65198 Federal Register / Vol. 75, No. 203 / Thursday, October 21, 2010 / Rules and Regulations 

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. 

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 lowincome 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 mixedfinance 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: 

• The entire section is recodified as 

subpart E of part 905, and section 

numbers redesignated accordingly, so 

that, for example, proposed § 905.700 is 

in this final rule § 905.500. 

• 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 

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

Capital fund 

formula 

grant 

RHF grants Total capital 

fund grants 

Max debt 

service from 

capital fund 

grants 

(50% of 

total) 

Debt service 

from RHF 

grants 

Debt service 

from 

formula 

grant 

Total debt 

service 

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 

(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. 

• 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. 

• 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. 

• 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, § 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. 

• The 40-year use restriction in 

section 9(d)(3) of the 1937 Act (42 

U.S.C. 1437g(d)(3)) is stated at 

§ 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). 

• 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. 

• Financing schedules, including 

debt service and sources and uses, are 

required by § 905.510(b)(3) of this final 

rule. 

• 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 § 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 § 905.505(c)(4) and 

mentioned in § 905.510(b)(6). 

• 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 

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65200 Federal Register / Vol. 75, No. 203 / Thursday, October 21, 2010 / Rules and Regulations 

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. 

negotiate and execute required legal 

documents as required by 

§ 905.510(b)(7). 

• 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 

§ 905.510(b)(7). 

• 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 § 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. 

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 thirdparty 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 poorperforming 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 § 905.705(e)), fairness 

opinions (proposed § 905.705(k)), and 

information about financial and 

construction management controls 

(proposed § 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 

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Federal Register / Vol. 75, No. 203 / Thursday, October 21, 2010 / Rules and Regulations 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 § 905.705(c)(5) (final 

§ 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 mixedfinance evidentiary approval process. 

(4) Proposed § 905.705(h)(2) (final 

§ 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 § 905.705(p) (final 

§ 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 

§ 905.710(b)(4). Proposed § 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 mixedfinance 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 

§ 905.710 (now § 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 § 905.510(b)(1) 

to describe in more detail the 

requirements for the transmittal letter 

and § 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 

§ 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 § 905.510(b)(4) 

to summarize other submittal items 

required pursuant to proposed § 905.705 

that were not delineated elsewhere in 

proposed § 905.710. New § 905.510(b)(6) 

incorporates the requirement for 

evidence regarding DOTs. New 

§ 905.510(b)(7) incorporates the 

requirement for a board resolution and 

a counsel’s opinion. New § 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 § 905.705(j) to specify 

requirements associated with variable 

rate transactions. This final rule also 

revises proposed § 905.705(n) (final 

§ 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 

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65202 Federal Register / Vol. 75, No. 203 / Thursday, October 21, 2010 / Rules and Regulations 

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 appropriationsbased 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 projectbased accounting, except for mixedfinance 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 § 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 § 905.705(g) (final 

§ 905.505(g)) to provide that 

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transactions structured in the abovenoted 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 § 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 § 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 § 905.505(i)(2) (redesignated 

from proposed § 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 

§ 905.705(i)(1), given that proposed 

§ 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 

§ 905.705(g). 

Response: HUD agrees that some 

further explanation of these related 

sections is necessary. Accordingly, this 

final rule removes proposed 

§ 905.705(i)(2) and adds § 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 §§ 905.705(i)(1) and 

905.705(i)(3) as final §§ 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 mixedfinance program. This final rule revises 

§ 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 § 905.705(g) should be 

clarified to indicate how current the 

physical needs assessment must be. 

Response: This final rule revises 

proposed § 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 

§ 905.705(g) (final § 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 

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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 § 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 projectbased requirements would be met if the 

proceeds were used for predevelopment 

or new development purposes. Several 

commenters recommended that 

proposed § 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 § 905.705(h)(4) an 

exception to the use of CFFP proceeds 

for administrative costs for mixedfinance projects. 

In response to public comments, the 

final rule revises proposed 

§ 905.705(h)(4) (final § 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 nondwelling space. However, PHAs that 

have significant physical needs in their 

public housing dwellings should take 

measures to ensure that they meet the 

test in § 905.505(g) if they propose to 

use CFFP proceeds for non-dwelling 

facilities. 

This final rule also revises proposed 

§ 905.705(h)(4) (final § 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 

§ 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 

§ 905.705(h)(4). 

Response: This final rule removes the 

phrase ‘‘cost already incurred’’ from 

proposed § 905.705(h)(4) (final 

§ 905.505(h)(5)), and clarifies the 

language in § 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 § 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 § 905.505(j)(l) to 

clarify the limitation of the term to 20 

years. 

Comment: One commenter 

recommended that § 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 § 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 

§ 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 

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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 thirdparty 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 mixedfinance 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 

§ 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, highperforming 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 § 905.705(l) are 

duplicative of the requirement that 

PHAs obtain approval for changes for 

work items at proposed § 905.705(m) 

and add unnecessary layers of 

administrative requirements. 

Response: Proposed § 905.705(l) (final 

§ 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 § 905.705(m) 

(final § 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 

§ 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 § 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 § 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 

(§ 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 

§ 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) 

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operating agreements and critical thirdparty 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-bycase 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 mixedfinance 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 mixedfinance process. 

Comment: Proposed § 905.710(b)(3) 

(final § 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 § 905.705(j)(1) (final 

§ 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 § 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 

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(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: 

• 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. 

• 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. 

• 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. 

• 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. 

• 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. 

• 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-bycase 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 

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65208 Federal Register / Vol. 75, No. 203 / Thursday, October 21, 2010 / Rules and Regulations 

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). Hearingor 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). Hearingor 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. 

■ For the reasons stated in the preamble, 

HUD amends 24 CFR part 905 as 

follows: 

PART 905—THE PUBLIC HOUSING 

CAPITAL FUND PROGRAM 

■ 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). 

■ 2. Designate §§ 905.10 and 905.120 as 

subpart A, and add a heading for 

subpart A before current § 905.10 to 

read as follows: 

Subpart A—Capital Fund 

■ 3. Revise the heading of § 905.120 to 

read as follows: 

§ 905.120 Penalties for slow obligation or 

expenditure of Capital Fund program 

assistance. 

* * * * * 

■ 4. Add and reserve subparts B through 

D, and add subpart E, consisting of 

§§ 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 highperforming PHAs. 

905.510 Submission requirements. 

905.515 HUD review and approval. 

§ 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. 

§ 905.505 Program requirements. 

(a) Written approval. A PHA shall 

obtain written HUD approval for all 

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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 § 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 

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65210 Federal Register / Vol. 75, No. 203 / Thursday, October 21, 2010 / Rules and Regulations 

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 

§ 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 nondwelling 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 § 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 

§ 905.10. 

(3) Subject to the reasonableness test 

in § 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 variablerate 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 § 905.505(i) 

shall be calculated based on the interestrate 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: 

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(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 thirdparty servicer approved by HUD, 

without any action by HUD postapproval; 

(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 § 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 § 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. 

§ 905.507 Streamlined application 

requirements for standard and highperforming 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 mixedfinance 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 § 905.505(e); 

(2) A third-party fairness opinion 

under § 905.505(k); 

(3) An assurance of financial controls 

and construction management under 

§ 905.505(l). 

(b) Notwithstanding § 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. 

§ 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 

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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 adequacyof-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. 

§ 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 § 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 

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