund grants    from RHF     formula      service
                                                                  grant                                  (50% of      grants       grant
                                                                                                         total)
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Scenario 1...................................................       $5,000         $500       $5,500       $2,750         $500       $1,667       $2,167
Scenario 2...................................................        1,000          500        1,500          750          500          250          750
Scenario 3...................................................          500          500        1,000          500          500            0          500
Scenario 4...................................................          200          500          700          350          350            0          350
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(1) In Scenario 1, because the RHF is much less than the Capital Fund formula grant, the PHA can leverage 100 percent ($500) of its projected RHF and 33
  percent ($1,667) of its projected Capital Fund formula grants.
(2) In Scenario 2, the 50 percent cap is triggered. The PHA will leverage 100 percent ($500) of its projected RHF, but may leverage no more than 25
  percent ($250) of its projected Capital Fund formula grants because borrowing more would exceed the 50 percent cap.
(3) In Scenario 3, the 50 percent cap is triggered. The PHA will be able to leverage 100 percent ($500) of its RHF, but will not be able to leverage any
  Capital Fund formula grants because borrowing more would exceed the 50 percent cap.
(4) In Scenario 4, the 50 percent cap is triggered. The cap results in the PHA being able to use only a portion of its RHF and none of its Capital Funds
  formula grants for debt service because borrowing more would exceed the 50 percent cap. This is due to the fact that the Capital Fund formula grants
  represent only a small portion of the PHA's overall funding.

    <bullet> Where the proposed rule would have permitted PHAs to 
pledge ``more than'' 33 percent of its projected future annual Capital 
Fund grants for debt service upon a showing to HUD that the PHA has 
sufficient Capital Fund grants to meet its needs, it was silent on the 
issue of existing grants. The final rule makes explicit that PHAs may 
pledge up to 33 percent of its future Capital Fund grants, and may 
pledge 100 percent of its RHF grants, provided that such pledge 
constitutes no more than 50 percent of the PHA's combined future 
Capital Funds (i.e., formula grant funds and RHF funds). Subject to a 
reasonableness test, PHAs may pledge more than 33 percent of their 
existing Capital Fund grants.
    <bullet> A streamlined procedure is provided for mixed-finance 
proposals and Capital Fund Financing Proposals from PHAs: (1) That are 
standard or high performers under the Public Housing Assessment System 
(PHAS) and have cumulative CFFP transactions of less than $2 million, 
or (2) that are high PHAS performers and have cumulative CFFP 
transactions of less than $20 million. For standard or high performing 
PHAs, management assessments under the following regulations--24 CFR 
905.505(e), fairness opinions under 24 CFR 905.505(k), and 
demonstration of construction management and financial controls under 
24 CFR 905.505(l)--may not be required as part of the Capital Fund 
Financing Proposal. HUD retains the discretion to require assessments, 
opinions, or controls in certain cases. In addition, physical needs 
assessments and quarterly reporting have been removed as requirements 
for PHAs that use the CFFP in mixed-finance transactions, and for PHAs 
that size their CFFP based only upon the projected receipt of RHF. 
Finally, as part of its processing of Capital Fund Financing Proposals 
on a case-by-case basis, HUD had been requiring PHAs to include in 
their cover letter the status of other HUD approvals needed to utilize 
CFFP proceeds, such as the approval of development proposals where the 
proceeds are proposed to be used for development. This final rule 
removes that information as a required part of the Capital Fund 
Financing Proposal. In the future, HUD will make the determination of 
required approvals based upon the PHA's description of the proposed use 
of proceeds. HUD will condition any CFFP Financing approvals upon the 
receipt of any other HUD approvals needed to use the proceeds.
    <bullet> In response to comments to clarify the requirements of a 
Capital Fund Financing Proposal in the rule, and limit the number of 
requirements for PHAs to make submittals in accordance with terms and 
conditions as determined by HUD, Sec.  905.510(b) is revised to list 
the submittal requirements for a Capital Fund Financing Proposal. The 
Capital Fund Financing Proposal requirements as presented in this final 
rule are based upon the proposal requirements for the program as it is 
currently being implemented on a case-by-case basis. In addition to the 
streamlining for certain transactions referenced above, changes in this 
final rule from what HUD has required on a case-by-case basis for all 
proposals include: (1) The cover letter is no longer required to 
include a narrative on the status of ancillary approvals required to 
use the CFFP proceeds; and (2) an effective cost of financing schedule 
is no longer required to be submitted as part of the CFFP Financing 
Proposal.
    <bullet> The 40-year use restriction in section 9(d)(3) of the 1937 
Act (42 U.S.C. 1437g(d)(3)) is stated at Sec.  905.505(c). This section 
follows the statutory language and provides for exceptions as 
``provided in'' the 1937 Act. Such exceptions would include, for 
example, demolition of obsolete units under section 18 of the 1937 Act 
(42 U.S.C. 1437p) and required conversion under section 33 of the 1937 
Act (42 U.S.C. 1437z-5).
    <bullet> The required contents of the transmittal letter under 24 
CFR 905.510(b)(1) are specified. The letter must contain a description 
of the proposed financing and use of proceeds, the percentage of 
Capital Funds being dedicated to debt service, the percentage of the 
PHA's public housing units benefiting from the financing the impact of 
the financing on the public housing portfolio, and any additional 
information that may be required.
    <bullet> Financing schedules, including debt service and sources 
and uses, are required by Sec.  905.510(b)(3) of this final rule.
    <bullet> A Capital Fund Plan currently consisting of a CFP Annual 
Statement/Performance and Evaluation Report (form HUD-50075.1, and CFP 
5-Year Action Plan (form HUD-50075.2) are described in Sec.  905.505(h) 
and (n). The PHA must provide evidence that the PHA has conformed to 
the requirements related to the Declaration of Trust (DOT) as described 
in Sec.  905.505(c)(4) and mentioned in Sec.  905.510(b)(6).
    <bullet> The PHA must provide a board resolution authorizing the 
PHA to finance a loan up to a specified amount, to provide all the 
security interests required by the loan, and authorizing the Executive 
Director of the PHA to

[[Page 65200]]

negotiate and execute required legal documents as required by Sec.  
905.510(b)(7).
    <bullet> The PHA must provide an opinion of counsel stating that 
the PHA has authority to enter into the transaction and that the 
transaction complies with the 1937 Act, Federal regulations, and the 
applicable Annual Contributions Contract (ACC) as described in Sec.  
905.510(b)(7).
    <bullet> If a PHA is proposing direct debt service payments through 
HUD's Line of Credit Control System (LOCCS), the PHA must execute a 
Capital Fund Financing Amendment to the ACC as required by Sec.  
905.510(b)(8).

III. Summary of Public Comments

    The public comment period closed on September 17, 2007, and HUD 
received 21 public comments. HUD received public comments from a 
variety of sources, including private citizens, six PHAs, three trade 
associations, four law firms, and several housing development 
consultants. A summary of the issues raised and HUD's responses to 
these issues are as follows.
    Comment: The proposed rule will not succeed as long as the 
Operating Fund and Capital Fund are so severely underfunded.
    Response: These comments concern appropriation levels, and are 
therefore outside of the scope of this rule. Furthermore, there exists 
a multiplicity of sources that PHAs can combine with Capital Funds to 
help meet the needs of their public housing portfolio. These include 
public housing sources, such as energy performance contracts, as well 
as nonpublic housing sources such as low income housing tax credits 
(LIHTCs), funds from the Federal Home Loan Banks' Affordable Housing 
Program, and local funds. Creative, proactive housing authorities can 
utilize Capital Funds and Capital Fund financing in conjunction with 
other sources to meet the needs of their public housing portfolios.
    In regard to the Operating Fund, HUD received many comments from 
respondents that, at current levels of pro-ration, the OFFP is not 
feasible. These comments warrant careful consideration. In order to 
provide the level of rigor necessary to meaningfully respond to the 
comments received on the OFFP, and yet not encumber the processing of 
the CFFP rule, HUD has decided to decouple the processing of the CFFP 
rule from the OFFP rule.
    Comment: Private lenders must accept the risk of continued and 
sufficient congressional appropriations to pay off the debt. Given the 
uncertain level of congressional funding for the Capital Fund and 
Operating Fund programs, lenders will likely charge higher fees and 
impose additional credit enhancements or performance standards, 
resulting in higher costs to finance capital improvements.
    Response: While it is true that the Antideficiency Act (31 U.S.C. 
1431) requires all future-year financing to be subject to the 
availability of appropriations, investors have developed a level of 
comfort with the CFFP. Certainly, the CFFP has been more stable than 
other similar investments in the recent past. Since HUD began 
implementing the CFFP in 2000, rates have remained remarkably stable. 
The CFFP has been structured in a way so that most transactions receive 
unenhanced, underlying AA \1\ ratings from Standard & Poor's. Other 
costs for CFFP transactions have been comparable to similar financing 
mechanisms in the marketplace. While investor perception may change if 
appropriations decrease below current levels, to date the CFFP has 
provided a financing tool with pricing similar to financing options 
available to HUD's multifamily portfolio.
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    \1\ In the Standard & Poor's rating system, an AA rating is the 
second-highest rating (AAA being the highest), and indicates that 
the obligor's capacity to meet its financial commitment on the 
obligation is very strong. Unenhanced, underlying ratings refer to 
debt obligations not supported by financial guarantees, structuring 
techniques, multiple-party features, or other external credit 
support. See http://www.standardandpoors.com.
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    Comment: The process for approving Capital Fund financing 
arrangements is too extensive and cumbersome and may require an entire 
year or more from planning through closing. Commenters made 
recommendations to simplify the approval process by making it similar 
to that of mixed-finance housing programs; to eliminate the requirement 
for a fairness opinion for transactions borrowing less than $2 million; 
to eliminate the requirement for third-party management reviews as 
duplicative and costly; and to eliminate management assessments for any 
transaction where the Capital Funding being financed is less than $20 
million, and the PHA is not classified as a poor-performing PHA.
    Similarly, several commenters stated that PHAs have experienced 
delays in getting HUD approvals and that these delays add costs or may 
negatively impact the deals. These commenters recommended that HUD 
establish clear time frames for the review and approval process, 
recommending a range of dates such as 30, 45, or 60 days. The 
commenters all noted that clear timelines will improve the willingness 
of private partners to enter into these transactions.
    Response: HUD initially implemented the CFFP on a case-by-case 
basis, to allow maximum flexibility in initial implementation of the 
program, and provide PHAs and HUD an opportunity to learn from 
collective experience at the inception of the program. However, one of 
the consequences of this approach was that the process of reviewing and 
approving transactions took longer than HUD believes would have 
otherwise been the case if HUD had initiated implementation of the 
program through rulemaking. HUD believes that rulemaking will make 
implementation more standardized and consistent, but, if done earlier, 
might have hampered the ability to more expeditiously implement changes 
during the early evolution of the program. HUD now has sufficient 
experience both to implement rulemaking, and to ensure a more 
streamlined review process. Reviews now take approximately 2 to 3 
months on average, the same length of time as in the Mixed-Finance 
Development Program, for which HUD's regulations are found in 24 CFR 
part 941, subpart F. However, there continue to exist opportunities to 
further streamline the process and make it more efficient.
    This final rule therefore makes the following streamlining changes:
    (1) The rule removes the effective cost of financing schedule as a 
program requirement. HUD will continue to make this tool available to 
PHAs as a mechanism whereby they can complete an ``apples-to-apples'' 
comparison of different financial structures. Nonetheless, PHAs remain 
obligated pursuant to 2 CFR part 225 (cost principals for state, local, 
and Tribal governments, OMB Circular A-87) to assure the cost 
reasonableness of their financial transactions, and the reasonableness 
of the proposal remains a requirement for approval.
    (2) Management assessments (proposed Sec.  905.705(e)), fairness 
opinions (proposed Sec.  905.705(k)), and information about financial 
and construction management controls (proposed Sec.  905.705(l)) are no 
longer required where Capital Fund Financing Proposals being pursued as 
part of mixed-finance transactions, the PHA is a standard or high 
performer under PHAS and is undertaking a CFFP transaction of less than 
$2 million cumulatively, or the PHA is a high performer under PHAS and 
is undertaking less than $20 million in cumulative CFFP transactions. 
HUD retains the discretion to require assessments, opinions, or 
controls in

[[Page 65201]]

certain cases. The removal of submittal requirements for financial and 
construction management controls applies only to the demonstration of 
such controls within the Capital Fund Financing Proposal itself. PHAs 
still must adhere to public housing requirements in regard to the use 
of CFFP proceeds.
    (3) Proposed Sec.  905.705(c)(5) (final Sec.  905.505(c)(4)) has 
been modified for CFFP use with a mixed-finance project such that the 
evidence of Declarations of Trust (DOTs) will be part of the mixed-
finance evidentiary approval process.
    (4) Proposed Sec.  905.705(h)(2) (final Sec.  905.505(h)(2)) has 
been modified to remove the requirement for the submission of a budget 
detailing the use of CFFP proceeds for certain PHAs. This requirement 
has been eliminated for PHAs that size their loans based only upon RHF 
funds, as well as those that use the CFFP proceeds as part of a mixed-
finance transaction. CFFP approval letters for these transactions will 
be conditioned upon the approval of the related development proposal.
    (5) Proposed Sec.  905.705(p) (final Sec.  905.505(p)) has been 
revised to eliminate quarterly reporting requirements under this 
program where the CFFP proceeds are being used as part of a mixed-
finance transaction, and for PHAs that size their transactions based 
only upon RHF funds.
    (6) This final rule removes proposed Sec.  905.710(b)(4). Proposed 
Sec.  905.710(b)(4) would have requested redundant information.
    Comment: HUD's submission and reporting requirements for this 
program are excessive. Commenters stated that HUD is bringing fewer 
resources to the project but is imposing requirements as though funding 
the entire project. They recommended that HUD reporting requirements be 
proportional to its financial stake in the project and that they 
reflect a more business-like approach to partnering with the private 
sector.
    Response: This final rule reduces reporting requirements for PHAs 
that combine CFFP with mixed-finance projects. PHAs that pursue mixed-
finance projects have both HUD and investor reporting requirements 
associated with the mixed-finance transaction, and HUD agrees that the 
CFFP reporting requirements could be reduced. In fact, this final rule 
streamlines those requirements, as described above in the preamble.
    However, for non-mixed-finance projects, quarterly reporting is 
still necessary. Unlike Capital Funds, CFFP proceeds do not appear in 
the Line of Credit Control System (LOCCS). Therefore, quarterly reports 
are the only mechanism at HUD's disposal by which it can monitor the 
project.
    Comment: Several items in the rule provide that requirements must 
be accomplished by the PHA ``in a form and manner to be determined by 
HUD'' or that additional ``terms and conditions'' may be determined by 
HUD. HUD should work with PHAs and other outside parties to clarify 
these points before the rule is published as a final rule.
    Response: HUD agrees with the comment that a clearly defined set of 
rules will result in a more efficient process for assembling Capital 
Fund Financing Proposals, and for HUD's review of those proposals. 
Since the Capital Fund Financing Proposal process which HUD has 
implemented on a case-by-case basis is a defined process with known 
submittal requirements, this final rule revises Sec.  905.710 (now 
Sec.  905.510 in the final rule) to state the general submittal 
requirements, while retaining HUD's administrative discretion in 
approving Capital Fund Financing Proposals that may present unique or 
complex financing for modernization and development.
    This final rule revises Sec.  905.510(b)(1) to describe in more 
detail the requirements for the transmittal letter and Sec.  
905.510(b)(2) to provide the requirement for incorporating a table of 
contents and contact information in the proposal. This final rule also 
revises Sec.  905.510(b)(3) to reflect the required financing schedules 
that must be submitted. These include the debt service schedule, 
sources and uses schedule, and portfolio schedule. The effective-cost-
of-financing schedule was dropped as a submittal requirement, although 
HUD will continue to make it available on its Web site to assist PHAs 
in assessing the overall financial costs of different financial 
structures.
    This final rule revises Sec.  905.510(b)(4) to summarize other 
submittal items required pursuant to proposed Sec.  905.705 that were 
not delineated elsewhere in proposed Sec.  905.710. New Sec.  
905.510(b)(6) incorporates the requirement for evidence regarding DOTs. 
New Sec.  905.510(b)(7) incorporates the requirement for a board 
resolution and a counsel's opinion. New Sec.  905.510(b)(8) states the 
requirement for a Capital Fund Financing Amendment to the ACC be 
executed as part of the CFFP transaction. This final rule revises 
proposed Sec.  905.705(j) to specify requirements associated with 
variable rate transactions. This final rule also revises proposed Sec.  
905.705(n) (final Sec.  905.505(n)) to state specific additional 
requirements that are also included in the Capital Fund Financing 
Amendment to the ACC.
    Comment: HUD should establish safe harbors for financing 
transactions with Capital Funds. Such safe harbors could include: The 
PHA has not been designated as troubled, the PHA has not defaulted on 
loan or obligations secured by Capital Funds, the PHA has described the 
proposed transaction in its PHA plan, the PHA pledges no more than one-
third of its annual allocation of Capital Funds under section 9(d) of 
the 1937 Act, the PHA is in compliance with obligation and expenditure 
requirements under section 9(j) of the 1937 Act, and the PHA submits a 
fairness opinion of an independent qualified third party.
    Response: Cost controls and safe harbor standards work well for 
transactions where industry norms are established and readily 
identifiable and few variations are expected, such as with development 
or management fees. Financing does not lend itself to such standards 
being established. Interest rates change daily. As recent events in the 
area of mortgage financing have demonstrated, the financial markets, 
including the home financing market, can be turbulent, if not volatile. 
Safe harbor standards are simply not workable in this environment.
    Instead of safe harbor standards, the CFFP establishes a 
requirement for an independent third-party fairness opinion, with 
certain exceptions where there are other indications of reduced risk. 
The requirement for a fairness opinion, as opposed to cost control and 
safe harbor standards, permits HUD to maintain flexibility in 
implementing the program. This approach allows PHAs to structure 
financial transactions that best meet their needs, provided that the 
fairness opinion establishes that the transaction is fair and 
reasonable given current market conditions.
    HUD believes that the streamlining process introduced in this rule 
(and described elsewhere in this preamble) will also assist with the 
issue. HUD's review process for complete Capital Fund Financing 
Proposals now averages approximately 2 to 3 months, and this shorter 
process time should allow PHAs to lower costs and respond to market 
conditions, which HUD believes is a better solution than safe harbor 
standards for this purpose.
    Comment: The rule will provide little assistance to small PHAs. HUD 
should consider other forms of incentive to assist those PHAs.
    Response: HUD recognizes and appreciates that the relative cost of 
financing is more expensive for smaller

[[Page 65202]]

PHAs. As a result, HUD has revised the rule to streamline procedures 
for smaller PHAs based on the size of their financings.
    For those PHAs that are standard or high performers with cumulative 
borrowings of less than $2 million, the requirement for the submission 
of management assessments and fairness opinions, and a demonstration of 
construction management and financial controls is limited. HUD reserves 
the right to require a fairness opinion or return the proposal if 
financing costs are outside of what HUD considers anticipated norms. 
This streamlining should assist small PHAs in reducing the costs of 
financing.
    Comment: The proposed rule refers to mortgaging public housing 
properties under section 30 of the 1937 Act (42 U.S.C. 1437z-2), but 
does not establish regulations for mortgaging public housing property. 
HUD should implement provisions related to mortgaging public housing 
property. Also, in implementing section 30 of the 1937 Act, HUD should 
allow PHAs to subordinate the DOT. Otherwise, the rule risks devaluing 
PHA real estate and destroying the potential utility of section 30 of 
the 1937 Act. Other comments stated that HUD should remove this 
authority. One commenter states that the authority is not needed and 
lenders might unnecessarily require pledges of real estate collateral; 
another states that the granting of security interests in public 
housing property other than Capital Funds is already addressed in 24 
CFR part 941, subpart F (mixed-finance development).
    Response: HUD may provide more detailed guidance to PHAs regarding 
mortgaging their properties in the future. In the meantime, this final 
rule does not remove the basic authority to mortgage real property. 
While it is true that in entering into financing transactions PHAs 
should aggressively represent their interest with financing providers, 
the overall success of the CFFP program is demonstrated by the fact 
that HUD has approved more than $3 billion in CFFP transactions to 
date. These transactions have been structured on an appropriations-
based financing model; that is, where future appropriations, not real 
estate, represents the security interest provided to lenders. Since the 
appropriations-based financing approach has been accepted by the 
housing finance market, lenders will have no basis to unnecessarily 
demand pledges of real estate collateral.
    Comment: The proposed rule missed the opportunity to encourage 
innovative financing for public housing that is more in line with 
financing for other rental housing. The rule should allow PHAs to 
pledge public housing Operating Funds, Capital Funds, rents, and the 
underlying property. Another commenter remarked that banks evaluate 
market-rate apartments on their ability to generate sufficient rents to 
cover expenses and have sufficient funds remaining to cover the debt, 
and if not, on the ability of the property to generate sufficient sales 
proceeds to pay off the loan and cover expenses in the event of a 
foreclosure. That commenter further stated that, given the nature of 
public housing, lenders cannot view PHAs or their stand-alone projects 
as market-rate financing, but rather that private and public housing 
are at opposite ends of the financing spectrum. Other commenters noted 
that, at current proration levels, PHAs will not have the cash flow 
necessary to support financing.
    Response: HUD recognizes that public housing financing is quite 
different from financing in the private sector. Since, in operating 
pro-formas (standard financial projections), changes in revenue have 
disproportionate impacts on net operating income (NOI), changes in the 
current appropriations level could cause the NOI to be volatile. The 
potential for volatility in the NOI, and thus, by extension, the debt 
coverage ratio, should PHAs undertake conventional NOI-based financing, 
present additional constraints on adopting a private sector model.
    Moreover, the unique regulatory environment in which public housing 
operates essentially precludes the adoption of a private sector model. 
While, pursuant to asset management, PHAs must now undertake project-
based accounting, except for mixed-finance projects, the public housing 
property in any PHA's portfolio is all owned by a single legal entity, 
namely the PHA. This is entirely different than the private sector 
model, where separate properties are normally owned by distinct legal 
entities, even if ultimately controlled by an individual or other 
overarching entity.
    Furthermore, HUD has approved more than $3 billion in Capital Fund 
Financing Proposals involving almost 200 PHAs, many of these amongst 
the largest PHAs in the country. The CFFP model is based upon a PHA-
wide pledge, and is not property specific. Given the nature of the 
covenants involved in CFFP transactions, it would not be possible for 
PHAs that have undertaken those transactions to provide mortgages in 
underlying properties without first refinancing their CFFP debt. Thus, 
a property-based approach would be further precluded for any PHA that 
has already undertaken a CFFP.
    Comment: Proposed Sec.  905.705(c)(5), which would require that an 
effective DOT be recorded in the first position, will severely hamper 
the amount of private funds that can be leveraged, because the lender 
would discount the value of any land and improvements pledged as 
security, due to the lender's security interest being subordinate to 
the DOT.
    Response: HUD's experience shows that there is limited value in 
allowing PHAs to provide security interests in real estate as part of 
the CFFP. As noted elsewhere, the appropriations-based CFFP program has 
demonstrated broad market acceptance, as well as strong ratings and 
attractive pricing from the investment community. The CFFP regularly 
achieves ratings of AA, which is a similar or better rating than that 
provided to strong multifamily housing projects, and has been used to 
leverage substantial funding.
    Comment: The rule fundamentally errs in treating borrowings secured 
by RHF funds as identical to borrowings secured by Capital Funds. There 
is no reason why the leveraging of RHF funds should be subject to any 
greater HUD review than the direct expenditure of them. Another 
commenter stated that HUD should allow for 80 percent pledging of the 
RHF funds, and allow the market to determine if 80 percent is an 
acceptable risk.
    Response: In general, HUD agrees that CFFP transactions that are 
sized assuming that only RHF funds will be used for the payment of debt 
service could be treated differently than CFFP transactions that are 
underwritten to include formula funds for the payment of debt service. 
However, generally, transactions that size loans based upon the receipt 
of RHF funds have always also included formula funds for the payment of 
debt service. Moreover, transactions that pledge RHF funds have always 
also included a pledge of formula funds. To date, there has not been a 
financing transaction involving RHF funds that isolates the remainder 
of the Capital Fund (i.e., formula funds) from the transaction, for 
debt service payments or for security purposes. Thus, there is not a 
clear distinction between the two types of transactions.
    Nonetheless, HUD agrees that the rule should allow for different 
treatment of proposals where the sizing of the loan is based only upon 
the use of RHF funds for the payment of debt service, if such a 
transaction occurs. This final rule revises proposed Sec.  905.705(g) 
(final Sec.  905.505(g)) to provide that

[[Page 65203]]

transactions structured in the above-noted manner shall not be required 
to complete or submit a physical needs assessment as part of their CFFP 
Financing Proposal.
    In addition to the above, while RHF funds and loan proceeds for 
such transaction must still be identified in schedules in the PHA's CFP 
Annual Statement/Performance and Evaluation Report and CFP Five-Year 
Action Plan, those schedules are not required to be submitted as part 
of the Capital Fund Financing Proposal. This final rule revises 
proposed Sec.  905.705(h) to remove the requirement for PHAs that size 
their loans based only upon the future receipt of RHF to submit a 
budget as part of their Capital Fund Financing Proposal (final Sec.  
905.505(h)(2)).
    Finally, HUD agrees that RHF funds should be treated differently 
than formula funds, for underwriting purposes. Therefore, this final 
rule revises Sec.  905.505(i)(2) (redesignated from proposed Sec.  
905.705(i)(2)) to permit PHAs to pledge up to 100 percent of their RHF 
funds for debt service, provided that this constitutes no more than 50 
percent of the PHA's combined Capital Funds (i.e., formula funds and 
RHF funds). HUD will allow PHAs to pledge 100 percent of their RHF due, 
in part, to the fact that the maximum term PHAs can underwrite RHF for 
is 10 years, which is the maximum period of time a PHA can receive a 
tier of RHF. This is half the maximum term of 20 years permitted where 
PHAs pledge Capital Fund formula funds for the payment of debt service, 
and, therefore, considerably more conservative. The 50 percent cap is 
being established to limit the amount of RHF funds PHAs can pledge in 
addition to formula Capital Funds. This limitation will be triggered 
for those PHAs where RHF funds make up a significant portion of their 
overall Capital Fund such that pledging RHF funds could exceed the 50 
percent overall cap.
    Comment: One commenter questioned the practical value of proposed 
Sec.  905.705(i)(1), given that proposed Sec.  905.705(i)(2) permits a 
PHA to pledge more than 33 percent of its annual Capital Fund grant 
upon a showing that is essentially duplicative of the physical needs 
assessment required by proposed Sec.  905.705(g).
    Response: HUD agrees that some further explanation of these related 
sections is necessary. Accordingly, this final rule removes proposed 
Sec.  905.705(i)(2) and adds Sec.  905.505(i)(3), to make explicit 
HUD's policy that, as long as it is reasonable to do so, a PHA may 
exceed 33 percent when pledging its existing Capital Fund grant. The 
PHA is necessarily more limited as to pledges of future Capital Fund 
grants because of the possibility of other capital needs arising. This 
final rule also revises proposed Sec. Sec.  905.705(i)(1) and 
905.705(i)(3) as final Sec. Sec.  905.505(i)(1) and 905.505(i)(2), to 
clarify that PHAs may exceed the 33 percent of future projected Capital 
Funds threshold only if they are utilizing RHF grants to size their 
financing. These revised sections allow PHAs utilizing RHF funds to 
exceed 33 percent leverage in their overall future Capital Funds (PHAs 
are permitted to pledge up to 50 percent of their overall future 
Capital Fund, including formula funds and RHF funds), in order to 
leverage up to 100 percent of their RHF funds.
    Comment: In the context of a project using an LIHTC, operating 
agreements and CFP Annual Statement/Performance and Evaluation Reports 
should allow the use of these funds to pay the annual LIHTC fund 
investment management fee specified in the respective operating 
agreement governing the investment of these LIHTC funds in a 
development or modernization activity. The investment management fee 
should be specified in the initial operating agreement, should not 
escalate faster than the consumer price index, and should initially not 
exceed $8,000 annually.
    Response: As a cost of financing, the fee would be a permissible 
Capital Fund expenditure, provided it is proportional to the ratio of 
public housing units to non-public housing units in the project.
    Comment: The time deadlines for HUD review of documentation should 
be waived in a mixed-finance development transaction. The rule should 
permit PHAs to submit executed copies of the required legal documents 
to HUD when they become available.
    Response: Submission of executed closing documents to HUD is 
required so that HUD may upload the debt service schedule into LOCCS. 
However, as a business practice for Capital Fund Financing Proposals 
that are part of mixed-finance transactions, HUD regularly conditions 
its CFFP approval on the receipt of approval of the mixed-finance 
program. This final rule revises Sec.  905.715(b)(2) to reflect this 
business practice. Section 905.515(b)(2), as revised by this final 
rule, requires closing documents to be submitted within 60 days of the 
date of HUD's approval letter; that letter sets conditions that must be 
met prior to closing (rather than using the closing date). HUD 
continues to make efforts to reduce paper submittal requirements, and 
now requires that only one hard copy of the Capital Fund Financing 
Proposal be submitted. The remaining copies can be submitted as 
electronic copies.
    Comment: Given the condition of HUD's information management and 
program systems, PHAs may be prevented from participating in the CFFP 
due to erroneous or missing information in HUD's PHAS.
    Response: HUD disagrees. The PHAS has consistently provided data in 
a time frame sufficient to permit the timely conclusion of financing 
transactions.
    Comment: Given the $18 billion backlog of capital needs, it is 
unreasonable to require PHAs to complete a physical needs assessment at 
the project level that covers the PHA's entire public housing portfolio 
before seeking approval of a CFFP or OFFP transaction. No PHA can 
legitimately demonstrate an ability to address all the capital needs of 
its stock.
    The requirement of a physical needs assessment should be removed 
and HUD should rely on information in the CFP Annual Statement/
Performance and Evaluation Report and CFP Five-Year Action Plan. Rather 
than conducting a physical needs assessment, PHAs should be required to 
consider alternative sources of financing. The physical needs 
assessment should be permissive rather than mandatory.
    Proposed Sec.  905.705(g) should be clarified to indicate how 
current the physical needs assessment must be.
    Response: This final rule revises proposed Sec.  905.705(g) to 
remove the requirement that PHAs demonstrate, based on the physical 
needs assessment, that they can maintain their public housing portfolio 
over the term of the financing. Instead, this final rule, responsive to 
public comments, requires that the PHA demonstrate that the financing 
will not negatively impact the ability of the PHA to meet the ongoing 
needs of its public housing portfolio over the term of the financing. 
In order to make this analysis, PHAs will need to project their future 
funding, and the demand for that funding from both capital and non-
capital activities. PHAs that borrow more than $2 million cumulatively 
and are not leveraging non-public housing funds must demonstrate that 
they have considered leveraging. As noted previously, PHAs that size 
their loans based only upon the receipt of future RHF, or that use 
their CFFP as part of mixed-finance transactions, are not required to 
meet the requirements of proposed Sec.  905.705(g) (final Sec.  
905.505(g)).
    In response to comments that HUD should not require a physical 
needs assessment at all, but rather require PHAs to seek alternative 
means of financing, or make the physical needs

[[Page 65204]]

assessment permissive, HUD notes that CFFP loans result in PHAs 
obligating a significant portion of long-term future funding streams to 
pay off the loans. For this reason, long-term capital planning is an 
essential part of undertaking the obligations and commitments 
associated with CFFP financing. However, the underlying point, that 
PHAs should consider alternative financing sources when structuring 
their CFFP transactions, is valid, as it maximizes funding for the PHA. 
Therefore, this final rule revises final Sec.  905.505(g) such that 
PHAs that borrow in excess of $2 million and do not leverage non-public 
housing funds must state why the proposed borrowing is appropriate in 
light of other alternatives available.
    In response to the comment that the rule should clarify the timing 
of the physical needs assessment, at present, the requirements stated 
in 24 CFR 968.315 apply. PHAs must conduct a new physical needs 
assessment at least once every 5 years.
    Comment: One commenter noted that the rule's prohibition on the use 
of financing proceeds for central office cost center costs raises 
numerous questions, including whether the application is a central 
office or project cost, whether HUD is suggesting that property 
managers set up affiliates to perform developer duties, and how the 
project-based requirements would be met if the proceeds were used for 
predevelopment or new development purposes. Several commenters 
recommended that proposed Sec.  905.705(h)(4) be eliminated. Another 
commenter stated that the provisions should be changed to permit PHAs 
to use CFFP financing proceeds to pay for costs directly incurred by 
the central office cost center.
    Response: The limitation concerning the use of CFFP proceeds for 
administrative and central office cost center costs effectively 
precludes PHAs from doubling the amount of Capital Funds that PHAs can 
use for administrative costs. Currently, and under the revised rules 
issued pursuant to asset management, administrative and central office 
cost center costs are eligible costs under the CFFP. Administrative and 
cost center costs are generally among the first costs set aside by PHAs 
each year as they budget their use of Capital Funds. Therefore, any 
Capital Funds used by PHAs to pay debt service will already be the net 
of administrative or central office cost center costs. Since CFFP debt 
is repaid from Capital Funds, if the rule permitted PHAs to use CFFP 
proceeds for these costs as well, the rule would in effect be doubling 
the ceiling on such use of Capital Funds, by allowing the PHA to take 
the fee once from the CFFP proceeds, and then a second time from the 
Capital Funds used to repay the CFFP financing.
    PHAs should use their Capital Funds to cover any eligible 
administrative costs associated with CFFP transactions, within the 
allowable limits. The rule proposed in Sec.  905.705(h)(4) an exception 
to the use of CFFP proceeds for administrative costs for mixed-finance 
projects.
    In response to public comments, the final rule revises proposed 
Sec.  905.705(h)(4) (final Sec.  905.505(h)(5)) to add a clarification 
that CFFP proceeds may be used, in addition to for the modernization 
and construction of public housing dwelling units, for the development 
or modernization of non-dwelling space. However, PHAs that have 
significant physical needs in their public housing dwellings should 
take measures to ensure that they meet the test in Sec.  905.505(g) if 
they propose to use CFFP proceeds for non-dwelling facilities.
    This final rule also revises proposed Sec.  905.705(h)(4) (final 
Sec.  905.505(h)(5)) to clarify that CFFP proceeds may be used to 
reimburse predevelopment costs only to the extent that those costs were 
incurred in accordance with regulatory requirements. Section 941.302 
limits predevelopment costs for traditional public housing to 3 percent 
of total development costs. Section 941.612 specifies the process for 
drawing down funds for predevelopment costs for mixed-finance 
transactions.
    Comment: Individual projects may not be able to fund the debt 
service, and the asset management project level may change with ongoing 
demolition, redevelopment, and realignment. As a result, the 
regulations should be expanded to include a method to use Capital Funds 
for debt service at the agency level.
    Response: This CFFP final rule permits PHAs to size their financing 
either on the project level, or on an agency level. The pledge of CFFP, 
however, is at an agency level. Further, this final rule allows PHAs to 
size their loans based on a pledge of up to 100 percent of their RHF 
funds (final Sec.  905.505(i)(2)). This revision should provide 
considerable resources to PHAs that wish to utilize the CFFP to realign 
their public housing portfolio.
    Comment: One commenter recommended that HUD define the term ``costs 
already incurred'' in proposed Sec.  905.705(h)(4).
    Response: This final rule removes the phrase ``cost already 
incurred'' from proposed Sec.  905.705(h)(4) (final Sec.  
905.505(h)(5)), and clarifies the language in Sec.  905.505(h)(5) of 
this final rule to specify that CFFP proceeds may reimburse only 
predevelopment costs incurred in accordance with regulatory 
requirements.
    Comment: Proposed Sec.  905.705(j)(1) should permit CFFP financing 
terms anywhere from 30 to 40 years.
    Response: Given the nature of appropriations-based financing, terms 
in excess of 20 years are difficult to support. By way of reference, 
the restrictive covenant associated with the use of Capital Funds for 
modernization is limited to 20 years. This final rule revises the 
language in Sec.  905.505(j)(l) to clarify the limitation of the term 
to 20 years.
    Comment: One commenter recommended that Sec.  905.705(j)(2) be 
clarified to provide that ``any loan with mandatory debt service 
payments shall have a cap on such payments and shall be self-
amortizing.'' Another commenter recommended that the prohibition on 
acceleration be removed. The commenter stated that such a restriction 
could negatively impact the marketability of the program.
    Response: All CFFP transactions have mandatory debt service 
payments, and pursuant to Sec.  905.705(j)(1) they are fully 
amortizing. HUD's policy in implementing the CFFP has been not to 
permit acceleration provisions. Given that HUD has approved more than 
$3 billion in Capital Fund Financing Proposals, there is broad market 
acceptance of the program, including HUD's policy on acceleration. 
Nonetheless, there may be circumstances in which a PHA proposes and can 
justify the inclusion of an acceleration provision in a CFFP 
transaction. This final rule revises Sec.  905.505(j)(2) to allow for 
that possibility.
    Comment: The requirement for a fairness opinion will add 
significant expense to a PHA's financing of a new development. 
Financial markets are competitive and if a PHA has thoroughly 
``shopped'' its financing needs, the PHA will receive a fair and 
competitive rate. Therefore, this requirement should be removed.
    One commenter recommended that HUD require a fairness opinion only 
if the opinion has a conclusive effect and if redundant determinations 
regarding commercial fairness will not be made by HUD. Another 
commenter recommended that the fairness opinion be limited to a 
determination that the ``interest rate, points and costs are reasonable 
given market conditions.''
    Response: The requirement for a fairness opinion permits HUD to 
maintain flexibility in implementing the

[[Page 65205]]

program. This approach allows PHAs to structure financial transactions 
that best meet their needs, provided that the fairness opinion 
establishes that the transaction is fair and reasonable given current 
market conditions.
    HUD will continue its general requirement to have independent 
third-party fairness opinions completed. However, this final rule 
eliminates that requirement for several types of transactions that 
present a reduced risk. For example, fairness opinions are eliminated 
for borrowings of less than $2 million, because of the relatively small 
amount of funds at risk; for high performers up to $20 million, because 
high performers have a demonstrated ability to effectively implement 
their public housing program; and in mixed-finance transactions, 
because PHAs in mixed-finance transactions are generally represented by 
a strong development team and have increased regulatory oversight under 
the mixed-finance program. In any of these cases, HUD can require a 
fairness opinion if the transaction does not meet industry norms. This 
final rule adds Sec.  905.507(a)(2) to eliminate the requirement for a 
fairness opinion for standard or high-performing PHAs that have 
cumulative CFFP transactions of less than $2 million, PHAs that were 
high performers under PHAS and have cumulative CFFP borrowings of less 
than $20 million, and PHAs that propose to use their CFFP proceeds as 
part of a mixed-finance transaction. Notwithstanding these changes, if 
HUD determines that the interest or other costs are not in line with 
industry norms, HUD may require a fairness opinion or return the 
application.
    Regarding the request to limit fairness opinions, fairness opinions 
are already limited to the business terms of financing transactions. As 
such, they are a low-cost and efficient mechanism for ensuring the 
reasonableness of the financing terms given current market conditions. 
HUD does not currently contemplate further reducing the scope of 
fairness opinions.
    Comment: For pooled bond transactions or a single bond transaction, 
the fairness opinion should be required only for transactions above $10 
million.
    Response: This final rule relaxes requirements for fairness 
opinions. PHAs that have cumulative CFFP borrowings under $2 million, 
high-performing PHAs with cumulative CFFP borrowings of less than $20 
million, and all PHAs using the proceeds to undertake mixed-finance 
transactions generally are not required to submit fairness opinions.
    HUD does not anticipate establishing separate criteria for bond 
pools. PHAs participating in bond pools are treated in the same manner 
as PHAs that submit stand-alone Capital Fund Financing Proposals. As 
such, the standards for requiring or waiving the submission of a 
fairness opinion will be the same for all PHAs, whether or not they 
participate in a pooled bond transaction.
    Comment: The requirements for construction management and financial 
controls at proposed Sec.  905.705(l) are duplicative of the 
requirement that PHAs obtain approval for changes for work items at 
proposed Sec.  905.705(m) and add unnecessary layers of administrative 
requirements.
    Response: Proposed Sec.  905.705(l) (final Sec.  905.505(l)) is 
aimed at obtaining representations from PHAs that they have sufficient 
construction management and financial controls in place to offer 
protections from fraud, waste, or abuse. Proposed Sec.  905.705(m) 
(final Sec.  905.505(m)) is a mechanism whereby PHAs may obtain 
approval from HUD for modifications to their approved budgets. 
Obtaining such approvals from HUD does not substitute for the value of 
effective internal controls on the part of the PHA.
    Nonetheless, toward the underlying goal of streamlining the 
regulations where possible, this final rule at Sec.  905.507 removes 
this requirement for assurances regarding construction management and 
financial controls for PHAs that meet the following criteria: PHAs that 
have cumulatively less than $2 million in CFFP financing and are 
standard or high performers, as well as high-performing PHAs that have 
cumulatively less than $20 million in CFFP financing, and all PHAs 
using the proceeds to undertake mixed-finance transactions.
    Comment: Proposed Sec.  905.705(p) would establish burdensome and 
costly requirements on PHAs and should be changed. One commenter 
suggested that such information should be submitted semi-annually 
rather than quarterly. Another suggested that HUD limit its 
requirements to the PHA's annual reports and copies of reports 
submitted to the financing institution. Other commenters questioned the 
need for these reports altogether, since HUD should be able to get this 
information from other reports submitted as part of the PHA's CFP 
Annual Statement/Performance and Evaluation Report or PHA Annual Plan.
    Response: Section 905.505(h)(1) now clarifies that the use of CFFP 
proceeds shall be included in the CFP Annual Statement/Performance and 
Evaluation Report and CFP Five-Year Action Plan in the same manner as 
other uses of a PHA's Capital Funds. In addition, the use of Capital 
Funds for the payment of debt service needs to be included in the CFP 
Annual Statement/Performance and Evaluation Report and CFP Five-Year 
Action Plan in the same manner as other uses of Capital Funds.
    HUD requires that PHAs report quarterly in regard to CFFP 
transactions, because data on the use of CFFP proceeds are not included 
in automated HUD systems in the same manner as Capital Funds, for which 
current data on obligation and expenditure can be accessed.
    Comment: Proposed Sec.  905.710(b)(3) would require parties to 
dedicate time and resources to negotiating an agreement without the 
confidence that they would ultimately obtain HUD approval. The rule 
should strike a better balance between protecting HUD's limited 
resources and requiring private parties to commit extensive resources 
to a transaction that may not be approved.
    Response: HUD's review of the documents associated with CFFP 
transactions is for conformance with program requirements only. As 
such, any negotiations should already be complete and the documents 
should be in their final form before the Capital Fund Financing 
Proposal is submitted to HUD.
    HUD nevertheless does recognize and appreciate that clarity and 
transparency in policy and programmatic requirements increases the 
efficiency of the overall process, both in structuring the Capital Fund 
Financing Proposal, and in HUD's review after the proposal is 
submitted. Toward this end, HUD has been developed legal guidance for 
bond documents. The legal guidance will provide sample provisions that 
the PHA could adopt at its discretion. Although the legal provisions 
would be optional, such provisions could provide a reference point for 
structuring Capital Fund Financing Proposals, removing some of the 
uncertainty that PHAs may now experience in structuring their 
transactions.
    Comment: While the proposed rule required PHA to submit a complete 
set of financing documents (Sec.  905.705(b)(3)), the proposed rule did 
not specify the documents that are to be submitted. More importantly, 
the proposed rule did not indicate how the documents are to be 
evaluated.
    One commenter recommended that Sec.  905.710(b)(3) be removed and 
made more like the streamlined requirements for mixed-finance projects. 
Another commenter recommended that HUD establish a process to approve 
LIHTC LLC (Limited Liability Company)

[[Page 65206]]

operating agreements and critical third-party financing documents 
before these documents are made final.
    Response: Financing documents vary significantly from one 
transaction to the next, even for similar transactions, such as direct 
loans or private placements. There is no definitive way that HUD can 
identify in a regulation the entire list of financing documents that 
each PHA will enter into as part of a CFFP.
    In regard to eliminating the requirement for financing documents as 
part of a streamlined process similar to the mixed-finance program, HUD 
has had much greater experience with mixed-finance public housing than 
with the CFFP. Although HUD has been implementing the CFFP on a case-
by-case basis since 2000, it was not until 2005 that the program began 
to be more widely used. As such, the CFFP is not deemed to be ripe for 
the same streamlining efforts as are currently being promulgated for 
HUD's mixed-finance program. Nonetheless, HUD appreciates the need to 
continually increase the efficiency of HUD programs, and this final 
rule does introduce some streamlining of procedure as have already been 
discussed in this preamble.
    In regard to HUD establishing a process to approve LIHTC LLC 
Operating Agreements before the documents are finalized, it is 
important to note that LIHTC documents, and HUD's review thereof, are 
subject to the mixed-finance program regulations at 24 CFR part 941. On 
December 27, 2006, HUD published a proposed rule entitled ``Streamlined 
Application Process in Public/Private Partnerships for the Mixed-
Finance Development of Public Housing Units.'' The streamlined process 
would substantially reduce the legal documents that must be submitted 
to HUD for review as part of the mixed-finance process.
    Comment: Proposed Sec.  905.710(b)(3) (final Sec.  905.510(b)(5)), 
which provides that HUD will not review preliminary financing documents 
that are still under negotiation, is problematic. The rule should make 
this requirement an option at HUD's discretion. PHAs may need assurance 
that HUD will approve the security interests prior to concluding 
negotiations.
    Response: The CFFP is an appropriations-based financing program. As 
an appropriations-based form of financing involving the CFFP, the 
security interest provided by PHAs to lenders or bondholders is a 
pledge of future Capital Funds, subject to the availability of 
appropriations. As HUD has approved more than $3 billion in Capital 
Fund Financing Proposals, the security interest provided pursuant to 
this program has been well established, accepted by the marketplace, 
and should be familiar to all program participants.
    In terms of reviewing financing documents that are still under 
negotiation or making the requirement for financing documents optional, 
HUD is not a party to the agreements between PHAs and their lenders or 
bondholders, although these negotiations concern substantial Federal 
funding. HUD's review of the documents associated with CFFP 
transactions is necessary for conformance with program requirements and 
to determine that the proposed use of Capital Funds is sound and 
consistent with use requirements. As such, HUD review can be useful 
only if negotiations are complete and the financing documents are in 
their final form and provided to HUD.
    Comment: HUD's proposed amendments to part 905 do not address 
whether Capital Fund financing proceeds may be used for short-term 
loans or bridge loans. The final rule should expressly provide for 
these uses. HUD's current informal position appears to be that proceeds 
from CFFP financings cannot be used to generate program income, and 
recommended that this type of structure be permitted.
    Response: This final rule revises proposed Sec.  905.705(j)(1) 
(final Sec.  905.505(j)(1)) to explicitly allow for short-term or 
bridge loans, provided they are fully amortizing. However, the 
commenter is correct that it has been HUD's position, while 
implementing the program on a case-by-case basis, that the transactions 
may not be structured in such a way so as to allow for the generation 
of program income. The rationale for this approach is related to the 
differences in financial controls for grant and non-grant programs. HUD 
permits Capital Funds and HOPE VI funds to be used in a manner that 
generates program income. These are both grant programs, where the 
focus is on the initial use of the grant. Part 85 of HUD's regulations 
(24 CFR part 85) explicitly addresses the generation of program income 
in grant programs. The CFFP, however, is a financing program. Given the 
long-term implications of CFFP financings, one of HUD's objectives in 
reviewing such applications is to ensure, to the extent feasible, that 
the proposed financing, including the use of the proceeds, will not 
have a negative effect on the viability of the PHA's public housing 
over the term of the financing. In order to make this analysis, the 
permanent use of the proceeds must be known. In the case of program 
income, however, the eventual re-use of the income cannot be known with 
any certainty given the fact that the re-use is in the future. This 
final rule modifies Sec.  905.705(j)(1) to formalize the existing 
policy that CFFP transactions may not be structured in a manner that 
generates program income, unless otherwise approved by HUD.

IV. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and given OMB 
control numbers 2577-0157 and 2577-0226. In accordance with the 
Paperwork Reduction Act, an agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information, 
unless the collection displays a currently valid OMB control number.

Regulatory Planning and Review

    OMB reviewed this rule under Executive Order 12866 (entitled 
``Regulatory Planning and Review''). OMB determined that this rule is 
significant as meant by the order, although it is not an economically 
significant regulatory action as defined in 3(f)(1) of the order. This 
rule creates transfers in that it permits Capital Funds that would be 
expended in future years to be expended earlier on eligible activities 
such as large capital improvements; however, this does not result in 
economically significant differences in expenditures or transfers to 
and among stakeholders. Rather, it merely time-shifts funding in a way 
that enables PHAs to obtain the benefits of future funding at an 
earlier time. In the course of time, however, PHAs would use the same 
future streams of Capital Funds absent this rule. While the expenses of 
financing must be considered, these do not rise to the level of 
economic significance. This rule will have no direct budgetary impact.
    The rule in itself does not add any new cost to the financing 
program and does not create any significant transfers. The only new 
costs to the program participant are transaction fees and interest cost 
associated with borrowing under the CFFP rule. These fees and cost 
would constitute transfers under this rule. For example a municipal 
bond would cost on average 2 percent in fees, in addition to the coupon 
interest rate, which is also 5 percent on average. To date, HUD's 
office overseeing the CFFP report that to date, about $183.4 million 
has been allocated to debt service

[[Page 65207]]

(interest and principal). Applying this rule of thumb, the $183.4 
million annual payment would have generated transfers of about $3.7 
million initially in fees (2 percent), and about $9.2 million annual in 
interest costs. HUD's argument on these transfers is that a well-
managed PHA would not undertake an investment if the net present value 
were less than zero. Thus, the option would be exercised only by those 
PHAs for whom there is an expected benefit. The CFFP final rule would 
permit PHAs to borrow for uses such as issuing bond debt to be repaid 
out of future CFP subsidy allocations. The financing costs associated 
with bond transactions are as follows. A municipal bond would cost on 
average 2 percent in fees, in addition to the coupon interest rate, 
which is also 5 percent on average. To date, according to HUD's office 
overseeing the CFFP, about $183.4 million has been allocated to debt 
service (interest and principal). That is about 7 percent of annual 
appropriation for the CFFP program. In addition, this final rule also 
permits PHAs to pledge up to 100 percent of their Replacement Housing 
Factor (RHF) funds for debt service, provided that such pledge 
constitutes no more than 50 percent of the PHA's combined future 
Capital Funds (i.e., formula funds and RHF funds). In 2008, a total of 
294 PHAs received RHF funds: 251 PHAs received $97,936,944 RHF in first 
increment, and 123 PHAs received $112,825,095 RHF in second increment 
funding. Five years after the implementation of the RHF phasedown, the 
$113 million second increment funding would be eliminated and 
redistributed by formula to all eligible 3,138 PHAs. This means that in 
time, debt supported by about $98 million in RHF (or as much as $500 
million, if one assumes level payments and a 5-year term) could be 
added to the $10.2 billion ``debt ceiling.'' Data from HUD's office of 
CFFP also show that the cost of insurance for CFFP transactions 
approved in 2008 and 2009 were, on average, 1.2 percent of the amount 
approved.
    This final rule provides the regulatory framework for compliance 
with the statute and establishes an approval process for PHAs to 
request authorization from HUD to pledge Capital Funds for debt service 
payments, including payments of debt service and customary financial 
costs for the modernization and development of public housing--
including public housing in mixed-finance development. Key benefits of 
the use of Capital Funds for financial activities include:
    <bullet> There exist economies of scale in making large-scale 
housing improvements. If the average cost for improving a unit fell as 
the number of units improved increases, then it would make economic 
sense to increase the number of units improved. These benefits may 
warrant undertaking the costs of debt.
    <bullet> The lump sum of loan proceeds will make possible large-
scale improvements at the PHA's biggest sites that could not be 
undertaken on the basis of annual CFP allocations. This is corroborated 
using the findings of a study by Abt Associates and funded by HUD (Abt 
Associates, Capital Needs of the Public Housing Stock in 1998: Formula 
Capital Study, January 2000; hereafter, ``the study''). The study 
estimated the total inspection-based existing modernization needs for 
the 1,194,370 units of public housing to be $22.5 billion in 1998--an 
average of $18,847 per unit, and another $2 billion to address ongoing 
accrual needs or, on average, $1,679 per unit, assuming that the 
inspection-based existing modernization needs were completely met.
    <bullet> Large-scale repair work will diminish the backlog of 
deterioration at key sites now, saving future CFP dollars and better 
securing the portfolio for the future.
    <bullet> Making repairs now using loan proceeds should also result 
in lower operating costs, linking the capital investment with the need 
for properties to stand on their own financially under HUD's new 
subsidy and asset management rules.
    <bullet> Allowing more flexibility in planning will allow PHAs to 
take advantage of economic trends. The optimal investment decision 
depends upon expectations concerning the direction of critical 
variables. For example, if the manager of a PHA observes that 
construction costs are rising faster than the costs of debt, there 
would be a reason to invest sooner and at a higher intensity than if 
construction costs were declining. This rule allows the flexibility to 
invest at varying levels of intensity. Indeed, the Department believes 
that a well-managed PHA would not undertake an investment if it did not 
view the transaction as having a positive impact on its Capital Fund 
program. Thus, the option would be exercised only by those PHAs for 
whom there is an expected benefit.
    <bullet> There are also costs of the use of Capital Funds for 
financial activities. The CFFP final rule would permit PHAs to borrow 
and issue bond debt to be repaid out of future Capital Fund program 
subsidy allocations. However, there are financing costs associated with 
such transactions that are discussed elsewhere in this economic impact 
statement.
    In conclusion and notwithstanding the financing costs under the 
CFFP, the implementation of the final rule would not have any budgetary 
impact on the Federal budget, and would not create any significant 
transfers, but rather would advantageously time-shift the use of 
Capital Funds. The rule would also comply with the statutory 
requirement that requires the Secretary of HUD to establish guidelines 
for the use of public housing Capital Funds for financial activities.
    HUD also considered alternatives to this rulemaking. As an 
alternative to publishing a rule on the CFFP, HUD could continue to 
implement the CFFP on a case-by-case basis without publishing a rule, 
as we have been doing since 2000. This is not an optimal approach, as 
the rulemaking process enables HUD to solicit comment from the public 
on the proposed rule, and to incorporate changes into the program based 
on those comments to the extent HUD determines it to be feasible. 
Furthermore, a final rule published in the Federal Register and then 
the CFR will serve to establish rules of general applicability and make 
those rules accessible to the public.
    Another possible alternative would involve changing the terms we 
deem approvable in a CFFP transaction. For example, we could allow a 
PHA to pledge more than 33 percent of its Capital Funds, or borrow for 
a period in excess of 20 years. Since HUD has been implementing the 
CFFP on a case-by-case basis since 2000, 33 percent appears to be an 
appropriate debt coverage ratio. At that ratio, PHAs can borrow a 
sufficient sum to enable them to address a substantial scope of work, 
but at the same time leave a sufficient amount of Capital Funds after 
the payment of debt service to mitigate for changes in appropriations, 
and to enable PHAs to address ongoing modernization needs. With regard 
to changing the period of years for which a PHA could borrow funds for, 
while extending the period would increase borrowing capacity, it would 
greatly increase the amount of Capital Funds used to pay interest 
costs. Furthermore, synchronizing the term of the CFFP with the term of 
the Capital Fund ACC amendment that PHAs signed each year when they 
receive Capital Fund grants would provide consistency between the 
financing program and its intended funding source.
    HUD's economic impact analysis is contained in the docket file, 
which is available for public inspection between the hours of 8 a.m. 
and 5 p.m. weekdays

[[Page 65208]]

in the Regulations Division, Office of General Counsel, Department of 
Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the docket file 
must be scheduled by calling the Regulations Division at 202-708-3055 
(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.

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 final 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 proposed 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(2)(C)). That 
Finding of No Significant Impact remains applicable to this final 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, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
10276, Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the docket file 
must be scheduled by calling the Regulations Division at 202-708-3055 
(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.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The regulatory changes made by this final rule will allow PHAs 
additional flexibility in using their Capital Funds. However, the 
decision whether to use this capability will be left to each PHA. 
Although some small 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 small PHAs. This 
final rule also grants some procedural exemptions to small PHAs, as 
measured by their total financings. Therefore, the undersigned 
certifies that this rule will not have a significant economic impact on 
a substantial number of small entities, and an initial regulatory 
flexibility analysis is not required.

Executive Order 13132, Federalism

    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.

Congressional Review of Final Rules

    This rule constitutes a ``major rule'' as defined in the 
Congressional Review Act (5 U.S.C. Chapter 8). This rule has a 60-day 
delayed effective date and will be submitted to the Congress in 
accordance with the requirements of the Congressional Review Act.

Catalog of Federal Domestic Assistance Number

    The Catalog of Federal Domestic Assistance number for 24 CFR part 
905 is 14.850.

List of Subjects in 24 CFR Part 905

    Grant programs--housing and community development, Modernization, 
Public housing, Reporting and recordkeeping requirements.

0
For the reasons stated in the preamble, HUD amends 24 CFR part 905 as 
follows:

PART 905--THE PUBLIC HOUSING CAPITAL FUND PROGRAM

0
1. The authority citation for 24 CFR part 905 is amended to read as 
follows:

    Authority: 42 U.S.C. 1437g, 42 U.S.C. 1437z-2, and 3535(d).

0
2. Designate Sec. Sec.  905.10 and 905.120 as subpart A, and add a 
heading for subpart A before current Sec.  905.10 to read as follows:

Subpart A--Capital Fund

0
3. Revise the heading of Sec.  905.120 to read as follows:


Sec.  905.120  Penalties for slow obligation or expenditure of Capital 
Fund program assistance.

* * * * *

0
4. Add and reserve subparts B through D, and add subpart E, consisting 
of Sec. Sec.  905.500 through 905.515, to read as follows:

Subpart E--Use of Capital Funds for Financing

Sec.
905.500 Purpose and description.
905.505 Program requirements.
905.507 Streamlined application requirements for standard and high-
performing PHAs.
905.510 Submission requirements.
905.515 HUD review and approval.


Sec.  905.500  Purpose and description.

    (a) This subpart provides the requirements necessary for a PHA to 
participate in the Capital Fund Financing Program (CFFP), under which 
the PHA may obtain HUD approval to borrow private capital and pledge a 
portion of its annual Capital Fund grant or public housing assets and 
other public housing property of the public housing agency as security.
    (b) Under the CFFP, PHAs are permitted to borrow private capital to 
finance public housing development or modernization activities. A PHA 
may use a portion of its Capital Fund for debt service payments and 
usual and customary financing costs associated with public housing 
development or modernization (including public housing in mixed-finance 
developments). A PHA that undertakes such financing activities may, 
subject to HUD's written approval, grant a security interest in its 
future annual Capital Fund grants, which shall be subject to the 
appropriation of those funds by Congress. The PHA's financing 
activities are not obligations or liabilities of the Federal 
Government. The Federal Government does not assume any liability with 
respect to any such pledge of future appropriations, and the Federal 
Government neither guarantees nor provides any full faith and credit 
for these financing transactions.


Sec.  905.505  Program requirements.

    (a) Written approval. A PHA shall obtain written HUD approval for 
all

[[Page 65209]]

Capital Fund financing transactions that pledge, encumber, or otherwise 
provide a security interest in public housing assets or other property, 
including Capital Funds, and use Capital Funds for the payment of debt 
service or other financing costs. HUD approval shall be based on:
    (1) The ability of the PHA to complete the financing transaction 
along with the associated improvements;
    (2) The reasonableness of the provisions in the Capital Fund 
Financing Proposal considering the other pledges or commitments of 
public housing assets, the PHA's capital needs, and the pledge being 
proposed; and
    (3) Whether the PHA meets the requirements of this subpart.
    (b) Antideficiency. Any pledge of future year Capital Fund grants 
under this section is subject to the availability of appropriations by 
Congress for that year. All financing documents related to future year 
Capital Fund amounts must include a statement that the pledging of 
funds is subject to the availability of appropriations.
    (c) Conditions on use--(1) Development. Any public housing that is 
developed using amounts under this part (including proceeds from 
financing authorized under this part) shall be operated under the terms 
and conditions applicable to public housing during the 40-year period 
that begins on the date on which the project becomes available for 
occupancy, except as otherwise provided in the 1937 Act.
    (2) Modernization. Any public housing or portion of public housing 
that is modernized using amounts under this part (including proceeds 
from financing authorized under this part) shall be maintained and 
operated during the 20-year period that begins on the latest date on 
which the modernization is completed, except as otherwise provided in 
the 1937 Act.
    (3) Applicability of latest expiration date. Public housing subject 
to the use conditions described in paragraph (c) of this section, or to 
any other provision of law mandating the operation of housing as public 
housing for a specific length of time, shall be maintained and operated 
as required until the latest such expiration date.
    (4) Declaration of Trust. All public housing rental projects must 
show evidence satisfactory to HUD of an effective Declaration of Trust 
being recorded in first position, meeting the requirements of paragraph 
(c) of this section and covering the term of the financing. If part of 
a mixed-finance project, this evidence will be with the mixed-finance 
evidentiary documents.
    (d) Public Housing Assessment System (PHAS) designation. Generally, 
a PHA shall be designated a standard performer or high performer under 
PHAS (24 CFR part 902), and must be a standard performer or higher on 
the management and financial condition indicators. HUD will consider 
requests from a PHA designated as troubled under PHAS when the PHA is 
able to show that it has developed appropriate management and financial 
capability and controls that demonstrate its ability to successfully 
undertake the Capital Fund Financing Proposal. The PHA must comply with 
all applicable fair housing and civil rights requirements in 24 CFR 
5.105(a). If a PHA has received a letter of findings, charge, or 
lawsuit involving ongoing systemic noncompliance under Title VI of the 
Civil Rights Act of 1964, Section 504 of the Rehabilitation Act of 
1973, the Fair Housing Act, or Section 109 of the Housing and Community 
Development Act of 1974, and the letter of findings, charge, or lawsuit 
has not been resolved to HUD's satisfaction, then unless the Capital 
Fund Financing Proposal is part of a plan to address such findings, 
charge, or lawsuit, the PHA will not be eligible for financing pursuant 
to the CFFP. HUD will determine if actions to resolve the charge, 
lawsuit, or letter of findings taken are sufficient to resolve the 
matter.
    (e) Management capacity. A PHA shall have the capacity to undertake 
and administer private financing and construction or modernization of 
the size and type contemplated. In order to determine capacity, HUD may 
require the PHA to submit a management assessment conducted by an 
independent third party, in a form and manner prescribed by HUD.
    (f) Existing financing. A PHA shall identify the nature and extent 
of any existing encumbrances, pledges, or other financing commitments 
of public housing funds undertaken by the PHA.
    (g) Need for financing. (1) A PHA must complete a physical needs 
assessment at the project level, in the form and manner prescribed by 
HUD that covers the PHA's entire public housing portfolio for the term 
of the financing and that takes into consideration existing needs and 
the lifecycle repair and replacement of major building components. The 
activity to be financed must be identified as a need in the physical 
needs assessment.
    (2) Based on the assessment under paragraph (g)(1) of this section, 
the PHA must demonstrate that the financing will not negatively impact 
the ability of the PHA to meet the ongoing needs of its public housing 
portfolio over the term of the financing. In making this demonstration, 
PHAs must reduce any projected future Capital Fund grants to account 
for planned or anticipated activities that would have the effect of 
reducing or otherwise limiting the availability of future Capital Fund 
grants. PHA projections must be detailed on the portfolio schedule form 
prescribed by HUD, and shall project a stabilized number of units 
(Stabilized Base Unit Count) to be reached in no more than 5 years 
after all planned or anticipated activities have been completed that 
would reduce future Capital Fund grants. PHAs must also take into 
consideration projected use of Capital Funds for other eligible 
activities under part 905, and may take into consideration alternative 
sources of financing that are available to help meet its needs.
    (3) For PHAs that are proposing to borrow more than $2 million on a 
cumulative basis, to the extent that:
    (i) Capital and other eligible Capital Fund needs exceed projected 
Capital Fund program funding amounts, and the PHA is not leveraging 
non-public housing funds as part of its Capital Fund Financing Proposal 
transaction, then
    (ii) The PHA must demonstrate that it has considered leveraging 
non-public housing funds, and state why the proposed financing is 
appropriate in light of alternative sources available.
    (iii) Notwithstanding paragraphs (g)(3)(i) and (ii) of this 
section, PHAs that size their financing by utilizing only replacement 
housing factor (RHF) funds, or PHAs that propose to use their Capital 
Fund Financing Proposal proceeds as part of a mixed-finance 
modernization transaction, are not required to comply with Sec.  
905.505(g).
    (h) CFP Plan. (1) The use of the CFFP proceeds shall be included in 
a form and manner as required by HUD for CFP planning and budgeting and 
in a same manner as a Capital Fund grant. The CFFP proceeds shall be 
included as a separate Capital Fund grant to the same extent that PHAs 
are required to plan and budget Capital Fund grants. The use of Capital 
Funds for the payment of debt service and related costs shall be 
planned and budgeted as would other eligible uses of Capital Funds.
    (2) As part of its Capital Fund Financing Proposal, the PHA shall 
submit a Capital Fund financing budget, in the form and manner required 
by HUD, detailing the proposed use of the Capital Fund Financing 
Proposal proceeds. There shall be no requirement for PHAs to submit a 
Capital Fund financing budget as part of their Capital

[[Page 65210]]

Fund financing proceeds where the sizing of the financing is based upon 
the use of RHF funds for debt service, or where the Capital Fund 
Financing Proposal proceeds are being used as part of a mixed-finance 
transaction. Approval letters for mixed-finance and RHF-related Capital 
Fund financing transactions shall be conditioned upon the approval of 
the mixed-finance proposal, or, in the case of conventional 
development, upon the approval of the development proposal and the 
execution of an associated construction contract with which the Capital 
Fund financing proceeds would be used.
    (3) The work financed with Capital Funds and described in the 
Capital Fund financing budget will be based on the physical needs 
assessment. The Capital Fund financing budget shall list the work items 
(e.g., roof replacement, window replacement, accessibility 
modifications) by development. These work items will constitute 
performance measures upon which the PHA's performance will be 
evaluated. A general representation of the work (e.g., ``rehabilitation 
of the development'') is not sufficient.
    (4) The CFP Plan (submission (as described in paragraph (h) of this 
section) shall include a copy of the physical needs assessment 
described in Sec.  905.505(g).
    (5) Financing proceeds under this part may be used only for the 
modernization or development of public housing and related costs 
including the modernization or development of non-dwelling space. 
Financing proceeds may not be used for administration or central office 
cost center costs (except for mixed-finance projects), management 
improvements, or upon non-viable projects, such as those subject to 
required conversion. Financing proceeds may be used to reimburse 
predevelopment costs, but only to the extent they were incurred in 
conformance with applicable regulatory requirements.
    (i) Debt Coverage Percentage. (1) Except as stated in Sec.  
905.505(i)(2), a PHA shall not pledge more than 33 percent of its 
annual future Capital Fund grants for debt service payments, assuming 
level Capital Fund appropriations over the term of the debt obligation 
and any reduction attributable to activities projected by the PHA to 
occur during the term of the financing such as demolition, disposition, 
or conversion of public housing units or other occurrences that could 
limit the availability of Capital Funds, including a voluntary 
compliance agreement. This percentage of Capital Funds dedicated for 
debt service, taking into account adjustments for activities that would 
reduce the receipt of Capital Funds, is called the ``Debt Coverage 
Percentage.''
    (2) A PHA may pledge up to 100 percent of any projected replacement 
housing factor (RHF) grants for debt service payments, provided that 
the pledge extends to the formula fund portion of its Capital Fund 
grants also, but that not more than 50 percent of its overall projected 
Capital Fund grants (including formula funds and RHF funds) are 
pledged. RHF projections shall account for any projected reductions in 
RHF over the term of the financing. Unless otherwise approved by HUD, 
PHAs shall be limited to sizing their loans based upon increments of 
RHF currently being received by the PHA. CFFP transactions pledging RHF 
funds shall include accelerated amortization provisions, requiring all 
RHF funds received by the PHA to pay debt service as those RHF funds 
are received. A RHF grant shall be used only to develop or pay 
financing costs for the development of replacement public housing units 
in accordance with Sec.  905.10.
    (3) Subject to the reasonableness test in Sec.  905.505(a)(2), PHAs 
may exceed 33 percent when pledging existing Capital Fund grants and 
RHF grants for the payment of debt service. Existing grants are grants 
that have been received by the PHA at the time of HUD's approval of the 
Capital Fund Financing Proposal.
    (j) Terms and conditions of financing. The terms and conditions of 
all financing shall be reasonable based on current market conditions. 
The financing documents shall include the following, as applicable:
    (1) Term. The term of the Capital Fund financing transaction shall 
not be more than 20 years. All Capital Fund financing transactions 
shall be fully amortizing. Bridge loans and other short-term loans are 
permitted; however, unless otherwise approved by HUD, the CFFP 
Financing transaction may not be structured in a manner that generates 
program income.
    (2) Acceleration. Unless otherwise approved by HUD, the financing 
documents shall provide that HUD approval is required before a lender 
may accelerate a PHA's debt obligation, for default or otherwise.
    (3) Public housing assets. A PHA may not pledge any public housing 
assets unless specifically approved in writing by HUD. PHAs seeking 
approval of a pledge of public housing assets must submit documentation 
to HUD that details the nature and priority of the pledge.
    (4) Variable interest rate. All variable-rate transactions shall 
include an interest-rate cap. The financing documents must specify that 
the PHA shall not be liable to pay debt service with public housing 
funds, and that there shall be no recourse to public housing assets, 
beyond the interest-rate cap. The limitation on the pledge of Capital 
Funds specified in Sec.  905.505(i) shall be calculated based on the 
interest-rate cap.
    (5) Other pledges or commitments. PHAs seeking approval of a pledge 
of public housing assets must describe the nature and extent of 
existing commitments or pledges of public housing assets, providing 
documentation of such other commitments or pledges to the extent 
required by HUD.
    (6) Terms and conditions. Financing documents must include any 
other terms and conditions as required by HUD.
    (k) Fairness opinion. The PHA shall provide an opinion, in a form 
and manner prescribed by HUD, from a qualified, independent, third-
party financial advisor attesting that the terms and conditions of the 
proposed financing transaction are reasonable given current market 
conditions with respect to such matters as interest rate, fees, costs 
of issuance, call provisions, and reserve fund requirements.
    (l) Financial controls and construction management. (1) The PHA 
shall have a financial control and construction management plan 
describing how the PHA will ensure that:
    (i) Adequate controls are in place regarding the use of the Capital 
Fund financing proceeds; and
    (ii) The improvements will be developed and completed in a timely 
manner consistent with the contract documents.
    (2) This plan shall contain protocols and financial control 
mechanisms that address the design of the improvements, construction 
inspections, construction draws, and requisition approval checks and 
balances. A PHA that is designated troubled under PHAS, or other PHAs 
as determined by HUD, may be required to institute risk mitigation 
measures to ensure that the funds are used properly and for the 
purposes intended.
    (m) Work items. To the extent that any changes in work items 
financed by Capital Fund financing proceeds meet or exceed the 
following threshold requirements determined by HUD, PHAs must obtain 
written approval of amendments to their Capital Fund financing budget 
from HUD:

[[Page 65211]]

    (1) A change in the type of activity being financed (for example, 
if the approved Capital Fund financing budget contemplated the proceeds 
being used for modernization, but after the proposal is approved, the 
PHA decides instead to pursue development);
    (2) A change in the project being modernized or developed with the 
proceeds;
    (3) A reduction in 20 percent or more in the number of public 
housing units being modernized; or
    (4) An increase of 20 percent or more of the cost of non-dwelling 
space.
    (n) Applicability of other Federal requirements. The proceeds of 
the Capital Fund financing are subject to all laws, regulations, and 
other requirements applicable to the use of Capital Fund grants made 
under 24 CFR part 905, unless otherwise approved by HUD in writing. 
PHAs undertaking CFFP transactions shall be subject to the following 
requirements, which shall be further enumerated in a Capital Fund 
Financing Amendment to the Annual Contributions Contract (CFF ACC 
Amendment):
    (1) Amounts payable to the PHA by HUD pursuant to the CFFP and 
pledged to the payment of debt service by the PHA shall be used 
exclusively for debt service in accordance with the debt service 
schedule approved by HUD and shall not be available for any other 
purpose;
    (2) The financing does not constitute a debt or liability of HUD or 
the United States, the full faith and credit of the United States are 
not pledged to the payment of debt service, and debt service is not 
guaranteed by HUD or the United States;
    (3) Nothing in this CFF ACC Amendment or 24 CFR part 905 is 
intended to diminish HUD's authority to administer, monitor, and 
regulate the public housing program, including HUD's authority to 
exercise any administrative sanction or remedy provided by law; 
provided, however, that except as required by law, HUD will not assert 
any claim or right under the ACC, including the exercise of 
administrative sanctions and remedies, if and to the extent that the 
effect of such claim or right would be to reduce the payment of Capital 
Fund moneys to the PHA below the level necessary to pay debt service or 
delay the time for payment of such moneys such that required amounts 
would not be available to pay debt service when due;
    (4) The financing is subject to mandatory prepayment prior to the 
obligation end date and expenditure end date of the Capital Fund 
financing proceeds to the extent necessary for the Capital Fund 
Financing Proposal proceeds to comply with section 9(j) of the 1937 Act 
(42 U.S.C. 1437g(j)). Bond and loan documents shall include appropriate 
provisions such that prepayment shall be made by the lender, trustee, 
or appropriate third-party servicer approved by HUD, without any action 
by HUD post-approval;
    (5) HUD agrees, subject to the availability of appropriations, to 
approve immediately upon receipt from the PHA (subject to any legal 
requirements or constraints applicable at the time), a CFP Plan 
document (as described in 24 CFR 905.505(h)) and/or an annual CFF ACC 
Amendment, to the extent and in an amount sufficient to make the 
applicable debt service payment;
    (6) Prior to cumulatively reducing its inventory of public housing 
units by more than 5 percent of the Stabilized Base Unit Count, if, 
after the removal of units from inventory, the Debt Coverage Percentage 
under Sec.  905.505(i)(1) would constitute more than 33 percent of 
future Capital Funds, the PHA shall prepay the financing such that the 
reduction in inventory shall not cause the Debt Coverage Percentage to 
increase. If the reduction in inventory is required by law or public 
housing requirements, the prepayment is not required to be made prior 
to the reduction in inventory, but instead shall be made as soon as 
possible after the PHA becomes aware of the requirement of law or 
public housing requirements, but only to the extent that Capital Funds 
are not otherwise needed by the PHA to address the health and safety 
issues or other requirements of law in the PHA's public housing 
portfolio, all as determined by HUD. For PHAs that size their loans 
based upon the projected receipt of RHF funds, prior to undertaking an 
activity that will reduce its RHF units below the number of units 
projected in the Capital Fund Financing Proposal as required by Sec.  
905.505(i)(3), the PHA shall prepay its loan such that debt service 
does not exceed 100 percent of projected RHF after accounting for the 
reduction in RHF units, all as determined by HUD.
    (o) Performance measures. Pursuant to 24 CFR 905.505(h) a PHA is 
required to identify in its CFP Plan documents specific items of work 
that will be accomplished using the proceeds of the proposed financing. 
The identified items, which shall be quantifiable, shall be the basis 
on which HUD evaluates a PHA's performance. HUD may also utilize the 
Capital Fund financing budget, and Capital Fund Financing Proposal 
approval documents as the basis to evaluate a PHA's performance. 
Failure to meet performance measures may result in:
    (1) Failure to receive HUD approval for future financing 
transactions;
    (2) Failure to be considered for future competitive grant programs; 
and
    (3) Other sanctions HUD deems appropriate and authorized by law or 
regulation.
    (p) Reporting requirements. (1) The use of the CFFP proceeds shall 
be reported in the same manner as a Capital Fund grant. The PHA shall 
submit a performance and evaluation report on a quarterly basis. PHAs 
that utilize their Capital Fund financing proceeds as part of a mixed-
finance transaction, and PHAs that size their financing based upon RHF 
in their Capital Fund financing transactions, are not required to 
submit quarterly reports.
    (2) Each CFFP transaction and/or development project is subject to 
fiscal closeout in the same manner of a Capital Fund grant. Fiscal 
closeout includes the submission of an Actual Modernization Cost 
Certificate (AMCC) or Actual Development Cost Certificate (ADCC), an 
audit, if applicable, a final quarterly report, and a final Performance 
and Evaluation report.


Sec.  905.507  Streamlined application requirements for standard and 
high-performing PHAs.

    (a) PHAs with cumulative CFFP borrowings of less than $2 million 
and that are standard or high performers under PHAS; PHAs that are high 
performers under PHAS with cumulative CFFP borrowings of less than $20 
million; PHAs that propose to use their CFFP proceeds in a mixed-
finance transaction, or proposals where the sizing of the financing is 
based only upon the use of RHF funds for debt service, shall not be 
required to submit:
    (1) A third-party management assessment under Sec.  905.505(e);
    (2) A third-party fairness opinion under Sec.  905.505(k);
    (3) An assurance of financial controls and construction management 
under Sec.  905.505(l).
    (b) Notwithstanding Sec.  905.507(a), if HUD determines that 
interest or other costs do not appear to meet industry norms, or other 
aspects of the proposal present atypical risks, HUD retains the 
discretion to require assessments, opinions, or controls, or to return 
the proposal.


Sec.  905.510  Submission requirements.

    (a) All requests for HUD approval of CFFP transactions shall be 
submitted to the Office of Public and Indian Housing (PIH), Attention: 
Office of Capital

[[Page 65212]]

Improvements, in such form and in such number of copies as designated 
by PIH through direct notice.
    (b) Each Capital Fund Financing Proposal shall be tabbed and 
presented with the following information in the order listed:
    (1) PHA transmittal letter. The PHA must submit a letter signed by 
the PHA Executive Director (or Chief Executive Officer, if applicable) 
briefly describing the proposed financing and use of proceeds, the 
percentage of Capital Funds being dedicated to debt service, the 
percent of the PHA's public housing units benefiting from the 
financing, and the impact of the financing upon the public housing 
portfolio, and transmit to HUD a request for approval of the CFFP 
transaction. The transmittal letter shall provide any additional 
information required pursuant to this subpart including, but not 
limited to:
    (i) Describing the transaction being proposed;
    (ii) Describing in detail any existing financing or similar 
commitments of public housing funds;
    (iii) Describing and providing justification for significant 
financial or legal provisions, such as variable interest or 
acceleration provisions;
    (iv) Describing construction management and financial controls.
    (2) Term sheet, table of contents, and contact information. The PHA 
must submit the HUD-prescribed term sheet that describes the basic 
terms of the transaction and financing structure, including the 
proposed amount of the financing, the term, interest rates, security, 
and reserve requirements. A table of contents must identify the 
materials submitted, as well as list the materials the PHA is not 
required to submit pursuant to this rule. Contact information for all 
of the participating parties is also required.
    (3) Financing schedules. The PHA must submit financing schedules 
that include a debt service schedule, sources and uses schedule, and a 
portfolio schedule (including projections for RHF, as appropriate), and 
an adequacy-of-Capital Funds schedule, all in a format prescribed by 
HUD.
    (4) Other required submissions. The following submissions must be 
incorporated in the proposal to the extent required to be submitted by 
this part: Capital fund financing budget, management assessment, 
fairness opinion, and physical needs assessment.
    (5) Financing documents. The PHA must submit a complete set of the 
legal documents that the PHA will execute in connection with the CFFP 
transaction. The legal documents must identify the nature and extent of 
any security being provided, as well as the position of any security 
interest (e.g., first lien position, second lien position). The legal 
documents are to be submitted to HUD only after they have been 
negotiated and agreed upon by the parties to the transaction. HUD will 
not review preliminary documents that are still under negotiation.
    (6) Declaration of Trust requirements. The PHA must submit evidence 
that the PHA has conformed to the Declaration of Trust requirements in 
accordance with this subpart.
    (7) Board resolution and counsel's opinion. The PHA must submit 
evidence of a PHA Board resolution that authorizes the PHA to: 
Undertake the loan up to a specified amount, provide all security 
interests required by the loan, and repay the loan with Capital Funds 
(including RHF funds, when applicable) as required by the financing 
documents. The Board resolution must also provide authorization for the 
Executive Director or other executive staff to negotiate and enter into 
all legal documents required as part of the transaction. The PHA must 
submit PHA counsel's opinion, which opines that the PHA has the 
authority to enter into the transaction, and affirms that the 
transaction complies with the requirements of the 1937 Act, as amended; 
Federal regulations; and the ACC, as amended.
    (8) Depository Agreement and ACC. The PHA must submit a Depository 
Agreement (form HUD-51999) and a CFF ACC Amendment.
    (9) Other documents as required by HUD.


Sec.  905.515  HUD review and approval.

    (a) After receipt of a Capital Fund Financing Proposal, HUD shall 
review the proposal for completeness. HUD will return to the PHA all 
incomplete or unapprovable proposals, identifying the deficiencies, and 
will not take any further action. HUD will also return proposals 
submitted by entities other than the PHA (e.g., the PHA's consultants). 
HUD shall review all complete proposals for compliance with the 
requirements under this subpart. HUD may require the PHA to make 
modifications to any of the CFFP documents submitted and may require 
the PHA to resubmit all or any portion of the proposal. After HUD 
determines that a proposal complies with all applicable requirements, 
HUD shall notify the PHA in writing of its approval and any 
condition(s) of the approval.
    (b) (1) A copy or copies of the CFF ACC Amendment shall accompany 
the approval letter.
    (2) Within 60 days of the date of HUD's approval of the transaction 
or, if HUD sets conditions on its approval, within 60 days of the date 
that the PHA satisfies such conditions (as evidenced by documentation 
retained in the PHA's file and available to HUD upon request), but in 
no event longer than 120 days after the HUD approval, unless the time 
has otherwise been extended by HUD in writing, the PHA must submit:
    (i) Closing documents as directed by HUD; and
    (ii) All documents required by HUD to take certain actions such as 
initiating debt service payments through HUD's automated systems.
    (3) Failure to provide the required documents to HUD within the 
time frame required under Sec.  905.515(b)(2) may result in HUD 
rescinding its approval.

    Dated: October 8, 2010.
Sandra B. Henriquez,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 2010-26404 Filed 10-20-10; 8:45 am]
BILLING CODE 4210-67-P