# Housing Trust Fund

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-01642

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** January 30, 2015
- **Citation:** 80 FR 5200

## Text

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 91 and 93
[Docket No. FR-5246-I-03]
RIN 2506-AC30
Housing Trust Fund

AGENCY:

Office of the Assistant Secretary for Community Planning and Development, HUD.

ACTION:

Interim rule.

SUMMARY:

The Housing and Economic Recovery Act of 2008 (HERA) establishes a Housing Trust Fund (HTF) to be administered by HUD. The purpose of the HTF is to provide grants to State governments to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low- and very low-income families. This rule establishes the regulations that will govern the HTF. HUD is issuing this rule as an interim rule. It is HUD's intention to open this interim rule for public comment to solicit comments once funding is available and the grantees gain experience administering the HTF program.

DATES:

Effective:
March 31, 2015.

FOR FURTHER INFORMATION CONTACT:

Marcia Sigal, Director, Program Policy Division, Office of Affordable Housing Programs, Office of Community Planning and Development, Department of Housing and Urban Development, 451 7th Street SW., Room 7164, Washington, DC 20410; telephone number 202-708-2684 (this is not a toll-free number). Persons with hearing or speech impairments may access this number through TTY by calling the toll-free Federal Relay Service at 800-877-8389.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

Purpose

This interim rule establishes the regulations that will govern HTF and the formula that will determine how HTF funds are distributed among eligible grantees. The purpose of HTF is to provide grants to State governments to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low- and very low-income families. HERA (Pub. L. 1110-289, approved July 30, 2008) establishes HTF and provides for it to be administered by HUD.

States and State-designated entities are eligible grantees for HTF. Annual formula grants will be made, of which at least 80 percent must be used for rental housing; up to 10 percent for homeownership; and up to 10 percent for the grantee's reasonable administrative and planning costs. HTF funds may be used for the production or preservation of affordable housing through the acquisition, new construction, reconstruction, and/or rehabilitation of nonluxury housing with suitable amenities.

Summary of Major Provisions

This rule contains both the program regulations that establish how the HTF program will be administered and the allocation formula that establishes how grant funds will be distributed to States. The formula allocation, located in subpart B of the rule, codifies language found in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA) (42 U.S.C. 4502
et seq.
), as revised by HERA (see Division A of HERA), and provides for the distribution of funds to the 50 States, the District of Columbia, Puerto Rico, and the Insular Areas. Allocation amounts are based on four need factors as well as a construction cost adjustment factor. The four need factors are found in 24 CFR 93.51(a)-(d). These need factors include: a State's relative shortage of rental housing available to extremely low-income families; a State's relative shortage of rental housing available to very low-income families; the relative number of extremely low-income renter households living in substandard, overcrowded or unaffordable units in a particular State; and the relative number of very low-income renter households living in substandard, overcrowded, or unaffordable units in a particular State. In addition, the State's local cost of construction is factored in as described in § 93.51(e).

The program regulations for HTF are found in subparts C through J of part 93 and closely mirror the regulations for the HOME Investment Partnerships program located in 24 CFR part 92. While HTF specifically targets affordable housing for very low and extremely low-income households, many of the program requirements applicable to the HOME program are similar to those for HTF. Further, each State is a participating jurisdiction in the HOME program, and all States or their designated housing entities will be HTF grantees. Consequently, many of the participation and submission requirements as well as many of the program requirements are modeled on provisions found in the regulations for HOME.

Major provisions in the HTF program regulations include: siting and neighborhood standards; income determinations; eligible costs and activities; project requirements; tenant and homeowner qualification requirements; other Federal requirements; program administration regulations; and quality control provisions. Significant changes from the proposed rule include: removal of a proposed incentive for transit-oriented development; inclusion of guidelines for a recapture provision of homeownership funds; permitting the use of HTF funds for public housing under certain Federal housing programs; and a requirement that all HTF funds be used for extremely low-income housing when HTF is less than $1 billion.

Costs and Benefits

The three primary impacts of this rule include: transfers from the government-sponsored enterprises (GSEs) and/or Treasury to States for investment in low-income housing; distribution among the States based on the formula HUD establishes for the HTF program; and the effects of HUD's program administration requirements. Of these, the largest impact is the infusion of Federal dollars into the affordable housing market.

Congress authorized HTF with the stated purpose of benefiting specific low-income populations by: (1) Increasing and preserving the supply of rental housing for extremely low-income families with incomes between 0 and 30 percent of area median income and very low-income families with incomes between 30 and 50 percent of area median income, including homeless families, and (2) increasing homeownership for very low and extremely low-income families. The formula in this rule is designed to distribute funds primarily to States with a shortage of rental housing affordable to very low and extremely low-income households. Specifically, this program provides funding to add a supply of affordable housing to markets where there is strong evidence of an inadequate supply.

The primary benefits of the HTF program are expected to be similar to the Housing Choice Voucher program. An evaluation of the impact of receiving a housing voucher versus not receiving one has shown that the primary benefit of housing assistance programs is to reduce homelessness and housing cost burdens. Thus, the primary benefit of the HTF program will be the reduction of number of homeless families and

individuals, as well as the number of families paying a disproportionate share of their income for housing in relatively tight housing markets.

HTF is a transfer to the low-income housing sector from the GSEs and/or Treasury. The size of the annual impact is equivalent to the size of the total HTF expenditures, which will vary depending on the amount of GSE business in a given year and any amounts that may be appropriated, transferred, or credited to the HTF under any other provision of law. (See 12 U.S.C. 4568.) There will be no allocation of grants under HTF if there is neither revenue from GSEs nor other funds as provided by HERA.

The formula for distributing among the States is largely determined by the statutory formula in FHEFSSA, which includes the four need factors described above, plus a construction cost adjustment factor. In addition, FHEFSSA directs that each of the 50 States and the District of Columbia are to receive a minimum allocation of $3 million. HUD's policy discretion in choosing the weights for housing needs factors has the impact of redistributing allocations among States. Different States are characterized by different measures of housing needs as well as construction costs. At a national level, however, the discretion has almost no impact because all funds are spent on low-income housing regardless of the State. The transfers are only among States, re-distributing the funds geographically.

Finally, the regulations governing program administration are not expected to have significant economic impacts. Regulations for the HOME program, which, like HTF, also provide grants for construction of low-income housing, served as the model for HTF regulations. Consequently, State grantees are already familiar with HTF's basic compliance requirements and procedures, and will not have to develop significant capacity to participate in the program. A more detailed cost-benefit analysis is provided in the regulatory impact analysis that accompanies this rule.

II. Background

HERA was major housing legislation enacted to reform and improve the regulation of the GSEs—Fannie Mae and Freddie Mac, strengthen neighborhoods hardest hit by the foreclosure crisis, enhance mortgage protection and disclosures, and maintain the availability of affordable home loans. The reform of the GSEs is provided in the Federal Housing Finance Regulatory Reform Act of 2008, which is Division A, Title I of HERA. Section 1131 of Division A amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501
et seq.
) (the Act) to add a new section 1337 entitled “Affordable Housing Allocations” and a new section 1338 entitled “Housing Trust Fund.”

Section 1337 of the Act provides for the HTF (and other programs) to be funded with an affordable housing set-aside by Fannie Mae and Freddie Mac. The total set-aside amount is equal to 4.2 basis points (.042 percent) of the GSEs' new mortgage purchases, a portion of which is directed to the HTF. Under section 1337 of the Act, the Director of the Federal Housing Finance Agency (FHFA), the independent federal agency with oversight of the GSEs, has the authority to suspend Fannie Mae's and Freddie Mac's affordable housing contributions if such contributions were to have an adverse impact on the financial stability of the GSEs, as described in section 1337(b). Shortly after being placed in conservatorship in 2008, the GSEs were instructed by the FHFA to suspend the contributions.

On December 11, 2014, the Director of FHFA issued a letter to the GSEs that reinstated the GSE contributions under section 1337, in accordance with the following terms and conditions (which may be supplemented or modified by specific guidance or directive from FHFA). During each GSE fiscal year (which runs from January 1 to December 31), commencing with the GSE's fiscal year 2015 and in each fiscal year thereafter, each GSE will set aside an amount equal to 4.2 basis points of each dollar of unpaid principal balance of its total new business purchases during the fiscal year for allocation in accordance with section 1337(a) . Within 60 calendar days after the end of each fiscal year commencing with fiscal year 2015 and for each fiscal year thereafter, the GSEs will allocate to the HTF the amount set aside unless during the fiscal year the GSE has made a draw from the Department of the Treasury under the terms of the Senior Preferred Stock Purchase Agreement (SPSPA) or unless the allocation would cause the GSE to have to make a draw from the Treasury Department under the terms of the SPSPA. If the GSE has made a draw from the Department of the Treasury under the terms of the SPSPA during fiscal year 2015 or makes a draw during a subsequent fiscal year or if the allocation would cause the GSE to make a draw for that fiscal year, the GSE will make no allocation for the fiscal year for which the draw was made or for any fiscal year in which it is determined that the allocation would cause a draw, and the set aside will be reversed for that fiscal year.

The letter from FHFA also noted that although the profit levels the GSEs experienced since 2012 are not expected to be sustainable, reasonable projections indicate that the GSEs will remain profitable for the foreseeable future. FHFA continues to monitor the financial condition of the GSEs and retains the authority to revise or reverse the decision at any time in accordance with the provisions of section 1337(b). Accordingly, HUD is proceeding with this rule to implement the HTF.

Congress authorized the HTF with the stated purpose of: (1) Increasing and preserving the supply of rental housing for extremely low-income (ELI) families with incomes between 0 and 30 percent of area median income and very low-income (VLI) families with incomes between 30 and 50 percent of area median income, including homeless families, and (2) increasing homeownership for ELI and VLI families. HUD's periodic reports to Congress on worst-case needs for affordable rental housing document that shortages of affordable rental housing for ELI and VLI families have grown more severe. A household defined as experiencing worst-case housing needs means that the household has an income at or below 50 percent of the area median income, receives no housing assistance, and has a severe rent burden (paying more than half of its income for rent) and/or lives in severely inadequate conditions (
e.g.,
incomplete plumbing). As of 2011, the combined number of ELI and VLI renters with worst-case housing needs was 8.48 million, or 44 percent of all ELI and VLI renters (19.27 million). Because extremely low income households also constitute by far most (61.1 percent) very low-income renters, nearly three out of four (73.3 percent) households with worst case needs had extremely low incomes during 2011.
1

1
See HUD's Worse Case Housing Needs 2011 Report to Congress at
http://www.huduser.org/portal//Publications/pdf/HUD-506_WorstCase2011_reportv3.pdf.
See page 7.

There is a documented shortage of low-cost rental units, as builders and housing providers are unable to construct, finance, and operate a sufficient supply of rental housing affordable to ELI and VLI households. In 2011, for every 100 ELI renters, on average, there were only 36 affordable units available, and for every 100 VLI renters nationwide, only 65 rental units

available.
2

The HTF will provide funds to produce additional units affordable to ELI and VLI households with the greatest need, thus increasing the supply and reducing the most critical component of the existing shortage.

2
See HUD's Worse Case Housing Needs 2011 Report to Congress at page 9.

Housing Trust Fund—Formula Allocation

Section 1338 of the Act directs HUD to establish, through regulation, the formula for distribution of amounts made available for the HTF. The statute specifies that only certain factors are to be part of the formula, and assigns priority to certain factors. HUD's proposed formula for the allocation of HTF funds was published for public comment on December 4, 2009, at 74 FR 63938.

Housing Trust Fund—Administration of the Fund

In addition to the statutory direction to establish by regulation a formula for the allocation of HTF funds, section 1338 of the Act directs HUD to establish and manage the HTF, the purpose of which is to provide grants to States for use to: (1) Increase and preserve the supply of rental housing for ELI and VLI families, including homeless families; and (2) increase homeownership for ELI and VLI families. Section 1338 of the Act also directs HUD to establish regulations to administer the HTF, and this rule presents the regulations that will govern the HTF, on an interim basis, as provided in the Summary of this rule.

HUD's proposed rule for the administration of the HTF funds was published for public comment on October 29, 2010, at 75 FR 66978. HUD proposed to codify the HTF regulations in a new subpart N of 24 CFR part 92. Part 92 contains the regulations for HUD's HOME Investment Partnerships program (HOME program). The HOME program is the largest federal block grant program that produces affordable housing for very low-income households. The HOME program provides formula grants that communities use, often in partnership with local nonprofit groups, to fund a wide range of activities that build, buy, and/or rehabilitate affordable housing units for rent or homeownership. The HTF will operate in substantially the same manner, by providing formula grants to States used to develop affordable housing units for rent or homeownership. In addition, the grant activities in both programs require the same grantee administration and HUD oversight functions.

III. Overview of Key Changes Made in Interim Rule

This interim rule largely adopts the provisions of the proposed rule, although HUD is making some changes based on public comments and other considerations. The following highlights key changes made to the proposed rule at this interim rule stage:

• The HTF regulations will be codified in a new part 93. While the HTF regulations have been synchronized with the HOME program regulations for the reasons set forth in the preamble to the proposed rule, HUD agrees with commenters that it would be clearer to place the HTF regulations into a new 24 CFR part. Therefore, the HTF formula allocation and program administration regulations are now found in 24 CFR part 93.

• The HTF proposed rule was published prior to the publication of the HOME final rule. (The HOME final rule published on July 24, 2013, at 78 FR 44638.) In order to synchronize the applicable requirements of the HTF regulations with those of the HOME regulations, HUD has revised several provisions in the HTF proposed rule. The proposed provisions revised by this interim rule include definitions, eligible costs, eligible administrative and planning costs, property standards, inspections, income determinations, tenant protections and selections. For some of the proposed provisions revised, only minor word changes were made so that the language in the HTF regulations matches the HOME regulations, while in other sections the exact language of certain HOME regulations was incorporated in the HTF regulations.

• HUD removed the proposed regulatory sections on property standards (§§ 92.741-92.745) that require HTF units to meet Energy Star and Water Sense certifications. Since issuance of the HTF proposed rule and the HOME program final rule, HUD proposed, in a notice published in the
Federal Register
on April 15, 2014, at 79 FR 21259, to adopt revisions to the 2006 International Energy Conservation Code (IECC) and to the 2004 energy codes of the American Society of Heating, Refrigerating, and Air-conditioning Engineers (ASHRAE), and apply these revised standards to the HUD programs covered by the Energy Independence and Security Act of 2007 (EISA). The covered HUD programs include the HOME program, and HUD also applies these standards to HTF to synchronize with the standards to be applied to the HOME program.

• At the proposed rule stage, HUD proposed to facilitate the use of HTF funds in transit-oriented development by proposing a different definition of commitment of HTF funds for transit-oriented development projects. HUD removes this definition in this interim rule and instead grantees will determine how best to use HTF funds in transit-oriented development projects within the requirements for commitment and allocation plans established in this rule.

• HUD adds a process by which minimum grant awards will be determined if the amount of funds in the HTF, in any given fiscal year, is insufficient to award each grantee a minimum grant of $3 million.

• The HTF regulations regarding operating cost assistance and operating cost reserves have been modified. In response to public comment to allow more flexibility for grantees to provide operating cost assistance, the limit on the amount of operating cost assistance and operating cost reserves that a grantee may award from its annual grant was increased from 20 percent to one third. In addition, the requirements for operating cost reserves will differ depending on the source of funds for the HTF. For non-appropriated funds (
i.e.,
the allocations from Fannie Mae and Freddie Mac) that become available for the HTF formula distribution, grantees will be allowed to fund operating cost reserves at the amount required for a period of up to 30 years (the term for the period of affordability for each HTF-assisted project). However, if appropriated funds become available for HTF, grantees will be allowed to fund operating cost reserve for a period of no more than five years, as provided in the proposed rule and retained in this interim rule. At the proposed rule stage, HUD did not propose to allow use of HTF funds for public housing. This interim rule allows the use of HTF funds (1) in connection with the Choice Neighborhoods (Choice), and low-income housing tax credit (LIHTC) programs for construction of new units that replace existing public housing properties; and (2) for the rehabilitation of existing public housing units in connection with the Rental Assistance Demonstration, Choice and LIHTC programs.

IV. Discussion of Public Comments and HUD Responses

The public comment period for the proposed formula rule closed on February 2, 2010. HUD received 13 public comments on the proposed formula rule. Commenters included

local housing and community development agencies, housing groups, housing authorities, trade associations, and individuals. A majority (eight) of the commenters wrote in support of the rule or portions of it, including a national advocacy organization that fully endorses the proposed rule. HUD is not addressing these favorable comments because they do not raise issues which require a response. Other comments are discussed below. The public comments on the proposed formula rule can be found at:
http://www.regulations.gov/#!docketDetail;D=HUD-2009-0149.

The public comment period for the proposed program rule closed on December 28, 2010. HUD received 93 comment letters; commenters included State and local housing and community development agencies, housing groups, housing authorities, trade associations, and individuals. The comment letters included general comments about the proposed rule and statutory requirements for the HTF, as well as suggestions for changes to specific provisions in the proposed rule. The public comments on the proposed program rule can be found at:
http://www.regulations.gov/#!docketDetail;D=HUD-2010-0101.

Issues raised in public comments on the proposed formula and proposed program rule and HUD's responses to these comments follow.

Part 91—Consolidated Submissions for Community Planning and Development Programs (Consolidated Plan Revisions)

The proposed program rule proposed to make conforming changes to the Consolidated Plan regulations at 24 CFR part 91 to require information related to the HTF to be included in State or local government strategic and annual action plans. As stated at § 91.220 and § 91.320, HUD proposed to require that the action plan must include the HTF allocation plan.

Comments:
HUD received several comments which suggested additional required elements be added to the allocation plan, including: National standards for green, healthy, sustainable development will be met by HTF units; caps on operating assistance; transit-oriented development projects; an explanation of the State's decision to use subgrantees, criteria for selecting subgrantees, and a method for distributing funds among subgrantees. One commenter suggested that HUD require the allocation plans for HTF funds to specifically prioritize transit-oriented development. One commenter suggested specific revisions to the language for the sake of further clarity, such as cross references between the definition of HTF funds at § 92.702 in § 92.220(l)(4)(i) and § 92.320(k)(5)(I). A commenter suggested that HUD require, at § 92.725(c), that the subgrantee's HTF allocation plan be consistent with the State's HTF allocation plan.

Similarly, a commenter suggested that HUD revise § 92.220(l)(4)(i) and § 92.320(k)(5)(i) so that they have identical language and requirements. One commenter suggested that the housing market characteristics in the HTF formula be added to the general housing market characteristics required in the consolidated plan at § 92.210(a) and § 92.310(a). Another commenter recommended that the rule require HTF allocation plans to certify that the HTF funds will not be subject to State or local laws and policies that impose requirements for subsidized housing development that exceed the requirements for similar residential development not involving subsidies. Two commenters stated that the proposed rule should not restrict the types or locations of HTF units, but instead should retain maximum flexibility to meet local needs.

HUD Response:
HUD appreciates the concern expressed by commenters that HTF allocation plans at the State and local level mirror each other so that the HTF funds expended are targeted to the needs identified in the state plans. However, it is possible that a State or State-designated entity would provide HTF funds to different subgrantees for different types of projects and programs throughout the state to address various needs. In these situations, having identical State and local plans would not be practicable. To address these concerns, rather than modifying part 91 requirements related to HTF allocation plan, at this interim rule stage, HUD modified language at § 93.404 (§ 92.774 of the proposed rule) to require that grantees include executed written agreements with subgrantees that specify allowable programs and requirements.

An explanation of the State's decision to use subgrantees, criteria for selecting subgrantees, and method for distributing funds among subgrantees are required at § 91.320(k)(5). The housing market characteristics used in the HTF formula are reflected in the analyses required in the consolidated plan. In response to comments about the locations where HTF funds will be used, HUD notes that the HTF statute does not preempt State or local law, and the regulation cannot prevent the use of HTF funds in places that impose requirements on subsidized projects that are not in violation of Federal laws.

General Comments on Promulgation of the HTF Regulations as Subpart N of Part 92 of the Proposed Rule

HUD specifically solicited input from HTF grantees and interested parties on HUD's proposed coordination of the HOME program and HTF regulations, as well as additional or alternative ways to better coordinate and use HTF funds with funding from other Federal, State, local programs, or private sources typically used to produce mixed-income affordable housing developments.

Comments:
Some commenters expressed concern that by including HTF regulations in Subpart N of the HOME program regulation, the HTF program will lack an identity as a separate program.

HUD Response:
HUD agrees with commenters that the regulations should be located in a new part 93, as this approach highlights HTF as a separate program, and this rule codifies the regulations in new part 93. However, many of the requirements are the same for both the HOME and HTF programs (
e.g.,
administrative requirements; monitoring, site and neighborhood standards; and affirmative marketing), therefore, in moving the HTF regulations as proposed in part 92 for the HTF to part 93, HUD repeated the requirements in the HOME rule that also apply to the HTF.

Several commenters also called for streamlining between HTF and other programs and asked that HUD avoid duplicative requirements. Because many HTF grantees also administer the HOME program, streamlining the regulations this way will help grantees avoid having to create entirely new or separate structures to administer HTF funds, and this may help grantees develop and deliver more affordable housing sooner to households and communities in need.

In addressing public comments on specific provisions in the proposed rule, this preamble will refer to the regulatory sections as they were originally proposed in part 92. The following table matches the proposed rule sections with the new sections in this interim rule:

Proposed
Final
Subject

Subpart A—General

92.701
93.1
Overview.

92.702
93.2
Definitions.

92.703
93.3
Waivers.

Subpart B—Allocation Formula; Reallocations

92.710
93.50
Formula Allocation.

92.711
93.51
Formula Factors.

92.712
93.52
Minimum State Allocations.

92.713
93.53
Federal Register Notice of Formula Allocations.

92.714
93.54
Reallocations by Formula.

Subpart C—Participation and Submission Requirements; Distribution of Assistance

92.720
93.100
Participation and Submission Requirements.

92.725
93.101
Distribution of Assistance.

Subpart D—Program Requirements

92.726
93.150
Site and Neighborhood Standards.

92.727
93.151
Distribution of Assistance.

Subpart E—Eligible and Prohibited Activities

92.730
93.200
Eligible Activities: General.

92.731
93.201
Eligible Project Costs.

92.732
93.202
Eligible Administrative and Planning Costs.

92.734
93.203
HTF Funds and Public Housing.

92.735
93.205
Prohibited Activities and Fees.

Subpart F—Income Targeting

92.736
93.250
Income Targeting: Rental Units.

92.737
93.251
Income Targeting: Homeownership.

Subpart G—Project Requirements

92.740
93.300
Maximum Per-Unit Subsidy Amount, Underwriting, and Subsidy Layering.

92.741
93.301
Property Standards.

92.746
93.302
Qualification as Affordable Housing: Rental housing.

92.747
93.303
Tenant Protections and Selection.

92.748
93.304
Qualification as Affordable Housing: Homeownership.

92.749
93.305
Qualification as Affordable Housing: Modest Housing Requirements for Homeownership.

92.750

Subpart H—Other Federal Requirements

92.760
93.350
Other Federal Requirements and Nondiscrimination; Affirmative Marketing.

92.761
93.351
Lead-Based Paint.

92.762
93.352
Displacement, Relocation, and Acquisition.

92.763
93.353
Conflict of Interest.

92.764
93.354
Funding Accountability and Transparency Act.

Subpart I—Program Administration

92.770
93.400
Housing Trust Fund (HTF) Accounts.

92.771
93.401
HTF Grant Agreement.

92.772
93.402
Program Disbursement and Information System.

92.773
93.403
Program Income and Repayments.

92.774
93.404
Grantee Responsibilities; Written Agreements; Onsite Inspections; Financial Oversight.

92.775
93.405
Applicability of Uniform Administrative Requirements.

92.776
93.406
Audit.

92.777

Closeout.

92.778
93.408
Recordkeeping.

92.779

Performance reports.

Subpart J—Performance Review and Sanctions

92.780
93.450
Accountability of Recipients.

92.781
93.451
Performance Reviews.

92.782
93.452
Corrective and Remedial Actions.

92.783
93.453
Notice and Opportunity for Hearing; Sanctions.

Definitions Proposed § 92.702; Final § 93.2

In § 92.702(a), HUD proposed that several definitions in the HOME program regulations (24 CFR 92.2) be applicable to the HTF. In § 92.702(b), HUD outlined key definitions applicable to the HTF, including: “Commitment,” several definitions related to energy efficiency, “Grantee,” “Recipient,” “State,” “State-Designated Entity,” and “Subgrantee.” HUD received several comments regarding the language proposed to define terms applicable to the HTF.

Commitment

To facilitate transit-oriented development projects, the proposed definition of “commitment” permitted a unit of general local government to acquire the land for a transit-oriented development project in advance of having specific project plans. Specifically, HUD proposed that the unit of general local government must hold title to the land for the transit-oriented development project; the proposed rule allowed 36 months from the date of acquisition of the property for a transit-oriented development project to commit additional funds to a specific project on the property.

Comments:
HUD received several comments regarding this proposed definition of and deadline for “commitment” for transit-oriented development projects. Some commenters suggested the deadline to commit additional funds to transit-oriented development should be extended to 42 months, while others suggested 48 months, and one commenter suggested 60 months. Another commenter suggested that the commitment deadline for transit-oriented development should be less than 36 months.

Some commenters stated that the proposed definition of “commitment” for transit-oriented development should be revised to allow non-local government entities to commit the few funds necessary to comply with the rule and two commenters suggested that these non-local government entities be allowed to hold title to the transit-oriented development property. A few commenters stated that the rule's emphasis on transit-oriented development gives preference to urban areas, and asked that the rule provide a framework for balancing transit-oriented development goals with rural areas that have limited or no transit services. Commenters asked HUD to instruct States to give the same priority to developments meeting the greatest rural needs as is given to transit-oriented development in urban areas. Some commenters stated that the rule should not mandate that all projects be located in a sustainable community since some States do not have fully developed transit systems, and the rule should provide flexibility to meet the varying needs of States.

Another commenter suggested that the rule should require a minimum percentage of HTF funds be expended for transit-oriented development and mixed-income housing development. A few commenters supported allowing HTF funds to be used in combination with other government programs to leverage sources for creating a transit-oriented development land acquisition or land bank program. A commenter proposed a more detailed definition for transit-oriented development that is intended to better target developments that promote transit ridership and reduce motor vehicle trips, remove the requirements for mixed-use and mixed-income development, require that developments within transit-oriented development be along a walkable route, and clarify what constitutes a “transit facility.” A few commenters suggested various methods to incentivize development of housing for ELI families in transit-oriented development projects that are accessible to transit and employment centers.

Several commenters expressed concern over potential abuses of the different commitment deadlines and asked HUD to include additional requirements in the final rule to ensure that grantees do not tie up funds,
e.g.,
to prevent local governments from using HTF funds to serially purchase land and hold it as if “land banking.” Some commenters stated that the rule should require that if the original land purchased is not used for ELI households, then the recipient must place the planned ELI housing within the same transit-oriented development area. A few commenters stated that the rule should also require that the correct zoning be in place before property is purchased for transit-oriented development, and one commenter suggested that the final rule include specific parameters for when property acquisition for transit-oriented development would be permissible. Finally, one commenter requested that the definition of “commitment” include a mechanism to ensure project completion, such as deadlines, progress schedules, or a recapture mechanism.

HUD Response:
HUD appreciates the comments regarding how HUD may provide incentives to encourage the use of HTF funds to develop housing affordable to ELI households that is also accessible to transit and employment centers. However, HUD acknowledges and agrees with the concerns expressed by many commenters that a separate commitment deadline for HTF funds used in transit-oriented development may cause a decrease in the amount of HTF units produced.

Transit-oriented development is not required in the HTF statute or regulations. As proposed, § 92.725 stated that grantees are responsible for distributing HTF funds throughout the State according to the State's assessment of the priority housing needs within the State, as identified in the HTF allocation plan, which is part of the State's consolidated and annual action plan. These plans contain several analyses of priority housing needs. Based on these identified priority needs, grantees may choose to prioritize development of HTF-assisted units near transit access and sustainable development.

HUD agrees with commenters that the separate definition of commitment for transit-oriented development could lead to “land banking.” Land acquisition for banking purposes is not an eligible activity in the HTF statute, and HUD does not seek to encourage the use of HTF funds for “land banking.” Based on the comments received, HUD decided that use of HTF funds in transit-oriented development projects is best addressed at the State and local level, and that it is not necessary at this time to establish a separate definition or deadline related to the use of HTF funds for transit-oriented development projects. Each grantee may include incentives and priorities in its HTF allocation plan to further promote sustainable development that is appropriate to the local communities where housing developed with HTF funds will be located.

This rule, at § 93.2, eliminates the separate definition of commitment for transit-oriented development.

State-Designated Entity, Grantee, Recipient

In the proposed rule, a State-designated entity was defined as a State housing finance agency, tribally designated housing entity, or any other qualified instrumentality of the State that is designated by the State to be the grantee.

Comments:
One commenter recommended that the definition of “State-designated entity” be revised to include “housing community development entity.” A commenter stated that the definitions of “grantee” and “recipient” should be consistent between HOME and HTF. Other commenters suggested that the rule be revised to explicitly state that public agencies, local governments, public housing authorities, non-profit entities, and for-profit entities are eligible recipients.

HUD Response:
The terms “state-designated entity” and “recipient” are defined in the statute. This rule includes examples of the types of entities, such as public housing agencies, that may be eligible recipients providing that they meet the statutory qualifications for a recipient.

Extremely Low- and Very Low-Income Families

The HTF statute contains definitions of extremely low and very low-income families based on percent of median income, with adjustments for family size (30 percent of area median income (AMI) for extremely low and 50 percent of AMI for very low income).

Comments:
Some commenters stated that the proposed definitions of “very low-income families” and “extremely low-income families” are inconsistent with the statute. A few commenters requested HUD provide a definition of “rural area” in the definition of “very low-income families.” Other commenters suggested that the HTF should adopt the definition of “family” as used in the HOME program. A commenter requested the term “household” replace “family” throughout the rule.

HUD Response:
While the terms “family” and “household” do not have the same meaning (a “household” can comprised more than one family), HUD acknowledges that the terms are sometimes used interchangeably in statute, regulation and guidance (
i.e.,
HOME uses the part 5 definition of “family” at 24 CFR 5.403, and defines household as one or more persons residing in a unit).

HUD agrees with commenters that the HTF statute does not allow for the same adjustments in income as in the HOME program and modified the regulatory language at § 93.2 (from § 92.702 of the proposed rule) to reflect only the adjustments allowed by the HTF statute.

For the purposes of the definition of very low-income families, in this interim rule, HUD defines the term “rural” based on the term “metropolitan” as defined by the Office of Management and Budget. All “non-metropolitan ” areas will be considered “rural.”

Allocation Formula Proposed § 93; Final § 93, Subpart B

Comments:
A commenter states that the need factors should be weighted equally to ensure fair distribution of resources. Another commenter specifically supports the 50 percent weight assigned to factor 1 (shortage of units), and the 25 percent weight assigned to factor 3. A commenter states, in the absence of information about how much of an increase California would receive compared to the proposed allocation, and the substantial housing needs of California's low and very low-income population, that the factors should be weighted in accordance with alternative three, under which the first factor would be weighted at 60 percent and the other factors weighted at 13.3 percent. Another commenter states that the extremely low-income focus of this program means that it should be a key resource for assisting the homeless, and the formula allocation should reflect that priority.

HUD Response:
Section 1338(c)(3)(C) of the Act requires the formula to give priority emphasis and consideration to the first factor in section 1338(c)(3)(B)(i), and therefore the factors cannot be weighed equally. The proposed rule reflected this priority consideration by weighting this factor higher than the other factors in the proposed allocation formula. The interim rule is adopting the proposal that the two factors addressing the needs of extremely low-income households, Factors 1 and 3, have a combined weight of 75 percent in keeping with the statutory targeting of funds.

The Regulatory Impact Analysis (RIA) for the formula allocation HTF proposed rule was issued on December 4, 2009, and can be found on HUD's Web site (
http://www.huduser.org/portal/publications/pubasst/riaforhtf.html
). The RIA describes in detail the alternative weight structures that HUD analyzed in developing the HTF allocation formula, the resulting impacts of each alternative on the States, and the analysis that supports HUD's selection of the alternative in the proposed allocation formula. The proposed formula strikes a balance between the high levels of housing needs in California and other States, as well as the competing priorities discussed in the RIA.

An extremely low-income household, by statutory definition, means a household whose income does not exceed 30 percent of the area median income, with adjustments for family size. Homeless individuals and families who qualify as extremely low-income will be eligible for HTF units. The combined weight of 75 percent for the two factors that address the needs of extremely low-income households, factors one and three, reflects the statutory targeting of funds to extremely low-income households in the proposed formula. Furthermore, section 1338(a)(1)(A) of the Act specifically states that the purpose of the HTF is “to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families . . .”

Data Used in the Allocation Formula

Comments:
A commenter states that homeless households should be included in the aggregate number of extremely low-income renter households to determine the true need. Data are readily available from Continuum of Care (CoC) programs and the Homeless Management Information System (HMIS). Another commenter states that more detail is needed on the sources of data the proposed formula uses. A commenter states that HUD should state exactly which American Community Survey data it will use, whether such data will be updated and used every year, and at what point 2010 Census data will be used. The commenter also states that HUD should clarify which RSMeans Cost Survey data will be used, and recommends data specific to multifamily construction. This commenter states that HUD should advise what sampling method will be used. Whatever method is used, the commenter stated that HUD should recognize that most multifamily construction is in the higher-cost areas.

HUD Response:
The proposed allocation formula incorporated the required statutory factors in section 1338(c)(3)(B). Consistent with the Community Development Block Grant (CDBG) and HOME formulas, the data source used to determine the number of extremely low-income renters with housing problems for factor three will be the most currently available data

from the United States Census Bureau.
3

For HTF allocations in Fiscal Year (FY) 2016, the most current data will be a special tabulation of the latest available three-year average data from the American Community Survey.
4

Census standard tabulation data do not provide counts of households by the income breaks required by statute so HUD must request a special tabulation of American Community Survey data to calculate the HTF formula. HUD is using the three-year average data to avoid problems with year-to-year bias in the data caused by small samples in some of the smaller population states. These data do not include homeless individuals and families.

3
See
http://www.census.gov/housing/.

4
See
http://www.census.gov/acs/www/data_documentation/data_main/.

HUD appreciates the commenter's view that homeless families should be included in the count of extremely low-income families. HUD has considered the idea of including CoC counts or (HMIS) counts of homeless people in the counts for extremely low-income. HUD has decided not to implement these suggestions for two reasons:

• Inconsistent and incomplete data. Neither CoC nor HMIS data are complete for all parts of the country and the method of data collection is somewhat different from place to place. That makes the data poorly suited for an allocation formula because they do not have full national coverage and different data collection methods may result in bias toward one place over another.

• Incentive bias. Even when the data have full coverage, HUD is unlikely to use CoC or HMIS data for any allocation formulas because the data are being reported by grantees. HUD is concerned that some grantees may adjust their method of reporting if they perceive they might get a different funding allocation based on that reporting.

The RSMeans construction cost data used in the formula are the RSMeans Square Foot Costs. Specifically, HUD used city-level location factors for residential construction to prepare state-level estimates of the relative cost of residential construction. In developing these State estimates, HUD did not select a subset or sample of cities. Rather, every city with a published location factor was included, and location factors were weighted in proportion to city populations. Data are not available for rural areas or for multifamily residential construction specifically. However, because construction costs are generally higher in population centers, HUD believes that the methodology adequately accommodates the commenter's concern about multifamily construction in costly areas. High-cost areas are reflected in the use of urban data to prepare State estimates as well as by the use of population weighting to ensure that the most populated cities receive their due priority. HUD intends to use the most recent available cost data and population data in developing future estimates.

Minimum Allocations

The interim rule contains a new provision to address minimum grant allocations. As noted earlier in this preamble, section 1338(c)(4)(C) of the Act directs that each of the 50 States and the District of Columbia is to receive a minimum grant of $3 million. This section of the statute further provides that if the formula amount determined in any fiscal year would result in an allocation of a minimum grant of less than $3 million to any of the 50 States or the District of Columbia, the allocation for any such State or the District of Columbia shall be allocated a minimum grant of $3 million, and the increase shall be deducted pro rata from the allocations made to all the other States.

The Act did not envision a situation in which the HTF lacked sufficient funds to award each of the 50 States and the District of Columbia a minimum grant of $3 million. After the deposits are made to the HTF for a fiscal year, section 1338(c)(4)(B) of the Act requires HUD to make allocations to its grantees. To give meaning to both of these statutory sections, HUD interprets the statute to require the allocation of grants even if the grants are less than the $3 million minimum. If the amount for a fiscal year is insufficient to provide the minimum allocations, HUD will publish a notice in the
Federal Register
for comment, describing an alternative allocation method.

Participation and Submission Requirements; Distribution of Assistance Proposed §§ 92.720-92.725; Final §§ 93.100-101

Allocation Plan/Participation and Submission Requirements § 92.720

In § 92.720, HUD proposed requiring each State to notify HUD of its intent to participate in the HTF program and to have a consolidated plan that contains its HTF allocation plan required by the Act. HUD proposed to implement the requirement for an HTF allocation plan by amending its regulations in 24 CFR 91.220 and 91.320 to include these requirements in the consolidated plans of grantees and, where applicable, subgrantees. Section 92.720 of the proposed rule directed States to include the HTF allocation plan in the consolidated plan and follow the citizen participation requirements found in the consolidated plan regulations in 24 CFR part 91.

Comments:
Several commenters expressed concern that the proposed requirements do not place enough emphasis on public participation and transparency.

HUD Response:
HUD recognizes the commenters' concerns but believes the requirements adopted in this rule provide for sufficient public input on the allocation of HTF funds without the need for additional or new citizen participation requirements. Section 92.720(b) of the proposed rule directed States to include the HTF allocation plan in the consolidated plan and follow the citizen participation requirements in the consolidated plan regulations in 24 CFR part 91. The HTF allocation plan must consider the merits of the application in meeting the priority housing needs of the State. The rule provides flexibility to allow each grantee to include incentives and priorities in its HTF allocation plan that are appropriate to the communities where housing developed with HTF funds will be located.

The language is adopted in this rule as proposed.

Distribution of Assistance: HTF Grantees, Subgrantees, and Recipients § 92.725

HUD proposed that a formula grant be provided to each State for each year that funds are made available for the HTF. In § 92.725, HUD described the proposed ways HTF funds will flow to the communities and recipients, as well as the participation and submission requirements for grantees receiving an HTF allocation.

Comments:
Some commenters suggested that HTF funds should be allocated directly to municipalities and local participating jurisdictions, as is done with other Community Planning and Development programs (
e.g.,
HOME, CDBG, Emergency Solutions Grants) because States may be unsuited to determine local housing priorities and unable to effectively administer the HTF. In addition, they stated that passing the funding through the State delays the use of funds at the local level, and local governments are more in tune with local needs.

Several commenters stated that HUD's rule should ensure adequate allocation to rural areas, and that allocations should be made based on the relative or proportional need of frontier, rural, and

urban areas. A few commenters suggested that the final rule should require funding to be allocated by formula to areas of greatest need, and adjusted for high-cost living areas and the lack of affordable housing.

HUD Response:
States and State-designated entities are the only permissible grantees in the HTF statute. HUD does not have the authority to designate local governments as grantees. An HTF grantee may choose to distribute HTF funds through one or more subgrantees. A subgrantee may be a State public agency or a unit of general local government. Section 91.320(k)(5) requires the action plan to reflect the State's decision to distribute HTF funds through grants to subgrantees, and § 92.725(d) requires the grantee to ensure that its subgrantees comply with the HTF requirements and carry out the responsibilities of the grantee. The HTF allocation formula is statutorily prescribed and HUD does not have the authority to change the allocation method. However, as described in § 92.725(b), each grantee is responsible for distributing HTF funds throughout the State according to the State's assessment of the priority housing needs within the State, as identified in the State's approved consolidated plan (which will include the HTF allocation plan). The HTF allocation plan must describe the distribution of the grant and priority housing needs, including rural housing needs.

The language is adopted in this rule as proposed.

Program Requirements Proposed §§ 92.726-92.727; Final §§ 93.150

Site and Neighborhood Standards § 92.726

In § 92.726, HUD proposed that the site and neighborhood standards contained in the HOME program regulations at § 92.202 apply to the HTF.

Comments:
A commenter suggested that HUD adopt all the site and neighborhood standard criteria applicable to existing housing being considered for project-based vouchers rather than limiting the criteria to new construction projects. The commenter reasoned that HTF, unlike HOME, will fund rehabilitation projects. Another commenter suggested that HUD's rule include a provision that requires site selection to occur in a manner that will not exclude people with disabilities. A commenter stated that the rule should allow HTF funds to be held when local opposition has delayed a project or when exclusionary zoning is being challenged.

HUD Response:
HUD is adopting the site and neighborhood standards from § 92.202 of the proposed rule in new § 93.150, with an updated cross-reference to the applicable standard for new construction projects at 24 CFR 983.57(e). As with the HOME program, HUD is not applying site and neighborhood standards to rehabilitation projects under HTF. However, if project-based vouchers are used in an HTF rehabilitation unit, the site and neighborhood standards for project-based vouchers will apply. In addition, the requirements of 24 CFR part 8 (which implement section 504 of the Rehabilitation Act of 1973) apply to the HTF, and specifically address the site selection with respect to accessibility for persons with disabilities.

Income Determinations § 92.727

In § 92.727, HUD proposed a definition for “annual income” and described the process for determining the annual income of tenants and homebuyers for eligibility in HTF-assisted housing.

Comments:
A commenter requested the proposed language be revised to further clarify which set of income determination provisions are applicable to the HTF. Another commenter recommended that HUD's rule allow residents and applicants to contest income determinations. Another commenter expressed concern that the use of the Enterprise Income Verification can pose a problem for recently institutionalized persons, as it can cause significant delays.

HUD Response:
HUD appreciates the suggestions but the income determination provisions provided in this HTF rule are those that HUD uses in its HOME program rule, which HUD believes work well. Therefore HUD is not inclined to change these provisions. The income determinations will be made in accordance with the HTF program requirements, which mirror the HOME program requirements, and do not involve the use of the Enterprise Income Verification system.

Eligible and Prohibited Activities Proposed §§ 92.730-92.735; Final §§ 93.200-93.205

In §§ 92.730-92.735, HUD proposed requirements that govern eligible and prohibited activities, eligible project costs, and planning and administrative costs. Allowable and prohibited fees were also addressed in these sections.

Eligible Activities § 92.730

In § 92.730, HUD set forth HTF-eligible activities. Section 1338(c)(7)(A) of the Act provides that HTF funds may be used for assistance for the production, preservation, rehabilitation, and operating costs of rental housing. To achieve the goal of using HTF funds primarily for the production of new affordable units, HUD proposed to limit the amount of HTF funds that may be used for operating cost assistance to 20 percent of each annual grant.

Section 1338(c)(7)(B) provides that the production, preservation, and rehabilitation of housing for homeownership, including forms of down payment assistance, closing cost assistance, and assistance for interest rate buy-downs, are eligible activities. HTF funds may be used only for units that will be the principal residence of eligible families who are first-time homebuyers.

Section 1338(c)(10)(A) of the Act provides that not more than 10 percent of the annual grant may be used for homeownership activities. If a grantee chooses to implement a homeownership program with HTF funds, HUD proposed requiring grantees to perform underwriting analysis.

Eligible Activities: General § 92.730(a)

Comments:
HUD received several comments which suggested the rule expand the list of eligible activities. A commenter stated that HUD's rule should allow for HTF funds to be used in projects already underway. Another commenter suggested HUD add explicit language clarifying that HTF funding may be used in mixed-income developments. A few commenters suggested that HUD's rule permit HTF funds to be used for development costs associated with laundry facilities and community space located in buildings which are separate from residential space. A commenter requested additional clarification regarding the prohibition on charging laundry access fees does not impact the ability to impose reasonable charges for the use of a washer or dryer. Another commenter recommended that HUD's rule include language that provides a basis for charging impact fees, and clarifies “reasonable and necessary costs.” A commenter asked for a definition of “non-luxury,” and stated that this requirement, as it applies to construction costs, is impractical to apply. Another commenter suggested that HUD allow grantees to charge property owners monitoring costs for the entire period of affordability up front and include monitoring costs as an eligible use of HTF funds. A commenter recommended that refinancing costs be included as an eligible cost.

Several commenters objected to allowing transitional housing as an eligible activity because it does not meet the intent of increasing access to rental properties available to ELI households and does not appear in the authorizing statute. Another commenter expressed concern that there may be conflicts between fair housing laws and transitional housing plans impacting people with disabilities.

Another commenter stated that there should be a greater focus on homeownership in the final rule, and that downpayment assistance programs should constitute an eligible use of HTF funds. A few commenters opposed the first-time homebuyer restriction and recommend the final rule permit the rehabilitation of ELI owner-occupied homes as a more effective means of addressing homeownership for ELI households. Other commenters recommended HUD's rule stress the voluntary nature of using 10 percent of HTF funds for homeownership activities.

HUD Response:
This rule makes clear that projects underway when the HTF rule is implemented are not eligible to receive HTF funds. HUD does not agree that HTF funds should be permitted to pay costs for constructing community space or laundry facilities in buildings that are separate from the residential space. Although it is sometimes necessary to provide such space in separate buildings, HUD believes that States should leverage other funds to pay such costs so that HTF funds are used to create as many ELI and VLI units as possible. Nothing in this interim rule prohibits reasonable charges for washing machines.

HUD does not believe that inclusion of a definition of non-luxury in the HTF rule is practical, as amenities considered luxury change over time. For example, air conditioning in certain HUD-assisted housing was considered a luxury item at one time. HTF grantees have experience with ensuring that only non-luxury items are included in housing because they also administer the HOME program, which has similar requirements.

HUD has reconsidered making transitional housing an eligible type of housing in the HTF and agrees with commenters that this type of housing is contrary to the primary purpose of the HTF, which is to increase the supply of permanent affordable housing. Transitional housing is frequently developed to address the needs of homeless persons, to provide housing assistance and services that will enable them to obtain permanent affordable housing. The language in this section was revised to delete transitional housing as an eligible type of housing.

Monitoring is an eligible administrative cost. This interim rule does not allow grantees to charge property owners monitoring costs for the entire period of affordability “up front” as suggested by commenters but does permit HTF grantees to charge property owners monitoring fees (see § 93.205).

Rehabilitation of housing for existing homeowners is not an eligible activity in the statute. The statute restricts the use of HTF funds for homeownership to first-time homebuyers and limits the amount of each annual HTF grant that may be used for homeownership to 10 percent. Each State is allowed by the statute to determine how it will use HTF funds for homeownership assistance. Downpayment assistance is an eligible activity in the regulation.

The proposed rule made refinancing of existing rental projects permissible as part of rehabilitation when the proportional cost of rehabilitation is greater than the amount of debt refinanced. HUD proposed these restrictions on refinancing in order to synchronize with the HOME program and to facilitate the preservation and rehabilitation of existing housing for ELI and VLI households. These proposed restrictions are therefore retained in this interim rule.

Eligible Project Costs § 92.731

In § 92.731, HUD proposed eligible project costs to include development hard costs, refinancing costs in conjunction with rehabilitation, acquisition of standard projects, development-related soft costs, architectural and engineering fees, project audit costs, staff overhead related to the development of the units, settlement costs, impact fees, the cost to address and meet environmental and historic preservation property standards, operating costs, relocation costs, repayment of construction or other loans, and certain types of costs for construction undertaken before HTF funds were committed to the project.

Operating Cost Assistance and Operating Cost Assistance Reserves (§ 92.731(e))

To achieve the goal of using HTF funds primarily for the production of new affordable units, HUD proposed, in § 92.730(a)(1), to limit the amount of HTF funds that may be used for operating cost assistance to 20 percent of each annual grant. The proposed rule stated that operating cost assistance can be provided for the entire period of affordability, but may be awarded only in two-year increments from each HTF grant. Operating cost assistance, as defined in § 92.731(e), may include the cost of utilities, insurance, taxes, and scheduled payments to a replacement reserve. The eligible amount of HTF funds per unit for operating costs is determined based on the deficit remaining after the tenant monthly rent payment for the HTF-assisted unit is applied to the HTF-assisted unit's share of monthly operating costs. The written agreement between the grantee and the recipient must set forth the maximum amount of the operating assistance to be provided to the HTF-assisted rental project.

The proposed rule also included operating cost reserves of up to five years worth of operating cost assistance as an eligible activity (§ 92.731(e)(2)). Grantees would be allowed to establish operating cost reserves for specific HTF-assisted projects if necessary to ensure the financial feasibility of a project.

Comments:
Several commenters disagreed with the proposed 20 percent cap on the amount of each annual grant that may be used for operating cost assistance and suggested that HUD eliminate any restriction on the amount of each annual grant that may be used for operating cost assistance. Others suggested increasing the cap. Still others recommended that any limits on operating cost assistance should be based on each State's housing needs and should be left to the discretion of the States. Commenters also recommended that HUD impose no restriction on using HTF funds for operating assistance in the absence of Section 8 voucher assistance. Some commenters stated that HTF funding for operating assistance should be limited to HTF-assisted units and units being developed with HTF funds, while others support allowing HTF operating assistance for units funded by other State and Federal programs.

A commenter stated that it will be difficult to attract investors and ensure the long-term financial success of projects without giving States flexibility in determining how to apply HTF funds toward operating assistance. Another commenter stated that the program will encounter underwriting challenges regardless of operating assistance, but depending on the mix of units, there may be sufficient revenue generated to support the properties. Commenters expressed concern that the proposed cap will limit the number of units that can be developed with HTF funds, particularly units that serve ELI households.

A commenter stated that the rule must clarify that States are permitted to limit

and target operating assistance. Commenters recommended that the final rule should permit the initial HTF grant to include sufficient funding for operating assistance or operating reserves to last for the entire term of affordability. A few commenters stated that the final rule should permit the creation of capital reserves aimed at increasing affordability for ELI households.

In response to a request from HUD for input on whether tax abatements can significantly reduce operating costs, one commenter stated that while tax abatements can reduce operating cost, local governments will hesitate to provide tax abatements due to current economic pressures.

A few commenters stated that the time limits for offering operating cost assistance and operating reserves should be eliminated at the final rule stage. Commenters stated that HTF-assisted units that require operating assistance during the first two years will almost certainly need operating assistance throughout the entire term of affordability, and that grantees should have the flexibility to provide more than two years of assistance when faced with underwriting or feasibility concerns. Another commenter stated that the HTF funding should be allowed to capitalize Section 8 transition reserves to encourage private lenders to underwrite HTF-assisted projects with Section 8 project-based assistance. A few commenters recommended that HUD provide guidance in the HTF program guidelines to State grantees on underwriting standards for reinvestment and building reserves to self-finance rehabilitation during the period of affordability.

Lastly, several comments were submitted regarding the use of Section 8 vouchers in conjunction with HTF funds. Some commenters recommended that Section 8 vouchers be awarded along with the HTF funding. Another commenter asks whether there is a unit-based or project-based prohibition on using HTF funds for operating costs when Section 8 project-based vouchers are also involved in the project.

HUD Response:
The HTF is primarily a production program meant to add units to the supply of affordable housing for ELI and VLI households. Analyses of the use of HTF funds for both development and operating cost assistance showed that the use of HTF funds for operating assistance could very quickly consume each State's annual grant. This would deter the use of HTF funds for production of additional units, as well as preservation and rehabilitation of units, targeted to ELI households—the primary purpose of the HTF. HUD also assumes that HTF funds will be combined with other sources to produce and preserve affordable units, mostly in mixed-income projects, and that the HTF will not be the sole source of funding for operating cost assistance. Therefore, establishment of a cap on the amount of HTF funding in each annual grant that may be used for operating cost assistance is appropriate.

However, to provide more flexibility to grantees to develop and finance HTF-assisted projects, this interim rule establishes the cap at up to one-third of each annual grant. This interim rule also makes clear that the cap applies to both amounts used for operating cost assistance as well as the operating cost reserves. Within this cap, each fiscal year the grantee will have discretion in how it awards operating cost assistance to projects. The grantee may apply the one-third limit to all projects or adjust it accordingly, as long as no more than one-third of each annual grant is used for operating cost assistance and for operating cost reserves.

HUD also revised the proposed rule at this interim rule stage to address comments about the way in which operating cost assistance may be provided to a project. This interim rule establishes that a grantee may provide operating cost assistance to a project during the entire period of the affordability for the project. The written agreement between the grantee and the owner that commits funds from an HTF grant received in a single fiscal year may provide operating cost assistance over a period for multiple years as long as the grantee to meet its five-year expenditure deadline in § 93.400(d). Allowing such commitment provides the grantee with flexibility to manage its grant funds when providing operating cost assistance to a project; however, HUD will recapture funds not expended by the five-year deadline. Because operating cost assistance is an eligible activity and may be provided to a project by more than one grant, the prohibition in the rule on providing additional HTF funds to a project during the period of affordability (§ 93.205(a)) does not apply to renewal of funds committed to operating cost assistance. The grantee may renew operating cost assistance for HTF-assisted units during the affordability period by executing written agreements after future fiscal year HTF grants are awarded.

If Section 8 project-based vouchers or other project-based rental assistance is made available to HTF projects for HTF-assisted units, HUD prohibits the use of HTF funds available for operating cost assistance for those same units, but such limitation will not hinder HTF implementation. Section 93.200(c) of the interim rule (§ 92.730(c) of the proposed rule) requires that only the actual cost of development and operation of HTF units can be charged to the HTF program, and describes the methods for allocating costs and determining HTF units in multi-unit projects. In this interim rule, HUD does not impose a limit on the use of Section 8 project-based vouchers in a project for which HTF is also providing operating cost assistance, as long as the Section 8 project-based voucher is not provided to the same unit receiving HTF operating cost assistance. HUD cannot guarantee that funds for project-based Section 8 or other project-based assistance will be appropriated for HTF-assisted projects; therefore, awards of HTF funding to projects should be made based on existing resources and underwriting.

HUD understands the need for both capital (replacement) and operating reserves in housing projects. When grantees provide HTF funding for a project, the need for annual or monthly contributions to these reserves are determined through the underwriting process. Funding for capital or operating reserves “up front” for the present value of the entire amount needed over the required period of affordability (30 years) is not possible if the HTF funds are appropriated, as Federal funds cannot be drawn in that manner, years in advance of need. However, funding for the HTF may come from non-appropriated sources,
i.e.,
the proceeds from GSEs as described in section 1337 of the Act. Therefore, in the interim rule HUD establishes separate requirements for operating cost reserves funded by appropriated and non-appropriated funds.

If the operating cost assistance reserve is funded with appropriated HTF funds, the allowable amount of the reserve may not exceed the amount necessary to provide operating cost assistance to the HTF-assisted units in an HTF-assisted project for a period of up to five years. Because operating cost assistance reserves are an eligible activity and may be provided by more than one grant, the prohibition on providing additional HTF funds to a project during the period of affordability (§ 93.205(a)) does not apply to renewal of operating cost assistance reserves. The grantee may renew operating cost assistance reserves for HTF-assisted units during the affordability period by executing written agreements after future fiscal year HTF grants are awarded. The grantee must demonstrate the necessity of the reserve amount based on an analysis of

potential deficits remaining after the expected rent payments for the HTF-assisted unit are applied to the HTF-assisted unit's expected share of operating costs.

If the operating cost assistance reserve is funded with non-appropriated HTF funds, the amount necessary to fund the reserve must be calculated using the same methodology; however, the reserve may be funded for the amount estimated to be necessary for the entire period of affordability up front, or if this amount would exceed the cap (one-third of each annual grant), could be funded in phases from future grants determined to be suitable and necessary to secure advantageous financing. HUD will provide guidance and training to states about underwriting standards for investment of HTF funds and establishing replacement reserves to provide necessary rehabilitation during the period of affordability in their HTF program guidelines.

Administration and Planning Costs § 92.732

As noted earlier in this preamble, the administrative costs allowable by statute in the HTF program cannot exceed 10 percent of the annual grant. In § 92.732, HUD proposed eligible administrative and planning costs similar to the HOME program at § 92.207.

Comments:
HUD received very few comments regarding the entity eligible for the 10 percent allocation to administrative and planning costs. One commenter suggested that HUD's rule clarify that only the agency responsible for the award, compliance, monitoring, and reporting of HTF funds is eligible and another commented that these funds should only be charged by the subgrantee, not the grantee. Other commenters offered recommendations about what should and should not be considered an eligible administrative and planning cost. A commenter stated that monitoring funds should be included, another stated project delivery costs (
i.e.,
inspections, work write-ups) should not be eligible to charge as administrative costs, and another requested clarification that the administrative costs in § 92.732(b)(2) are not the same as prohibited travel costs at section 1338(c)(10)(D)(i)(V) of the Act. Another commenter suggested that HUD's rule require the allocation to administrative and planning costs be proportional to the amount of HTF units in the project. Another commenter expressed concern that the 10 percent cap on administrative costs is not enough to cover all the monitoring requirements. A commenter requested that HUD make clear whether the amounts available for rental housing and homeownership activities are calculated based on the funds available after 10 percent of the annual formula grant is deducted for administrative costs.

HUD Response:
This interim rule permits grantees to charge monitoring fees to cover the costs of required monitoring. The HTF grantee (State or State-designated entity) may use up to 10 percent of its annual grant for administrative costs. A grantee may provide funding for administrative costs to subgrantees. Program-related travel that is eligible under § 92.732(b)(2) remains an eligible cost in this rule, as this is not the same type of travel prohibited in section 1338(c)(10)(D)(i)(V) of the Act. Only non-program-related travel is prohibited as an eligible cost in the HTF statute. The Act permits up to 10 percent of the annual HTF grant to be used for homeownership activities, and up to 10 percent of the grant for administrative costs. Therefore, up to 10 percent of each annual grant may be spent on administrative costs, up to 10 percent may be spent on eligible homeownership activities, and the remainder on eligible rental housing.

HTF and Public Housing and Rental Assistance Demonstration § 92.734

HUD proposed prohibiting the use of HTF funds for public housing, including public housing that is developed under the HOPE VI program.

Comments:
Several commenters requested that HUD's rule explicitly include public housing authorities as eligible recipients of HTF funding. Some commenters requested that the development, preservation, and rehabilitation of public housing be allowed as an eligible activity, as the exclusion of public housing was not clearly mentioned in HERA or the Act; public housing tenants meet the HTF eligibility requirements and public housing funding sources are inadequate to meet the demands.

HUD Response:
Public housing agencies (PHAs) are already eligible entities to be HTF recipients. They are eligible to apply for HTF funding if they have the required capacity defined in the HTF statute and at § 93.2. PHAs, if qualified as recipients, can compete for HTF funding to develop HTF-assisted projects. HUD has considered the comments that the HTF should be permitted to be used for public housing projects and agrees that there is a role for the HTF in public housing. HUD has decided to allow the use of HTF funds (1) in connection with the Choice and LIHTC programs for construction of new units that replace existing public housing properties; and (2) for the rehabilitation of existing public housing units in connection with the Rental Assistance Demonstration (RAD), Choice, and LIHTC programs.

When the HTF program proposed rule was published on October 29, 2010, RAD was not yet established. RAD was established by HUD's 2012 Appropriations Act (Pub. L. 112-55, 125 Stat. 552, approved November 18, 20111, at 125 Stat. 673). Consequently, there were no public comments submitted on the HTF program proposed rule about the possible interplay between HTF and RAD. However, with RAD now an active demonstration program, questions have been raised to HUD about whether HTF may used for RAD units, and HUD takes the opportunity to address those questions in this preamble. HTF funds can be used in connection with RAD for the rehabilitation of public housing properties in which assistance will be converted and used. HTF funds can also be used for rehabilitation of “RAD units” (that is public housing properties in which assistance has been converted) after conversion takes place. Such uses are not contrary to HUD's position that use of HTF funds for public housing is limited to use with other programs to rehabilitate or replace public housing properties, and not for the expansion of the public housing inventory, which can be achieved through other funding sources.

Prohibited Activities § 92.735

HUD proposed prohibited activities in § 92.735. To synchronize with the HOME program, prohibited activities and fees at § 92.735 mirror the HOME program regulation at § 92.214. In addition, § 92.735 also includes activities expressly prohibited in the HTF statute. Section 1338(c)(10)(D) of the Act provides that HTF funds may not be used for: Political activities; advocacy; lobbying, whether directly or through other parties; counseling services; travel expenses; and preparing or providing advice on tax returns. This statutory section further provides that, subject to the exception in section 1338(c)(10)(D)(iii) of the Act, HTF funds may not be used for administrative, outreach, or other costs of the grantee, or any other recipient of such grant amounts. The statutory exception to this prohibition is that a grantee may use up to 10 percent of the HTF grant for the administrative costs of carrying out its HTF-funded program, including homeownership counseling.

Comments:
A commenter stated that several provisions, including provisions

on renewing operating assistance and grants for transit-oriented development projects, seem to conflict with the prohibition on using additional HTF assistance for previously assisted projects, and requested clarification. Several commenters requested that HUD eliminate the prohibition on using HTF funds in developments previously assisted with HTF. Alternatively, these commenters recommended that the final rule should limit the prohibition to 15 years after initial receipt of HTF funds, and allow for exceptions to the prohibition during the period of affordability. Other commenters stated that the rule should allow projects previously receiving HTF funds to obtain subsequent capital funds, operational expenses, and maintenance costs under the condition that the period of affordability would be reset, extended, or expanded to additional units upon receipt of additional HTF assistance. Another commenter stated that the final rule should include a provision that HUD has the ability to waive the prohibition in exchange for an extension of the affordability period.

HUD Response:
Per the requirements of 24 CFR 93.300, HUD expects that HTF projects will be properly constructed or rehabilitation with HTF funds and underwritten to ensure that capital needs can be addressed at the appropriate time in the life cycle of the property. Therefore, HUD will not change the regulation to allow the addition of HTF funds after 15 years, as commenters suggested. To address concerns about projects that may need additional operating cost assistance during the 30-year period of affordability, HUD revised § 93.205(a).

Income Targeting Proposed §§ 92.736-92.737; Interim §§ 93.250-93.251

Sections 92.736 and 92.737 of the proposed rule set forth the proposed income targeting requirements, as required by section 1338(c)(7) of the Act, for HTF-assisted rental units and homeownership units, respectively.

The Act requires that not less than 75 percent shall be used for the benefit only of ELI families or families with incomes at or below the poverty line (whichever is greater). Not more than 25 percent may be used for the benefit only of VLI families. Under the rulemaking authority of section 1338(g) of the Act, the Secretary has the discretion to direct grantees, in any given year, to use more than 75 percent of the HTF funds for the benefit only of ELI families or families with incomes at or below the poverty line, whichever is greater. HUD proposed that for the first year in which HTF funds are made available, of the amount made available for rental and homeownership housing, grantees are required to expend 100 percent of HTF funds to provide rental and homeownership housing for ELI households. The proposed rule provided that the HUD would publish subsequent income targeting requirements when HUD's allocation amounts to states are published.

Comments:
HUD received many comments opposing the proposed targeting of 100 percent of the HTF funds to ELI households in the first year that funding is provided under the program. The commenters stated that the income targeting should not change between the first year and subsequent years of funding, as it will make the HTF more difficult to administer. Commenters also stated that this approach to targeting is not reflective of the statute.

Several commenters expressed support for targeting some VLI households in the first year of funding, with one commenter expressing concern that there may not be adequate local support to target ELI households exclusively. Other commenters requested that HUD continue to target 100 percent of ELI households until the shortage of ELI housing is resolved. Several commenters expressed concern that the proposed income targets will limit the use of HTF funds in rural and non-urban areas. Another commenter recommended that the proposed language be revised to explicitly state that any portion of HTF funding not be targeted to ELI households and should be used for VLI households only.

HUD also received many comments advising of challenges resulting from use of HTF funds for homeownership activities targeted at ELI households, with many of these commenters suggesting that HTF funding for homeownership would be better served targeting VLI households or other income groups.

HUD Response:
HUD is aware that changes over time to income targeting may require grantees to adjust their approaches to using HTF funds to produce affordable housing, but believes this necessary in order to target limited resources to ELI households. There is a well-documented and overwhelming need to increase the supply of housing targeted to ELI households within each grantee's jurisdiction.

However, in consideration of the comments received, at this interim rule stage, HUD adjusted the targeting based on the amount of resources being made available through the HTF. With limited resources available for production of affordable housing targeted to ELI households, HUD has determined that targeting 100 percent of HTF to ELI households is appropriate if the amount available in a fiscal year for HTF is less than $1 billion. If the amount exceeds $1 billion, grantees may spend up to 25 percent for the benefit of VLI households. In either scenario, any funds not used for ELI households must be used to serve VLI households.

HUD acknowledges the commenters' concerns regarding the difficulty of providing homeownership assistance to ELI households. The statute and regulation are clear—there is no minimum percentage of HTF funds to be spent on homeownership, only a maximum percentage (10 percent). If HTF-eligible homeownership activities are not appropriate for ELI households in their jurisdictions, grantees are not required to use HTF funds for homeownership projects. HUD believes grantees are in the best position to determine whether a homeownership program for ELI or VLI households is appropriate within their jurisdictions. Public input on the use of HTF funds for rental housing or homeownership must be sought through public participation on a grantee's proposed HTF allocation plan.

Project Requirements Proposed §§ 92.740-92.750; Interim §§ 93.300-93.306

In §§ 92.740 through 92.750, HUD proposed requirements applicable to HTF-assisted housing projects. HUD proposed maximum per-unit development subsidy, underwriting, and subsidy layering requirements at § 92.740. To align with the HOME rule, the HTF proposed rule at § 92.740 mirrored the HOME Prohibited Activities and Fees provisions in § 92.250, with the exception of the maximum per-unit development subsidy amount section. The maximum per-unit development subsidy amount section is now § 93.300.

Maximum Per-Unit Subsidy, Underwriting and Subsidy Layering § 92.740

At § 92.740(a), HUD proposed requiring the grantee to establish maximum limitations on the amount of HTF funds the grantee may invest on a per-unit basis. In § 92.740(b), HUD proposed requiring the grantee to perform subsidy layering analysis before committing HTF funds to a project. Included in this proposed provision was the requirement that the grantee must determine that costs are reasonable, examine the sources and uses of funds, and ensure that the amounts available and their use are necessary to provide

quality affordable rental or homeownership housing for ELI households for the affordability period (30 years). The proposed rule also stated that recipients of HTF-assisted projects may not receive undue returns on their investments.

Comments:
Of the commenters that submitted comments on this provision, the majority addressed the proposed requirement that the grantee must establish a maximum per-unit development subsidy limit. A few commenters opposed that the subsidy limit be established as a total dollar amount and suggested the requirement be revised to allow States to set the maximum subsidy limit as a percentage of the project cost on a per-project basis. Another commenter wrote that States should have the flexibility to establish their maximum per-unit subsidy at 100 percent of the development costs for HTF-assisted units. A commenter suggested that the maximum per-unit subsidy requirement at § 92.710 be eliminated. Finally, a commenter stated that the per-unit subsidy limit and subsidy layering should only take into account capital development costs.

With respect to a subsidy layering review, a commenter suggested that HUD's rule should allow a subsidy layering review, conducted as a requirement of another program to satisfy the subsidy layering review for an HTF project. Another commenter suggested that the language in the proposed rule be clarified so that it is not interpreted to mean that certification of underwriting and subsidy layering requires HUD-specified processes, standards, and forms because it would be burdensome. Another commenter suggested that HUD establish minimum underwriting standards for homeownership.

HUD Response:
This interim rule adopts this provision as essentially proposed, although HUD revised the language to more closely mirror the language on subsidy layering from the HOME final rule. HUD does not agree that maximum subsidy limits should be established based on a percentage of total project cost. Some project costs are not eligible HTF costs, and one of the purposes of this requirement is to ensure the determination of the cost of HTF-assisted housing units includes a cost reasonableness test. With respect to a subsidy layering review, HUD does not prescribe specific subsidy layering forms or processes. The grantee may use the subsidy layering reviews conducted by other project funders, but a subsidy layering review conducted by another agency or funder does not “satisfy” the proposed requirement in § 92.740(b) (in this rule at § 93.300(b) unless the review is completed in accordance with the HTF grantee's standards.

Grantees must establish the minimum underwriting standards for their HTF-funded homeownership programs, as required by § 93.304.

To address comments on maximum subsidy limits, HUD chose not to establish national maximum subsidy limits that would be published by HUD. The amount of subsidy needed to produce affordable rental units targeted to ELI or VLI households will vary depending upon the project proforma. It is possible that in some projects, the entire development cost of an HTF unit must be paid for with HTF funds in order to achieve affordability. For example, it would be desirable to pay the entire development cost of HTF units so that they carry no debt service because rents are likely to be insufficient to pay for the debt service of the units. However, to address accountability, HUD added language to require grantees to adopt maximum subsidy limits that are appropriate for non-luxury housing units, based on reasonable and actual costs of developing such housing in the area.

Property Standards §§ 92.741 Through 92.745, Interim § 93.301

At the proposed rule stage, HUD proposed property standards applicable to HTF-assisted properties at §§ 92.741 through 92.745. Section 92.741 contains the property standards for new construction, § 92.742 establishes the standards for housing undergoing rehabilitation, § 92.743 contains the property standards for existing housing that is acquired with HTF funds, § 92.744 establishes property standards for manufactured housing, and § 92.745 establishes ongoing property standards for rental housing during the period of affordability. HUD requested comments from interested parties on how additional minimum property standards may be imposed to increase the efficiency and reduce the operating costs of HTF assisted units.

Comments:
Several commenters stated that HUD's rule should provide more flexibility in adopting property and energy efficiency standards and that the proposed property standards are too specific. A commenter stated that HUD's rule should specify who will conduct the environmental reviews for HTF projects. Several commenters stated that the units must meet habitability standard requirements, but not necessarily the use of Housing Quality Standards (HQS). Another commenter stated that HUD's rule should require properties to be free of all health and safety standards and specify the life-threatening conditions that must be addressed.

A commenter stated that HUD's rule should provide standards that will be applied on a building-by-building basis. A few commenters stated that the proposed efficiency requirements will drive up the costs of developing ELI units. A commenter stated that for major life systems HUD should clarify improvements necessary to meet the standard. Another commenter stated that the term for the useful life is burdensome and too expensive.

A commenter requested that buildings seeking historic tax credits or that are located in historic districts be provided with an exception from property requirements. Another commenter stated that the property standards will make it difficult for developers to use HTF funding to buy existing properties for rehabilitation.

A commenter stated that HUD's rule should include a “discreet” funding allocation to create affordable and accessible housing for people with developmental disabilities. Several commenters stated that HUD's rule should require “visitability” and “universal design.” Other commenters stated that HUD's rule should address accessibility by requiring 100 percent of units in new construction and substantial rehabilitation projects be both visitable by wheelchair users and adaptable, and that 30 percent of the units are fully accessible.

HUD Response:
To ensure compatibility with the HOME rule and in an effort to ease implementation of HTF by maintaining consistency with the requirements of the HOME rule to the extent feasible, this interim rule adopts the language used in the HOME final rule property standards section at § 92.251, with the exception of the environmental review requirements.

For the HTF program, HUD proposed at minimum that all HTF-assisted units that are newly constructed or undergoing gut rehabilitation must be certified that they meet the guidelines for ENERGY STAR-Qualified New Homes (for residential buildings up to three stories) or exceed, by 20 percent, the energy efficiency requirements of the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2007, Appendix G: Performance Rating Method (for residential buildings over three stories), as defined in § 92.741. A Home Energy Rater (HER) must inspect the units to certify that the units meet the ENERGY STAR guidelines. HUD does not adopt these proposed requirements in this interim rule. HUD

plans to establish new and consistent energy and water efficiency requirements for both the HTF program and HOME program through separate rulemaking. For new construction, the interim rule adopts the energy efficiency standards established under section 109 of the Cranston-Gonzalez National Affordable Housing Act, so that the standards are the same for HTF and HOME.

HTF grantees are responsible for ensuring compliance with these environmental review requirements. HUD knows of no justification to provide a blanket exemption of HTF-assisted projects seeking historic tax credits or located in historic districts from property requirements. While HUD would encourage grantees to include “visitability” standards in the development of HTF-assisted and other affordable housing, these visitability standards are not required by any Federal statute and are not included in this rule.

HTF Property Standards Environmental Requirements

Comments:
Several commenters stated that the rule creates a new definition for “wetlands.” These commenters stated that HUD's rule should incorporate the U.S. Army Corps of Engineers and the Environmental Protection Agency definition in regulations pursuant to the Clean Water Act. A commenter stated that the regulations for environmental remediation, testing for toxins, and other property standards are too detailed. A commenter suggested that the HTF rule should include language permitting States to request that reports are prepared in accordance with the most current ASTM standard. Another commenter stated that for HTF projects developed within a quarter mile of a site with an unclosed environmental case status, the final rule should require a written justification for determination that the proposed site does not pose a health and safety risk for the HTF project. A commenter recommended that the HTF rule require a State to maintain files with written justification for the State's determination that a proposed site does not pose a health and safety risk for an HTF project located within a quarter mile of a site with a reported Federal, State, or local environmental case status that is open. Another commenter stated that HUD's rule needs to specify who will conduct the environmental review for HTF projects. Several commenters stated the proposed rule was overly detailed and the final rule should replace these requirements with standards from the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). Another commenter stated that HUD's rule should clarify that a single environmental review may satisfy the requirements for both the HTF and project-based voucher programs, when both sources of assistance are used. Another commenter requested an exception in the property requirements for buildings seeking historic tax credits or located in historic districts.

HUD Response:
This rule adopts the definition of “wetland” as defined in HUD regulation at 24 CFR 55.2(b)(11) and which is used for all HUD programs. The guidance within the regulation for environmental remediation, testing for toxins, and other standards must remain detailed because the purpose of the regulations is to assist grantees to comply with the requirements of the regulations.

HUD agrees that its HTF rule should not include references to the ASTM year and rather include language that reports should be prepared in accordance with the most current ASTM standard. HUD already requires HTF projects to avoid sites located within .25 miles of a Superfund or Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS) site or other contaminated site reported to Federal, State, or local authorities without a statement in writing from the U.S. Environmental Protection Agency or the appropriate state agency that there is no hazard that could affect the health and safety of the occupants or conflict with the intended use of the property.

HUD disagrees with the comment that the HTF rule should clarify that a single environmental review may satisfy requirements for both HTF and project-based voucher (PBV) programs. The grantee that is responsible for these environmental requirements may in some cases be the same as the “responsible entity” that conducts an environmental review under 24 CFR part 58 for a PBV project, and much of the environmental information needed to comply with both requirements may be the same. However, the HTF environmental requirements, to be codified at § 93.301(f), are not identical to the environmental review requirements under part 58 for PBV projects. For example, the HTF environmental requirements do not include certain interagency consultation and public notice requirements that are required for PBV projects under some of the environmental laws and authorities cited in part 58.

Qualification as Affordable Housing: Rental Housing § 92.746, Interim § 93.302

In § 92.746(a), HUD proposed that all HTF-assisted rental housing be occupied only by ELI families. Section 92.746(b) proposed to establish the maximum rent (including utilities) for HTF-assisted units at 30 percent of the annual income of a family whose income equals 30 percent of the area median income, or 30 percent of the poverty line, whichever is greater. Section 92.746(c) provided that grantees must establish maximum monthly allowances for utilities and services (excluding telephone, television, and Internet service), and must approve rents proposed by the owner for HTF units. Section 92.746(d) proposed to establish an affordability period of not less than 30 years for rental housing assisted with HTF funds. Section 92.746(e) proposed to require that HTF project owners verify the initial and continued eligibility of tenants living in HTF-assisted rental units and establishes the methods by which HTF project owners must verify tenant income.

Comments:
Several commenters requested that HUD adopt income-based limits that cap the amount of rent paid by tenants at 30 percent of household income. Several other commenters suggested creating operating subsidy reserves to fund income-based rents, and requiring a percentage of units set aside for people with disabilities or people who receive their income from supplemental social security (SSI) income. Some commenters expressed concern about individuals whose sole source of income is SSI, because many of these people have incomes well below 30 percent of AMI and without operating subsidy for HTF-assisted units tenants will be forced to pay a substantial proportion of their income toward rent (or lose the opportunity to benefit from HTF-assisted housing).

Several commenters asked for clarification whether there will only be one rent limit for the HTF program or whether there will be different rent limits for ELI and VLI households. Several stated that there should be a means for limiting a tenant's rent burden depending on the type of rental subsidy. Another commenter stated that subsidy amounts should also be adjusted downward for units not carrying any debt to avoid over-subsidizing units. Another commenter asked whether HUD could provide rent and income limit levels in 5 percent increments.

A commenter stated that grantees should be permitted to set utility allowances for new projects that best reflect the costs to tenants. Another stated that HUD's rule should provide additional protections to tenants regarding the utility allowance, including notice, opportunity to seek review, and allowance for utilities be provided in the lease.

Many commenters stated that HUD should increase the minimum period of affordability proposed in the rule to 40, 45, or 55 years, and that HUD's rule should incentivize projects which agree to longer periods of affordability. Another commenter stated that the rule should increase the minimum period of affordability for non-low income housing tax credit (LIHTC) projects, but only if HUD develops a means for recapitalizing projects and applying the affordability restrictions to the land, not the building. Several commenters stated that the determination of the period of affordability should be left to the discretion of the State, or should match the period of affordability used by other funding sources.

HUD Response:
Unlike public housing, the HTF has no separate annual appropriation source of funding for operating costs. In any given year, if no funding for the HTF is provided, it is possible that no operating cost assistance would be available for HTF-assisted units. Therefore, while operating costs may be paid with HTF funds, the assistance cannot be based on a formula that assumes income-based rents and an annual appropriation to pay for operating costs. For this reason, it is necessary to establish fixed rents for the HTF for underwriting purposes and required subsidy layering analyses. Section 8 project-based vouchers may be made available to HTF-assisted units, and these vouchers alleviate cost burdens for ELI tenants, including individuals whose source of income is from Supplemental Social Security Income.

This interim rule includes rent limits for both extremely low-income and very low-income households. For extremely low-income households, rents are set at 30 percent for a households at 30 percent of the area median income. For very low-income households, rents are set at 30 percent for households at 50 percent of the area median income. HUD will provide the actual rent limits for each State.

If utility data are available on a project-by-project basis or utilities are individually metered, it would be permissible to establish utility allowances more reflective of the actual cost for the HTF-assisted unit.

HTF grantees are allowed to impose longer periods of affordability, beyond the period in the regulation. HUD anticipates that States may adopt criteria whereby projects will be incentivized to adopt longer periods of affordability.

Tenant Protections and Selection§ 92.747, Interim § 93.303

In § 92.747, HUD proposed tenant protection, lease, and selection requirements, and incorporated the requirements of section 1338(c)(8) of the Act.

Comments:
A commenter recommended greater safeguards be required for tenant selection, including prohibition of local residency or employment preferences, the use of lottery-based selection, and strong affirmative marketing and outreach requirements. A few commenters suggested HUD's rule be revised to include additional tenant and homeowner protections, including the right to organize, associate, advocate for stronger protections without fear of retaliation. Other commenters requested that HUD's rule to clarify tenant rights regarding the applicant screening process, the prohibition on eviction without good cause, the lease provision protections, and how tenants can participate and protect their tenant rights. A few commenters pointed out the importance of retaining economic diversity in projects containing HTF-assisted units, and suggested that HUD's rule incorporate some mixed-income standards and limits on the number of families using vouchers. Another commenter suggested that § 92.747(c) be removed to permit residents to pursue a “housing first” model for ending homelessness. Some commenters requested that the protections offered to people receiving any type of tenant-based assistance from being denied access to HTF-assisted units be enhanced.

A commenter provided several comments about resident access to judicial review. The commenter stated that the rule should include greater access to judicial review for tenants and applicants, and that the regulations should require residential leases to include any conditions of tenancy found in HTF allocation plans and to explicitly state that a resident or tenant organization may seek judicial enforcement of plan violations which result in injury. The commenter recommended that grant agreements with subgrantees and recipients should incorporate a resident complaint review, grievance system, and right to judicial enforcement. Another commenter stated that if HUD has the right to initiate an administrative hearing or impose sanctions, then residents and applicants should have the right to join as a party to the proceeding. The commenter stated that the right to pursue an independent action for redress of injury in court should be included in the rule and incorporated into residential leases.

Another commenter stated that a reference to the Violence Against Women Act (42 U.S.C. 13701
et seq.
) should be added to § 92.747(c).

HUD Response:
The Violence Against Women Act of 2013 (VAWA 2013), enacted March 7, 2013, did not specify HTF as a covered program. The possible applicability of VAWA to HUD programs not listed in VAWA 2013 will be addressed in HUD's upcoming proposed rule on VAWA 2013.

Section 93.303 of the rule prohibits lease terms which require tenants residing in HTF-assisted units to waive their rights with respect to their tenancy. The statute does not create any right to judicial review; however, State and local law may provide rights to judicial review of HTF grantees or landlords of HTF-assisted properties. HUD's proposed language is compliant with applicable civil rights laws and regulations, including section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794) and implementing regulations at 24 CFR part 8, and therefore is not changed at this interim rule stage. Additionally, the proposed rule language did not present problems for the particular permanent supportive housing model favored by several commenters, which was their primary concern, and therefore this language is not changed at the interim rule stage. In fact, adopting the suggested language would limit flexibility to use other models of permanent supportive housing.

Qualification as Affordable Housing: Homeownership § 92.748, Final § 93.304

In § 92.748(a), the proposed rule required that homeownership activities funded by the HTF must be for first-time homebuyers. Section 92.748(b) proposed to require that only single family housing, as defined in § 92.2, is eligible for HTF-assisted homeownership activities. Section 92.748(c) would require that all HTF-assisted homeownership activities apply to modest housing, in accordance with § 92.749. Section 92.748(d) proposed to establish the requirements for HTF requirements for first-time homebuyers and income requirements. Section 92.748(e) proposed to establish the period of affordability for HTF-assisted homeownership activities. Section 92.748(f) proposed to establish the

resale requirements for homeownership units assisted by the HTF.

Comments:
Some commenters suggested that HUD's rule should include a recapture provision for homeownership funds, as permitted under the HOME program, and they expressed concern that limiting homeownership properties to resale, without the option of recapture, will be too burdensome for grantees and subgrantees. Other commenters stated that HUD's rule should include more language to encourage the use of land trusts.

HUD Response:
HUD agrees with commenters that the recapture provisions should be added to the HTF rule. Accordingly, this rule, at § 93.304, adopts the structure of the HOME program requirements for recapture, with adjustments to the subsidy amounts to reflect the greater need for subsidy for very low-income homebuyers. The periods of affordability also differ from the HOME program to tiers that reflect the maximum period of affordability (30 years) for the HTF program. The use of land trusts in conjunction with the HTF is permitted. However, HUD does not agree that the HTF rule needs modification to encourage the use of land trusts; guidance and technical assistance may be provided in the future on this topic.

Other Federal Requirements Proposed § 92.760-92.764; Final § 93.350-93.355

Proposed §§ 92.760 through 92.764 set forth other Federal requirements that are applicable to the use of HTF funds, including nondiscrimination, affirmative marketing, lead-based paint, relocation, and funding accountability and transparency requirements. However, the proposed regulations inadvertently omitted a provision in section 1337(f) of the Act that prohibits the use of HTF funds in conjunction with property taken by eminent domain unless eminent domain is employed only for a public use. The HTF regulation at § 93.355 includes this statutory prohibition.

Program Administration Proposed § 92.770-92.779; Final § 93.400-93.409

Proposed §§ 92.770 through 92.779 set forth the conditions and requirements by which States are to administer their HTF funds, including HTF accounts, allocation and reallocation of HTF funds, program disbursement and the establishment of an information system, written agreement, onsite inspections, financial and project reporting, record retention, and audit requirements.

Comments:
Several commenters suggested that HUD eliminate duplicative monitoring, review, and inspection requirements. A few commenters stated that if a subgrantee receives HOME funding, the subgrantee should be directly responsible for compliance and alleviate grantees of the burden of annual performance reviews. A commenter recommended revising the HTF audit requirements to mirror HOME and that additional audit requirements should be removed. A few commenters suggested that equivalent onsite property inspections for other public funding programs and construction oversight by third parties should be allowed to satisfy the HTF requirements to avoid duplicative inspections. A commenter stated that the rule should permit HOME inspection standards rather than Uniform Physical Conditions Standards (UPCS) standards. Another commenter stated that the initial inspection during the period of affordability should be required to occur within 24 months instead of 12 months, as proposed, to align with LIHTC requirements. A commenter stated that the requirement to follow up with an inspection within 12 months of observing a deficiency during an onsite inspection is burdensome and suggested that evidence of the correction, with the right to re-inspect, should be sufficient.

Some commenters offered recommendations for other administrative issues. A commenter suggested that the project completion date for HTF units should be the date the project is placed in service. Another commenter stated that HUD's rule should clarify that the recordkeeping requirements in § 92.778 would allow a grantee to delegate record maintenance to the project owner or manager who would make the records accessible to the grantee.

Several commenters stated that the rule should increase opportunities for forgiveness under the repayment and recapture provisions. Commenters suggested that the rule permit a prorated reduction of the repayment obligation based on the extent that the affordability period was satisfied. A commenter suggested that this prorated reduction in the repayment obligation also apply to HTF-assisted housing lost through a foreclosure action, natural events or disasters, or similar events that are not the result of malfeasance on the part of the grantee or subgrantee. A few commenters suggested that complete forgiveness should be permitted when there have been best faith efforts to avoid foreclosure. A commenter stated that the repayment provisions are too onerous and repayments for failed ELI housing projects should be limited to instances when the grantee directly provides funds for an ineligible activity.

Some commenters offered suggestions about the foreclosure provisions. A commenter suggested that if HUD is the foreclosing entity, the affordability restrictions should not terminate and funds should not be required to be repaid. Another commenter suggested that the rule should authorize HUD and the grantee to modify the affordability restrictions in limited circumstances (
e.g.,
loss of rental assistance through no fault of the owner), if doing so is necessary to avoid a foreclosure and complete loss of affordable units. Another commenter suggested that HUD should require grantees to use purchase options, right of first refusal, or other preemptive rights to purchase as tools to protect HTF-assisted housing from foreclosure or deed in lieu of foreclosure. Another commenter suggested that additional data collection requirements be required. The commenter attached a list of 22 project-level data points that should be listed in § 92.778(a)(2)(i).

HUD Response:
The HTF statute includes mandatory monitoring, reporting, and audit requirements. HUD does not have the authority to change these requirements.

Except where that statute differs, or where policy determinations about the HTF have been made by HUD that preclude alignment, HUD adopted the majority of the requirements of the HOME program for the HTF rule, but the HTF audit requirements cannot be modified to mirror HOME requirements, as suggested by a commenter, because the HTF statute imposes different requirements for the audit of HTF-assisted projects than what is required by the HOME program.

HUD does not agree that grantees are relieved of responsibility for compliance if a subgrantee receives the HTF funds. The statute makes clear that the State or State-designated entity is the grantee of the HTF funds and that compliance with all requirements, including compliance monitoring of subgrantees, is the responsibility of the grantee. Moreover, HUD has no relationship with a subgrantee and has no basis to take action against a subgrantee.

This interim rule requires that Uniform Physical Condition Standards (UPCS) be incorporated into the property standards, as is the case with the property standards for the HOME program. This will facilitate alignment of HTF-assisted projects with projects assisted by the LIHTC program and HOME. Training and guidance will be

provided to address some of the concerns about implementing UPCS.

HUD has chosen not to synchronize when project completion occurs for an HTF-assisted projects with when an LIHTC project is placed in service. The HTF rule requires beneficiary reporting that is different than that required for LIHTCs. The project completion date must ensure timely occupancy. Accordingly, HUD adopts the language as proposed.

One commenter suggested that the rule should authorize HUD and the grantee to modify the affordability restrictions in limited circumstances (
e.g.,
loss of rental assistance through no fault of the owner). To ensure compatibility with the HOME rule and in an effort to ease HTF implementation, this interim rule contains language that is consistent with the repayment language in the HOME regulations. For natural events or other disasters, insurance proceeds should be used to replace the lost housing. In the case of foreclosure, repayment would not be required if the affordability restrictions are preserved and the project continues to meet HTF requirements. Grantees have the option, rather than a requirement, of using preemptive rights to ensure flexibility for each grantee to ensure HTF projects remain affordable. The repayment and foreclosure provisions are required and the language is adopted in this interim rule as proposed.

Performance Review and Sanctions Review Proposed § 92.780-92.783; Final § 93.450-93.453

HUD proposed that grantees report on their progress and performance in meeting the requirements of the HTF in HUD's Integrated Disbursement and Information System (IDIS) and the consolidated plan. The statutory requirements for corrective and remedial actions at section 1338(e)(1)(B) of the Act are reflected in § 92.782. The statutory requirements at section 1338(e)(2)(B) of the Act for notification of determination and opportunity for hearing and sanctions are reflected in § 92.783.

Comments:
One commenter recommended that performance report on grantees be posted regularly on public Web sites.

HUD Response:
In this interim rule, HUD moved the requirement for a HTF performance report to the Consolidated Plan regulations at 24 CFR part 91. The HTF performance report is included in the performance reports for the consolidated plans in 24 CFR 91.52

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-01642. Public record. Not legal advice.