Community Development Block Grant Program; Economic Development Guidelines; Proposed Rule DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

SUMMARY: This rule proposes guidelines to assist Community Development

Block Grant (CDBG) recipients in evaluating and selecting economic

development activities for assistance with CDBG funds. The proposed

guidelines deal with project costs and financial requirements and with

the public benefit provided by such activities. This rule also proposes

certain other changes to facilitate the use of CDBG funds for economic

development objectives.

DATES: Comments due date: June 30, 1994.

ADDRESSES: Interested persons are invited to submit comments regarding

the proposed rule to the Rules Docket Clerk, Office of General Counsel,

room 10276, Department of Housing and Urban Development, 451 Seventh

Street, SW., Washington, DC 20410. Comments should refer to the above

docket number and title. Copies of all written comments received will

be available for public inspection and copying between 7:30 a.m. and

5:30 p.m. weekdays in the Office of the Rules Docket Clerk, at the

address listed above.

FOR FURTHER INFORMATION CONTACT: James R. Broughman, Director,

Entitlement Communities Division, Office of Block Grant Assistance,

room 7282, 451 Seventh Street, SW., Washington, DC 20410. Telephone:

(202) 708-1577; TDD: (202) 708-2565. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION: One of the Department of Housing and Urban

Development's (HUD's) expressed goals is to provide an economic lift

for distressed cities. Toward this end, HUD has embarked on a course

designed to make the Community Development Block Grant (CDBG) program a

potentially major contributor to the provision of jobs, especially for

low-income persons residing in our poorest areas. To accomplish this

goal, the Department recognizes that it will need to change both the

perception and the reality concerning the usefulness of CDBG for

economic development objectives.

Section 806 of the Housing and Community Development Act of 1992

(the 1992 Act) requires the Secretary to establish, by regulation,

guidelines to assist CDBG recipients to evaluate and select economic

development activities for assistance with CDBG funds. The 1992 Act

also made further changes in the CDBG program affecting the use of

funds for economic development activities, particularly those carried

out under the national objective of benefiting low- and moderate-income

persons through the creation or retention of jobs. These changes

necessitate revisions to the CDBG regulations. HUD has also determined

that it is appropriate to take this opportunity to propose certain

other changes to the regulations to facilitate the use of CDBG funds

for economic development objectives. These changes are designed to

reduce the administrative burden on grantees while, at the same time,

focusing efforts on assisting the residents of low- and moderate-income

neighborhoods.

Applicability of This Proposed Rule to the State CDBG Program

Separate regulatory language for the Entitlement and State CDBG

programs is contained in this proposed rule. This preamble discusses

the proposed changes for the two programs together; differences between

the proposals for the two programs are noted. In general, the

differences have been kept to a minimum.

The State CDBG program regulations do not contain an explanatory

list of eligible activities, and relatively few terms are defined in

regulation. The proposed changes to Secs. 570.201, 570.203, 570.204,

570.500 and 570.506 (and the accompanying preamble discussions thereof)

are thus not applicable to the State CDBG program, as there are no

comparable sections in the State regulations. In interpreting the list

of eligible activities found in section 105 of the Housing and

Community Development act of 1974, as amended, states may use the

Entitlement regulations as interpretive guidance.

Applicability of This Proposed Rule to the HUD-Administered Small

Cities and Insular Areas CDBG Programs

Portions of the Entitlement CDBG Program regulations are

incorporated by reference into the regulations for the HUD-Administered

Small Cities program and the Insular Areas CDBG program. The proposed

changes to the Entitlement regulations would also apply to the HUD-

Administered Small Cities and Insular Areas programs. The Department

welcomes comment on whether these proposed changes can be practicably

applied as written to the HUD-Administered and Insular Areas programs,

or whether separate approaches are needed for those two programs.

Further clarification would be provided (such as through annual Notices

of Funding Availability or other instructions) for those programs,

particularly regarding applications proposing a limited number of

activities subject to the public benefit guidelines. Public comment is

particularly welcomed on the proposed rule's approach in applying the

aggregate public benefit tests to the HUD-Administered Small Cities and

Insular Areas Programs.

Applicability of This Proposed Rule to the Indian CDBG Program

It has been determined by the Office of Native American Programs

that this proposed regulation will not be applicable to the Indian

Community Development Block Grant (ICDBG) program. The nature of the

ICDBG program is so separate and distinct from the Entitlement or the

State and Small Cities program that it is in the best interest of the

ICDBG to address these issues separately. A specific rule will be

proposed at a later date to address the needs of the Indian Tribes and

Alaskan Native Villages served by the ICDBG program to comply with the

requirements of the Housing and Community Development Act of 1992.

Comments and suggestions are solicited on the possible modification of

this proposed rule or the development of a method of implementing these

requirements for the ICDBG program.

Assistance for Microenterprises

Section 807(a)(4) of the Housing and Community Development Act of

1992 added a new section 105(a)(23) to the Housing and Community

Development Act of 1974, as amended, regarding the provision of CDBG

assistance to facilitate economic development through assistance to

microenterprises and persons developing microenterprises. A

``microenterprise'' is defined by section 807(c)(2) of the 1992 Act as

a ``commercial enterprise that has five or fewer employees, one or more

of whom owns the enterprise.'' This new eligibility provision became

effective upon the enactment of the 1992 Act (October 28, 1992). In

policy guidance issued in January 1993, the Department indicated that

it intended to publish rules for public comment in order to show how

assistance provided under the new provision should be distinguished

from that provided to and for microenterprises under other existing

authority in the CDBG program.

The proposed rule implements the new microenterprise eligibility

category by adding a new paragraph Sec. 570.201(o) to the CDBG

Entitlement regulations. The Department has determined that it is

appropriate to add the new provision to Sec. 570.201, basic eligible

activities, rather than Sec. 570.203, special economic development

activities, to highlight the unique aspects of the new microenterprise

eligibility category. The provision of direct assistance to

microenterprises has long been, and continues to be, eligible as a

special economic development activity under Sec. 570.203(b). Such

activities are carried out under the authority of section 105(a)(17) of

the Housing and Community Development Act of 1974, as amended;

therefore, they are statutorily subject to an ``appropriateness''

determination and the economic development ``guidelines'' (included in

this proposed rule as a new Sec. 570.209 of the Entitlement regulations

and additions to Sec. 570.482 of the State regulations). As noted

above, however, this new microenterprise eligibility category was added

to the Act as a new section 105(a)(23). This new paragraph of the

statute does not contain any requirement that assistance for such

activities be determined to be ``appropriate.'' In addition, this new

paragraph is not included among those eligibility categories listed as

covered by the economic development ``guidelines'' to be established

pursuant to the new section 105(e) of the statute, as added by section

806(a) of the 1992 Act. The new microenterprise eligibility category at

section 105(a)(23) also authorizes the provision of ``general support *

* * to owners of microenterprises and persons developing

microenterprises,'' over and above the technical assistance and

business support services authorized by the provision for such persons.

The ``general support'' aspect of the eligibility provision is

discussed in further detail later in this preamble. Given the above

unique characteristics of the new statutory provision, the Department

has determined that it is most fitting to list the eligibility category

as a separate activity under Sec. 570.201 instead of adding it as

another special economic development activity under Sec. 570.203 of the

Entitlement regulations.

While the new eligibility category does provide significant

flexibility, there is an important restriction that must be noted. The

beneficiaries of CDBG assistance under this new provision are limited

to ``owners of microenterprises and persons developing

microenterprises'' by the statute. As noted above, a

``microenterprise'' is defined by section 807(c)(2) of the 1992 Act as

a ``commercial enterprise that has five or fewer employees, one or more

of whom owns the enterprise.'' This definition has recently been

incorporated into the CDBG Entitlement regulations at Sec. 570.3.

Pursuant to this statutory restriction, CDBG assistance to any business

that has more than five employees cannot qualify under this provision

and must continue to comply with the requirements of Sec. 570.203(b) of

the Entitlement regulations. It should also be noted that given that

activities assisted under this new provision are to exclusively benefit

microenterprises and persons developing microenterprises, a CDBG-

assisted economic development loan or grant program that is open to any

for-profit business under the provisions of Sec. 570.203(b) (Section

105(a)(17) of the Housing and Community Development Act of 1974, as

amended) cannot exempt an individual activity from compliance with the

economic development ``guidelines'' simply because that individual

business happens to be a microenterprise. The ``guidelines'' as

currently proposed to be implemented by a new Sec. 570.209 of the

Entitlement regulations (and Sec. 570.482 of the State regulations)

take into account the special needs and limitations arising from the

size of such businesses assisted under Sec. 570.203(b) as required by

the new section 105(g)(1) of the statute as added by section 807(c)(1)

of the 1992 Act.

The new section 105(a)(23) authorizes the ``provision of assistance

to public and private organizations, agencies, and other entities

(including nonprofit and for-profit entities) to enable such entities

to facilitate economic development by'' providing assistance to

microenterprises and persons developing microenterprises. The

Department has determined that given the general language contained in

the statute, the grantee itself could be considered an entity eligible

to carry out microenterprise assistance activities under section

105(a)(23). If the grantee provides CDBG funds to other intermediary

organizations to carry out microenterprise assistance activities under

the new eligibility category, the Department considers such entities to

be subrecipients. (See further discussion on such subrecipients later

in this preamble.)

As noted earlier, the new microenterprise eligibility category at

section 105(a)(23) authorizes the provision of ``general support (such

as peer support programs and counseling) to owners of microenterprises

and persons developing microenterprises.'' Such ``general support'' is

over and above the technical assistance and business support services

authorized by the provision for such persons. This provision represents

a potentially significant broadening of CDBG eligibility. The language

of the statute indicates that the two specific types of services cited

are meant only to serve as examples of what may be considered eligible

under this provision and not an exclusive listing. The Department

believes that this paragraph may be interpreted very broadly to include

a multitude of non-business services for microenterprise owners and

persons in varying stages of developing microenterprises. Thus, for

illustrative purposes in the proposed rule at Sec. 570.201(o)(3), the

Department has added two additional examples of potentially eligible

services--child care and transportation. The proposed rule also makes

it clear that other similar services that can be shown to help a person

become a microenterprise owner can be considered eligible under this

paragraph. Examples of other such services that might qualify under

this provision, depending on the design of the microenterprise

assistance activity, include personal financial counseling, substance

abuse counseling, job training, and other education programs. Such an

interpretation of this provision may provide significant new

flexibility for grant recipients because services qualifying under this

paragraph are not considered to be subject to the 15 percent cap on

general public service activities qualifying under Sec. 570.201(e) of

the CDBG Entitlement regulations (as authorized by section 105(a)(8) of

the statute). Comment on the Department's interpretation of this

provision is welcome.

A new Sec. 570.482(c) of the State regulations is proposed. This

proposed paragraph would specify that recipients of state CDBG grants,

as well as subrecipients, may provide microenterprise development

assistance; the proposed Sec. 570.482(c) also specifies that provision

of support services to owners or developers of microenterprises is not

subject to the statutory restrictions on public services.

Modification to the Definition of Subrecipient Related to

Microenterprise Assistance Activities

As noted earlier in this preamble, the new Section 105(a)(23)

eligibility provision (proposed herein to be implemented by a new

Sec. 570.201(o) in the Entitlement regulations) authorizes ``the

provision of assistance to public and private organizations, agencies,

and other entities (including nonprofit and for-profit entities) to

enable such entities to facilitate economic development by'' providing

various forms of assistance to owners of microenterprises and persons

developing microenterprises. The Department interprets this provision

to mean that any such entities beyond the grantee itself are to serve

as intermediaries in the grant assistance chain rather than being

considered beneficiaries in and of themselves. Thus, the Department

considers such organizations to be subrecipients under the CDBG

program. The term ``subrecipient'' is currently defined at

Sec. 570.500(c) of the CDBG Entitlement regulations as a ``public or

private nonprofit agency, authority or organization, or an entity

described in Sec. 570.204(c), receiving CDBG funds from the recipient

to undertake activities eligible for such assistance under Subpart C.''

As noted above, however, the new statutory eligibility category

specifically includes for-profit entities as organizations that may be

provided CDBG assistance to carry out microenterprise assistance

activities. Thus, in this proposed rule, the Department is revising

Sec. 570.500(c) to add a reference to ``an entity described in

Sec. 570.201(o)'' to include such for-profit entities in the definition

of a subrecipient.

There are no regulatory requirements governing how a grant

recipient selects a subrecipient under the CDBG program. Thus, a

grantee may designate any entity, including a for-profit entity, to act

as a subrecipient to carry out a microenterprise assistance activity

under the new eligibility category. However, the Entitlement recipient

and the subrecipient must then enter into a written agreement that

meets all the requirements of Sec. 570.503 of the CDBG Entitlement

regulations. These requirements include compliance with the applicable

uniform administrative requirements as described at Sec. 570.502 and

the program income requirements as set forth in Sec. 570.504(c).

Ensuring that Economic Development Projects Minimize Displacement

The proposed rule implements section 907(a) of the National

Affordable Housing Act of 1990 by amending Sec. 570.203(b) of the CDBG

Entitlement regulations to delete the words ``necessary or'' from the

previously required ``necessary or appropriate determination'' and to

add the requirement that economic development projects assisted under

this provision must minimize, to the extent practicable, displacement

of existing businesses and jobs in neighborhoods. The language being

added to the regulation on displacement is identical to that contained

in the statute. The Department welcomes comment on whether any further

explanatory language should be added and how broadly this provision

should be interpreted.

Additional Changes to Sec. 570.203, Special Economic Development

Activities

Section 570.203 of the Entitlement regulations is further revised

in this proposed rule, as is Sec. 570.204, to reflect that these

activities are subject to the guidelines for selecting activities as

required by section 806(a) of the Housing and Community Development Act

of 1992 (``1992 Act''). The guidelines themselves are set forth in this

proposed rule in a proposed new Sec. 570.209 in the Entitlement

regulations and additions to Sec. 570.482 in the State regulations.

These proposed changes are discussed in further detail later in this

preamble.

Additionally, a new paragraph (c) is proposed to be added to

Sec. 570.203 of the Entitlement regulations to specifically address

items that may be considered activity delivery costs in conjunction

with special economic development activities assisted under this

section. The Department's principal purpose in proposing the addition

of this paragraph is to permit certain job training and placement

activities in direct conjunction with otherwise assisted CDBG special

economic development activities to be considered part of the ``delivery

cost'' of those special economic development activities. Under current

regulations, all job training and placement activities are considered

to be public service activities qualifying under Sec. 570.201(e) of the

Entitlement regulations and, thus, subject to the 15 percent cap on

such activities. The Department recognizes that there are significant

differences between general skill-building training programs and those

that are directly linked with assisting individuals, especially low-

and moderate-income persons, to obtain specific job openings generated

by a CDBG-assisted special economic development activity. HUD believes

it would be beneficial to permit the latter type of program to be

considered part of the ``delivery cost'' of the associated special

economic development activity. Such placement and training costs would

then be considered to be eligible under Sec. 570.203 (Sections 105(a)

(14) and (17) of the Housing and Community Development Act of 1974, as

amended) and, thus, not subject to the limitations imposed on general

public service activities. The remaining types of activities delineated

in the proposed Sec. 570.203(c) are already considered to be activity

delivery costs eligible under Sec. 570.203 under current regulations.

The proposed new paragraph only provides a more specific statement of

this point.

National Objective Standards for Low- and Moderate-Income Area Benefit

Activities

This proposed rule includes a revision to Sec. 570.208(a)(1)(i) of

the Entitlement regulations and Sec. 570.483(b)(1)(i) of the State

regulations dealing with activities qualifying under the national

objective of benefiting low- and moderate-income persons as area

benefit activities. The proposed revision relates specifically to

special economic development activities that may be carried out under

Sec. 570.203 (Sections 105(a) (14) and (17) of the Housing and

Community Development Act of 1974, as amended) by a community

development financial institution.

Supporting the development and growth of community development

financial institutions is a major initiative of this Administration.

Such existing institutions have demonstrated their ability to identify

and respond to community needs for equity investments, loans, and

development services. They can play a critical role in the

comprehensive revitalization of distressed neighborhoods by addressing

the financing needs of the area that are otherwise unmet. The proposed

change to Sec. 570.208(a)(1)(i) and Sec. 570.483(b)(1)(i) would allow

that if a community development financial institution's charter limits

its overall investment area to a primarily residential area where at

least 51 percent of the residents are low- and moderate-income persons,

any economic development activity carried out under Sec. 570.203

(Sections 105(a) (14) and (17) of the Housing and Community Development

Act of 1974, as amended) by that institution would be presumed to

benefit that investment area generally. Thus, any such activity would

qualify as an area benefit activity. This would reduce record keeping

burdens for such activities while still ensuring that low- and

moderate-income persons are receiving benefits from the activities.

National Objective Compliance by Microenterprise Assistance

Activities

Just as there are unique aspects distinguishing the new

microenterprise eligibility category at section 105(a)(23) of the

statute from CDBG special economic development activities, there is

also a key distinction between the two types of activities relating to

national objective compliance. Special economic development activities

carried out under Sec. 570.203 (a) and (b) of the Entitlement

regulations (Sections 105(a) (14) and (17) of the statute,

respectively) are subject to the restrictions imposed by section

105(c)(1) of the Act. That section limits the manner in which CDBG

special economic development activities may be considered to meet the

national objective of benefiting low- and moderate-income persons.

Pursuant to section 105(c)(1), special economic development activities

carried out under Sec. 570.203 (a) and (b) (Sections 105(a) (14) and

(17) of the Housing and Community Development Act of 1974, as amended)

can only be considered to benefit low- and moderate-income persons

either as an area benefit activity (Sec. 570.208(a)(1) of the

Entitlement regulations and Sec. 570.483(b)(1) of the State

regulations) or as a job creation or retention activity

(Sec. 570.208(a)(4) of the Entitlement regulations and

Sec. 570.483(b)(4) of the State regulations). As noted above, however,

the new microenterprise eligibility category was added to the Act as a

new section 105(a)(23), and this new paragraph is not statutorily

subject to the restrictions imposed by section 105(c)(1). Thus, the

low- and moderate-income limited clientele method of meeting a national

objective becomes an option for activities carried out under the new

microenterprise eligibility category.

In this proposed rule, a new Sec. 570.208(a)(2)(iii) has been added

to the Entitlement regulations, and a new Sec. 570.483(b)(2)(iv) has

been added to the State regulations, to specifically provide the

limited clientele national objective option for the new microenterprise

assistance activities. The Department believes that the limited

clientele option provides the greatest flexibility for recipients and

their subrecipients actually carrying out microenterprise assistance

activities under the new eligibility category to qualify these

activities as benefiting low- and moderate-income persons. This

national objective provision would allow such activities to serve a

broad range of microenterprise owners and persons developing

microenterprises without concern as to whether and how many jobs are

actually being ``created'' or ``retained'' as those terms are used in

the CDBG Entitlement regulations at Sec. 570.208(a)(4)

[Sec. 570.483(b)(4) of the State regulations]. This may be particularly

significant when CDBG funds are used under the new eligibility category

for the ``stabilization'' of existing microenterprises or to assist

persons who subsequently decide against ``developing

microenterprises.'' Also, under this proposed national objective

provision, only the income status of the assisted microenterprise

owners and persons developing microenterprises would need to be

assessed; the recipient or subrecipient carrying out the activity would

not have to ascertain the income status of any employees who may be

hired or retained as a result of the CDBG assistance.

The proposed rule would also permit the aggregating of

beneficiaries by program year. Under the limited clientele provision,

the recipient and any subrecipient carrying out the activity would need

to demonstrate that at least 51 percent of the beneficiaries of the

activity during the program year are low- and moderate-income persons.

(States would need to demonstrate 51 percent low- and moderate-income

benefit for each annual grant. Recipients of grants from HUD under the

Insular Areas and HUD-Administered Small Cities programs would need to

demonstrate 51 percent low- and moderate-income benefit for each

separate grant.) Many activities carried out under the new eligibility

category will likely be designed to assist an individual as he/she is

attempting to develop a microenterprise and then to continue to assist

the individual once that person has actually become an owner of a

microenterprise. It is possible that a low- or moderate-income person

initially assisted under such an activity may no longer be considered

to be of low or moderate income in a later program year after the

microenterprise actually becomes operational. The Department believes

that some continuity of service for such persons may still be

desirable. Thus, the proposed rule states that for purposes of meeting

this national objective requirement, any person determined to be of low

or moderate income may be presumed to continue to qualify as such for

up to a three-year period before that person would have to requalify.

Comment on the proposed manner for permitting a microenterprise

assistance activity to demonstrate that it is meeting the national

objective of benefiting low- and moderate-income persons is welcome. As

discussed above, the Department believes that the proposed limited

clientele provision will provide the greatest flexibility to recipients

and their subrecipients actually carrying out such activities.

Demonstrating compliance as job creation or retention activities would

still be an option for activities carried out under the new eligibility

category, but the Department is not proposing to make any special

provisions in Sec. 570.208(a)(4) of the Entitlement regulations and

Sec. 570.483(b)(4) of the State regulations for such activities. While

job creation and retention activities can use the new presumptions

added by Section 806(e) of the 1992 Act for determining a person's

status as a low- or moderate-income person, the Department believes

that microenterprise assistance activities carried out under the new

eligibility category could still more easily meet national objective

requirements under the proposed limited clientele provision.

National Objective Standards for Benefiting Low- and Moderate-Income

Persons Through the Creation or Retention of Jobs--Presumptions Added

by 1992 Act

The proposed rule implements Section 806(e) of the 1992 Act by

amending Sec. 570.208(a)(4) [Sec. 570.483(b)(4) in the State

regulations] regarding the national objective standard for benefiting

low- and moderate-income persons through the creation or retention of

jobs. Section 806(e) of the 1992 Act amended section 105(c) of the

Housing and Community Development Act of 1974 by adding a new paragraph

(4) which permits certain presumptions to be made regarding the low- or

moderate-income status for employees benefiting under that national

objective criterion. The presumption permitted by the new section

105(c)(4)(B) was effective upon enactment of the 1992 Act and is now

being codified into the regulations. That section permits a person to

be presumed to be of low or moderate income under this national

objective standard if he/she resides within a census tract where not

less than 70 percent of the residents are low- and moderate-income

persons.

The presumption permitted by the new section 105(c)(4)(A) has not

yet become effective because it refers to census tracts that meet

Federal enterprise zone criteria and HUD determined that further

rulemaking was necessary to identify the specific criteria that must be

met. Section 834 of the 1992 Act makes references to and updates

certain portions of the enterprise zone designation authorized by

section 701 of the Housing and Community Development Act of 1987.

However, at the time the 1992 Act was enacted (October 28, 1992), a new

enterprise zone bill was also being considered in Congress. The Omnibus

Budget Reconciliation Act of 1993 (``1993 Act'') was subsequently

enacted on August 10, 1993. Title XIII, chapter I, subchapter C, part I

of that Act outlines a new program providing for the Federal

designation of Empowerment Zones and Enterprise Communities. This

program has now replaced the more limited enterprise zone designation

authority that was provided in the 1987 Act. Section 1392 of the 1993

Act prescribes the eligibility criteria for Empowerment Zones and

Enterprise Communities. While there are various size, population, and

distress criteria applicable to the overall area proposed for

designation, the only eligibility criterion that is applied to

individual census tracts is a poverty level standard. Pursuant to the

1993 Act, each census tract to be included in an Empowerment Zone or an

Enterprise Community must have a poverty rate of at least 20 percent.

(Note: HUD interprets all of the above-noted statutory

references to ``census tracts'' as also including ``block numbering

areas'' (``BNAs'') in areas where census tracts are not defined. As

used hereafter in this preamble, ``census tracts'' includes BNAs.)

The low- and moderate-income presumption authorized by the new

section 105(c)(4)(A), as added by section 806(e) of the 1992 Act,

states that under the national objective standard of benefiting low-

and moderate-income persons through the creation or retention of jobs,

a person may be presumed to be of low or moderate income if either the

person resides in a census tract that meets Federal enterprise zone

eligibility criteria or the assisted activity is located in such a

census tract. The statute does not require actual Federal designation,

but only that the census tract meet the eligibility criteria. As noted

above, the only eligibility criterion applicable to individual census

tracts under the new Empowerment Zone/Enterprise Community program is

the poverty level standard. Thus, HUD proposes to further amend

Sec. 570.208(a)(4) and Sec. 570.483(b)(4) in this rule to provide that

for purposes of determining whether a job is held by or made available

to a low- or moderate-income person, the person may be presumed to be

of low or moderate income if either (1) he/she resides in a census

tract where at least 20 percent of the residents are in poverty or (2)

the assisted business is located in a census tract where at least 20

percent of the residents are in poverty and the job under consideration

is to be located within that census tract. Such a change in the

regulations should significantly ease grantees' record keeping burdens

for many economic development activities, as was the apparent

Congressional intent behind the change in the statute. A conforming

change to Sec. 570.506(b) of the Entitlement regulations (the addition

of a new paragraph (7) with the subsequent paragraphs renumbered)

regarding records that need to be maintained is also included in this

proposed rule. Comment on HUD's interpretation of the subject statutory

provision is welcome.

The Department particularly seeks comment as to whether further

standards should be established for census tracts that comprise or

include any part of a community's central business district. In

delineating the size requirements for an area to be nominated as an

Empowerment Zone or an Enterprise Community, section 1392(a)(3)(D) of

the 1993 Act states that the area must exclude any portion of a central

business district unless the poverty rate for each census tract in such

district is not less than 35 percent in the case of an Empowerment Zone

or 30 percent in the case of an Enterprise Community. HUD is interested

in obtaining comment regarding whether the presumption of low- and

moderate-income status included in the proposed revision to

Sec. 570.208(a)(4) and Sec. 570.483(b)(4) should be revised to require

a higher than 20 percent poverty percentage for census tracts that are

part of a community's central business district and if so, whether such

a standard should be set at 30 or 35 percent.

It is noted that the new low- and moderate-income presumption based

on a census tract meeting the eligibility criteria for the Empowerment

Zone/Enterprise Community program would become effective only when a

final rule is published for effect in this regard. It should also be

noted that both of the above presumptions of a person's low- or

moderate-income status are only applicable to activities qualifying

under the low- and moderate-income national objective provisions of

Sec. 570.208(a)(4) and Sec. 570.483(b)(4), job creation or retention

activities. They cannot be extended to activities that qualify as

benefiting low- and moderate-income persons under any of the other

criteria delineated in Sec. 570.208(a) (1) through (3) or

Sec. 570.483(b) (1) through (3). This is because the new section

105(c)(4) of the Act, as added by section 806(e) of the 1992 Act,

specifically states that it is only ``for the purposes of subsection

(c)(1)(C).'' Section 105(c)(1)(C) of the Act is that provision which

states that one of the ways in which economic development activities

can be considered to principally benefit low- and moderate-income

persons is to ``involve employment of persons, a majority of whom are

persons of low and moderate income.''

Other Revisions Regarding Income Documentation

As noted above, a new paragraph (7) is proposed to be added to

Sec. 570.506(b) of the Entitlement regulations to specifically address

what records should be maintained to document compliance with the above

presumptions of a person's low- or moderate-income status as added by

the 1992 Act. HUD is also including in this proposed rule additional

revisions to the introductory paragraph of Sec. 570.506(b) regarding

information HUD will generally accept as documentation of income by

family size. The proposed revisions are principally designed to clarify

what is already the intent of the current rule. The proposed rule cites

specific examples of programs having income qualification criteria at

least as restrictive as CDBG and would also permit grantees to use

evidence that a person is homeless as a substitute for specific

information on income by family size.

Section 570.490(a) of the State regulations states that HUD and the

states shall jointly agree on the content of records to be maintained

by states. HUD is presently in the midst of negotiations with states on

recordkeeping, and will continue the consultation process when final

regulations are published.

Job Creation or Retention by Public Infrastructure Improvements

In this proposed rule, the Department is also including another

amendment to Sec. 570.208(a)(4) of the CDBG Entitlement regulations and

Sec. 570.483(b)(4) of the State CDBG program regulations that is not

directly related to any specific statutory change. This change relates

to grantee concerns that have been raised regarding the requirements

for demonstrating national objective compliance for CDBG-assisted

public infrastructure improvements, such as parking garages, streets,

and water and sewer improvements, that are designed to support an

economic development project and are claimed under the national

objective of benefiting low- and moderate-income persons through the

creation or retention of jobs. Inasmuch as such public infrastructure

improvements qualify independently for eligibility as public

facilities, they are not statutorily subject to the additional

eligibility determinations required for ``special economic

development'' activities. However, such infrastructure improvements may

often have unique difficulties in demonstrating compliance with the

national objective requirements for the creation or retention of jobs.

Grantee concerns in this regard have been most notable in the State

CDBG program, but Entitlement grantees, particularly urban counties,

may also face the same issues.

In the November 9, 1992, State CDBG Program Regulations, HUD

included a new criterion by which public improvements undertaken for

economic development purposes could demonstrate compliance with the

low- and moderate-income benefit national objective. Prior to 1992,

both the Entitlement and State CDBG programs had no specific criteria

for public improvement projects meeting the national objective through

job creation or retention. All recipients were required to track job

creation or retention indefinitely for any and all businesses

benefiting from the CDBG assistance for the public improvements. Such

is still the case for Entitlement grant recipients.

The present State program rule at Sec. 570.483(b)(4)(iv)(C)

requires that a unit of general local government develop an assessment

which identifies any businesses located or expected to locate in the

area to be served by the public improvement. Under that provision, the

jobs to be considered for purposes of meeting the national objective

are all jobs created or retained as a result of the public improvement,

both by businesses identified in the assessment and by any other

businesses which locate in the area within three years after the

completion of the public improvement. If the cost of the public

improvement is less than $3,000 per job, however, the jobs to be

considered may be limited to those created or retained by the

businesses identified in the assessment.

This criterion has been subject to considerable question and

concern from states. Three particular areas of concern have been

frequently cited:

(1) The $3,000 per job threshold is too low;

(2) Counting jobs from all businesses that locate in the area

within a three-year period is unreasonable, as most projects are

undertaken to serve one (or a small number of) specific, identified

business(es);

(3) Counting jobs from businesses which were not identified in the

initial assessment is problematic, because local governments cannot

predict or control the business expansion activities of all businesses

in the service area of a public improvement. A project could fail to

meet the low- and moderate-income benefit national objective if

unanticipated, higher-income jobs created by such previously

unidentified businesses reduce the aggregate percentage of low- and

moderate-income jobs below 51%.

The Department has considered the issues raised by states and their

experiences in implementing this criterion over the past year. As HUD

desires to make the CDBG program a more flexible resource for assisting

economic development projects, the Department proposes to revise the

current State program criterion and also add a comparable provision to

the Entitlement program regulations.

In this proposed rule, the $3,000 per job threshold is raised to

$10,000. The Department recognizes that a public works project with an

economic development purpose is usually undertaken with the primary

goal of assisting one (or a small number of) identified business(es).

Benefit might accrue from the CDBG-assisted public improvement to

other, currently unidentifiable businesses in the service area,

particularly if that area is relatively undeveloped; however, the

project is not being undertaken for their benefit. Where the $10,000

per job threshold can be met by the identified business(es) for whom

the public improvement is being undertaken, job creation or retention

by only that (those) specific business(es) must be tracked.

Where the $10,000 per job threshold cannot be met by considering

only those specific businesses, recipients will still be required to

track all job creation or retention resulting from the CDBG-assisted

public improvement. However, the time period for determining the

universe of businesses for which job creation must be tracked is

changed in this proposed rule. The time period would be changed from 3

years after completion of the improvement to a period starting with the

award of the grant by the state and ending one year after the

completion of the public improvement. In the case if an Entitlement

recipient, the period would start with the identification of the

project in the grantee's final statement. For recipients of grants from

HUD under the Insular Areas or HUD-Administered Small Cities programs,

the period would start with HUD's award of the grant to the recipient.

The proposed rule clarifies that the requirement applies to the time

period during which businesses move into a service area or expand as a

result of the assistance, not to the time period for which jobs must be

tracked for any given business.

The present State CDBG regulation requires that ``the assistance

must be reasonable in relation to the number of jobs''; the Department

chose not to define ``reasonableness'' in the existing regulations. The

portion of this proposed rule establishing the required guidelines for

evaluating the public benefit of special economic development

activities, which is fully discussed later in this preamble, provide a

gauge for defining the reasonableness of the CDBG cost per job.

Therefore, while a public facilities activity would not normally be

subject to the public benefit guidelines, HUD proposes to make such an

activity subject to the new public benefit guidelines proposed herein

at Sec. 570.209(b) and Sec. 570.482(e) in any case where the activity

is undertaken to support an economic development project and it does

not meet the $10,000 per job threshold that is proposed to be

established in the job creation or retention national objective

regulations. The Department will presume that public improvement

activities that meet the proposed $10,000 per job threshold provide

reasonable benefits relative to the amount of the assistance.

Given the above proposed changes, Sec. 570.208(a)(4) is also being

reformatted for clarity in this proposed rule. The only substantive

changes in this section of the regulations are those regarding the

presumptions added by the 1992 Act and job creation/retention by public

infrastructure projects as discussed above. These changes can be found

at the proposed new paragraphs Sec. 570.208(a)(4)(iv) and (v)(C),

respectively.

Request for Comment on Certain Other Job Creation/Retention Issues Not

Contained in the Proposed Rule

In addition to the revisions included in this proposed rule, HUD is

also deliberating certain other issues in an attempt to determine

whether further changes should be proposed regarding the national

objective standards for benefiting low- and moderate-income persons

through the creation or retention of jobs.

While the presumptions added by the 1992 Act regarding a person's

low- or moderate-income status for job creation or retention activities

should significantly ease grantees' record keeping burdens for many

economic development activities, HUD is also considering whether any

further presumptions could be made in this regard. Specifically, HUD is

deliberating whether any reasonable, objective presumption of a

person's low- or moderate-income status could be made on the basis of

the type of job being assisted. Given the statutory requirements of

Section 105(c)(1)(C) of the Act, it is recognized that the type of job

being created or retained cannot be the sole determining factor in

assessing whether an assisted activity actually benefits low- and

moderate-income persons. However, there may be cases where grantee

experience clearly demonstrates that in certain types of businesses or

industries, the large majority of persons employed are low- and

moderate-income persons. HUD is attempting to determine whether there

may be any feasible method for providing a grantee with some relief of

record keeping burdens in such cases. On the other hand, HUD does not

want to provide any encouragement for grantees to assist only those

businesses that produce what may be considered ``dead-end jobs.''

Comment on this issue is welcome.

CDBG job retention requirements are also often the subject of

debate. There is criticism by certain grantees and other entities that

the requirement to document that jobs claimed as being retained would

actually be lost without the CDBG assistance may result in assistance

that is ``too little and too late.'' Such groups argue that a grantee

should be able to provide CDBG assistance to businesses much earlier in

the process in order to help the business remain competitive. However,

it may often be the case that such efforts would actually result in the

``down-sizing'' of a business' workforce. Given that a job retention

national objective claim is based on providing employment

opportunities, principally for low- and moderate-income persons, any

such net reduction in a business' workforce is problematic. Relaxation

of the current requirement to document that jobs would otherwise be

lost may also provide opportunities for abuse of the CDBG program by

permitting assistance to any business that threatens to move or to

close without any objective evidence that supports such a statement.

Comment on these issues, particularly specific proposals as to how they

could be dealt with, is welcome.

There is a second aspect of CDBG job retention requirements that is

often criticized. That is the fact that, except for some allowance for

jobs that may become available through turnover, the low- and moderate-

income standards are applied at the time the assistance is provided,

which is while the employees still have the income from the jobs that

they are subject to lose. There can be cases where the employees do not

meet the low- and moderate-income limits at that point, but would

likely do so if the jobs are actually lost. The presumptions of a

person's low- and moderate-income status added by the 1992 Act should

help resolve this concern in many such situations. HUD is also

considering whether it may be appropriate to propose some further

regulatory change in this regard, particularly for cases where the

majority of persons holding the endangered jobs have limited education

and no specialized skills and the labor market area does not provide

opportunities for other employment at comparable rates of pay. Comment

on this issue, particularly specific proposals as to how it could be

dealt with, is welcome.

National Objective Standards for Addressing Slums or Blight on an Area

Basis

The proposed rule includes a revision to Sec. 570.208(b)(1)(ii) of

the Entitlement regulations and Sec. 570.483(c)(1)(ii) of the State

regulations to provide for a limited broadening of the requirements an

area must meet in order to be designated as a blighted area under the

CDBG program. Under current regulations, in addition to meeting a

definition of a blighted or deteriorating area under State or local

law, there must also either be a substantial number of deteriorated or

deteriorating buildings throughout the area or the public improvements

must be in a general state of deterioration. The proposed rule would

add a third option as a qualifier for areas that are exclusively

commercial or industrial in nature. Such an area could qualify as a

blighted area under the CDBG program if it met an applicable definition

under State or local law and exhibited pervasive economic

disinvestment. According to the change included in the proposed rule,

such economic disinvestment would be evidenced by a substantial number

of vacancies in previously occupied commercial or industrial buildings

in the area. This change would permit grantees to use CDBG funds to

assist an area experiencing substantial economic disinvestment before a

substantial number of buildings in the area actually reached the point

of being deteriorating or deteriorated. Comment on this proposed change

is welcome. The Department is particularly interested in receiving

comment regarding whether there are any alternative objective and

easily quantifiable measures of economic disinvestment in a commercial

or industrial area.

Request for Comment on an Additional Slum/Blight Issue Not Included in

the Proposed Rule

Several communities have described to the Department situations in

which the presence of environmentally contaminated sites negatively

affects the surrounding community. The Department has, in the past,

determined that cleanup of contaminated sites (as a clearance activity)

can meet the national objective of eliminating slums or blight on a

spot basis. Current regulations do not provide clear means for

recipients to demonstrate that an area is blighted because of

environmental contamination in and of itself.

The presence of contamination could cause abandonment of buildings

or long-term vacancies on or near contaminated sites, which may enable

a commercial or industrial area to qualify as blighted under the

revision to Sec. 570.208(b)(1)(ii) of the Entitlement regulations or

Sec. 570.483(c)(1)(ii) of the State regulations included in the

proposed rule. However, there may also be situations in which the link

between environmental contamination and economic disinvestment may not

be clear-cut.

At question is whether the presence of one or more contaminated

sites, in and of itself, should be considered as evidence of blighting

conditions in an area otherwise meeting a State or local definition of

blight or deterioration. Comments are invited on this issue. In

particular, the Department seeks comments addressing the following

questions:

--How severe must environmental contamination be to have a blighting

influence on an area? Should site(s) be required to appear on a Federal

``Superfund'' (or similar State) cleanup priority list in order to be

considered blighting? If not, how would the serious effect of the

contamination on the area be demonstrated?

--How pervasive must the contamination be in order to affect an entire

area? Must there be multiple contaminated sites throughout the area, or

can one or two contaminated sites be so significant as to cause a

larger overall area to be considered blighted?

--How broad a definition of ``contamination'' is appropriate? The

Department envisions that soil or groundwater pollution would generally

be viewed as ``contamination.'' Presence of hazardous building

materials (such as asbestos or lead-based paint) could also be viewed

as ``contamination''; however, such conditions could already permit an

area to qualify under the existing regulations by causing

``deteriorated or deteriorating buildings.'' Should more widespread air

or water pollution, which may affect not just one area but an entire

city or region, also be viewed as a blighting condition?

Guidelines for Evaluating and Selecting Economic Development Activities

for CDBG Assistance

The proposed rule implements section 806(a) of the 1992 Act at a

proposed new Sec. 570.209 in the Entitlement regulations and additions

to Sec. 570.482 in the State regulations. This proposed section of the

regulations is intended to provide guidelines for the purpose of

enabling the recipient to evaluate certain activities proposed to be

assisted with CDBG funds for economic development purposes.

Specifically, these guidelines are to be applied to activities that are

eligible under Sec. 570.203(a) or (b) and similar activities that may

be undertaken by a subrecipient eligible under Sec. 570.204 [Sections

105(a) (14), (17), and (15), respectively of the Housing and Community

Development Act of 1974, as amended]. Section 570.209(a) and

Sec. 570.482(d) discuss the guidelines and objectives for evaluating

project costs and financial requirements, and Sec. 570.209(b) and

Sec. 570.482(e) delineate the guidelines for evaluating public benefit.

In defining the applicability of these guidelines, HUD carefully

reviewed the language contained in section 806(a) of the 1992 Act. The

title of the new subsection added by this provision is cited as

``Guidelines for Evaluating and Selecting Economic Development

Projects.'' The text of the provision then states the following:

The Secretary shall establish, by regulation, guidelines to

assist grant recipients under this title to evaluate and select

activities described in section 105(a)(14), (15), and (17) for

assistance with grant amounts.

The correlation to sections 105(a) (14) and (17) of the Housing and

Community Development Act of 1974, as amended, is clear inasmuch as

those sections authorize the use of CDBG funds for special economic

development activities that are codified in the current Entitlement

regulations under Sec. 570.203 (a) and (b), respectively. Section

105(a)(15) of the Act, however, authorizes the provision of CDBG

assistance to certain eligible subrecipients to carry out a wide

variety of activities as part of a neighborhood revitalization,

community economic development, or energy conservation project. This

provision is codified in the CDBG Entitlement regulations at

Sec. 570.204 (revisions to which are included in this proposed rule).

HUD does not believe that Congress intended to extend the applicability

of the subject guidelines to all CDBG-assisted activities undertaken by

subrecipients eligible under Sec. 570.204, but rather limit the

coverage of the guidelines to economic development activities

undertaken by such entities. The Department has heretofore not formally

defined a ``community economic development project'' (see definition

proposed at Sec. 570.204(a)(2) herein), but the term can be broadly

considered to encompass any project that increases economic

opportunities for community residents. Establishing reasonable

evaluation measures relevant to the entire spectrum of activities

potentially eligible under this criterion would be quite complicated,

and the implementation of such standards could be unduly burdensome for

grantees. Such an outcome does not appear to be consistent with

Congressional intent in enacting the subject statutory provision. Thus,

in this proposed rule, HUD has, for the Entitlement, HUD-Administered

Small Cities, and Insular Areas Programs, limited the extent to which

the guidelines are to be applied to activities that are carried out

under Sec. 570.204 of the CDBG regulations. Activities implemented by

subrecipients eligible under Sec. 570.204 would be subject to the

guidelines only to the extent that if the eligible subrecipient were

not involved, the activities would otherwise be considered eligible

under Sec. 570.203. The State regulations note that the guidelines are

applicable to activities eligible under section 105(a)(17) of the

Housing and Community Development Act of 1974 (as amended), economic

development activities eligible under section 105(a)(14) of the Act,

and activities that are part of a community economic development

project eligible under section 105(a)(15) of the Act. Comment on this

interpretation is welcomed.

As noted above, the new section 105(e)(1) of the Housing and

Community Development Act of 1974, as added by section 806(a) of the

1992 Act, requires HUD to ``establish'' the referenced guidelines ``by

regulation.'' However, that section of the Act further specifically

states that the Secretary may not base a determination of ineligibility

of the use of CDBG funds for economic development activities solely on

the basis that the recipient fails to achieve one or more of the

objectives of that portion of the guidelines pertaining to project

costs and financial requirements. Given this limited ability to enforce

the financial guidelines, HUD considered a variety of approaches in

drafting the Sec. 570.209(a) and Sec. 570.482(d) portion of the

proposed rule. The first issue considered was whether the above

referenced statutory provision was intended to make conducting any form

of financial underwriting for CDBG-assisted economic development

activities totally optional on the part of grant recipients. If some

form of underwriting was to be required, the issue would then be

whether the regulations should specify the exact system of underwriting

that must be followed or whether the regulations should simply set

forth a ``safe harbor'' approach and allow grantees to follow some

other process as long as it aims at the same objectives. Also, given

the limited enforceability noted above, there is a question as to what

level of detail should be included in the regulations themselves.

The proposed rule states that the use of the financial guidelines

discussed under Sec. 570.209(a) and Sec. 570.482(d) is not mandatory.

To further demonstrate this point, the specific elements of the

financial guidelines are not included within the text of the proposed

rule itself. Instead, they are proposed to be published in a concurrent

but separate Federal Register Notice, which is subject to the same

standards for public review and comment as those that govern the

rulemaking process. It should be noted, however, that the proposed rule

further states that grantees electing not to use these guidelines would

be expected to conduct basic financial underwriting with respect to any

CDBG financial assistance provided to a for-profit business. States

would be expected to ensure that the state or units of general local

government conduct basic financial underwriting prior to the provision

of CDBG financial assistance to a for-profit business. Thus, compliance

with the exact financial guidelines delineated in the proposed Federal

Register Notice, which is also published herein, is optional on the

part of grant recipients. Nonetheless, HUD believes that sound

management practices dictate that some form of financial underwriting

be performed for any economic development activity proposed for

financial assistance under the CDBG program. Therefore, in cases where

such an activity receiving CDBG financial assistance fails to meet

other applicable program requirements, such as the public benefit

standards described in Sec. 570.209(b) and Sec. 570.482(e) of this

proposed rule or the national objective requirements, HUD will consider

the extent to which the recipient conducted prudent underwriting in

HUD's determination of the appropriate sanctions to be imposed on the

recipient for such noncompliance. Comment on this approach is welcomed.

Comment is also welcomed on the specific elements included in the

proposed financial guidelines. HUD believes that the information

included in the proposed Federal Register Notice provides reasonable

guidance for financial underwriting aimed at the objectives set forth

in the 1992 Act. The Department is interested in obtaining comment as

to whether the guidance provided is seen by local practitioners as

being sufficient or, on the other hand, overly prescriptive. Commenters

are encouraged to submit any recommended alternatives in this regard.

While the 1992 Act specifically limits HUD's enforcement of the

guidelines for project costs and financial requirements in assessing

the eligibility of the use of CDBG funds for economic development

activities, no such limitation is imposed by the Act on the guidelines

required to be established for evaluating the public benefit provided

by CDBG-assisted economic development activities. The new section

105(e)(3) of the Housing and Community Development Act of 1974, as

added by Section 806(a) of the 1992 Act, states that the guidelines

shall provide that the public benefit generated by such an activity is

appropriate relative to the amount of CDBG assistance provided for the

activity. The proposed rule implements this statutory provision at

Sec. 570.209(b) and Sec. 570.482(e) and states that unlike the

financial guidelines discussed in Sec. 570.209(a) and Sec. 570.482(d),

adherence to the guidelines for public benefit is mandatory.

Assessing the extent of public benefit expected to be derived from

an economic development project receiving financial assistance under

the CDBG program has long been required to be documented as part of the

``appropriate'' determination required as a condition of eligibility

for some of the activities covered by the guidelines. However, HUD has

heretofore provided little specific guidance as to what such an

assessment should entail. As discussed above, the changes made by the

1992 Act significantly increase the importance of the public benefit

review in determining the eligibility of certain CDBG-assisted economic

development activities. Thus, it is important that the guidelines

establish reasonable and clear standards for determining whether the

level of public benefit provided by an economic development activity is

appropriate given the amount of CDBG assistance provided to that

activity.

Establishing reasonable public benefit guidelines is a formidable

task. There are a myriad of different factors that are commonly

ascribed to the overall public benefit generated by an economic

development activity. The relative importance of the various factors

can vary significantly between communities, making it difficult to

establish a single set of standards on a national level. Setting such

standards is made even more difficult by the fact that many elements of

the public benefit provided by an economic development project are

highly qualitative and thus difficult to measure objectively.

In developing this proposed rule, HUD considered whether to attempt

to include in the regulatory guidelines a wide array of different

elements of public benefit that could be rated for each economic

development activity proposed for CDBG assistance. However, as noted

above, such an approach would require ratings on each activity for many

highly qualitative elements that can be difficult to measure

objectively. HUD thus decided against using this approach. One of the

common grantee complaints regarding the use of CDBG funds for economic

development activities has been that HUD staff have unreasonably

``second guessed'' the community's underwriting decisions in funding

specific businesses. Congress responded to such complaints in the 1992

Act by clearly stating that no ``but for'' test is to be applied to

CDBG-assisted economic development activities and as discussed earlier

in this preamble, by specifically prohibiting the Secretary from making

determinations of ineligibility solely on the basis that such an

activity fails to achieve the objectives of the financial guidelines.

Given the increased importance of the public benefit evaluation in

determining the eligibility of CDBG-assisted economic development

activities pursuant to the 1992 Act, HUD does not believe that it would

be beneficial to establish public benefit guidelines that could easily

become susceptible to similar ``second guessing'' debates.

In order to provide grantees with clear standards for assessing

what level of CDBG assistance, if any, may be appropriate for proposed

economic development activities, HUD believes it is best to delineate

standards using elements of public benefit that are easily measured and

commonly considered by grant recipients. One of the most widely used

and easily calculated measures in various public economic development

financing programs is a ``cost per job'' standard. HUD has determined

that such a standard is also appropriate to serve as a principal factor

for evaluating the level of public benefit provided by many CDBG-

assisted economic development activities, regardless of which national

objective may be claimed for the activity. It is also recognized,

however, that not all such activities are designed to create or retain

jobs. Some economic development activities assisted with CDBG funds are

designed to serve a certain geographic area, with no direct change in

employment levels. An example of such an activity is the provision of a

CDBG working capital loan to a neighborhood grocery store that may be

experiencing financial difficulties and thus plans to move to a

different location. HUD believes that a ``cost per low- and moderate-

income person served'' calculation is appropriate to serve as a

principal factor for measuring the level of public benefit provided by

such activities. However, HUD recognizes that using the above two

factors as principal measures may unduly limit the scope of the types

of public benefit that are to be generally considered in evaluating a

proposed economic development project for CDBG assistance. Thus, the

proposed rule also includes standards that focus on benefits that

address what HUD believes are important national interests.

The proposed rule at Sec. 570.209(b)(1) and Sec. 570.482(e)(2)

delineates certain basic tests to be applied to each economic

development activity receiving CDBG assistance. The ``CDBG cost per

job'' and the ``CDBG cost per low- and moderate-income person served''

standards included in these tests are designed to establish absolute

upper limits for what HUD would consider to be reasonable on an

individual project basis. This portion of the proposed rule also

delineates certain types of activities that HUD believes, in the

context of the CDBG program, provide insufficient public benefit. Thus,

HUD is proposing to deem these activities to be ineligible for

assistance as part of activities governed by the public benefit

standards. Comment on this proposed list of activities is welcome.

Commenters are encouraged to submit justification for any recommended

additions or deletions.

Beyond the above threshold tests for individual activities, the

proposed rule establishes criteria for measuring the public benefit of

a grantee's CDBG economic development activities on an aggregate

portfolio basis. Under the State CDBG program, these standards would be

applied to the aggregate amount of all such activities carried out by

all units of local government receiving funds from a state's annual

grant. A state would aggregate each annual grant separately, for the

entire time period that an annual grant remains open. Under the HUD-

Administered Small Cities and Insular Areas CDBG Programs, these

standards would be applied to the aggregate amount of all such

activities carried out by the grantee from a single year's grant. A

grantee would aggregate each grant separately, for the entire time

period that a grant remains open. Under the Entitlement program, these

standards would be applied to the aggregate of all such activities for

which the grantee obligated CDBG funds within a single program year

without regard to the source year of the funds. Such aggregate tests

are similar to those already used by other public economic development

financing programs, such as the Small Business Administration's (SBA's)

Section 504 program. They provide the grantee with more flexibility in

selecting individual economic development activities for CDBG funding.

The proposed rule at Sec. 570.209(b)(2) and Sec. 570.482(e)(3)

describes two different criteria that may be used to measure public

benefit in the aggregate. Only one of these criteria would have to be

met to demonstrate compliance with the standards for activities in the

aggregate. Each grantee would have the option of choosing which

criterion it would meet. The first option in the proposed rule applies

a $35,000 ``CDBG cost per job'' standard and a $350 ``CDBG cost per

low- and moderate-income person served'' standard to a grantee's

aggregate portfolio. Under the second option, a grantee would be

considered to meet the public benefit standards if at least 75 percent

of the aggregate amount of CDBG funds used by the grantee for economic

development activities is used for activities that are principally

designed to address at least one of a variety of specified goals that

HUD believes represent important national interests.

Public comment on the proposed rule's approach for evaluating the

level of public benefit provided by a grantee's CDBG-assisted economic

development activities, including the specific numerical standards

established, is particularly welcome. In considering whether and how to

comment on this section, there are certain factors that should be kept

in mind. While it has been noted earlier in this preamble that the

aggregate ``cost per job'' standard is similar to that already used by

SBA's Section 504 program, the proposed CDBG standard is different in

one significant fashion. While SBA's cost per job calculation is based

only on the amount of the debentures guaranteed by SBA, the amount of

CDBG funds to be used in the cost per job calculation under the

proposed CDBG standard is the total amount of CDBG funds used by the

grantee for economic development activities in the specified period.

This amount would include all CDBG-funded activity delivery costs for

economic development activities and all CDBG funds used for technical

assistance to for-profit businesses. Secondly, in devising the proposed

CDBG standards, consideration was given to the possibility of

differentiating between loans and grants. When CDBG funds are provided

to an economic development activity in the form of a loan, it is

generally with the expectation that the funds will be repaid over some

term. Any repayment of such funds reduces the activity's ultimate

``cost'' to the CDBG program. However, the face amount of the loan

still represents at least an ``opportunity cost'' to the grantee's CDBG

program. Given that the majority of CDBG assistance to for-profit

businesses is awarded in the form of loans, HUD has thus determined

that adding any calculations to the public benefit standards to

differentiate between loans and grants would unnecessarily complicate

the process and would be unduly burdensome for grantees.

Section 570.209(c) and Sec. 570.482(f) of the proposed rule address

amendments to economic development activities after the ``appropriate''

review determinations have been completed. As an economic development

activity is implemented, there are often changes in the financing

structure and other various aspects of the project. The intent of this

provision is to indicate that when such changes occur, the grantee

should reevaluate the various terms and conditions of the CDBG

assistance it has agreed to provide for the project. HUD considers each

such reevaluation to be equivalent to a new ``appropriate''

determination in that it is subject to the same guidelines,

particularly those relating to public benefit.

Section 570.209(d) and Sec. 570.482(e)(5) of the proposed rule

address the grantee's responsibility to maintain records that

demonstrate the actual public benefit results, based on the standards

contained in Sec. 570.209(b) and Sec. 570.482(e), achieved upon

completion of the CDBG-assisted economic development activities. These

records must also indicate how the actual results for each project

compare to the level of benefit that was projected to be achieved by

the project at the time the CDBG assistance was obligated. If actual

results vary substantially from the grantee's initial projections, the

grantee is expected to take all actions reasonably within its control

to improve the accuracy of its projections in future cases. This

paragraph is intended to address possible grantee concerns that it may

be put in the position of having to guarantee job creation/retention

results under the proposed public benefit standards. HUD generally

judges compliance with program requirements on the basis of actual

results rather than initial projections. Thus, with the proposed public

benefit standards, HUD intends to track the aggregate of economic

development activities funded by a grantee each year to assess whether

the cost per job standards are actually met. Assessing compliance only

on initial job projections would invite abuse through deliberate

overstatements. As experience with the national objective standard for

benefiting low- and moderate-income persons through the creation or

retention of jobs has shown, the number of jobs actually created by a

CDBG-assisted activity is often less than that which was originally

projected by the grantee. The reasons for the decrease in the number of

jobs created may vary from unexpected developments in the economy

completely beyond the control of the grantee to the deliberate

overstatement of job projections at the time the CDBG assistance was

obligated. It is unreasonable to expect that the number of actual jobs

created by CDBG-assisted economic development activities will always

meet or exceed original projections. However, if actual results vary

significantly from initial projections, the grantee is expected to

review its systems for making such projections and/or reviewing those

supplied by developers and take all actions reasonably within its

control to improve the accuracy of the projections. The actions the

grantee takes in this regard will be considered by HUD in determining

the appropriate sanctions to be imposed on the recipient for any

noncompliance with the public benefit standards.

History of Special Activities by Certain Subrecipients (Section

105(a)(15) of the Act)

This portion of the rule proposes changes to Sec. 570.204 of the

Entitlement regulations, which implements section 105(a)(15) of the

Act, authorizing the provision of ``assistance to neighborhood-based

nonprofit organizations, local development corporations, or entities

organized under 301(d) of the Small Business Investment Act of 1958 to

carry out a neighborhood revitalization or community economic

development or energy conservation project * * *.'' Activities assisted

in accordance with the requirements of Sec. 570.204 are eligible in

their own right, and may thus consist of activities that are ineligible

to be carried out by the recipient, or by subrecipients which do not

qualify under this section. Over the past several years, the Department

has been aware of a considerable amount of confusion among grantees

concerning various aspects of this provision. The main questions raised

repeatedly have been: What kinds of organizations can qualify as

special subrecipients; what limitations are there on the involvement of

the grantee in establishing or operating the organization; and, what

are the essential characteristics of the types of projects to which

this provision is limited? It has become increasingly apparent that

clarification of the provision would be useful. As noted above, one of

the project types that this provision makes eligible is that of

community economic development. Because HUD has embarked upon a course

aimed at making the CDBG program more readily used for economic

development, it has been decided to propose changes to this provision

at this time.

In order to minimize the confusion and misunderstanding concerning

Sec. 570.204, this rule would provide specific criteria for the

entities permitted to carry out such activities and assure that they

are not controlled by the recipient (or other entities not qualified

under this section) to indirectly carry out activities for which they

are ineligible. The rule also establishes the requirement for

meaningful involvement of the eligible subrecipient receiving

assistance ``to carry out a * * * project,'' in order to preclude the

use of the subrecipient as a mere conduit to launder CDBG funds for

otherwise ineligible activities. In addition, the rule provides

definitions for the three types of projects made eligible by section

105(a)(15), particularly in regard to a neighborhood revitalization

project (under which most of the activities are currently carried out

for otherwise ineligible housing activities). The purpose of this is to

give meaning to the statutory ``project'' language and to make clear

that any single CDBG-assisted activity, such as an otherwise ineligible

public service or residential construction, will not of itself

necessarily qualify simply because it is carried out by a subrecipient

qualified under this section. The changes in this rule would apply to

metropolitan city and urban county entitlement recipients.

The only legislative history on the meaning of ``local development

corporation'' in section 105(a)(15) is the reference in the House

Report, 95th Congress 1st Session (1977), to ``local development

corporations organized under either Federal or State laws such as those

under title VII of the Community Services Act of 1974.'' Both title VII

and its successor legislation, the Community Economic Development Act

of 1981, defined community development corporation as:

a nonprofit organization responsible to residents of the area it

serves and which is receiving assistance under part A and any

organization more than 50 percent of which is owned by such an

organization, or designated by such an organization for the purpose

of this subchapter [Subchapter I]. [emphasis added.]

The purpose of Subchapter I--Community Economic Development was:

To encourage the development of special programs by which the

residents of urban and rural low-income areas may, through self-help

and mobilization of the community at large, with appropriate Federal

assistance, improve the quality of their economic and social

participation in community life in such a way as to contribute to

the elimination of poverty and the establishment of permanent

economic and social benefits.

The purpose of part A was:

To establish special programs of assistance to nonprofit private

locally initiated community development corporations which (1) are

directed to the solution of the critical problems existing in

particular communities or neighborhoods (defined without regard to

political or other subdivisions or boundaries) within those urban or

rural areas having concentrations or substantial numbers of low-

income persons; (2) are of sufficient size, scope, and duration to

have an appreciable impact in such communities, neighborhoods and

rural areas in arresting tendencies toward dependency, chronic

unemployment, and community deterioration; (3) hold forth the

prospect of continuing to have such impact after the termination of

financial assistance under this part; and (4) provide financial and

other assistance to start, expand, or locate enterprises in or near

the area to be served so as to provide employment and ownership

opportunities for residents of such areas * * *

Despite the emphasis on economic development in title VII and the

Community Economic Development Act of 1981, the range of activities

permitted for CDCs under these Acts included not only community

business and commercial development programs, but also community

physical development programs, including parks and housing activities

that contribute to an improved environment, and a variety of public

service programs that complement the community development program.

Special Subrecipient Local Development Corporations

As can be seen, the term local development corporation (LDC) does

not have a precise and uniform meaning, but rather encompasses a

diverse range of organizations generally sharing certain basic

characteristics. The existing regulation at Sec. 570.204 therefore

recognizes LDCs qualified under sections 502 and 503 of the Small

Business Investment Act, the CDCs under title VII and the Community

Economic Development Act of 1981, and ``other entities incorporated

under State or local law whose membership is representative of the area

of operation of the entity (including nonresident owners of businesses

in the area) and which are similar in purpose, function, and scope to

the above listed organizations.'' Most LDCs have in common the

characteristics of operating in a defined geographic area; being

established and controlled by residents and businesses located in the

defined area; carrying out community development activities, including

economic development and housing assistance; being established for the

purpose of meeting critical needs in the area, particularly of lower-

income persons, by improving the physical, economic, and social

environment of the area; and being not-for-profit associations or

corporations created under State or local law. While some LDCs may vary

somewhat (e.g., the SBA LDCs provide assistance only for economic

development, do not have a focus on lower-income areas or persons, and

may be for-profit if earnings are only incidental to their operations),

the proposed rule sets forth these more commonly shared characteristics

(including a focus on lower-income residents of the area in view of the

primary purpose of benefiting such persons under the CDBG program) as

the criteria that must be met for all LDCs qualified in Sec. 570.204.

Note that the statutory reference to entities organized under section

301(d) of the Small Business Investment Act of 1958 is reflected in the

proposed rule revisions although these for-profit entities make loans

to businesses (or to other entities that make loans to businesses), and

these activities were made eligible under other provisions of the CDBG

program added in 1981 (Sec. 570.203(b) of the Entitlement regulations).

Reference to the SBA 502 and 503 organizations would be continued in

this rule, however, to avoid unnecessarily disqualifying currently

qualified organizations.

The Department anticipates that a few entities that recipients

believe qualify under the current rule would not qualify under this

rule, and plans to allow in the final rule for a one-year grace period

during which any such organizations may reorganize or find other

funding. Because this rule is based on the history of legislation,

regulation, and policy currently in place, it should not affect the

eligibility of many currently qualified organizations.

Two New Special Subrecipient Policies

Two points on which this proposed rule varies from the current rule

for CDBG entitlements deserve mention. First, this rule would reflect

the policy in the State CDBG program that when the funded project

activities carried out by the subrecipient under this subpart include,

as activities integral to the project, otherwise ineligible income

payments or other public service activities that are eligible under

section 105(a)(8) of the statute, such activities are not subject to

the limitations in that section. This change will be particularly

important for special subrecipients who wish to provide services, such

as day care and job training, as part of a Sec. 570.204 project. Such

services would not be subject to the public service cap. Removal of

this limit would provide more flexibility for community-based efforts

by entitlement communities.

The ``maintenance of effort'' requirements that apply to public

service activities protect an important part of the goals of the CDBG

program, and would be included in this proposed rule to cover both

otherwise eligible and otherwise ineligible public services. The

Department requests comment on inclusion of this clause.

The second point of variation from the current rule is that the

distinction between ``public'' and ``private'' nonprofits, now used to

exclude public nonprofits that might potentially be controlled by the

grantee from eligibility under this section, will no longer be made in

determining the eligibility of entities under this section. A public

nonprofit entity that meets the requirements to be an LDC may now

qualify. The Department believes that these requirements are sufficient

to ensure the independence of the LDC.

Special Subrecipients in Nonentitlement Areas

Section 807(f) of the 1992 Act expanded the list of organizations

eligible to carry out activities in nonentitlement areas under section

105(a)(15) of the Housing and Community Development Act of 1974, as

amended. ``Nonprofit organizations serving the development needs of the

communities of nonentitlement areas'' may now qualify as special

subrecipients under section 105(a)(15) of the Act. Since the State CDBG

program regulations contain no listing of eligible activities, no

regulatory language is needed to implement this change. Consistent with

the above discussions of proposed changes to Sec. 570.204 of the

Entitlement regulations, the Department interprets section 807(f) of

the 1992 Act as clearly excluding units of general local government.

However, a public nonprofit organization that meets Internal Revenue

Service requirements for nonprofit status may qualify.

Description of Regulatory Changes

Projects defined. The changes in the rule begin at Sec. 570.204(a)

by clarifying that activities funded under this section may be

considered either alone or in concert with other activities being

carried out or for which funding has been committed (which other

activities need not be funded with CDBG funds or carried out by the

subrecipient) for purposes of determining whether an eligible

Sec. 570.204 neighborhood revitalization, community economic

development, or energy conservation project is being undertaken. The

rule continues with definitions of the eligible projects under

Sec. 570.204: Neighborhood revitalization, community economic

development, and energy conservation projects. The definition of

``carry out'' is included to clarify how the LDC is to control the

project.

Public services. The new policy on application of the funding

limitation on public service activities and of the maintenance of

effort clause is discussed above. The Department's interpretation of

the existing rule is that when ineligible public services, such as

income payments, are carried out under Sec. 570.204, the activity is

considered to be a public service and the funds used for this purpose

are subject to the 15 percent limitation at Sec. 570.201(e). Judging

from the questions received by HUD on this matter, recipients do not

believe that the existing rule is sufficiently clear on this matter.

Thus, this proposed rule clarifies the policy.

Ineligible activities. Paragraph (b) has been replaced with a new

paragraph delineating the types of otherwise ineligible activities that

are also not authorized under this section.

Eligible subrecipients. Paragraph (c) has been rewritten to define

eligible subrecipients. This proposed rule removes any further

reference in the rule to neighborhood-based nonprofits (NBNs) since

most, if not all, NBNs qualified under the current rule could meet the

qualifying criteria for an LDC in the proposed rule. The sole purpose

of this change is to simplify the regulation. The Department believes

that NBNs can be very effective agents for neighborhood revitalization

and community economic development, and has drafted this rule to

continue the qualification of such organizations. The proposed rule

refers to all qualifying entities as LDCs, regardless of the geographic

area they serve.

Community control. In general, the Department's history in

implementing section 105(a)(15) reflects a belief that community

control, and not mere community participation is crucial to the

existence of an LDC. Therefore, at Sec. 570.204(c)(2), this rule would

require that 51 percent of the governing body of a qualified LDC be

low- and moderate-income persons residents of or business owners in the

LDC's area of operation. This reflects current policy for most NBN

organizations under Sec. 570.204(c)(1), LDC/CDC organizations under

Sec. 570.204(c)(3)(i), and those organized like CDCs pursuant to the

``similar to'' language at Sec. 570.204(c)(3)(iii). The 51 percent

requirement possibly may disqualify some organizations that currently

qualify as NBNs because their clients are residents of the

neighborhood, even though no residents serve on the governing body of

the organization. The Department believes that the definition of NBN in

the existing rule at Sec. 570.204(c)(1) has allowed grantees to create

``shell'' organizations that serve as conduits for grantees to carry

out otherwise ineligible activities without benefit of any significant

contribution to decision making from persons with a stake in the

neighborhood.

The reasons for the changes the rule proposes at Sec. 570.204(c) to

the definition of LDC have been discussed above. Comment is

specifically requested on whether these changes will disqualify any

truly community-based and controlled organizations, and if so,

specifically how the rule will have this effect.

Special Subrecipients and ``CHDOs''

The new HOME Investment Partnerships program authorized under Title

II of the National Affordable Housing Act of 1990 has a provision

defining community housing development organizations, or ``CHDOs'',

which are similar in many ways to LDCs. In developing this proposed

rule, some care was taken when drafting the language describing common

characteristics of LDCs to define the same characteristics of LDCs as

the HOME regulations define for CHDOs. By establishing definitions

around the same criteria (e.g. percentage of low- and moderate-income

persons on the governing body, percentage of grantee or other entity

representation on the governing body, primary purpose of the

organization, geographic area served) the Department hopes to minimize

confusion among organizations that may qualify both as an LDC for CDBG

and as a CHDO under the HOME Program, and may want to receive funds

under both. After further consideration of these criteria and the

activities undertaken by Sec. 570.204 subrecipients and by CHDOs, the

Department has decided to propose that any qualified CHDO that (1) is

designated by the participating jurisdiction in accordance with the

HOME program rules and (2) has a geographic area of operation that is

no greater than one neighborhood, and (3) has or is expected to receive

HOME funds for developing housing would qualify as an LDC. Note that

two characteristics of CHDOs can vary from the common characteristics

of LDCs in general: (1) CHDOs can serve a geographic area as large as a

metropolitan area (LDCs may serve no more than one county); and (2) the

minimum percentage of low- and moderate-income persons on the governing

body of a CHDO is the same as the percentage of grantee or other entity

appointments (i.e. 33 percent) (the minimum percentage of low- and

moderate-income persons/representatives on the board of an LDC is 51

percent).

While it would be possible under this proposal for one organization

to be designated both as an LDC for CDBG and as a CHDO for HOME, the

CDBG and HOME program requirements for activities undertaken by the two

types of organizations are NOT identical. For example, an LDC using

CDBG funds under Sec. 570.204 must carry out a neighborhood

revitalization, community economic development, or energy conservation

project, and meet a national objective. A CHDO funded under the HOME

program must develop, own or sponsor housing that meets income

targeting and affordability requirements. To the extent feasible within

the above constraints, the Department has developed this proposed rule

to avoid an unnecessary burden on any organization that may qualify

both as an LDC and as a CHDO. The Department requests comments on this

aspect of the proposed rule.

Relationship to Section 3 Economic Opportunity Requirements

Recipients of CDBG funds must also comply with the requirements of

section 3 of the Housing and Urban Development Act of 1968 (Section 3),

as amended by Section 915 of the 1992 Act. Section 3 requires that, to

the greatest extent feasible, and consistent with existing Federal,

State and local laws and regulations, employment and other economic

opportunities arising in connection with the CDBG assistance to any

Section 3 covered project are given to low- and very low-income persons

residing within the metropolitan area (or nonmetropolitan county) in

which the project is located. For the CDBG program, Section 3 covered

projects include housing rehabilitation, housing construction, and

other public construction. The Section 3 requirements apply to

training, employment and contracting opportunities arising in

connection with a covered project, as well as job (or other

opportunities) which may be retained or created as a result of the

project. The Department anticipates that regulations implementing the

1992 amendments to Section 3 will be published this fiscal year.

Other Matters

Justification for 30-day Public Comment Period

The Department has determined that it is contrary to the public

interest to have the usual 60-day comment period and, therefore,

believes it appropriate to shorten the comment period to 30 days in

order to expedite the process for developing a final rule that may be

published for effect. Current requirements governing the use of CDBG

funds for economic development activities are unclear, and thus they

tend to be inconsistently applied. This uncertainty has caused many

communities to be apprehensive about undertaking economic development

activities with CDBG funds. As a result, potentially valuable

opportunities for economic empowerment may be lost. While some of the

statutory changes made by the 1992 Act became effective upon enactment,

certain provisions will not become effective until a final rule is

published.

Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

proposed in this proposed rule would not have Federalism implications

when implemented and, thus, are not subject to review under the Order.

Nothing in the proposed rule implies any preemption of State or local

law, nor does any provision of the proposed rule disturb the existing

relationship between the Federal Government and State and local

governments.

Executive Order 12606, the Family

The General Counsel, as the designated Official under Executive

Order 12606, has determined that this proposed rule would not have

potential significant impact on family formation, maintenance, and

general well-being, and, thus, is not subject to review under the

Order.

Environmental Finding

A Finding of No Significant Impact with regard to the environment

has been made in accordance with HUD regulations in 24 CFR part 50,

which implement section 102(2)(C) of the National Environmental Policy

Act of 1969, 42 U.S.C. 4321. The Finding of No Significant Impact is

available for public inspection between 7:30 a.m. and 5:30 p.m.

weekdays in the Office of the Rules Docket Clerk, room 10276, 451

Seventh Street SW., Washington, DC 20410.

Regulatory Flexibility

Under the Regulatory Flexibility Act (5 U.S.C. 605(b)), the

Secretary by his approval of publication of this proposed rule hereby

certifies that this proposed rule would not have a significant economic

impact on a substantial number of small entities. The rule does not

affect the amount of funds provided in the CDBG program, but rather

modifies and updates program administration and procedural requirements

to comport with recently enacted legislation.

Semiannual Agenda

This proposed rule was listed as item 1638 in the Department's

Semiannual Agenda of Regulations published on April 25, 1994 (59 FR

20424, 20458) under Executive Order 12866 and the Regulatory

Flexibility Act.

Catalog of Federal Domestic Assistance

The Community Development Block Grant Program is listed in the

Catalog of Federal Domestic Assistance under the following numbers:

Entitlements--14.218, HUD-administered Small Cities--14.219, Indian--

14.223, Insular Areas--14.225, State's Program--14.228.

List of Subjects in 24 CFR Part 570

Administrative practice and procedure, American Samoa, Community

development block grants, Grant programs--education, Grant programs--

housing and community development, Guam, Indians, Lead poisoning, Loan

programs--housing and community development, Low and moderate income

housing, New communities, Northern Mariana Islands, Pacific Islands

Trust Territory, Pockets of poverty, Puerto Rico, Reporting and

recordkeeping requirements, Small cities, Student aid, Virgin Islands.

Accordingly, 24 CFR part 570, subparts C, I, and J, are proposed to

be amended as follows:

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

Subpart C--Eligible Activities

1. The authority citation for 24 CFR part 570 would continue to

read as follows:

Authority: 42 U.S.C. 3535(d) and 5300-5320.

2. In Sec. 570.200, paragraph (e) would be revised to read as

follows:

Sec. 570.200 General policies.

* * * * *

(e) Recipient determinations required as a condition of

eligibility. In several instances under this subpart, the eligibility

of an activity depends on a special local determination. Recipients

shall maintain documentation of all such determinations. A written

determination is required for any activity carried out under the

authority of Secs. 570.201(f), 570.202(b)(3), 570.203(b), 570.204,

570.206(f), and 570.209.

* * * * *

3. In Sec. 570.201, paragraph (o) would be added to read as

follows:

Sec. 570.201 Basic eligible activities.

* * * * *

(o) (1) The provision of assistance either through the recipient

directly or through public and private organizations, agencies, and

other subrecipients (including nonprofit and for-profit subrecipients)

to facilitate economic development by:

(i) Providing credit, including, but not limited to, grants, loans,

loan guarantees, and other forms of financial support, for the

establishment, stabilization, and expansion of microenterprises;

(ii) Providing technical assistance, advice, and business support

services to owners of microenterprises and persons developing

microenterprises; and

(iii) Providing general support, including, but not limited to,

peer support programs, counseling, child care, transportation, and

other similar services, to owners of microenterprises and persons

developing microenterprises.

(2) Services provided under this paragraph (o) shall not be subject

to the restrictions on public services contained in Sec. 570.201(e).

4. Section 570.203 would be amended by revising the introductory

text and paragraph (b); and by adding a new paragraph (c) to read as

follows:

Sec. 570.203 Special economic development activities

A recipient may use CDBG funds for special economic development

activities in addition to other activities authorized in this subpart

which may be carried out as part of an economic development project.

Guidelines for selecting activities to assist under this paragraph are

provided at Sec. 570.209. The recipient must ensure that the

appropriate level of public benefit will be derived pursuant to those

guidelines before obligating funds under this authority. Special

activities authorized under this section do not include assistance for

the construction of new housing. Special economic development

activities include:

* * * * *

(b) The provision of assistance to a private for-profit business,

including, but not limited to, grants, loans, loan guarantees, interest

supplements, technical assistance, and other forms of support, for any

activity where the assistance is appropriate to carry out an economic

development project, excluding those described as ineligible in

Sec. 570.207(a). In selecting businesses to assist under this

authority, the recipient shall minimize, to the extent practicable,

displacement of existing businesses and jobs in neighborhoods.

(c) Economic development services in connection with activities

assisted under this section, including, but not limited to, outreach

efforts to market available forms of assistance; screening of

applicants; reviewing and underwriting applications for assistance;

preparation of all necessary agreements; monitoring and management of

assisted activities; and the screening, referral, and placement of

applicants for employment opportunities generated by CDBG-assisted

economic development activities, including the costs of providing

necessary training for persons filling those positions.

5. Section 570.204 would be revised to read as follows:

Sec. 570.204 Special activities by Local Development Corporations

(LDCs).

(a) Eligible activities. The recipient may provide CDBG funds as

grants or loans to any LDC subrecipient qualified under this section to

carry out a neighborhood revitalization, community economic

development, or energy conservation project. The funded project

activities may include those listed as eligible under this subpart,

and, except as described in paragraph (b) of this section, activities

not otherwise listed as eligible under this subpart. For purposes of

qualifying as a project under paragraphs (a)(1), (a)(2), and (a)(3) of

this section, the funded activity or activities may be considered

either alone or in concert with other project activities either being

carried out or for which funding has been committed. For purposes of

this section:

(1) Neighborhood revitalization project means an activity or

activities of sufficient size and scope to have an impact on the

decline of a geographic location within the jurisdiction of a unit of

general local government (but not the entire jurisdiction) designated

in comprehensive plans, ordinances, or other local documents as a

neighborhood, village, or similar geographical designation; or the

entire jurisdiction of a unit of general local government which is

under 25,000 population;

(2) Community economic development project means an activity or

activities that increase economic opportunity for persons of low- and

moderate-income or that stimulate or retain businesses or permanent

jobs;

(3) Energy conservation project means an activity or activities

that address local energy conservation;

(4) To carry out a project means that the LDC undertakes the funded

activities directly or through contract with an entity other than the

grantee, or through the provision of financial assistance for

activities in which it retains a direct and controlling involvement and

responsibilities; and

(5) When the funded project activities carried out by the

subrecipient under this subpart include income payments described as

ineligible in Sec. 570.207(b)(4) or other public service activities

generally eligible under Sec. 570.201(e), such activities shall not be

subject to the limitations in Sec. 570.201(e); however, such an

activity must be either a new service or a quantifiable increase in the

level of an existing service above that which has been provided by or

on behalf of the unit of general local government (through funds raised

by the unit, or received by the unit from the State in which it is

located) in the twelve calendar months before the submission of the

statement. (An exception to this requirement may be made if HUD

determines that any decrease in the level of service was the result of

events not within the control of the unit of general local

government.);

(b) Ineligible activities. Notwithstanding that subrecipients may

carry out activities that are not otherwise eligible under this

subpart, this section does not authorize:

(1) Carrying out an activity described as ineligible in

Sec. 570.207(a);

(2) Providing assistance to activities that would otherwise be

eligible under Sec. 570.203 that do not meet the requirements of

Sec. 570.209; or

(3) Carrying out an activity that would otherwise be eligible under

Sec. 570.205 or Sec. 570.206, but that would result in the recipient's

exceeding the spending limitation in Sec. 570.200(g).

(c) Eligible subrecipients. (1) An LDC qualifying under this

section is an organization which has the following characteristics:

(i) Is an association or corporation organized under State or local

law to engage in community development activities (which may include

housing and economic development activities) within an identified

geographic area of operation not to exceed the jurisdiction of the

recipient, or in the case of an urban county, the jurisdiction of the

county; and

(ii) Has as its primary purpose the improvement of the physical,

economic or social environment of its geographic area of operation by

addressing one or more critical problems of the area, with particular

attention to the needs of persons of low and moderate income; and

(iii) May be either non-profit or for-profit, provided any monetary

profits to its shareholders or members must be only incidental to its

operations; and

(iv) Maintains at least 51 percent of its governing body's

membership for low- and moderate-income residents of its geographic

area of operation, owners of private establishments located in its

geographic area of operation, or representatives of low- and moderate-

income neighborhood organizations located in its geographic area of

operation; and

(v) Is not an agency or instrumentality of the recipient and does

not permit more than one-third of the membership of its governing body

to be appointed by, or to consist of, elected or other public officials

or employees or officials of an ineligible entity (even though such

persons may be otherwise qualified under paragraph (c)(1)(iv) of this

section); and

(vi) Except as otherwise authorized in paragraph (c)(1)(v) of this

section, requires the members of its governing body to be nominated and

approved by the general membership of the organization, or by its

permanent governing body; and

(vii) Is not subject to requirements under which its assets revert

to the recipient upon dissolution except as required for compliance

with Sec. 570.503(b)(8); and

(viii) Is free to contract for goods and services from vendors of

its own choosing.

(2) An LDC will also qualify as an eligible subrecipient under this

section if it meets one of the following requirements:

(i) Is an entity organized pursuant to section 301(d) of the Small

Business Investment Act of 1958 (15 U.S.C. 681(d)), including those

which are profit making, or

(ii) Is an SBA approved Section 501 State Development Company or

Section 502 Local Development Company, or and SBA Certified Section 503

Company under the Small Business Investment Act of 1958, as amended; or

(iii) Is a Community Housing Development Organization (CHDO) under

24 CFR 92.2, designated as a CHDO by the HOME Investment Partnerships

program participating jurisdiction, with a geographic area of operation

of no more than one neighborhood, and has received HOME funds under 24

CFR 92.300 or is expected to receive HOME funds as described in and

documented in accordance with 24 CFR 92.300(e).

6. Section 570.208 would be amended by revising the paragraph

heading of paragraph (a) and by revising paragraph (a)(1)(i); by adding

a new paragraph (a)(2)(iii); and by revising paragraphs (a)(4) and

(b)(1)(ii), to read as follows:

Sec. 570.208 Criteria for national objectives.

* * * * *

(a) Activities benefiting low- and moderate-income persons.

* * * * *

(1) Area benefit activities. (i) An activity, the benefits of which

are available to all the residents in a particular area, where at least

51 percent of the residents are low and moderate income persons. Such

an area need not be coterminous with census tracts or other officially

recognized boundaries but must be the entire area served by the

activity. An activity that serves an area that is not primarily

residential in character shall not qualify under this criterion.

Activities carried out under Sec. 570.203 by a community development

financial institution shall be presumed by HUD to meet this criterion

if the institution's charter limits its investment area to a primarily

residential area consisting of at least 51 percent low- and moderate-

income persons.

* * * * *

(2) * * *

(iii) A microenterprise assistance activity carried out in

accordance with the provisions of Sec. 570.201(o) if at least 51

percent of all persons, including both owners of microenterprises and

persons developing microenterprises, who are assisted under the

activity during each program year are low- and moderate-income persons.

For purposes of this paragraph, persons determined to be low and

moderate income may be presumed to continue to qualify as such for up

to a three-year period.

* * * * *

(4) Job creation or retention activities. An activity designed to

create or retain permanent jobs where at least 51 percent of the jobs,

computed on a full time equivalent basis, involve the employment of

low- and moderate-income persons. To qualify under this paragraph, the

activity must meet the following criteria:

(i) For an activity that creates jobs, the recipient must document

that at least 51 percent of the jobs will be held by, or will be

available to, low- and moderate-income persons.

(ii) For an activity that retains jobs, the recipient must document

that the jobs would actually be lost without the CDBG assistance and

that either or both of the following conditions apply with respect to

at least 51 percent of the jobs at the time the CDBG assistance is

provided:

(A) The job is known to be held by a low- or moderate-income

person; or

(B) The job can reasonably be expected to turn over within the

following two years and that steps will be taken to ensure that it will

be filled by, or made available to, a low- or moderate-income person

upon turnover.

(iii) Jobs that are not held or filled by a low- or moderate-income

person may be considered to be available to low- and moderate-income

persons for these purposes only if:

(A) Special skills that can only be acquired with substantial

training or work experience or education beyond high school are not a

prerequisite to fill such jobs, or the business agrees to hire

unqualified persons and provide training; and

(B) The recipient and the assisted business take actions to ensure

that low- and moderate-income persons receive first consideration for

filling such jobs.

(iv) For purposes of determining whether a job is held by or made

available to a low- or moderate-income person, the person may be

presumed to be a low- or moderate-income person if:

(A) He/she resides within a census tract (or block numbering area)

having either:

(1) At least 20 percent of its residents who are in poverty; or

(2) At least 70 percent of its residents who are low- and moderate-

income persons; or

(B) The assisted business is located within a census tract (or

block numbering area) having at least 20 percent of its residents who

are in poverty and the job under consideration is to be located within

that census tract.

(v) As a general rule, each assisted business shall be considered

to be a separate activity for purposes of determining whether the

activity qualifies under this paragraph, except:

(A) In certain cases such as where CDBG funds are used to acquire,

develop or improve a real property (e.g., a business incubator or an

industrial park) the requirement may be met by measuring jobs in the

aggregate for all the businesses which locate on the property, provided

such businesses are not otherwise assisted by CDBG funds.

(B) Where CDBG funds are used to pay for the staff and overhead

costs of a subrecipient making loans to businesses exclusively from

non-CDBG funds, this requirement may be met by aggregating the jobs

created by all of the businesses receiving loans during each program

year.

(C) In any case where the activity undertaken for the purpose of

creating or retaining jobs is a public facility or improvement, the

requirement shall be met as follows:

(1) Prior to the obligation of CDBG assistance for the activity,

the recipient shall develop an assessment which identifies the

businesses located in or expected to locate in the service area of the

public facility or improvement. For each identified business, the

recipient shall project the number of jobs anticipated to be created or

retained by the business as a result of the public facility or

improvement and enter into written agreements with each such business,

as applicable, concerning such jobs and identifying the number of such

jobs that are to be provided or made available to low- and moderate-

income persons;

(2) The recipient shall compare the number of jobs expected to be

created or retained as a result of the public facility or improvement

with the CDBG cost of the public facility or improvement to be

undertaken:

(i) If the number of jobs actually created or retained by the

combination of the businesses with whom such agreements have been

executed is not less than one full-time equivalent job per $10,000 of

CDBG funds used for the activity, then only the jobs created or

retained by those specific businesses need be considered for purposes

of meeting the national objective requirement;

(ii) If the number of jobs actually created or retained by the

combination of those businesses is less than one full-time equivalent

job per $10,000 of CDBG funds used for the activity, then all jobs

created or retained as a result of the public facility or improvement

shall be considered for purposes of meeting the national objective

requirement. This includes jobs created or retained as a result of the

assistance by businesses already located in the public facility or

improvement's service area, whether identified in the assessment or

not. This also includes jobs created or retained as a result of the

assistance by businesses which locate in the public facility or

improvement's service area during the period starting with the date the

recipient identifies the activity in its final statement and ending one

year after the physical completion of the public facility or

improvement.

(iii) If the public facility or improvement is subject to paragraph

(a)(4)(v)(C)(2)(ii) of this section, then the activity must also comply

with the guidelines concerning public benefit at Sec. 570.209(b).

Note: * * *

(b) Activities which aid in the prevention or elimination of slums

or blight.

* * * * *

(1) * * *

(ii) Throughout the area there exists at least one of the following

conditions:

(A) A substantial number of deteriorated or deteriorating

buildings;

(B) The public improvements are in a general state of

deterioration; or

(C) For exclusively commercial or industrial areas only, pervasive

economic disinvestment as evidenced by a substantial number of

previously occupied buildings experiencing either long term vacancies

or an unusually high rate of turnover in occupancy.

* * * * *

7. A new Sec. 570.209 would be added to read as follows:

Sec. 570.209 Guidelines for evaluating and selecting economic

development projects.

The following guidelines are provided to assist the recipient to

evaluate and select activities to be carried out for economic

development purposes. Specifically, these guidelines are applicable for

activities that are eligible for CDBG assistance under Sec. 570.203 and

activities carried out under the authority of Sec. 570.204 that would

otherwise be eligible under Sec. 570.203. These guidelines are composed

of two components: guidelines for evaluating project costs and

financial requirements; and standards for evaluating public benefit.

The standards for evaluating public benefit are mandatory, but the

guidelines for evaluating projects costs and financial requirements are

not.

(a) Guidelines and objectives for evaluating project costs and

financial requirements. (1) HUD has developed guidelines that are

designed to provide the recipient with a framework for financially

underwriting and selecting CDBG assisted economic development projects

that are financially viable and that will make the most effective use

of the CDBG funds. These guidelines are published separately as a

Federal Register Notice. The use of the financial underwriting

guidelines published by HUD is not mandatory. However, grantees

electing not to use these guidelines would be expected to conduct basic

financial underwriting prior to the provision of CDBG financial

assistance to a for-profit business.

(2) Where appropriate, HUD's guidelines for financial underwriting

recognize that different levels of review are appropriate to take into

account differences in the size and scope of a proposed project, and in

the case of a microenterprise or other small business take into account

the differences in the capacity and level of sophistication among

businesses of differing sizes. Recipients are encouraged, when they

develop their own programs and underwriting criteria, to also take

these factors into account.

(3) The guidelines for financial underwriting are for the purpose

of achieving the following objectives:

(i) That project costs are reasonable;

(ii) That all sources of project financing are committed;

(iii) That to the extent practicable, CDBG funds are not

substituted for non-Federal financial support;

(iv) That the project is financially feasible;

(v) That to the extent practicable, the return on the owner's

equity investment will not be unreasonably high; and

(vi) That to the extent practicable, CDBG funds are disbursed on a

pro rata basis with other finances provided to the project.

(b) Standards for evaluating public benefit. The grantee is

responsible for making sure that at least a minimum level of public

benefit is obtained from the expenditure of CDBG funds under the

categories of eligibility governed by these guidelines. The standards

set forth in this paragraph (b) identify the types of public benefit

that must be used for this purpose and the minimum level of each that

must be obtained for the amount of CDBG funds used. Unlike the

guidelines for project costs and financial requirements covered under

paragraph (a) of this section, the use of the standards for public

benefit is mandatory.

(1) Tests for individual activities. (i) With respect to each

individual activity for which CDBG funds are expended under one of the

authorities governed by these guidelines, one of the following two

tests must be met:

(A) The number of permanent jobs created or retained by an assisted

business(es) as a direct result of the CDBG assisted activity shall not

be less than one full-time equivalent job per $100,000 of CDBG funds

used for the activity; or,

(B) The number of low- and moderate-income persons residing in the

area served by an assisted activity which directly results in providing

essential goods or services shall not be less than one person per

$1,000 used for the activity.

(ii) The following activities provide insufficient public benefit

in the context of the CDBG program and are thus deemed to be ineligible

as part of activities governed by these guidelines:

(A) General promotion of the community as a whole (as opposed to

the promotion of specific areas and programs);

(B) Assistance to professional sports teams;

(C) Assistance to privately-owned recreational facilities that

serve a predominantly higher-income clientele where the benefit to such

clientele clearly outweighs employment or other benefits to low- and

moderate-income persons;

(D) Acquisition of land for which no specific proposed use has yet

been identified; and

(E) Additional assistance to a for-profit business while that

business is the subject of unresolved findings of noncompliance

relating to previous CDBG assistance provided by the recipient.

(2) Tests for activities in the aggregate. With respect to the

aggregate amount of CDBG funds from a single grant year that are

expended on activities under the authorities governed by these

guidelines, one of the following two criteria, selected at the option

of the grantee, must be met:

(i) In order to qualify under the first criterion, the following

two tests must be met, as applicable:

(A) For activities that are expected to result directly in the

creation or retention of jobs, the number of permanent jobs created or

retained by the assisted businesses shall not be less than one job

(computed on a full-time equivalent basis) per $35,000 of CDBG funds

used for the activities; and,

(B) For activities that are expected to provide essential goods or

services to an area as a direct result of the CDBG assistance, the

number of low- and moderate-income persons residing in the areas served

by the assisted businesses shall not be less than one person per $350

of CDBG funds used for the activities.

Note: With respect to activities that are expected both to

create or retain jobs and to provide essential goods or services to

an area, the grantee may elect to consider such activities under

either the jobs test or the persons-served test, but not both.

(ii) In order to qualify under the second criterion, at least 75

percent of the CDBG funds used by the recipient for activities governed

by these guidelines must be used for activities that are principally

designed to address at least one of the following:

(A) The provision of jobs for participants in any of the following

programs: Jobs Training Partnership Act (JTPA), Jobs Opportunities for

Basic Skills (JOBS), or Aid to Families with Dependent Children (AFDC);

(B) The provision of jobs for participants in Unemployment

Insurance programs;

(C) The provision of jobs for residents of Public and Indian

Housing units;

(D) The provision of jobs for homeless persons;

(E) The provision of jobs that provide clear opportunities for

promotion, such as through the provision of training;

(F) The provision of jobs for persons residing within a census

tract (or block numbering area) that has at least 20 percent of its

residents who are in poverty;

(G) The establishment, stabilization, or expansion of

microenterprises;

(H) The stabilization or revitalization of a neighborhood that is

predominantly low and moderate income;

(I) The provision of assistance to a community development

financial institution whose service area is predominantly low and

moderate income;

(J) The provision of assistance to a neighborhood-based nonprofit

organization serving a neighborhood that is predominantly low and

moderate income;

(K) The provision of employment opportunities that are an integral

component of a community's strategy to promote spatial deconcentration

of low- and moderate-income and minority families;

(L) The provision of assistance to business(es) that operate(s)

within a census tract (or block numbering area) that has at least 20

percent of its residents who are in poverty; or

(M) With prior HUD approval, other innovative approaches that

provide substantial benefit to low-income persons.

(3) Applying the aggregate tests. With respect to the aggregate

tests under paragraph (b)(2) of this section, a metropolitan city or an

urban county shall apply the criteria to all applicable activities for

which CDBG funds are obligated within each single CDBG program year

without regard to the source year of the funds.

(c) Amendments to economic development projects after review

determinations. Once the recipient has completed its economic

development analysis under these guidelines and has agreed to provide

CDBG assistance to the for-profit business, any material change in the

project that affects the underlying assumptions upon which the

recipient relied to conduct its review should be reevaluated under

these and the recipient's guidelines. A ``material change'' is defined

for these purposes as a change in the size, scope, location or public

benefit of the project or a change in the terms or the amount of the

private funds (both lender's funds and equity capital) to be invested

in the project or a change in the terms or the amount of the CDBG

assistance to be made available to the project. If the recipient

determines that a material change has occurred and a reevaluation of

the project indicates that the financial elements and public benefit to

be derived have also changed, then the recipient should make

appropriate adjustments in the amount, the type of CDBG assistance and/

or the terms and conditions under which that assistance has been

offered to reflect the impact of the material change. For example, if a

material change in the project elements resulted in a reduction of the

total project costs, it would be appropriate for the recipient to

reduce the amount of total CDBG assistance.

(d) Documentation. The grantee must maintain sufficient records to

demonstrate the level of public benefit, based on the above standards,

that is actually achieved upon completion of the CDBG-assisted economic

development activity(ies) and how that compares to the level of such

benefit that was projected to be achieved at the time the CDBG

assistance was obligated. If actual results vary substantially from the

grantee's initial projections, the grantee is expected to take all

actions reasonably within its control to improve the accuracy of its

projections. If the actual results demonstrate that the recipient has

failed the public benefit standards, HUD may require the recipient to

meet more stringent standards in future years as appropriate.

Subpart I--State's Program: State Administration of CDBG

Nonentitlement Funds

8. Section 570.482 would be amended by adding paragraphs (c), (d),

(e), and (f) to read as follows:

Sec. 570.482 Eligible activities.

* * * * *

(c) Provision of assistance for microenterprise development--(1)

Eligible providers. Microenterprise development activities eligible

under section 105(a)(23) of the Housing and Community Development Act

of 1974, as amended, may be carried out either through the recipient

directly or through public and private organizations, agencies, and

other subrecipients (including nonprofit and for-profit subrecipients).

(2) Provision of support services. Support services provided under

Section 105(a)(23) of the Housing and Community Development Act of

1974, as amended, shall not be subject to the restrictions on public

services under section 105(a)(8) of the Housing and Community

Development Act of 1974, as amended.

(d) Guidelines and objectives for evaluating project costs and

financial requirements.--(1) Applicability. The following guidelines

are provided to assist the recipient to evaluate and select activities

to be carried out for economic development purposes. Specifically,

these guidelines are applicable for activities that are eligible for

CDBG assistance under Sec. 105(a)(17) of the Act, economic development

activities eligible under Sec. 105(a)(14) of the Act, and activities

that are part of a community economic development project eligible

under Sec. 105(a)(15) of the Act. The use of the financial underwriting

guidelines published by HUD is not mandatory. However, states electing

not to use these guidelines would be expected to ensure that the state

or units of general local government conduct basic financial

underwriting prior to the provision of CDBG financial assistance to a

for-profit business.

(2) Objectives. (i) The guidelines are designed to provide the

recipient with a framework for financially underwriting and selecting

CDBG assisted economic development projects that are financially viable

and that will make the most effective use of the CDBG funds. Where

appropriate, HUD's guidelines for financial underwriting recognize that

different levels of review are appropriate to take into account

differences in the size and scope of a proposed project, and in the

case of a microenterprise or other small business take into account the

differences in the capacity and level of sophistication among

businesses of differing sizes. Recipients are encouraged, when they

develop their own programs and underwriting criteria, to also take

these factors into account.

(ii) These guidelines are published separately as a Federal

Register Notice. The guidelines for financial underwriting are for the

purpose of achieving the following objectives:

(A) That project costs are reasonable;

(B) That all sources of project financing are committed;

(C) That to the extent practicable, CDBG funds are not substituted

for non-Federal financial support;

(D) That the project is financially feasible;

(E) That to the extent practicable, the return on the owner's

equity investment will not be unreasonably high; and

(F) That to the extent practicable, CDBG funds are disbursed on a

pro rata basis with other finances provided to the project.

(e) Standards for evaluating public benefit--(1) Purpose and

applicability. The grantee is responsible for making sure that at least

a minimum level of public benefit is obtained from the expenditure of

CDBG funds under the categories of eligibility governed by these

guidelines. The standards set forth in this paragraph (e) identify the

types of public benefit that must be used for this purpose and the

minimum level of each that must be obtained for the amount of CDBG

funds used. These guidelines are applicable for activities that are

eligible for CDBG assistance under Sec. 105(a)(17) of the Act, economic

development activities eligible under Sec. 105(a)(14) of the Act, and

activities that are part of a community economic development project

eligible under Sec. 105(a)(15) of the Act. Certain projects eligible

under Section 105(a)(2) of the Act and undertaken for economic

development purposes are subject to these guidelines, as specified in

Sec. 570.482(d)(4)(iv)(C)(3)(iii). Unlike the guidelines for project

costs and financial requirements covered under paragraph (a) of this

section, the use of the standards for public benefit is mandatory.

(2) Tests for individual activities. (i) With respect to each

individual activity for which CDBG funds are expended under one of the

authorities governed by these guidelines, one of the following two

tests must be met:

(A) The number of permanent jobs created or retained by an assisted

business(es) as a direct result of the CDBG assisted activity shall not

be less than one full-time equivalent job per $100,000 of CDBG funds

used for the activity; or,

(B) The number of low- and moderate-income persons residing in the

area served by an assisted activity which directly results in providing

essential goods or services shall not be less than one person per

$1,000 used for the activity.

(ii) The following activities provide insufficient public benefit

in the context of the CDBG program and are thus deemed to be ineligible

as part of activities governed by these guidelines:

(A) General promotion of the community as a whole (as opposed to

the promotion of specific areas and programs);

(B) Assistance to professional sports teams;

(C) Assistance to privately-owned recreational facilities that

serve a predominantly higher-income clientele where the benefit to such

clientele clearly outweighs employment or other benefits to low- and

moderate-income persons;

(D) Acquisition of land for which no specific proposed use has yet

been identified; and

(E) Additional assistance to a for-profit business while that

business is the subject of unresolved findings of noncompliance

relating to previous CDBG assistance provided by the recipient.

(3) Tests for activities in the aggregate. With respect to the

aggregate amount of CDBG funds from a single grant year that are

expended on activities under the authorities governed by these

guidelines, one of the following two criteria, selected at the option

of the grantee, must be met:

(i) In order to qualify under the first criterion, the following

two tests must be met, as applicable:

(A) For activities that are expected to result directly in the

creation or retention of jobs, the number of permanent jobs created or

retained by the assisted businesses shall not be less than one job

(computed on a full-time equivalent basis) per $35,000 of CDBG funds

used for the activities; and,

(B) For activities that are expected to provide essential goods or

services to an area as a direct result of the CDBG assistance, the

number of low- and moderate-income persons residing in the areas served

by the assisted businesses shall not be less than one person per $350

of CDBG funds used for the activities.

(ii) In order to qualify under the second criterion, at least 75

percent of the CDBG funds used by the grantee for activities governed

by these guidelines must be used for activities that are principally

designed to address at least one of the following:

(A) The provision of jobs for participants in any of the following

programs: Jobs Training Partnership Act (JTPA), Jobs Opportunities for

Basic Skills (JOBS), or Aid to Families with Dependent Children (AFDC);

(B) The provision of jobs for participants in Unemployment

Insurance programs;

(C) The provision of jobs for residents of Public and Indian

Housing units;

(D) The provision of jobs for homeless persons;

(E) The provision of jobs that provide clear opportunities for

promotion, such as through the provision of training;

(F) The provision of jobs for persons residing within a census

tract (or block numbering area) that has at least 20 percent of its

residents who are in poverty;

(G) The establishment, stabilization, or expansion of

microenterprises;

(H) The stabilization or revitalization of a neighborhood that is

predominantly low and moderate income;

(I) The provision of assistance to a community development

financial institution whose service area is predominantly low and

moderate income;

(J) The provision of assistance to a neighborhood-based nonprofit

organization serving a neighborhood that is predominantly low and

moderate income;

(K) The provision of employment opportunities that are an integral

component of a community's strategy to promote spatial deconcentration

of low- and moderate-income and minority families;

(L) The provision of assistance to business(es) that operate(s)

within a census tract (or block numbering area) that has at least 20

percent of its residents who are in poverty; or

(M) With prior HUD approval, other innovative approaches that

provide substantial benefit to low-income persons.

(4) Applying the aggregate tests. The following shall apply with

respect to the aggregate tests under paragraph (e)(3) of this section:

(i) With respect to activities that are expected both to create or

retain jobs and to provide essential goods or services to an area, the

grantee may elect to consider such activities under either the jobs

test or the persons-served test, but not both.

(ii) A state shall apply the criteria to all funds distributed for

applicable activities from each annual grant. This includes the amount

of the annual grant, any funds reallocated by HUD to the state, any

program income distributed by the state and any guaranteed loan funds

made under the provisions of subpart M of this part covered in the

method of distribution in the final statement for a given annual grant

year.

(5) Documentation. The grantee must maintain sufficient records to

demonstrate the level of public benefit, based on the above standards,

that is actually achieved upon completion of the CDBG-assisted economic

development activity(ies) and how that compares to the level of such

benefit that was projected to be achieved at the time the CDBG

assistance was obligated. If actual results vary substantially from the

grantee's initial projections, the grantee is expected to take all

actions reasonably within its control to improve the accuracy of its

projections. If the actual results demonstrate that the grantee has

failed the public benefit standards, HUD may require the grantee to

meet more stringent standards in future years as appropriate.

(f) Amendments to economic development projects after review

determinations. Once the recipient has completed its economic

development analysis under these guidelines and has agreed to provide

CDBG assistance to the for-profit business, any material change in the

project that affects the underlying assumptions upon which the

recipient relied to conduct its review should be reevaluated under

these and the recipient's guidelines. A ``material change'' is defined

for these purposes as a change in the size, scope, location or public

benefit of the project or a change in the terms or the amount of the

private funds (both lender's funds and equity capital) to be invested

in the project or a change in the terms or the amount of the CDBG

assistance to be made available to the project. If the recipient

determines that a material change has occurred and a reevaluation of

the project indicates that the financial elements and public benefit to

be derived have also changed, then the recipient should make

appropriate adjustments in the amount, the type of CDBG assistance and/

or the terms and conditions under which that assistance has been

offered to reflect the impact of the material change. For example, if a

material change in the project elements resulted in a reduction of the

total project costs, it would be appropriate for the recipient to

reduce the amount of total CDBG assistance.

9. Section 570.483 would be amended by:

a. Revising the section heading;

b. Revising the paragraph heading of paragraph (b) and by adding a

sentence to the end of paragraph (b)(1)(i);

c. Adding a new paragraph (b)(2)(iv);

d. Redesignating paragraph (b)(4)(iv) as (b)(4)(v), and by adding a

new paragraph (b)(4)(iv);

e. Revising newly redesignated paragraph (b)(4)(v)(C); and

f. Revising paragraph (c)(1)(ii), to read as follows:

Sec. 570.483 Criteria for national objectives.

* * * * *

(b) Activities benefiting low- and moderate-income persons.

* * * * *

(1) * * * (i) * * * Activities carried out under Sections

105(a)(14) or 105(a)(17) of the Act by a community development

financial institution shall be presumed by HUD to meet this criterion

if the institution's charter limits its investment area to a primarily

residential area consisting of at least 51 percent low- and moderate-

income persons.

* * * * *

(2) * * *

(iv) A microenterprise assistance activity carried out in

accordance with the provisions of Section 105(a)(23) of the Act or

Sec. 570.482(c) if at least 51 percent of all persons, including both

owners of microenterprises and persons developing microenterprises, who

are assisted under the activity from each annual grant are low- and

moderate-income persons. For purposes of this paragraph, persons

determined to be low and moderate income may be presumed to continue to

qualify as such for up to a three-year period.

* * * * *

(4) * * *

(iv) For purposes of determining whether a job is held by or made

available to a low- or moderate-income person, the person may be

presumed to be a low- or moderate-income person if:

(A) He/she resides within a census tract (or block numbering area)

having either:

(1) At least 20 percent of its residents who are in poverty; or

(2) At least 70 percent of its residents who are low- and moderate-

income persons; or

(B) The assisted business is located within a census tract (or

block numbering area) having at least 20 percent of its residents who

are in poverty and the job under consideration is to be located within

that census tract.

(v) * * *

(C) Where CDBG funds are used for public improvements (e.g., water,

sewer and roads) and the national objective is to be met by job

creation or retention as a result of the public improvement, the

requirement shall be met as follows:

(1) Before CDBG assistance is obligated for such an activity, the

unit of general local government shall develop an assessment which

identifies the businesses located in or expected to locate in the

service area of the public improvements. For each identified business,

the unit of general local government shall project the number of jobs

anticipated to be created or retained by each identified business as a

result of the public improvement;

(2) For any business which agrees to retain or create jobs as a

result of the CDBG-assisted public improvements, the unit of local

government shall have a written agreement with the business spelling

out the business' obligation to create or retain jobs. The agreement

should specify the total number of jobs to be created or retained, the

number of jobs involving the employment of low- and moderate-income

persons, and the time period during which the job creation or retention

will occur. For purposes of meeting the national objective requirement,

the unit of general local government shall count all jobs covered by

such agreements until the local government determines that the business

has fulfilled its job creation or retention obligation;

(3) The unit of local government shall compare the number of jobs

created or retained as a result of the pubic improvement with the CDBG

cost of the public improvements to be undertaken:

(i) If the number of jobs actually created or retained by any

combination of businesses served by the public improvements is such

that the cost (in CDBG funds) per job is less than $10,000, then the

jobs created or retained by those specific businesses shall be

considered for purposes of meeting the national objective requirement;

(ii) If the number of jobs actually created or retained by any

combination of businesses served by the public improvements is such

that the cost (in CDBG funds) per job is $10,000 or more, then all jobs

created or retained as a result of the public improvements shall be

considered for purposes of meeting the national objective requirement.

This includes jobs created or retained as a result of the assistance by

businesses already located in the public improvements service area,

whether identified in the assessment or not. This also includes jobs

created or retained as a result of the assistance by businesses which

locate in the public improvements service area during the period

starting with the date the state awards the CDBG funds to the local

government and ending one year after the physical completion of the

public improvements.

(iii) If the number of jobs actually created or retained by any

combination of businesses served by the public improvements is such

that the cost (in CDBG funds) per job is $10,000 or more, then the

activity shall also be subject to the Guidelines for Evaluating Public

Benefit at Sec. 570.482(e).

* * * * *

(c) * * *

(1) * * *

(ii) Throughout the area there exists at least one of the following

conditions:

(A) A substantial number of deteriorated or deteriorating

buildings;

(B) The public improvements are in a general state of

deterioration; or

(C) For exclusively commercial or industrial areas only, pervasive

economic disinvestment as evidenced by a substantial number of

previously occupied buildings experiencing either long term vacancies

or an unusually high rate of turnover in occupancy.

Subpart J--Grant Administration

10. In Sec. 570.500, paragraph (c) would be revised to read as

follows:

Sec. 570.500 Definitions.

* * * * *

(c) Subrecipient means a public or private nonprofit agency,

authority or organization, or an entity described in Sec. 570.201(o) or

Sec. 570.204(c), receiving CDBG funds from the recipient to undertake

activities eligible for such assistance under subpart C of this part.

The term includes a public agency designated by a metropolitan city or

urban county to receive a loan guarantee under subpart M of this part,

but does not include contractors providing supplies, equipment,

construction or services subject to the procurement requirements in 24

CFR 85.36 or in Attachment O of OMB Circular A-110, as applicable.

11. Section 570.506 would be amended by revising paragraph (b)

introductory text; by redesignating paragraphs (b)(7) through (b)(11)

as (b)(8) through (b)(12), respectively; by adding a new paragraph

(b)(7); and by revising paragraph (c), to read as follows:

Sec. 570.506 Records to be maintained.

* * * * *

(b) Records demonstrating that each activity undertaken meets one

of the criteria set forth in Sec. 570.208. (Where information on income

by family size is required, the recipient may substitute evidence

establishing that the person assisted qualifies under another program

having income qualification criteria at least as restrictive as that

used in the definitions of ``low and moderate income person'' and ``low

and moderate income household'' (as applicable) at Sec. 570.3, such as

Job Training Partnership Act (JTPA) and welfare programs; or the

recipient may substitute evidence that the assisted person is homeless;

or the recipient may substitute a copy of a verifiable certification

from the assisted person that his or her family income does not exceed

the applicable income limit established in accordance with Sec. 570.3;

or the recipient may substitute a notice that the assisted person is a

referral from a state, county or local employment agency or other

entity that agrees to refer individuals it determines to be low and

moderate income persons based on HUD's criteria and agrees to maintain

documentation supporting these determinations.) Such records shall

include the following information:

* * * * *

(7) For purposes of documenting, pursuant to paragraphs

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

that the person for whom a job was either filled by or made available

to a low- or moderate-income person based upon the census tract where

the person resides or in which the business is located, the recipient,

in lieu of maintaining records showing the person's family size and

income, may substitute records showing either the person's address at

the time the determination of income status was made or the address of

the business providing the job, as applicable, the census tract in

which that address was located, the percent of persons residing in that

tract who either are in poverty or who are low- and moderate-income, as

applicable, and the data source used for determining the percentage.

* * * * *

(c) Records which demonstrate that the recipient has made the

determinations required as a condition of eligibility of certain

activities, as prescribed in Secs. 570.201(f), 570.201(i),

570.202(b)(3), 570.203(b), 570.204(a), 570.206(f), and 570.209.

* * * * *

Dated: May 20, 1994.

Andrew Cuomo,

Assistant Secretary for Community Planning and Development.

Attachment--The Following Is Proposed To Be the Substance of What Will

Be Published as a Separate Federal Register Notice Concurrent With the

Final Rule

Guidelines and Objectives for Evaluating Project Costs and

Financial Requirements. HUD has developed the following guidelines that

are designed to provide the recipient with a framework for financially

underwriting and selecting CDBG assisted economic development projects

that are financially viable and that will make the most effective use

of the CDBG funds. The use of these financial underwriting guidelines

as published by HUD is not mandatory. However, grantees electing not to

use these guidelines would be expected to conduct basic financial

underwriting prior to the provision of CDBG financial assistance to a

for-profit business. States electing not to use these guidelines would

be expected to ensure that the state or units of general local

government conduct basic financial underwriting prior to the provision

of CDBG financial assistance to a for-profit business.

Where appropriate, HUD's guidelines for financial underwriting

recognize that different levels of review are appropriate to take into

account differences in the size and scope of a proposed project, and in

the case of a microenterprise or other small business take into account

the differences in the capacity and level of sophistication among

businesses of differing sizes. Recipients are encouraged, when they

develop their own programs and underwriting criteria, to also take

these factors into account.

The guidelines for financial underwriting are for the purpose of

achieving the following objectives:

(1) That project costs are reasonable;

(2) That all sources of project financing are committed;

(3) That to the extent practicable, CDBG funds are not substituted

for non-Federal financial support;

(4) That the project is financially feasible;

(5) That to the extent practicable, the return on the owner's

equity investment will not be unreasonably high; and

(6) That to the extent practicable, CDBG funds are disbursed on a

pro rata basis with other finances provided to the project.

(1) Project costs are reasonable. Reviewing costs for

reasonableness is important. It will help the recipient avoid providing

either too much or too little CDBG assistance for the proposed project.

Therefore, it is suggested that the grantee obtain a breakdown of all

project costs and that each cost element making up the project be

reviewed for reasonableness. The amount of time and resources the

recipient expends evaluating the reasonableness of a cost element

should be commensurate with its cost. For example, it would be

appropriate for an experienced reviewer looking at a cost element of

less than $10,000 to judge the reasonableness of that cost based upon

his or her knowledge and common sense. For a cost element in excess of

$10,000, it would be more appropriate for the reviewer to compare the

cost element with a third-party, fair-market price quotation for that

cost element. Third-party price quotations may also be used by a

reviewer to help determine the reasonableness of cost elements below

$10,000 when the reviewer evaluates projects infrequently or if the

reviewer is less experienced in cost estimations. If a recipient does

not use third-party price quotations to verify cost elements, then the

recipient would need to conduct its own cost analysis using appropriate

cost estimating manuals or services.

The recipient should pay particular attention to any cost element

of the project that will be carried out through a non-arms-length

transaction. A non-arms-length transaction occurs when the entity

implementing the CDBG assisted activity procures goods or services from

itself or from another party with whom there is a financial interest or

family relationship. If abused, non-arms-length transactions

misrepresent the true cost of the project.

(2) Commitment of all project sources of financing. The recipient

should review all projected sources of financing necessary to carry out

the economic development project. This is to ensure that time and

effort is not wasted on assessing a proposal that is not able to

proceed. To the extent practicable, prior to the commitment of CDBG

funds to the project, the recipient should verify that: sufficient

sources of funds have been identified to finance the project; all

participating parties providing those funds have affirmed their

intention to make the funds available; and the participating parties

have the financial capacity to provide the funds.

(3) Avoid substitution of CDBG funds for non-Federal financial

support. The recipient should review the economic development project

to ensure that, to the extent practicable, CDBG funds will not be used

to substantially reduce the amount of non-Federal financial support for

the activity. This will help the recipient to make the most efficient

use of its CDBG funds for economic development. To reach this

determination, the recipient's reviewer would conduct a financial

underwriting analysis of the project, including reviews of appropriate

projections of revenues, expenses, debt service and returns on equity

investments in the project. The extent of this review should be

appropriate for the size and complexity of the project and should use

industry standards for similar projects, taking into account the unique

factors of the project such as risk and location.

Because of the high cost of underwriting and processing loans, many

private financial lenders do not finance commercial projects that are

less than $100,000. A recipient should familiarize itself with the

lending practices of the financial institutions in its community. If

the project's total cost is one that would normally fall within the

range that financial institutions participate, then the recipient

should normally determine the following:

(i) Private debt financing--whether or not the participating

private, for-profit business (or other entity having an equity

interest) has applied for private debt financing from a commercial

lending institution and whether that institution has completed all of

its financial underwriting and loan approval actions resulting in

either a firm commitment of its funds or a decision not to participate

in the project; and

(ii) Equity participation--whether or not the degree of equity

participation is reasonable given general industry standards for rates

of return on equity for similar projects with similar risks and given

the financial capacity of the entrepreneur(s) to make additional

financial investments.

If the recipient is assisting a microenterprise owned by a low- or

moderate-income person(s), in conducting its review under this

paragraph, the recipient would generally only need to determine that

non-Federal sources of financing are not available (at terms

appropriate for such financing) in the community to serve the low- or

moderate-income entrepreneur.

(4) Financial feasibility of the project. The public benefit a

grantee expects to derive from the CDBG assisted project (the subject

of separate regulatory standards) will not materialize if the project

is not financially feasible. To determine if there is a reasonable

chance for the project's success, the recipient should evaluate the

financial viability of the project. A project would be considered

financially viable if all of the assumptions about the project's market

share, sales levels, growth potential, projections of revenue, project

expenses and debt service (including repayment of the CDBG assistance

if appropriate) were determined to be realistic and met the project's

break-even point (which is generally the point at which all revenues

are equal to all expenses). Generally speaking, an economic development

project that does not reach this break-even point over time is not

financially feasible. The following should be noted in this regard:

(i) Some projects make provisions for a negative cash flow in the

early years of the project while space is being leased up or sales

volume built up, but the project's projections should take these

factors into account and provide sources of financing for such negative

cash flow; and

(ii) It is expected that a financially viable project will also

project sufficient revenues to provide a reasonable return on equity

investment. The recipient should carefully examine any project that is

not economically able to provide a reasonable return on equity

investment. Under such circumstances, a business may be overstating its

real equity investment (actual costs of the project may be overstated

as well), or it may be overstating some of the project's operating

expenses in the expectation that the difference will be taken out as

profits, or the business may be overly pessimistic in its market share

and revenue projections and has downplayed its profits.

In addition to the financial underwriting reviews carried out

earlier, the recipient should evaluate the experience and capacity of

the assisted business owners to manage an assisted business to achieve

the projections. Based upon its analysis of these factors, the

recipient should identify those elements, if any, that pose the

greatest risks contributing to the project's lack of financial

feasibility.

(5) Return on equity investment. To the extent practicable, the

CDBG assisted activity should provide not more than a reasonable return

on investment to the owner of the assisted activity. This will help

ensure that the grantee is able to maximize the use of its CDBG funds

for its economic development objectives. However, care should also be

taken to avoid the situation where the owner is likely to receive too

small a return on his/her investment, so that his/her motivation

remains high to pursue the business with vigor. The amount, type and

terms of the CDBG assistance should be adjusted to allow the owner a

reasonable return on his/her investment given industry rates of return

for that investment, the local conditions and the risk of the project.

(6) Disbursement of CDBG funds on a pro rata basis. To the extent

practicable, CDBG funds used to finance economic development activities

should be disbursed on a pro rata basis with other funding sources.

This will help avoid the situation where it is learned that a problem

has developed that will block the completion of the project, even

though all or most of the CDBG funds going in to the project have

already been expended. When this happens, a recipient may be put in a

position of having to provide additional financing to complete the

project or watch the potential loss of its funds if the project is not

able to be completed. When the recipient determines that it is not

practicable to disburse CDBG funds on a pro rata basis, the recipient

should consider taking other steps to safeguard CDBG funds in the event

of a default, such as insisting on securitizing assets of the project.

[FR Doc. 94-13196 Filed 5-26-94; 9:48 am]

BILLING CODE 4210-29-P