Cost Containment and Vulnerability

DEPARTMENT OF AGRICULTURE

Farmers Home Administration

7 CFR Parts 1924, 1930, and 1944

RIN 0575-AB08

Cost Containment and Vulnerability

AGENCY: Farmers Home Administration, USDA.

ACTION: Final rule.

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SUMMARY: The Farmers Home Administration (FmHA) amends its regulations

regarding the processing of preapplications for Rural Rental Housing

(RRH) assistance. This action is necessary to decrease costs associated

with the program and to reduce program vulnerability. The intended

effect is to improve credit quality and to make our regulations more

responsive to the prudent development of RRH complexes in rural

America.

EFFECTIVE DATE: March 14, 1994.

FOR FURTHER INFORMATION CONTACT: Gail McCowan, Senior Loan Specialist,

Rural Rental Housing Branch, Multi-Family Housing Processing Division,

Farmers Home Administration, USDA, Room 5337--South Agriculture

Building, Washington, DC 20250, telephone (202) 720-1608.

SUPPLEMENTARY INFORMATION:

Classification

We are issuing this final rule in conformance with Executive Order

12866, and we have determined that it is not a ``significant regulatory

action.'' Based on information compiled by the Department, we have

determined that this final rule:

(1) Would have an effect on the economy of less than $100 million;

(2) Would not adversely affect in a material way the economy, a

sector of the economy, productivity, competition, jobs, the

environment, public health or safety, or State, local or tribal

governments or communities;

(3) Would not create a serious inconsistency or otherwise interfere

with an action taken or planned by another agency;

(4) Would not alter the budgetary impact of entitlements, grants,

user fees, or loan programs or rights and obligations of recipients

thereof; and

(5) Would not raise novel legal or policy issues arising out of

legal mandates, the President's priorities, or principles set forth in

Executive Order 12866.

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940,

Subpart G, ``Environmental Program.'' It is the determination of FmHA

that this action does not constitute a major Federal action

significantly affecting the quality of the human environment and in

accordance with the National Environmental Policy Act of 1949, Public

Law 91-90, an Environmental Impact Statement is not required.

Intergovernmental Consultation

For the reasons set forth in the Final Rule related Notice(s) to 7

CFR part 2015, subpart V, programs 10.415 Rural Rental Housing Loans

and 10.427--Rural Rental Assistance Payments are subject to Executive

Order 12372 which requires intergovernmental consultation with State

and local officials.

Paperwork Reduction Act

The information collection requirements contained in these

regulations have been approved by the Office of Management and Budget

(OMB) under the provisions of 44 U.S.C. chapter 35 and have been

assigned OMB control numbers 0575-0042 and 0575-0033 in accordance with

the Paperwork Reduction Act of 1980 (44 U.S.C. 3507). The information

collection contained in 0575-0047 will not become effective until

approved by OMB. Please send written comments to the Office of

Information Regulatory Affairs, OMB, Attention: Desk Officer for USDA,

Washington, DC 20503. Please send a copy of your comments to Jack

Holston, Agency Clearance Officer, USDA, FmHA, AG Box 0743, Washington,

DC 20250.

Programs Affected

These programs/activities are listed in the Catalog of Federal

Domestic Assistance under Numbers 10.415, Rural Rental Housing Loans

and 10.427, Rural Rental Assistance Payments.

Background

During its audits of FmHA's identity of interest construction cost

certification process, the Office of Inspector General found many

instances where borrowers were taking advantage of loopholes in FmHA

regulations. This resulted in the loss of Government funds through

excess profit being paid to paper contractors, failure of the borrowers

to reveal identities of interest with related parties, failure on the

part of CPA's to adequately perform cost certifications, and numerous

other discrepancies of varying severity, all of which have had

detrimental effects on the program. OIG reviewed the proposed changes

to the regulations and voiced its support for the proposed changes as a

mean for reducing fraud, waste, and abuse in the 515 program.

Discussion of Comments

The proposed rule, published in the Federal Register (57 FR 27379-

27394) on June 19, 1992, provided for a 60-day comment period ending

August 18, 1992. One hundred and twenty-one comments were received

during the comment period from the public and from FmHA field

employees.

Comments

Implementation Proposal

FmHA has stated that all preapplications and applications on hand

will be subject to the final rule with the exception of applications

whose plans and specifications have been finalized.

Several persons agreed that preapplications and applications not be

``grandfathered'' except for those which have received an AD-622 and

which are within the District's 150 percent loan approval authority.

Other persons objected to not ``grandfathering'' because of the expense

already incurred in developing an application.

Since applicants have already invested substantial sums of money in

the development of building plans, FmHA has reconsidered this position.

Building plans included with preapplications which have been issued an

AD-622 inviting a formal application will not be affected; all other

material associated with preapplications will be subject to the

provisions of the final rule.

FmHA Instruction 1924-A

1. Section 1924.10 (c)(2)(i)

Comment: Comments were received concerning the requirement that all

transfers of funds between line items would require the approval of the

servicing official using Form FmHA 1924-7. The general feeling is that

estimates are merely estimates and will fluctuate during the

construction period. To require the servicing official to approve

change orders for every line item change would cause a major paperwork

burden on both the contractor and FmHA.

FmHA response: The Agency recognizes the volume of paperwork and

delay involved with this requirement. FmHA will, instead, implement a

means to flag significant variances in line item costs. Increases or

decreases at or above a 15 percent threshold will require documentation

from the borrower to justify the differences. The State Director will

also have the authority to require documentary justification for less

than 15 percent variances if he/she deems it necessary. The

documentation will be required at the time the project is cost

certified so that construction will not be delayed.

2. Section 1924.13(a)(3)

Comment: Most persons agreed that architectural fees should be

reduced when less than full architectural services are provided. It was

suggested that it would be appropriate to establish a range of fees

covering a range of similar services. It was also pointed out that an

acceptable design in one place can involve a redraw in others due to

local code interpretations.

FmHA response: The intent of this requirement is for those

instances where the applicant uses a set of plans that has previously

been used. Even if a new site requires some modification to adapt the

building to the site, it will not require a complete redraw of the

building. While there can be no hard and fast rules set by Washington

as to the degree of revision needed to qualify the architect for full

services, this can be determined at the State level. Compensation is

expected to reasonably represent the value of the architect's services

to the owner.

3. Section 1924.13(e)(1)(iii)(B)(3) and 1924.13(e)(2)(i)(D)

Comment: A number of persons suggested that more training be

provided to FmHA field staff in analyzing the financial statement to

determine whether there is sufficient ``financial strength to carry out

all phases of construction.'' Another suggestion was that FmHA require

a performance and payment bond from all contractors, in which case the

credit worthiness will have been determined by a surety company.

Several persons pointed out the fact that credit reports do not reflect

the financial strength of the contractor.

FmHA response: FmHA has completed phase one of a two phase training

program in the proper analysis of financial reports. The training is

being conducted by an outside accounting firm and involves State,

District, and National Office personnel. We recognize that requiring a

payment and performance bond from all contractors would probably

eliminate the small yet qualified contractor from participating in the

515 program. Based on the comments that a credit report is not the

vehicle through which financial strength can be determined, FmHA will

require that each contractor provide a financial statement of its

operations. The financial statement will be analyzed to determine if

the contractor has the financial strength to pay construction bills

prior to obtaining draws from the lender. Language relating to the

submission of a financial statement has been added to this section. A

credit report will still be required from all contractors.

4. Section 1924.13(e)(1)(iv) and 1924.13(e)(2)(i)(G)

Comment: There was some opposition to eliminating the price of cost

certifications from the contract.

FmHA response: FmHA deleted this cost from this section because it

intended to contract for cost certifications itself. This would have

eliminated the need for including the cost in the construction contract

since they would be paid from Agency funds. It has now been determined

that the Agency will be unable to contract for all cost certifications,

so the previous language pertaining to cost certification expenses has

been restored to this section to cover those situations where the

borrower will be required by FmHA to obtain the certification.

5. Section 1924.13(e)(1)(v) and 1924.13(e)(1)(v)(E)

Comment: Several persons agreed with the proposal that FmHA

contract directly for cost certifications. The most consistently

expressed concern was about the delay in the Government contracting

process, resulting in increased interim interest expense. There was

also some concern about the burden this proposal would place on FmHA.

There was a suggestion to have FmHA contract with a CPA to review and/

or audit a certain percentage of the cost certifications within the

State each year. Also, one person suggested that FmHA allow contracts

between the CPA and the contractor when the CPA can certify that he/she

has no other relationship with the contractor except for the cost

certification. Comments from other persons stated that the ongoing

working relationship between the borrower and the CPA is a definite

advantage since the CPA is familiar with the accounting system and

procedures of the borrower. They felt that having full-time access to

the CPA who is responsible for monitoring the construction cost

recording process would allow for timely maintenance of records. An

FmHA-contracted auditor would not have this familiarity with the

borrower's books. One respondent suggested that FmHA publish a guide to

tell CPA's how FmHA wants the cost certifications performed and

reported. One suggestion is that instead of contracting for cost

certifications directly, FmHA should strengthen its ability to debar an

incompetent CPA. Another respondent suggested that FmHA establish a

list of CPA's who have been designated as acceptable for cost

certification. One suggestion was that FmHA make a judgment of whether

the borrower's cost certification is satisfactory instead of hiring the

CPA directly.

FmHA response: FmHA has worked with the Office of Inspector General

to develop an audit program which CPA's will follow in performing cost

certification audits. During recent OIG audits of cost certifications

prepared on FmHA-financed rental housing projects, it was discovered

that many CPA's were not maintaining the independence required by

generally accepted auditing standards. It is obvious from some of the

comments that some CPA's who are cost certifying construction costs

have also been involved in the maintenance of the borrowers'

construction records. FmHA will not have sufficient contracting funds

to cover the cost of all certifications; therefore, it anticipates

contracting for all certifications on loans of $1.5 million and over

and a random sampling of all other loans. Details will have to be

worked out in the contracting process to prevent undue delay in closing

loans. In the event FmHA does contract for a cost certification, the

borrower will not be responsible for providing a certification since

that would duplicate energies and expenses. Any funds earmarked in the

loan for cost certification but which are not needed because of an

FmHA-contracted certification will be returned on the loan and may not

be used for any other purpose.

6. Section 1924.13(e)(1)(v)(A)

Comment: There was some confusion about whether FmHA would be

contracting with the CPA who examines the borrower's accounting system

or just with the CPA who performs the cost certification. A suggestion

was offered that the borrower provide a written assertion that it has

an accounting system which complies with the regulations. The cost

certification CPA would then report on the validity of the assertion.

FmHA response: It was the intent of this proposal that the

borrower's CPA be responsible for verifying that the borrower's

accounting system meets the requirements of the regulation so that this

responsibility can be removed from FmHA field personnel. Since the

Agency does not have accountants on staff, we do not feel we have the

expertise to adequately check the borrower's accounting system. We

agree with the suggestion that the borrower be allowed to provide a

written assertion on the accounting system and that the cost

certification CPA report on its validity. This section has been

rewritten to incorporate that suggestion.

7. Section 1924.13(e)(1)(v)(B), 1924.13(e)(2)(iv), and

1924.13(e)(2)(viii)(B)

Comment: There was a question as to whether FmHA intends to reduce

builder's profit when costs of line item are increased. Another

respondent wondered if it is the intent of FmHA to restrict the amount

of each line item to the estimated amount. Several persons objected to

the restriction of general requirements to the estimated amount. One

respondent recommended that any cost savings from project construction

be returned on the loan and that the loan be reamortized to reflect a

decrease in tenant rent.

FmHA response: FmHA intends that builder's profit be reduced when

the total costs of the line item costs exceed their estimates and would

result in an increase in the contract amount. The amounts for general

overhead, profit, and general requirements will be restricted to their

estimated amounts, not the line items to their estimated amounts. FmHA

believes that the estimates for general requirements can be accurately

determined prior to the start of construction and not deviate

significantly thereafter. We do not feel this would result in an undue

burden on the borrower. A refund of loan funds can be used to

reamortize the loan if it can be shown that the amount refunded will

reduce the rents and an exception to the 10 percent requirement has

been granted by the National Office.

8. Section 1924.13(e)(1)(v)(C) and 1924.13(e)(2)(viii)(A)

Comment: There was some objection to requiring the borrower to

agree that the tests conducted will include FmHA audit requirements.

One respondent has recommended that the language be changed to refer to

FmHA 1924-A instead of ``FmHA regulations'' and has provided FmHA with

suggested language for this section.

FmHA response: Because of the problems with how cost certifications

are conducted, as revealed by OIG, FmHA felt it necessary to institute

additional instructions to the CPA/LPA's which are intended to provide

uniformity in the examination of construction costs. FmHA sought advice

and assistance from the American Institute of Certified Public

Accountants in developing the additional instructions referred to as

the Audit Program. The Audit Program will be available in FmHA offices.

It is FmHA's intent that the borrower recognize the Audit Program and

to ensure that the auditor include its requirements in the cost

certification process. The language of this section has been reworded

as recommended by AICPA. FmHA has changed the reference from FmHA

regulations to FmHA Instruction 1924-A.

9. Section 1924.13(e)(1)(v)(D)

Comment: One respondent objects to the auditor having to certify

that he/she has no financial interest in or with the applicant/owner-

builder, architect, engineer, attorney, contractor, etc., since

Government Auditing Standards prohibit such an identity of interest.

Two respondents pointed out an inconsistency in the suggested CPA

opinion letter since one paragraph refers to Generally Accepted

Government Auditing Standards (GAGAS) and another refers to General

Accepted Accounting Principles (GAAP).

FmHA response: Even though the Government Auditing Standards

prohibits identities of interest between CPA's and the applicant,

architect, engineer, attorney, contractor, etc., OIG audits have

revealed apparent close relationships exist between some CPA's and

borrowers. Certain CPA's have not maintained an independence from the

borrower as required by Government Auditing Standards. There is no

inconsistency in the suggested opinion letter since GAGAS pertains to

the audit of the construction costs and GAAP pertains to the accounting

system which the borrower uses in recording construction costs. OIG has

submitted a sample auditor's report which is incorporated in the Audit

Program and available in any FmHA office.

10. Section 1924.13(e)(1)(v)(F)

Comment: The opinion was expressed that the CPA who reviews the

borrower's accounting system be allowed to cost certify. Also, costs

will be duplicated if the borrower has to hire a CPA in addition to

FmHA contracting for CPA services. There was objection to denying the

right of a CPA to cost certify when that CPA is currently handling the

contractor's accounting.

FmHA response: It was originally FmHA's intent that the CPA who

reviews the borrower's accounting system not cost certify the project

after construction. This was primarily due to the fact that OIG audit

findings revealed a lack of independence between CPA's and borrowers.

We have reconsidered this prohibition and will allow the same CPA who

sets up or examines the borrowers accounting system to certify

construction costs. However, the CPA who provides any accounting

services to the borrower during construction will not be allowed to

cost certify the project. To do so would be a violation of rules of

independence set forth in Government Auditing Standards.

11. Section 1924.13(e)(1)(v)(G)

Comment: There was one objection to using the new forms since the

respondent felt FmHA already has an identity of interest statement in

use.

FmHA response: The purpose of the new forms is twofold; one to

require all borrowers to disclose all identities of interest and the

other to identify ``paper companies.'' The identity of interest

statement itself has been changed to also include other related

parties. The forms also provide notification to all affected parties of

the penalty for falsifying the documents. FmHA feels these forms are

needed.

12. Section 1924.13(e)(1)(v)(H)

Comment: One respondent objected to having to report a discount or

rebate when the original line item costs were based on the discounted

amount. Another person offered the rationale that rebates and discounts

are incentives to buy ``right'' and to pay bills on time and that FmHA

is attempting to remove these incentives. One respondent requested

clarification of the next to last sentence in this section. The general

objection was voiced about reducing profit to agree with the reduction

in line item costs of construction. One person felt that contractors

would use the pretext of obtaining a rebate or discount in order to not

contribute additional funds to cover the increase in line item costs.

One respondent supported this section.

FmHA response: After due consideration, FmHA has decided that this

section more appropriately pertains to multiple advance loans where

payments are made by FmHA and the amount of any discounts or rebates

will be deducted before invoices are paid. If discounts or rebates are

given after the invoices are paid, the funds will be returned to the

supervised bank account. Therefore, this section has been amended to

delete reference to discounts and rebates.

13. Section 1924.13(e)(1)(v)(I)

Comment: The reference to the HUD regulatory language apparently

has caused some confusion since it was merely referenced. One

respondent wanted to know if the general contractor has to hammer nails

in order to be performing work. Another respondent felt that

subcontracting out all or nearly all of the work is a typical and

accepted practice. One respondent suggested that this provision be

waived if it can be demonstrated that it is to the benefit of the

property. One person questioned whether this provision will pertain to

everyone or just in those cases where an identity of interest exists;

if it pertains to everyone, then this section should be taken from the

cost certification portion of the regulation. One respondent requested

that we provide a definition of ``actual construction.'' Two

respondents requested that a distinction be made between work on new

construction and work on a rehabilitation. One respondent agreed with

this section.

FmHA response: To eliminate confusion, the reference to the HUD

regulation has been removed from this section. OIG audits have found

repeatedly that persons who identified themselves as the construction

contractor were not qualified to build the project or, for some reason,

did not build the project. They, instead, subcontracted out all or most

of the construction and still took a full builder's profit. FmHA

adamantly opposes the payment of profit to anyone who does not perform

the full range of duties of a general contractor. This section does not

prohibit a contractor from subcontracting out any or all of the work as

long as that contractor does not receive a builder's profit. The Agency

has no objection to the contractor being paid for services rendered.

FmHA does not foresee any situation where waiver of this provision will

benefit the property. This section pertains only to identity of

interest borrowers and will remain in this location. For purposes of

clarification, we are defining ``actual construction'' to mean ``work''

as defined in A.I.A. documents: ``* * * labor, materials, equipment,

and services provided by the contractor to fulfill the contractor's

obligations.'' Irrespective of whether the project is new construction

or rehabilitation, the general contractor should not expect to receive

a builder's profit if he/she has not performed the full ranges of

responsibilities of a general contractor.

14. Section 1924.13(e)(1)(v)(J)

Comment: There was agreement that FmHA implement these new forms.

One respondent suggested that more specific requirements be added such

as years in business, work performed other than on FmHA-financed.

FmHA response: The new Form FmHA 1944-31 will require the entity to

disclose number of years in business. We do not feel that

identification of the work performed on other than FmHA-financed

projects is necessary since the entity is certifying that it is an on-

going business.

15. Section 1924.13(e)(1)(vii)(B)(1) and 1924.13(e)(2)(iii)(A)

Comment: One respondent expressed an opinion that this section will

eliminate the smaller developers. There was some feeling that this

would discourage the participation of owner-builders or that it will

cause undue delay in the processing of the preapplication. One

respondent recommended that the determination of whether to grant an

exception to competitive bidding be made at the application stage

rather than at the preapplication stage. One respondent misinterpreted

this section to mean competitive bids would be granted rather than the

negotiated contracts.

FmHA response: The only new language added to this section requires

that FmHA document, in writing, the examination required prior to the

State Director granting an exception to competitive bidding. We do not

feel that small developers are any more at risk now than before the

change since the requirement is not new to this revision. FmHA agrees

that the determination of whether to grant an exception to competitive

bidding be made during the application stage and have changed the

language to reflect this requirement. The correct meaning of this

section is that negotiated contracts may be allowed once the State

Director has determined all requirements for granting an exception to

competitive bidding have been met.

16. Section 1924.13(e)(2)(i)(G)

Comment: One respondent wanted to know under what circumstances

will cost estimation services be required and asked where else in the

regulation this subject is discussed. Another respondent raised issues

which appear to be unrelated to this section and we could not determine

to which section the comment referred. Other comments pertain to the

deletion of cost certification fees which was previously discussed

under Sec. 1924.13(e)(1)(iv).

FmHA response: The existing regulation contained a provision for

cost estimation services to be used if FmHA did not agree with the

owner-builder's estimate. This was seldom, if ever, imposed. Our recent

test of using estimating services proved to be unreliable and

inconsistent. The reference to cost estimation has been removed from

the regulation.

17. Section 1924.13(e)(2)(iv)

Comment: One respondent suggested that allowances for general

overhead, general requirements, and a builder's profit be based on a

regional cost rather than on a State average.

FmHA response: This section states that the amounts may be

determined by local investigation and also from HUD data for the area.

It does not mention a State average.

18. This Respondent Refers to 1924.13(e)(1)(vii)(D)

There is no such section in FmHA Instruction 1924-A.

19. Section 1924.13(e)(2)(viii)

Comment: One respondent asked if the requirement that projects have

their costs ``audited by FmHA'' refers to cost certification contracted

by FmHA, OIG or other FmHA audit. Another respondent points out that

this section contains a cost certification cutoff for projects of

$350,000 or more and expresses an opinion that there should be no

difference between identity of interest and owner-builder. One

respondent points out that a FmHA 1924-13 is mandatory for all loans of

over $350,000 and that if the loan is publicly bid this form should not

be mandatory.

FmHA response: The reference to ``audited by FmHA'' falls within

the same provision that was discussed earlier concerning FmHA

contracting for all cost certifications. The respondent is correct in

his observation concerning the $350,000 cutoff for owner-builders. All

owner-builders are identity of interest entities which automatically

require a cost certification. The reference to $350,000 has been

removed from this section. FmHA regulation 1944-E now requires that all

applicants submit Form FmHA 1924-13 to facilitate the tracking of line

item costs in the Agency's upcoming computerized cost tracking system.

This applies to all applicants regardless of whether or not an identity

of interest is involved.

20. Section 1924.13(e)(2)(viii)(B)

Comment: One respondent suggested that further clarification be

added to the section regarding amounts for general overhead, general

requirements, and builder's profit as being treated as individual and

separate line items amounts or whether all three should be combined,

thus eliminating the need for Administrative Notice explanation.

Another comment did not appear to pertain to this section.

FmHA response: The Administrative Notice issued on this subject

addressed the percentages for establishing separate amounts for general

overhead, general requirements, and builder's profit; this section

refers to the dollar amounts which are established as a result of the

percentage calculation. The FmHA 1924-13 requires that these three

items be listed separately. This section refers to establishing dollar

amounts for general overhead, general requirements, and builder's

profit and that actual costs for those three items will not exceed

their dollar estimates. Language addressing the allowable percentages

for general overhead, general requirements, and builder's profit has

been added to Sec. 1944.215(a)(1) of subpart E of part 1944.

21. Section 1924.13(e)(2)(viii)(C)

There was one comment and the respondent expressed agreement with

this section.

22. Section 1924.13(e)(2)(viii)(D)

Comment: One respondent expressed agreement with this section.

Another respondent requested clarification of the reference to HUD

regulation.

FmHA response: The reference to the HUD regulations has been

dropped from this section as discussed under Sec. 1924.13(e)(1)(v)(I),

above.

1944-E

1. Section 1944.211(a)(3)

Comment: A number of objections were expressed to limiting the

number of preapplications to five. Several respondents supported this

proposal. The reasons were many and too numerous to list. One

respondent suggested that the limitation be based on applications and

not preapplications and that the number be controlled on a State basis.

Many persons suggested that the number of preapplications be based on

the financial capacity of the applicant and not on the number of

preapplications. Other recommendations include a limit of from 3 to 15

preapplications; 5 preapplications and a nationwide limit of 10; 10

preapplications per District; 15 or 20 with no more than 5 funded and/

or under construction at one time; and 10 preapplications nationwide

except for preapplications accompanied by a deposit equal to 1 percent

of the loan. Other respondents recommended no limit be set for

preapplications or applications. Several persons recommended returning

preapplications which cannot be funded within a set period of months.

To illustrate his objection to limiting the number of

preapplications, one respondent sent several photographs of FmHA-

financed apartment complexes which were not being properly managed. The

respondent alleged that these apartments were owned by small developers

and the photographs serve as an example of what would happen to the

section 515 program if only small developers could participate.

FmHA response: The majority of comments were overwhelmingly opposed

to restricting the number of preapplications. Therefore, the Agency is

not undertaking any changes to this section at this time.

FmHA was concerned over the photographs and investigated the

respondent's claim. In all cases, FmHA was taking action to correct the

management deficiencies. In almost all cases, the developers of the

subject apartments were not small developers. In the one case where the

developer would be considered a small developer, the State did not feel

the management problems were due to the fact the developer was not a

large entity. Therefore, we do not consider this particular objection

to the proposed rule to have merit.

2. Section 1944.211(a)(5)

Comment: One respondent expressed an opinion that requiring

evidence that the borrower has or can obtain the 3 percent borrower

contribution at the preapplication stage is premature and should not be

required until prior to obligation.

FmHA response: The ability of the borrower to furnish the

contribution is a criterion of eligibility. The Agency feels that

eligibility must be established at preapplication stage. If that

requirement were to be delayed until the loan is ready to be obligated,

the applicant and FmHA would have invested far too much time and money

to have the applicant determined not eligible. The 3 percent

contribution was increased to 5 percent by the Community Development

Act of 1992 for all projects whose members will receive benefits from

Low Income Housing Tax Credits. The regulation has already been changed

to reflect the increase in the equity contribution requirement.

3. Section 1944.211 (a)(5)

Comment: Two respondents expressed the opinion that applicants

should be required to furnish the 3 percent borrower contribution from

its own resources.

FmHA response: Currently, borrowers have no personal financial

obligation to serve as an impetus to seeing that the project operates

successfully. We agree that such an obligation will encourage continued

interest in overseeing the well-being of the project and it makes sense

from a business standpoint. Therefore, FmHA agrees that applicants

should furnish the 3 or 5 percent contribution from their own resources

and have changed this section to reflect that requirement.

4. Section 1944.211(a)(7)(i)

Comment: Several comments were received concerning the requirement

that the applicant provide sufficient cash to cover start-up costs and

that a list of such materials and equipment be provided. It was felt

that this was an attempt to disallow the use of letters of credit to

cover the O&M expenses.

FmHA response: Currently, regulations allow borrowers to provide a

letter of credit to cover the total amount needed for operating and

maintenance expenses. FmHA has experienced a reluctance on the part of

borrowers to draw on the letters of credit since doing so will incur

interest expenses for which they are liable. Thus, there have been many

instances where there were insufficient funds to cover needed start-up

costs. Requiring the borrower to provide the requirement in cash will

ensure the availability of adequate funds with which to cover these

expenses. The Housing Act of 1949, as amended, states that ``The

Secretary may require that the initial operating reserve under this

section may be in the form of an irrevocable letter of credit * * *''.

This language provides the Agency the option of whether to require

letters of credit or to require the initial O&M in cash. FmHA has

determined that more benefits will be derived by projects if cash is

furnished for the operating reserves and, for this reason, has decided

not to accept letters of credit.

5. Section 1944.212(b)

Comment: A number of comments were received concerning restricting

rehabilitation loans to no more than 5 percent of the loan for new

construction. Several of the respondents expressed their support for

placing this limit on rehabilitation loans. Also, a couple of

respondents suggested that FmHA eliminate purchase and rehabilitation

of historic buildings altogether. Several respondents did not favor

this proposal and misconstrued its intent as an attempt to eliminate

rehabilitation of historic buildings.

FmHA response: The cost for purchasing and rehabilitating existing

buildings has increased noticeably within the recent past and has, in

some cases, exceeded the amount needed for constructing new units. FmHA

feels it appropriate to establish a ceiling to ensure maximum use of

loan funds. The excess cost of rehabilitation would be better spent to

finance more units in other areas of need. Therefore, the Agency feels

that a limit should be placed on the amount of Government funds being

expended for rehabilitating historic buildings. While the Agency does

not wish to prohibit the purchase and rehabilitation of historic

buildings, it feels that a ceiling is needed to prevent unlimited funds

from being used for this purpose. The proposed regulation does not

prohibit the borrower from infusing additional cash from its or other

sources in order to fully fund the purchase and rehabilitation. FmHA's

first consideration must be to providing rental units to its

beneficiaries at the lowest cost to the tenants.

6. Section 1944.212(c)(1)

Comment: One respondent expressed an opinion that this section

limits the basis of FmHA's maximum loan being 97 percent of total

development cost or appraised value. Another respondent stated it does

not appear there is a specific provision to accomplish what is required

in this section. One respondent suggested adding clarification that

FmHA can lend the present market value of the site ``as improved'' and

that the cost of the improvements could not be released until all

improvements were in place. One respondent recommended the section be

revised to state the lower of the appraised value or purchase price

will be used to determine total development cost and the applicant's

initial investment. Another respondent recommended we restore the

original language of this section. One respondent agreed that loan

funds used to purchase land may not exceed the estimated market value

as established by an appraisal.

FmHA response: The only changes made to this section are the

reference to FmHA Instruction 1922-B and deletion of the words ``in

excess of estimated market value'' in the last sentence. These changes

do not alter how the loan is calculated. The purchase price of land is

not the basis for establishing the applicant's initial investment. The

FmHA loan is limited to the development cost or the security value of

the project, whichever is less; the applicant is responsible for the

equity contribution whether it is in the form of land, cash, or a

combination of both. After considering the comments, we feel that this

section is confusing as written since it should be addressing the

amount of loan funds which can be used to purchase land and should not

include discussion of how the purchase price affects the applicant's

initial investment. The last sentence has been removed.

7. Section 1944.212(c)(2)

Comment: One respondent suggested that the existing language be

restored to this section.

FmHA response: The first sentence of the existing paragraph was

removed because it already exists under Sec. 1944.213(c)(10).

8. Section 1944.212(c)(3)

Comment: One respondent voiced the opinion that the density

requirements referred to in Sec. 1944.215(a)(5) are not definitive.

Another respondent suggested that FmHA define excess land. Another

respondent felt that this section is in conflict with

Sec. 1944.215(a)(6) and should be deleted. One respondent agreed with

the section as long as consideration is given to local zoning

requirements.

FmHA response: FmHA feels that excess land is adequately defined in

this section and in Sec. 1944.215(a)(6). We do not agree that this

section conflicts with Sec. 1944.215(a)(6). Section 1944.215(a)(6)

states that local zoning ordinances and, in extreme cases, the site

size, shape, or condition will be the determining factors in arriving

at site density.

9. Section 1944.212(d)

Comment: There were a number of suggestions concerning the

establishment of a range of costs for offsite facilities. One

respondent recommended that all offsite costs be eliminated from the

loan. It was pointed out by several respondents that States have not

approved any off-site facility costs. It was also suggested that each

situation is unique and should be judged on its own merits and not be

compared with past performance. One respondent felt this would place an

undue burden on FmHA and that establishing a range would not prove

anything since the bottom line must be the actual ``as developed''

value of the site.

FmHA response: FmHA agrees that every situation has to be judged on

its own merit and that it would be impractical to try to establish a

range of costs for offsite facilities. The language has been changed to

delete this requirement.

10. Section 1944.212(g)

Comment: There was generally an expression of agreement with the

addition of blinds as an eligible loan purpose. One respondent,

however, suggested that we also include shades with this provision. One

respondent wanted to know if individual washer/dryer hookups could be

interpreted to mean ``laundry facility.'' Another respondent voiced an

opinion that washer/dryer hookups in addition to a central laundry

facility increases marketability of rental units.

FmHA response: FmHA has no objection to including shades in this

provision and has amended the language accordingly. Laundry facilities

are defined as the actual washers and dryers facilities available to

all of the tenants and not just washer and dryer hookups. Washers and

dryers owned by individual tenants are not available to all tenants and

cannot be considered as ``laundry facilities.'' FmHA stands by its

previous position regarding the prohibition of placing washers and

dryers in individual units when a central laundry facility is provided

unless it is customary for the area for the size of project and type of

housing involved. Washer and dryer hookups are an additional expense to

overall project costs and, in the majority of cases, are not used by

the tenants. Additionally, there have been problems with the hookups

leaking and causing water damage to the units.

11. Section 1944.212(i)

Comment: There were numerous objections to disallowing certain fees

when the borrowing entity will receive low income housing tax credits,

primarily because the end result will be an increase in the borrower's

contribution. Other respondents felt that if certain items were

required by FmHA, then those items should be funded. One respondent

suggested that FmHA automatically increase the equity requirement for

low income housing tax credit projects to 5 percent rather than to

eliminate certain fees and charges. One respondent suggested that the

intent be clarified to mean the legal fees associated with closing the

FmHA loan and not the interim lender loan. Another person suggested

that all non-low income housing tax credit projects receive an

additional 10 points in the rating criteria. One respondent felt that

this provision would reduce loan costs and thereby maximize the State's

funding allocation.

FmHA response: The Community Development Act of 1992 increased the

equity contribution to 5 percent for borrowers whose members will

receive benefits from Low Income Housing Tax Credits. The regulation

has already been changed to reflect this increase. The original

language pertaining to related costs has been restored. Legal fees

pertain to the costs associated with the FmHA loan closing only;

clarification has been added to the section. FmHA does not agree with

the suggestion to allow an additional 10 points for non-low income

housing tax credit projects. The purpose of the priority points is to

direct funding to the areas of greatest need and the lack of tax

credits is not an indication of need.

12. Section 1944.212(j)

Comment: There were several respondents who expressed opposition to

allowing payment for assistance to nonprofit groups because of the

inequity in handling profit vs. nonprofit applicants.

FmHA response: FmHA published this section to correct a

typographical error in the original section; however, the Agency feels

that the payment for technical assistance is appropriate for nonprofits

since they must rely on their own resources which, in some cases, are

slim or nonexistent.

13. Section 1944.213(b)(1)

Comment: One respondent understood this section to mean the

nonprofit organization may provide the initial operating capital and/or

relocation costs incurred and suggested that the section be revised to

include relocation costs in the loan.

FmHA response: This section states that the loan may provide for

the development cost or the security value of each project, whichever

is less, plus the 2 percent O&M and/or the relocation costs. This

provision allows for the inclusion of relocation costs in the loan.

14. Section 1944.213(b)(2)

Comment: While 3 respondents agreed with the proposed computation

of the loan amounts, numerous others disagreed. Most felt that the

Agency was attempting to increase the borrower's equity contribution.

FmHA response: FmHA has removed the examples from this section and,

instead, will provide instructions to its staff in how loans should be

calculated in a new Exhibit A-12. The Exhibit provides administrative

guidance only and is not being published with this document. A copy is

available in any FmHA office.

15. Section 1944.213(c)(10)

Comment: One respondent expressed an opinion that there should be

an exception to this provision which allows the person who has owned

land for a period of at least 3 years to recover costs associated with

the increase in value and betterment of the site. Another respondent

suggested the restriction be expanded to provide that there be no

common interest for at least 3 years and that the option be with the

owner of public record; an exception could be made for subsequent loans

on adjacent property.

FmHA response: FmHA does not agree with this suggestion.

Regulations, except in the case of a broadly-based nonprofit

organization, prohibit the use of loan funds to purchase land from the

applicant or a member of the applicant organization. In the case of a

nonprofit organization, the appraisal will determine the value which

can be included in the loan. We think the suggestion concerning common

interest has merit and have changed this section to add a 3-year

provision.

16. Section 1944.213(c)(12)

Comment: One respondent felt that this section is no longer needed

in light of the provisions of Sec. 1944.211(a)(7) (i) and (ii) which

would require the applicant to put up in cash the amount necessary for

the initial 2 percent O&M.

FmHA response: FmHA agrees with this comment and the section has

been deleted.

17. Section 1944.213(d)

Comment: A few respondents expressed their opinion that this

provision would be burdensome and time-consuming. One respondent

pointed out that the expense of a market study is always incurred prior

to the applicant's filing a preapplication. Another respondent pointed

out the language of this section does not allow for predevelopment

loans from nonprofit organizations as was originally intended.

FmHA response: Since most borrowers are familiar with the process

and are aware of what must be done during the preapplication and

application phase, obtaining written verification from FmHA should pose

no undue delay. OIG strongly recommended that FmHA be aware of the

applicant's intention to incur debts before they are actually incurred

to preclude the appearance of giving blanket approval for all such

expenses. We agree that the language does not allow for predevelopment

loans from nonprofit organizations and the language has been amended to

correct this omission. We have also exempted market studies from the

prior written approval requirement since they must be completed prior

to filing a preapplication.

18. Section 1944.213(e)(1)

Comment: Several persons objected to this section because of the

delay it would cause during the construction process. Some suggested

that FmHA require post-approval instead of pre-approval to avoid such

delays.

FmHA response: The Agency feels that obtaining pre-approval from

the District Office will not sufficiently hamper the construction

process if the contractor and borrower react in a timely manner. The

only two occurrences which will allow an increase in per unit cost is

design changes by FmHA or State or local jurisdictions or changes in

financing approved by FmHA. Neither of these events would be construed

as an emergency.

19. Section 1944.215(a)

Comment: Two respondents expressed agreement with this section.

Another respondent voiced an opinion that to require more expensive

building materials and, even though maintenance costs will be less, is

contradictory to cost containment goals.

FmHA response: The Agency has witnessed what happens when cheaper

building materials are used to initially control costs. The results

have been high maintenance costs over the life of the materials and the

ultimate replacement of the materials. While construction costs may be

lower using the cheaper building materials, these savings are more than

overshadowed by the high maintenance costs necessary to prolong the use

of the materials. FmHA strongly advocates the use of low maintenance

and long life materials in its construction.

20. Section 1944.215(a)(1)

Comment: There were several comments expressed about the costs

being ``locked in'' to either our cost tracking system or to the

Marshall & Swift estimates, thereby not allowing any inflation

increases. It was also noted that projects with abnormally high or low

costs should not be entered into the system and that only newer (one

year old) projects be tracked. It was felt that the borrower should not

be responsible for resolving differences between a proposed project's

costs and those costs in the FmHA tracking system or in the Marshall &

Swift estimates. Another respondent suggested that the tracking system

allow for a comparison of bedroom sizes rather than project to project

comparison. One respondent felt that the tracking system should provide

for a distinction between new construction and rehabilitation.

FmHA response: The new cost tracking system will allow FmHA to

track by line item the costs of construction. For instance, the final

estimated cost of concrete for a proposed project will be recorded in

the system at the time the loan is obligated. Once the project has been

built and the costs are certified (identity of interest projects), the

certified cost of concrete will also be recorded in the system and will

become the basis for establishing a benchmark on costs. This should

take into consideration the inflationary escalation of costs during the

construction period. Thereafter, the line item costs for each new

proposal will be compared with the amounts recorded in the tracking

system. Local FmHA offices will allow for future inflationary increases

just as they do now. Only the projects received and processed after the

tracking system comes on line will be entered. We intended that

significant differences between an applicant's cost estimates and the

estimates of our established tracking costs or Marshall & Swift be

resolved since FmHA will not arbitrarily accept any estimates which

appear out of line or unreasonable. We foresee the borrower's

responsibility for resolving the differences in cost as either

providing justification for the differences or taking whatever action

is required to ensure the best estimates are being considered in the

construction. This method of tracking construction costs will make no

distinction between numbers of bedrooms or new construction vs.

rehabilitation; costs will be tracked on a line item basis and not on a

project basis.

21. Section 1944.215(a)(2)

Comment: A few respondents suggested that FmHA establish timeframes

for District and State Offices to follow during preapplication and

application review processing. Another respondent suggested that the

AD-622 cover only the authorization to develop plans and specifications

and that the balance of the application not be pursued until receipt of

the plans and specifications and after the appraisal is completed. It

was felt that this would reduce the time between signing of the

construction documents and the start of construction.

FmHA response: From periodic assessments made of the multi-family

housing program by FmHA's National Office, it is apparent that the

field staff's time is being utilized to its fullest extent. The large

volume of preapplications being filed has placed a considerable burden

on the field, particularly when those preapplications which will not

continue to be processed because of their rating must still receive

some degree of attention. To place timeframes on the field for each

step of processing would be unrealistic since they would most likely be

impossible for the staff to meet. We do not agree that authorizing just

the completion of plans and specifications would reduce the time

between signing of the construction contract and the actual start of

construction, since there are many other items needed to complete the

application and these could not be addressed until we authorized the

applicant to proceed to a full application. The cost estimates should

be updated at the time the construction contract is signed so that the

most up-to-date estimates are obtained prior to approving the loan.

22. Section 1944.215(a)(3)

Only one comment was received and the respondent agreed with this

section.

23. Section 1944.215(a)(4)

Only one comment was received and the respondent agreed with this

section.

24. Section 1944.215(a)(5)

Comment: There were numerous objections to establishing a set

number of units per acre because of the size, shape, and condition of

sites.

FmHA response: FmHA feels that more diligent efforts could be

expended by applicants in locating more viable sites. Sites which have

sections unsuitable for building should be avoided. However, if a

situation exists where the only available site is of a size, shape, or

condition which makes a portion unsuitable for building and the only

alternative is to not provide units, then a request to the State Office

for an exception to this density requirement may be considered. Such

language has been added to the section.

25. Section 1944.215(a)(6)

Comment: Several respondents expressed the opinion that hiring

construction inspectors is unrealistic at a time when FmHA staff is

being reduced. They also pointed out that delay in obtaining timely

construction inspections by FmHA has been a problem and suggested

including language in the regulation that would require necessary

inspections within a reasonable timeframe.

FmHA response: The hiring of construction inspectors is a

suggestion which may or may not be possible to follow. If not, it may

be possible for States to contract for these services. The comment

about not having timely construction inspections by FmHA provides an

appropriate case-in-point for adequate inspection coverages. This

subject will be discussed at future training meetings with the field

staff. FmHA feels that the proposed language is appropriate as

proposed.

26. Section 1944.215(a)(7)

Comment: There were several comments that the restriction of

building design will result in all buildings being shaped like a box.

FmHA response: FmHA feels this is an overreaction and that this

section will not lead to the construction of boxes. We have observed,

in many States, how a simple yet attractive design is an asset to the

community. These types of simple designs do not deter potential tenants

from seeking residency. The Agency feels that the design of some of the

housing units now in existence have gone beyond what is necessary to

provide decent, safe, and sanitary living units. The Housing Act of

1949, as amended, specifies that ``no loan shall be made or insured * *

* unless the Secretary finds that the construction involved will be

undertaken in an economical manner and will not be of elaborate or

extravagant design or materials.''

27. Section 1944.215(a)(8)

Comment: Two respondents recommended against setting the building

roof slope limits proposed in this section, one because of the snow

loads in the northern States and the other because they could result in

a building which lacks interest.

FmHA response: FmHA agrees with the argument against setting the

lower slopes in cases where there are heavy snow loads. The wording has

been changed to allow the State Director to authorize a higher slope if

needed to accommodate severe weather conditions. The Agency disagrees

with the opinion that these slopes will result in a lack of building

interest.

28. Section 1944.215(a)(9)

Comment: Several respondents expressed agreement with this section.

Several others felt that the use of repetitive designs would result in

``cloned'' projects.

FmHA response: FmHA does not feel that the use of repeat designs

will have any detrimental effect on the aesthetic value of FmHA-

financed units. In fact, several States now require the use of repeat

designs without detrimental effects. The National Office assesses the

515 program in multiple States each year, which includes a visual

inspection of the rental stock. We have not found the use of repeat

designs to be offensive or boring in any State. FmHA feels that the

submission of new designs for all projects needlessly increases the

amount of Government funds needed since the amount of architectural

fees is based on the level of services provided. Repeat designs will

decrease the amount being paid for architectural fees since the use of

``shelf'' plans will reduce the detailed architectural services needed.

29. Section 1944.215(a)(10)

Comment: Several respondents stated that community room furniture

should be included as an eligible loan expense; one respondent

supported the inclusion of dining room furniture in congregate housing.

Another respondent supported the inclusion of community rooms in family

projects and garbage disposals. A few respondents suggested allowing

sliding glass doors where patios/balconies are permitted. One

respondent suggested adding whirlpools to developmentally disabled

housing. Two respondents supported the inclusion of bay/box/picture

windows. One respondent voiced support for prohibiting fire places,

garages and covered parking. Two respondents supported this section.

FmHA response: Community and congregate dining room furniture is

the responsibility of the borrower and its expense should be covered by

the initial O&M funds. Outdoor recreation facilities for family

projects are allowable loan expenses and are intended to substitute for

community room facilities allowed in elderly projects. The Agency

considers community rooms to be an essential part of the daily living

requirement for those elderly projects which can support the additional

expense of the facilities. The obvious reason for not allowing

community rooms in family projects is that family activities are not

necessarily curtailed by age or climate and they are more mobile than

elderly residents, which means their choice of entertainment can extend

beyond their living accommodations. FmHA does not feel that garbage

disposals are necessary and has recommended against financing them in

the past. In addition to the initial cost of the disposal units, too

often problems develop because of lack of care in what is processed

through them, resulting in additional expense of the repairs. FmHA does

not agree that sliding glass doors are necessary even when patios/

balconies are customary for the area. FmHA contends that if a

developmentally disabled person requires whirlpool therapy, then it

should fall within the responsibility of a professional to provide the

service at a therapist's facility. Some of the States which were

previously allowing bay/box/picture windows have discontinued this

practice in accordance with the efforts to contain costs, an action

which we support.

30. Section 1944.215(a)(11)

Comment: One respondent supported the inclusion of individual

patios for the elderly as a means for increasing socialization. Two

respondents supported washer and dryer hookups for all types of units.

FmHA response: FmHA views the community room as instrumental in

encouraging elderly tenant socialization. In a recent survey conducted

by the National Association of Home Builders, tenants were asked to

list amenities in order of their desirability. This survey showed that

balconies were ranked by the tenants at number 15 out of a list of 16

amenities. We place individual patios in the same category with

balconies. See discussion of washer and dryer hookups under

Sec. 1944.212(g), above.

31. Section 1944.215(a)(12)

Comment: One respondent voiced support for allowing outdoor

recreation for elderly projects for those occasions where there are

minor children in the unit and where grandchildren come to visit. There

was support expressed for the allowance for garbage disposals and

community rooms for family projects.

FmHA response: Playground equipment would either stand idle in the

case where there were no minors living with the elderly or would

attract children from outside the project. The noise generated as a

result of playgrounds would not be viewed as a welcome addition by some

of the elderly residents who enjoy peaceful surroundings. FmHA response

to community rooms for family projects and garbage disposals has

already been discussed under Sec. 1944.215(a)(10) above.

32. Section 1944.215(a)(13)

Comment: Several respondents objected to the number of parking

spaces for elderly since more persons now keep their cars for a longer

period of time, particularly since those persons reside in rural areas

with no other means of transportation. One respondent recommended that

spaces for visitors and health care workers not be included in the

calculation. One respondent suggested that this limit be recommended

and not mandated. One respondent recommended the limit be set at 1.5 to

2 for family and .5 to 1.25 for elderly; another respondent recommended

.75 to 1.25 for elderly. One respondent supported this section.

FmHA response: A 1990 congregate housing study revealed that only

21 percent of congregate tenants owned cars. The proposed allowance for

congregate parking spaces is based on that percentage. In order to

accommodate the additional cars owned by persons in elderly projects,

we have changed the language of this section to allow for additional

spaces for visitors and staff.

33. Section 1944.215(a)(14)

Comment: A number of respondents objected to establishing a range

of acceptable allowances for earthwork. A couple of respondents

mistakenly interpreted this section to mean that the allowance cover

the combination of landscaping and earthwork.

FmHA response: FmHA's cost tracking system will allow us to capture

landscaping and earthwork costs; therefore, the section has been

amended to delete the requirement that ranges be established.

34. Section 1944.215(a)(15)

Comment: One respondent recommended that congregate projects where

an expanded meal service is designed to provide meals to all of the

community's elderly citizen be exempted from the limitations of the

Manual of Acceptable Practices (MAP). The same respondent pointed out

that the MAP is a supplement to an obsolete minimum property standards.

Another respondent pointed out that the MAP is not available in any

FmHA office. One respondent agreed with this section.

FmHA response: The MAP is no longer in print. Guidance pertaining

to the size of these facilities can be found in Guide 2 of FmHA

Instruction 1924-A. This section has been changed to reflect the proper

reference.

35. Section 1944.215(b)(1)

Comment: Several respondents objected to this way of measuring

square footages. Two others objected to restricting congregate units to

110 percent of the minimum square footages since this dimension may not

allow sufficient square footages to meet the requirements of the

Americans with Disabilities Act. One respondent voiced the opinion that

setting the square foot limits will lead to a drop to the minimum

footages and adversely impact the rentability. One respondent

recommended a lower maximum square footage. One respondent recommended

eliminating the reference to ``related facilities'' since their

inclusion will distort the square footage of ``living area.''

FmHA response: The methodology described in this section for

calculating living area is consistent with common industry practices.

Congregate living units are not affected by the Americans with

Disabilities Act. We do not understand the concern that setting the

square foot limit will lead to a drop to the minimum footages since

these ranges have been in existence for some time and have not resulted

in an automatic drop in square feet. We see no reason to lower the

maximum square footage since the size of the unit can be controlled

within the allowable ranges. The section has been changed to eliminate

``related facilities'' from being included in the computation of living

area.

36. Section 1944.215(e)

Two comments were received and the respondents supported this

section.

37. Section 1944.215(w)(3)

Comment: A number of respondents objected to FmHA's requiring the

applicant to reveal the percentage of tax credits it will seek. Several

persons appeared to misinterpret the intent of the section. A few of

the respondents felt that FmHA is attempting to make the determination

of the number of tax credit units the project will receive. One

respondent suggested that the section be amended to state that the

``market study'' will be subject to further examination and not the

preapplication itself. One respondent points out that if the project is

requesting rental assistance, the affordability of basic rent is

irrelevant. One person recommended that the word ``percentage'' to

changed to ``number'' to avoid confusion. Several persons supported

this section.

FmHA response: FmHA regulations require that the Agency determine

whether a proposed project is feasible. In order for a project to be

feasible, there must be persons of sufficient incomes to support the

expenses and to amortize the loan. The market for 515 projects depends

on the existence of persons with a lower level of incomes in those

cases where tax credits are awarded to the borrower. Many market

analysts are still determining need based on incomes up to the moderate

level. This becomes an issue when there is not sufficient rent subsidy

for all units. In order to make a proper analysis of feasibility, we

must determine the level of incomes which will be required to support

the project. Even if the applicant requests 100 percent rental

assistance and there is sufficient subsidy to cover all of the units,

FmHA is not absolved of its responsibility of examining feasibility.

FmHA feels that it is imperative that we are aware of the number of tax

credit units anticipated so that the appropriate level of incomes can

be studied. In no way does FmHA intend to become involved in the

determination of the number of tax credits assigned to a project by the

State Agencies. We will, however, provide information to the State

Agencies as to the amount of financial assistance granted to the

borrower by FmHA. The word ``percentage'' has been changed to

``amount'' and the words ``percentage of units targeted for tax credit

eligible persons'' have been added.

38. Section 1944.231(a)(2)

Comment: A number of respondents supported this section with the

stipulation that no other preapplication be authorized until the second

market study has been completed and a determination made on the

original preapplication. Two respondents pointed out that the 45-day

period in which to respond to the applicant is not sufficient to

accomplish the necessary processing.

FmHA response: FmHA agrees that the preapplication hold its

position in the ranking and has amended the section to state that no

other preapplication will move ahead of the preapplication in question

until the feasibility issue has been resolved. The contracts will be

similar to those used by the Agency in obtaining appraisals in that the

State will let one contract under which the market studies will be

prepared by one or more market analysts. This will eliminate the need

for contracting for each individual study, thus saving processing time.

39. Section 1944.235(a)(1)

Comment: Two respondents suggested that closing instructions be

furnished to the borrower within a certain timeframe.

FmHA response: The issuance of the closing instructions involves

coordination and input from another Government Agency. While FmHA may

request more expeditious issuance of the closing instructions, it has

no control over when the instructions will be furnished. Additionally,

we have no way of knowing how the process is impacted by that Agency's

workload.

40. Section 1944.235(a)(2)

Comment: One respondent supported this section. Another respondent

stated that this section does not agree with the earlier requirement

concerning what amount needs to be furnished to cover the initial O&M

amount discussed in Sec. 1944.211(a)(7)(i).

FmHA response: This issue was discussed under

Sec. 1944.211(a)(7)(i), above.

41. Section 1944.235(b)(3)

Comment: One respondent suggested that an appeal process be

included for co-general partners. One respondent suggested that another

provision be added to allow transfer of an obligation when the

applicant is unable to continue for legitimate reasons and the

transferee is eligible for 515 assistance. Another respondent suggested

consideration be given to who is responsible for the default so that a

co-general partner who is innocent of the default will not be penalized

by being denied access to the program for 5 years.

FmHA response: We interpret the first and last respondent comments

to pertain to the same concern. FmHA does not agree that a co-general

partner be exempt from these provisions since the loan was made to the

entity and it is up to the entity to maintain its financial integrity.

The regulations already contain provisions for handling cases where the

entity chooses to transfer an obligation without monetary default.

There would be no penalty in that case.

42. Section 1944.235(c)(1)

Comment: One respondent suggests that the language be changed to

allow interim lenders who are now making loans to only FmHA-financed

projects. Another suggested that the language be changed to state

``other than identity of interest companies.'' Another respondent felt

that the record of providing financing to non-FmHA projects be on a

national basis and not limited to the State in which a particular loan

is made. A respondent suggested that the language be changed to state

the lender be ``authorized'' to do business in a State since not all

States require the lender to be licensed. Two respondents suggested

that FmHA provide the interim financing to eliminate the expense

connected with outside interim financing. Two other respondents voiced

their objection to this section. Two respondents supported this

section.

FmHA response: FmHA feels strongly that the borrower not provide

its own interim financing. The interim lender is responsible for

inspecting each stage of construction. If borrowers are allowed to

provide their own interim financing they, in essence, would also be

allowed to inspect their own construction. FmHA feels that inspections

by arms-length third parties will provide a more objective assessment

of construction standards and quality. The language has been changed to

state that the lender be ``authorized'' to do business in a State

rather than ``licensed.'' As long as interim financing can be secured

at reasonable rates, fees, and terms, FmHA does not feel that the

wholesale use of Government funds for interim financing is in keeping

with the intent that local lenders be given the opportunity of

furnishing the interim financing.

43. Section 1944.236

Comment: Two respondents objected to nonprofit borrowers being able

to use an attorney who is a member of their organization while limited

profit borrowers are prohibited from doing the same.

FmHA response: The only change being made to this section is to

correspond to a recent wording change in FmHA's closing regulation. The

use of member attorneys by nonprofit groups has been allowed by the

regulation for some time. FmHA does not consider the relationship

between a nonprofit borrower and its attorney in any way resembles the

relationship between a profit-motivated borrower and its attorney. The

nonprofit attorney has no financial interest in the nonprofit whereas

the reverse can be true of the attorney who is a member of the limited

profit.

44. Section 1944.237(a)

Comment: One respondent suggested that this section be amended to

make clear that subsequent loans to existing borrowers for

rehabilitation do not have to go through the preapplication process.

Another respondent felt that this will adversely affect developers who

acquired land for a future second phase. Another respondent recommended

that this section show what types of paperwork are needed for a

subsequent loan or that the information be contained in an exhibit to

the regulation. Two respondents expressed their opinion that the

language which states that subsequent loans made on or after December

15, 1989, cannot be prepaid is contrary to prior interpretations by the

National Office. Another person suggested that this section be revised

to permit the addition of office, laundry, maintenance, or other

community space not be subject to rating and ranking. One respondent

agreed with this section.

FmHA response: This section states that subsequent loans to develop

additional units must be rated and ranked. All other subsequent loans

which do not fall within this definition are excluded, including

rehabilitation of existing FmHA-financed units. It was always FmHA's

intention that subsequent loans to develop additional units be subject

to the rating system; this section merely clarifies that intention.

FmHA agrees that some guidance be added to the regulation which better

defines what types of paperwork are required for subsequent loans. The

types of paperwork needed for subsequent loans has been added to the

regulation as Exhibit A-14. Prepayment is covered by proposed changes

now being incorporated in FmHA regulations. Office, laundry,

maintenance, and other community space facilities are not considered

living units and do not fall under this definition.

45. Exhibit A

Paragraph IV.B.6

Comment: Two respondents expressed their opinion that no new AD-622

be issued until the market question is resolved.

FmHA response: This was discussed under section 1944.231(a) above.

46. Exhibit A-2

Comment: One respondent felt that a new column ``housing

condition'' be added to this exhibit.

FmHA response: The respondent did not make known whether the

reference to housing condition refers to the overall condition or to

the interior condition of the units. If the latter, we have

deliberately not required this type of information since it would be

almost impossible for a market analyst to inspect the inside of the

units. In the case of the overall exterior condition of the property,

FmHA feels this analysis is subject to the personal feelings of the

analyst and would not be based on any uniform means for ranking the

physical condition. FmHA does require the analyst to give an opinion as

to the upkeep of the existing stock in accordance with Exhibit A-8,

``Outline of Professional Market Study.''

47. Exhibit A-7

Paragraph I.A

Comment: There were many objections raised to this section that

requires an audited financial statement. It was pointed out that, even

if individual financial statements could be audited, the cost for

providing the original and updates during the processing period would

be prohibitive. These same individuals objected to providing a copy of

their prior year income tax return because it is deemed an invasion of

privacy. One respondent pointed out the hardship this would create for

nonprofit applicants and proposed that they be able to provide their

most recent audited statement. One respondent supported this section

but suggested that ``current'' be defined as the end of the company's

last fiscal year and that updates be unaudited. One respondent

suggested that instead of requiring audited financial statements, a

good review of financial statements by FmHA personnel would ensure

financial security. Several persons pointed out the fact that most

applicants are newly established organizations which have no financial

record to audit. One respondent representing a Certified Public

Accounting firm stated that it is often impracticable to conduct an

examination of personal financial records in accordance with generally

accepted accounting principles and to express an unqualified opinion.

That respondent recommended the section be changed to require that the

personal financial statements either be compiled or reviewed and stated

that a detailed and complete underwriting of creditworthiness can be

performed on compiled or reviewed personal financial statements that

are comprehensively prepared. Two respondents supported this section.

FmHA response: In light of the difficulty in obtaining audited

financial statements of individuals, FmHA will continue with the

requirements currently in existence and has eliminated the word

``audited'' from this section. The Agency also feels that a proper

analysis of a financial statement will provide a better understanding

of an applicant's creditworthiness than would an individual's income

tax statement. FmHA maintains the position that a financial statement

not be more than 6 months old when the preapplication is filed.

48. Exhibit A-7

Paragraph I.H

Respondents agreed with this section.

49. Exhibit A-7

Paragraph II.A

Comment: One respondent recommended that FmHA establish a

percentage of elderly homeowners that could be considered as potential

tenants. Two respondents disagreed with the use of a checklist in

evaluating market studies. A few respondents disagreed with limiting

the area of consideration to 20 percent of the substandard rental

units. Two respondents objected to the use of professional market

studies in the analysis of need and suggested that personal contact

with possible tenants, talking with other apartment owners, or

conducting a newspaper questionnaire would provide a more credible

means for determining need. One respondent suggested that we include a

definition of ``substandard units.'' Also, that respondent pointed out

that the same persons who reside in ``overcrowded'' units are being

doublecounted, first from the substandard category and second from the

new households category. One respondent agreed with this section.

FmHA response: FmHA does not agree that elderly homeowners should

be considered in the need for units. That is not to say these elderly

homeowners cannot live in the FmHA-financed unit. We do not feel that

the general market can absorb the sale of multiple homes at one time.

Exhibit A-8 does state that if the economic conditions reflect normal

selling times for homes in the market area, then elderly homeowners may

be considered as a secondary market. FmHA has had in use a checklist

for analyzing market studies for some time; this regulation now

requires its use to enhance internal control over administration of the

program. The purpose of the checklist is to enable the reviewer to

determine if all segments of Exhibit A-8 have been addressed by the

study.

Market demand and feasibility is created by several factors. One of

those factors is the demand created by persons who are living in

substandard units and seeking decent, safe and sanitary housing which

can be financed by FmHA. Currently, there is no limit on the percentage

of substandard units which an analyst can project in determining market

demand. For example, if there are 100 units of substandard housing in a

given market, analysts can and have stated that 80, or any other

arbitrary, percentage of the families living in these units create a

portion of the demand. We have found that the percentage of units

projected as a result of substandard housing varies significantly from

study to study. In addition, without any boundaries, it provides the

market analyst with a contingency to justify demand. The 20 percent

limitation was offered based upon previous experience with market

analysis. Without a threshold, FmHA is defenseless in challenging a

professional market analyst. It is reasonable to set a limit since

there is no objective methodology in which to actually determine how

many people residing in substandard units will move to a newly

completed Section 515 complex. The Agency will, however, allow a higher

number if the analyst can clearly document that the occupants of more

than 20 percent of the occupied substandard rental units are willing

and able to relocate to the proposed housing. The documentation will be

in the form of signed survey sheets prepared expressly to capture such

information.

The use of market studies does not prohibit anyone from doing more

to assess the market, such as making local contacts. Placing a

questionnaire in a newspaper does not ensure the return of any

responses. A definition of substandard has been added.

FmHA feels it necessary to standardize the way need is calculated

in order to provide some uniformity in market studies. The revised

Exhibit A-8 outlines the sources of demand which will be accepted by

the Agency. There was a discrepancy between this section and the

Exhibit A-8 language in delineating sources of need. This section of

the regulation has been changed to agree with the language of Exhibit

A-8.

Paragraph II.F

Comment: One respondent suggested that the tax credit income

information be provided with the application and not with the

preapplication.

FmHA response: Feasibility must be determined during the

preapplication stage and the ranges of local incomes must be

established at that time. For this reason, the Agency cannot change

this requirement. Other discussions concerning tax credit incomes is

found under Sec. 1944.215(w)(3).

50. Exhibit A-7

Paragraph III.C

Comment: One respondent suggested adding a provision that the

option to buy be with the current owner of public record.

FmHA response: We agree with this suggestion and have added that

provision.

51. Exhibit A-7

Paragraph IV.F

Comment: One respondent objected to applicants who publicly bid

their projects having to submit a Form FmHA 1924-13. One respondent

felt that requesting this much detail information at the preapplication

stage would not prove useful since cost estimates change markedly

between preapplication and application. One respondent supported this

section.

FmHA response: FmHA's new cost tracking system will track the trade

item costs of each project. The Form FmHA 1924-13 provides a breakdown

of trade item costs which will readily facilitate the use of the cost

tracking system. Otherwise, the value of the tracking system will be

diminished, thus not allowing the Agency to establish cost data

comparisons. Persons submitting bids must have prepared extensive cost

estimates in preparing the bid. Therefore, we do not feel this will

cause an undue burden on the contractor.

52. Exhibit A-8

Comment: One respondent suggested that a definition of substandard

be included. One respondent asked if FmHA intends to prepare and

distribute special tabulations of substandard units by its definition,

by occupancy, tenure, income, and household size. Several respondents

expressed objection to FmHA not considering elderly homeowners as a

basis of need. Several respondents objected to the 20 percent ceiling

on substandard units which FmHA will accept in the determination of

need. One respondent raised the question of who is responsible for

determining if the analyst is qualified and what the qualifications are

for preparing a study. That person also wanted to know if the study is

incomplete, is the preapplication determined incomplete and returned to

the applicant. Two respondents felt that requiring the market analyst

to make an on-site visit was a significant improvement in this exhibit.

One respondent suggested that the exhibit be used as a guide only and

not mandated. One respondent asked if FmHA intended to exclude

rentoverburden households from rentup demand estimates. That respondent

also expressed an opinion that the listing of small businesses in the

Site section of the exhibit would be construed to mean those businesses

must be available in order for a community to be considered eligible

for FmHA financing. Other comments and suggestions offered on the

technical content of the exhibit are too numerous to list here.

FmHA response: A definition for substandard has been included. HUD

furnished FmHA with information pertaining to occupancy in substandard

units based on the 1980 census. That information was disseminated to

our field staff for distribution to market analysts. We are in the

process of coordinating with HUD to obtain this same data when it

becomes available. (See discussion of elderly homeowners under Exhibit

A-7, Paragraph II.A. and a discussion of substandard housing under

Exhibit A-7, Paragraph II.A). The qualifications of a market analyst

and the responsibility for determining whether an analyst is qualified

are iterated in Exhibit A-7 of this instruction. If a market study is

incomplete, the applicant may furnish additional information to

complement the market study without the necessity of returning the

entire preapplication. This will inevitably delay the processing of the

preapplication. The requirement that a market analyst visit the site of

the proposed project was not introduced with this revision; it has

always been a requirement. The purpose of the exhibit is to require

enough information on which a feasibility decision can be based and to

establish uniformity in the content of studies. Prior to FmHA issuing

the exhibit, the market studies varied greatly and all did not contain

the most basic types of information. We have seen a marked improvement

in the studies because of the issuance of the exhibit. While FmHA

originally allowed applicants to consider the exhibit as a guideline,

we did not feel it prudent to continue this practice. The exhibit is,

therefore, required in order for the study to be acceptable to the

Agency; market studies which do not contain Exhibit A-8 requirements

will not be acceptable. We understand that the HUD information on

rentoverburdened households is not yet available. In the interim,

language has been added to the exhibit which invites the analyst to

include this type of information where available. While this exhibit is

not the proper vehicle for establishing policies concerning required

community services and facilities, the Site section has been reworded

to state that the businesses listed are an example of the types of

business which may be located in the community.

Many of the proposed changes are based on comments and

recommendations submitted from market analysts over the past two years.

Market analysts have expressed differing opinions concerning the

content of this exhibit. We have considered all of these differing

opinions and have amended the exhibit to include what we consider a

rational and understandable basis for a market study. We have attempted

to correct the original exhibit requirements where it lacked sufficient

statistics to make a determination for elderly and congregate projects.

Other changes made to the exhibit will standardize the types of

information market studies will contain and provide the uniformity

heretofore missing. We have considered all comments and the exhibit now

reflects those changes which FmHA has determined appropriate for

inclusion.

53. Exhibit A-9

Paragraph 2

Comment: One respondent suggested a rewrite of this section to

include other items of construction.

FmHA response: This section has been reworded to further define

what types of information on related costs must be submitted in

addition the Form FmHA 1924-13.

Paragraph 5

Comment: A few respondents recommended that the market information

be updated after 12 months rather than requiring a new study.

FmHA response: FmHA feels this is reasonable and has changed the

wording to reflect an update rather than a new study.

54. Exhibit A-10 is Amended to Include Language Implementing

Section 515(x)(2) of the Housing Act of 1949, as Amended, to Provide

for Cooperation between FmHA and State Agencies in Developing a

Comprehensive Housing Affordability Strategy (CHAS)

Other comments: Other comments were received which were general in

nature and did not pertain to any specific issues. These comments have

not been addressed by FmHA.

List of Subjects

7 CFR Part 1924

Agriculture, Construction management, Construction and repair,

Energy conservation, Housing, Loan programs--Agriculture, Low and

moderate income housing.

7 CFR Part 1930

Accounting, Administrative practice and procedure, Grant programs--

Housing and community development, Loan programs--Housing and community

development, Low and moderate income housing--Rental, Reporting

requirements.

7 CFR Part 1944

Administrative practice and procedure, Aged, Handicapped, Loan

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

housing--Rental, Mortgages, Nonprofit organizations, Rent subsidies,

Rural housing.

Accordingly, parts 1924, 1930, and 1944, chapter XVIII, title 7,

Code of Federal Regulations are amended as follows:

PART 1924--CONSTRUCTION AND REPAIR

1. The authority citation for part 1924 continues to read as

follows:

Authority: 7 U.S.C. 1989; 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR

2.23; 7 CFR 2.70.

Subpart A--Planning and Performing Construction and Other

Development

2. Section 1924.4 is amended by redesignating paragraphs (i)(4)

through (i)(7) as (i)(5) through (i)(8), respectively, and by adding

paragraphs (i)(4) and (i)(9) to read as follows:

Sec. 1924.4 Definitions.

* * * * *

(i) * * *

(4) Between the spouse, significant other, relatives, and step-

relatives of the principal owners of the party of the first part and

its management, such as Grandmother, Aunt, Daughter, Granddaughter,

Grandfather, Uncle, Son, Grandson, Mother, Sister, Niece, Cousin,

Father, Brother, Nephew;

* * * * *

(9) An identity of interest will also exist when another party can

significantly influence the management or operating policies of the

transacting parties or if it has an ownership interest in one of the

transacting parties and can significantly influence the other to an

extent that one or more of the transacting parties might be prevented

from fully pursuing its own separate interests.

* * * * *

3. Section 1924.13 is amended by revising paragraphs (a)(3),

(e)(1)(iii)(B)(2), (e)(1)(iv), (e)(1)(v), (e)(1)(vii)(B)(1),

(e)(2)(i)(B), (e)(2)(i)(G), (e)(2)(i)(H), (e)(2)(ii)(C),

(e)(2)(iii)(A), (e)(2)(iv), (e)(2)(v), and (e)(2)(viii) to read as

follows:

Sec. 1924.13 Supplemental requirements for more complex construction.

* * * * *

(a) * * *

(3) Architectural fees. Fees for architectural services shall not

exceed the fee ordinarily charged by the profession for similar work

when FmHA financing is not involved. The fee should cover only the

architectural services rendered by the architect. The reduction or

elimination of any services described in paragraph (a)(5) of this

section shall be directly reflected in the fee. Fees for special

services rendered by the architects, such as the packaging of the loan

application or additional nonarchitectural services, will not be

authorized to be paid with loan funds.

* * * * *

(e) * * *

(1) * * *

(iii) * * *

(B) * * *

(2) A current, dated and signed financial statement of the

contractor's operations indicating the payment status of accounts and

any contingent liabilities that may exist. FmHA personnel will be

responsible for analyzing the financial statement as to the sufficiency

of the contractor's financial capability to carry out construction. The

financial strength must demonstrate the ability of the contractor to

pay all bills prior to receiving periodic draws of funds from the

lender.

* * * * *

(iv) Contract cost breakdown. In any case where the loan approval

official feels it appropriate, and prior to the award or approval of

any contract in which there is an identity of interest as defined in

Sec. 1924.4 (i) of this subpart, the contractor and any subcontractor,

material supplier or equipment lessor sharing an identity of interest

must provide the applicant and FmHA with a trade-item cost breakdown of

the proposed contract amount for evaluation. The cost of any surety as

required by Sec. 1944.222 (h) and (i) of subpart E of part 1944 of this

chapter and Sec. 1924.6 (a)(3) of this subpart, or cost certification

as required by paragraph (e)(1)(v) of this section, will be included in

the proposed contract amount and shown under General Requirements on

Form FmHA 1924-13, which is available in all FmHA offices. FmHA

personnel will be responsible for reviewing the estimates on Form FmHA

1924-13 to determine if the dollar amounts total correctly, to assure

that costs are categorized under their appropriate columns, and to

confirm that the estimated costs for all line items are reasonable and

customary for the State.

(v) Cost certification. Whenever the State Director determines it

appropriate, and in all situations where there is an identity of

interest as defined in Sec. 1924.4 (i) of this subpart, the borrower,

contractor and any subcontractor, material supplier, or equipment

lessor having an identity of interest must each provide certification

using Form FmHA 1924-13 as to the actual cost of the work performed in

connection with the construction contract. The construction costs, as

reported on Form FmHA 1924-13, must also be audited, in accordance with

Government Auditing Standards, by a CPA, or LPA licensed on or before

December 31, 1970. In addition, certain agreed upon procedures

(available in any FmHA office) will be performed in accordance with

Attestation Standards. In some cases, FmHA will contract directly with

a CPA or LPA for the cost certification. In that event, documentation

necessary to have the costs of construction certified by an FmHA

contractor that they were the actual costs of the work performed, as

reported on Form FmHA 1924-13, will be provided. Funds which were

included in the loan for cost certification and which are ultimately

not needed because FmHA contracts for the cost certification will be

returned on the loan. FmHA personnel will utilize Exhibit M of this

subpart (available in any FmHA office) and Form FmHA 1924-26, ``Cost

Certification Worksheet,'' to assist in the evaluation of the cost

certification process.

(A) Prior to the start of construction, the borrower, contractor

and any subcontractor, material supplier, or equipment lessor sharing

an identity of interest must submit, to the CPA or LPA, the accounting

system that the borrower, contractor, subcontractor, material supplier

or equipment lessor and/or the CPA or LPA proposes to set up and use in

maintaining a running record of the actual cost. In order to be

acceptable, the borrower must provide a written assertion that it has

an accounting system that is suitably designed to provide for a trade-

item basis comparison of the actual cost as compared to the estimated

cost submitted on Form FmHA 1924-13. Costs pertaining to a specific

line item will be set up in the accounting system for that particular

account. For instance, only costs of materials, supplies, equipment,

and labor associated with concrete will be shown in the concrete

account. The accounting system must also restrict costs to those

pertaining to a specific project so that costs from multiple projects

will not be co-mingled. The independent CPA or LPA shall report on the

borrower's assertion in accordance with the Standards for Attestation

Engagements of the American Institute of Certified Public Accountants

(AICPA). The borrower's and the CPA or LPA's reports on the accounting

system shall be provided to FmHA by the borrower.

(B) Prior to final payment to anyone required to cost certify, a

trade-item breakdown showing the actual cost compared to the estimated

cost must be provided to the owner and FmHA. Form FmHA 1924-13 is the

form of comparative breakdown that must be used, and contains the

certifications required of the applicant and contractor prior to final

payment. The amounts for builder's general overhead, builder's profit,

and general requirements, respectively, shall not exceed the amounts

represented on the estimate of cost breakdown provided in accordance

with paragraph (e)(1)(iv) of this section for any contractor,

subcontractor, material supplier, or equipment lessor having or sharing

an identity of interest with the borrower. The amounts for general

overhead, builder's profit, and general requirements must be

established prior to FmHA approving the construction contract and will

not be changed during the course of construction. This applies to all

contractors, subcontractors, material suppliers, or equipment lessors

having or sharing an identity of interest with the applicant. Contract

change orders will be processed to adjust the contract amount downward

prior to the final payment to the contractor, if necessary, to assure

that the amounts shown in the certificate of actual costs do not exceed

the amounts represented in the contract cost breakdown. Reduction in

the builder's profit, and general overhead if needed, will

counterbalance any increase reflected in the contract costs. Any funds

remaining as a result of hard cost savings will be applied to the

account as an extra payment or used for eligible loan purposes approved

by FmHA as long as the improvements are genuinely needed and will

enhance marketability of the project. All increases or decreases of 15

percent or more in line item costs will require documentation as to the

reason for the increases and/or decreases. The State Director may

require documentation for increases and/or decreases of less than 15

percent, if he/she determines it necessary. This information will be

required with the cost certification.

(C) The CPA or LPA audit, performed in accordance with Government

Auditing Standards, will include such tests of the accounting records

and such other auditing procedures of the borrower and the contractor

(and any subcontractor, material supplier or equipment lessor sharing

an identity of interest) concerning the work performed, services

rendered, and materials supplied in accordance with the construction

contract he/she considers necessary to express an opinion on the

construction costs as reported on Form FmHA 1924-13. The CPA or LPA

shall also perform the additional agreed upon procedures specified by

FmHA (available in any FmHA office), performed in accordance with

Attestation Standards, for the applicant and the contractor (and any

subcontractor, material supplier, or equipment lessor sharing an

identity of interest) concerning the work performed, services rendered,

and materials supplied in accordance with the construction contract.

(D) Upon completion of construction and prior to final payment, the

CPA or LPA will provide an opinion concerning whether the construction

costs, as reported on Form FmHA 1924-13, present fairly the costs of

construction in conformity with eligible construction costs as

prescribed in FmHA regulations.

(E) In some cases, cost certification will be obtained by FmHA

through direct contract with the CPA or LPA. The borrower and his/her

CPA or LPA will cooperate fully with the contract CPA or LPA by

providing all documentation necessary to conduct the certification.

FmHA reserves the right to determine, upon receipt of the certified

Form FmHA 1924-13 and the auditor's report, whether they are

satisfactory to FmHA. If not satisfactory to FmHA, the borrower will be

responsible for providing additional information.

(F) There will exist no business relationship between the CPA or

LPA and the borrower except for the performance of the examination of

the cost certification, accounting systems work, and tax preparation.

Any CPA or LPA who acts as the borrower's accountant (performing manual

or automated bookkeeping services or maintains the official accounting

records) will not be the same CPA or LPA who cost certifies the

project.

(G) Forms FmHA 1944-30, ``Identity of Interest (IOI) Disclosure

Certificate'' and FmHA 1944-31, ``Identity of Interest (IOI)

Qualification Form,'' provide written notification to the borrower that

willful and intentional falsification of cost certification documents

will result in debarment of all violators in accordance with the

provisions of FmHA Instruction 1940-M (available in any FmHA office).

These forms require the disclosure of all identities of interest

associated with project construction, certify the entity's ability to

provide the contracted service, and cite the penalties for failure to

disclose or falsify such certification. Each applicant/borrower will be

required to complete and sign the forms (available in any FmHA office).

(H) Subcontracting development work.

(1) Contractors will not be allowed to obtain a profit and overhead

unless they are performing actual construction. ``Actual construction''

means ``work'' as defined in American Institute of Architects (AIA)

documents: ``* * * labor, materials, equipment, and services provided

by the contractor to fulfill the contractor's obligations.'' Under this

definition, contractors who choose to subcontract out construction of

the project to another contractor will not obtain a builder's fee

(general overhead and profit) when:

(i) More than 50 percent of the contract sum in the construction

contract is subcontracted to one subcontractor, material supplier, or

equipment lessor, and/or

(ii) Seventy-five percent or more with three or fewer

subcontractors, material suppliers and/or equipment lessors.

(2) Note: If two or more subcontractors have common ownership, they

are considered as one subcontractor.

(3) How to apply rule:

(i) The 50 percent rule will apply when division of the amount of

the largest subcontract by the contract sum of the construction

contract results in more than 50 percent.

(ii) The 75 percent rule will apply when division of the sum of the

amounts of the three largest subcontracts by the contract sum of the

construction contract results in 75 percent or more.

(I) Qualified contracting entities. Contractors, subcontractors,

material suppliers, and any other individual or organization sharing an

identity of interest and providing materials or services for the

project must certify that it is a viable, ongoing trade or business

qualified and properly licensed to undertake the work for which it

intends to contract. Form FmHA 1944-31 will be prepared and executed by

the contracting entities. The form provides notification to the

entities of the penalty, under law, for erroneously certifying to the

statements contained therein. Debarment actions will be instituted

against entities who fail to disclose an identity of interest in

accordance with the provisions of FmHA Instruction 1940-M (available in

any FmHA office).

* * * * *

(vii) * * *

(B) * * *

(1) If, after a full review of the case documents by the

appropriate members of the State Office staff, the State Director

determines that the requirements have been met and the costs are

reasonable, an exception to competitive bidding may be granted. Written

documentation of the State Office review results will be placed in the

application file.

* * * * *

(2) * * *

(i) * * *

(B) Dated and signed financial statements on the owner-builder's

operation (including balance sheets and statements of income and

expense) from current and prior years indicating the payment status of

the owner-builder's accounts and any contingent liabilities that may

exist. FmHA personnel will be responsible for analyzing the financial

statement as to the sufficiency of the owner-builder's financial

capability to carry out construction. The financial strength must

demonstrate the ability of the owner-builder to pay all bills prior to

receiving periodic draws of funds from the lender.

* * * * *

(G) A current, dated, and signed trade-item cost breakdown of the

estimated total development cost of the project which has been prepared

by the applicant/owner-builder. Form FmHA 1924-13 will be used for this

purpose. If cost certification services are required by FmHA, the cost

of such services may be included in the total development cost of the

project. Any subcontractor, material supplier, or equipment lessor

sharing an identity of interest with the applicant/owner-builder as

defined in Sec. 1924.4(i) of this subpart must also provide a trade-

item cost breakdown of the proposed amount.

(H) Prior to the start of construction, the owner-builder and any

subcontractor, material supplier, or equipment lessor sharing an

identity of interest must submit, to the CPA or LPA, the accounting

system that the owner-builder, subcontractor, material supplier or

equipment lessor and/or the CPA or LPA proposes to set up and use in

maintaining a running record of the actual cost. In order to be

acceptable, the owner-builder must provide a written assertion that it

has an accounting system that is suitably designed to provide for a

trade-item basis comparison of the actual cost as compared to the

estimated cost submitted on Form FmHA 1924-13. Costs pertaining to a

specific line item will be set up in the accounting system for that

particular account. For instance, only costs of materials, supplies,

equipment, and labor associated with concrete will be shown in the

concrete account. The accounting system must also restrict costs to

those pertaining to a specific project so that costs from multiple

projects will not be co-mingled. The independent CPA or LPA shall

report on the owner-builder's assertion in accordance with the

Standards for Attestation Engagements of the AICPA. The owner-builder's

and the CPA or LPA's reports on the accounting system shall be provided

to FmHA by the owner-builder.

* * * * *

(ii) * * *

(C) The total development cost of the project does not exceed that

which is typical for similar type projects in the area. The total

development cost recognized by FmHA for each individual case will be

determined by the MFH Coordinator with the advice of the State

Architect.

* * * * *

(iii) * * *

(A) If, after a full review of the case documents by the

appropriate members of the State Office staff, the State Director

determines that the requirements have been met and the construction

cost is reasonable, an exception to competitive bidding may be granted.

Written documentation of the State Office review results will be placed

in the application file.

* * * * *

(iv) The development cost of the project may include a typical

allowance for general overhead, general requirements and a builder's

profit. These amounts may be determined by local investigation and also

from HUD data for the area. The applicant/owner-builder and any

subcontractors, material suppliers and equipment lessors having or

sharing an identity of interest with the applicant/owner-builder may

not be permitted a builder's profit, general overhead, and general

requirements which exceed the amounts represented on their cost

breakdown.

(v) Under no circumstances will loan funds be used to pay the

owner/builder or its stockholders, members, directors or officers,

directly or indirectly, any profits from the construction of the

project except a typical builder's fee for performing the services that

would normally be performed by a general contractor under the contract

method of construction. Discounts and rebates given the owner-builder

in advance must be deducted before the invoices are paid. If discounts

or rebates are given after the invoices are paid, the funds must be

returned to the supervised bank account or applied on the interim

construction loan, as appropriate. Under no circumstances will the

dollar amount be placed in the reserve account.

* * * * *

(viii) The applicant/owner-builder and any subcontractor, material

supplier, or equipment lessor sharing an identity of interest as

defined in Sec. 1924.4(i) of this subpart must each provide

certification as to the actual cost of the work performed in connection

with the construction of the project on Form FmHA 1924-13 prior to

final payment. The construction costs, as reported on Form FmHA 1924-

13, must be audited by a CPA, or LPA licensed on or before December 31,

1970, in accordance with Government Auditing Standards, and certain

agreed upon procedures (available in any FmHA office) performed in

accordance with Attestation Standards. In some cases, FmHA will

contract directly with a CPA or LPA for the cost certification. In that

event, documentation necessary to have the costs of construction

certified by an FmHA contractor that they were the actual costs of the

work performed, as reported on Form FmHA 1924-13, will be provided.

Funds which were included in the loan for cost certification and which

are ultimately not needed because FmHA contracts for the cost

certification will be returned on the loan.

(A) The CPA or LPA's audit, performed in accordance with Government

Auditing Standards, will include such tests of the accounting records

and such other auditing procedures of the applicant/owner-builder (and

any subcontractor, material supplier, or equipment lessor sharing an

identity of interest) concerning the work performed, services rendered,

and materials supplied in connection with the construction of the

project he/she considers necessary to express an opinion on the

construction costs as reported on Form FmHA 1924-13. Upon completion of

construction and prior to final payment, the CPA or LPA will provide an

opinion as to whether the construction costs as reported on Form FmHA

1924-13 present fairly the costs of construction in conformity with

eligible construction costs as prescribed in FmHA regulations. FmHA

reserves the right to determine, upon receipt of the certified Form

FmHA 1924-13 and the auditor's report, whether they are satisfactory to

FmHA. At a minimum, the CPA or LPA shall also perform any additional

agreed upon procedures (available in any FmHA office) specified by

FmHA, performed in accordance with Attestation Standards, of the owner-

builder (and any subcontractor, material supplier, or equipment lessor

sharing an identity of interest) concerning the work performed,

services rendered, and materials supplied in connection with the

construction. There will exist no business relationship between the CPA

or LPA and the borrower except for the performance of the examination

of the cost certification, accounting systems work, and tax

preparation. Any CPA or LPA who acts as the borrower's accountant

(performing manual or automated bookkeeping services or maintains the

official accounting records) will not be the same CPA or LPA who cost

certifies the project.

(B) Prior to final payment to anyone required to cost certify, FmHA

must be provided with a certification and a trade-item breakdown

showing the actual cost compared to the estimated cost furnished in

accordance with paragraph (e)(2)(i)(G) of this section. Form FmHA 1924-

13 is the form of comparative breakdown that must be used, and contains

the certification required of the applicant/owner-builder prior to

final payment. The amounts for builder's general overhead, general

requirements, and builder's profit shall not exceed the amounts

represented on the estimate of cost breakdown provided in accordance

with paragraph (e)(2)(i)(G) of this section for the owner-builder or

any subcontractor, material supplier, or equipment lessor having or

sharing an identity of interest with the applicant/owner-builder. Final

payment to the owner-builder will be adjusted, if necessary, to assure

that the amounts shown on the certificate of actual cost do not exceed

the amounts represented on the cost breakdown. Any funds remaining as a

result of hard cost savings will be applied to the account as an extra

payment or used for eligible loan purposes approved by FmHA as long as

the improvements are genuinely needed and will enhance marketability of

the project. All increases or decreases of 15 percent or more in line

item costs will require documentation as to the reason for the

increases or decreases. The State Director may require documentation

for increases or decreases of less than 15 percent, if he/she

determines it necessary. This information will be required with the

cost certification.

(C) Subcontracting development work.

(1) Owner-builders will not be allowed to obtain a profit and

overhead unless they are performing actual construction. ``Actual

construction'' means ``work'' as defined in AIA documents: ``* * *

labor, materials, equipment, and services provided by the contractor to

fulfill the contractor's obligations.'' Under this definition, owner-

builders who choose to subcontract out construction of the project to

another contractor will not obtain a builder's fee (general overhead

and profit) when:

(i) More than 50 percent of the total cost of the building

construction is subcontracted to one subcontractor, material supplier,

or equipment lessor, and/or

(ii) Seventy-five percent or more with three or fewer

subcontractors, material suppliers, and/or equipment lessors.

(2) Note: If two or more subcontractors have common ownership, they

are considered as one subcontractor.

(3) How to apply rule:

(i) The 50 percent rule will apply when division of the amount of

the largest subcontract by the total amount of the building cost

results in more than 50 percent.

(ii) The 75 percent rule will apply when division of the sum of the

amounts of the three largest subcontracts by the total building cost

results in 75 percent or more.

(D) Qualified contracting entities. Contractors, subcontractors,

material suppliers, and any other individual or organization sharing an

identity of interest and providing materials or services for the

project must certify that it is a viable, ongoing trade or business

qualified and properly licensed to undertake the work for which it

intends to contract. Form FmHA 1944-31 will be prepared and executed by

the contracting entities. The form provides notification to the

entities of the penalty, under law, for erroneously certifying to the

statements contained therein. Debarment actions will be instituted

against entities who fail to disclose an identity of interest in

accordance with the provisions of FmHA Instruction 1940-M (available in

any FmHA office).

* * * * *

4. Section 1924.50 is revised to read as follows:

Sec. 1924.50 OMB control number.

The reporting and recordkeeping requirements contained in this

regulation have been approved by the Office of Management and Budget

(OMB) and have been assigned OMB control number 0575-0042. Public

reporting burden for this collection of information is estimated to

vary from 5 minutes to 4 hours per response, with an average of 37

minutes per response, including time for reviewing instructions,

searching existing data sources, gathering and maintaining the data

needed, and completing and reviewing the collection of information.

Send comments regarding this burden estimate or any other aspect of

this collection of information, including suggestions for reducing this

burden, to U.S. Department of Agriculture, Clearance Officer, OIRM, AG

Box 7630, Washington, DC 20250; and to the Office of Management and

Budget, Paperwork Reduction Project (OMB# 0575-0042), Washington, DC

20503.

PART 1930--GENERAL

5. The authority citation for part 1930 continues to read as

follows:

Authority: 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR 2.23 and 2.70.

Subpart C--Management and Supervision of Multiple Family Housing

Borrowers and Grant Recipients

Sec. 1930.123 [Amended]

6. Section 1930.123 is amended by revising in the first column of

paragraph (i) the words ``Identity of Interest Disclosure Certification

Memorandum'' to read ``Forms FmHA 1944-30, Identity of Interest (IOI)

Disclosure Certificate, and FmHA 1944-31, Identity of Interest (IOI)

Qualification Form.''

7. Exhibit B of subpart C is amended by redesignating paragraphs V

B 2 a and V B 2 b as paragraphs V B 2 b and V B 2 d, respectively, by

revising newly redesignated paragraph V B 2 b, and by adding paragraphs

V B 2 a and V B 2 c; by removing paragraph XIII B 2 a (1)(iii), by

redesignating paragraph XIII B 2 a (1)(iv) as XIII B 2 a (1)(iii), and

by revising paragraphs XIII B 2 a (1)(i), XIII B 2 a (1)(ii), and the

introductory text of newly redesignated paragraph XIII B 2 a (1)(iii)

to read as set forth below; and by revising in the first column of

paragraph XIII C 2 f (3) the words ``Identity of Interest Disclosure

Certification Memorandum'' to read ``Identity of Interest (IOI)

Disclosure Certificate, Form FmHA 1944-30 and Identity of Interest

(IOI) Qualification Form, Form FmHA 1944-31''.

Exhibit B of Subpart C--Multiple Housing Management Handbook

* * * * *

V * * *

B * * *

2 * * *

a FmHA Forms 1944-30, ``Identity of Interest (IOI) Disclosure

Certificate,'' and FmHA 1944-31, ``Identity of Interest (IOI)

Qualification Form,'' (available in any FmHA Servicing office) will

be completed and submitted as part of the management plan.

Management agents will sign either form as ``applicant.''

b The initial disclosure shall be in effect for a period of 3

years and renewed every 3 years thereafter, except if there are any

changes in the business practices of the applicant/borrower and/or

management entity during the interim years that include identity of

interest concerns, the entity must file amended Forms FmHA 1944-30

and FmHA 1944-31.

c The forms provide notification to the entities of the

penalty, under law, for erroneously certifying to the statements

contained therein.

* * * * *

XIII * * *

B * * *

2 * * *

a * * *

(1) * * *

(i) The initial operating capital must be in the form of cash as

set forth in Sec. 1944.211 (a)(6) of subpart E of part 1944 of this

chapter.

(ii) The borrower will have deposited the required initial

operating cash into the general operating account by the time of the

FmHA loan closing or when interim financing funds are obtained,

whichever occurs first. These funds will blend with other revenue

that accrues to the account to cover budgeted expenditures including

payment of return to owner.

(iii) After 2, but before 5 full (12 month) borrower fiscal

years of project operation, the borrower may request (in writing)

the State Director's authorization to make a one-time withdrawal of

the initial operating capital, or a part of it. The one-time

withdrawal can never exceed the initial operating capital as

described in the loan agreement or loan resolution. The withdrawal

can be approved provided that:

* * * * *

8. Exhibit B-3 of subpart C is amended by revising paragraph I D

and the list of Attachments at the end of this exhibit to read as

follows:

Exhibit B-3 of Subpart C--Sample Management Agreement for Farmers Home

Administration (FmHA) Financed Multiple Family Housing (MFH) Projects

* * * * *

I * * *

D Identity of interest. The Agent discloses to the Owner and

FmHA any and all identities of interest that exist or will exist

between the Agent and the Owner, suppliers of material and/or

services, or vendors in any combination of relationship. Forms FmHA

1944-30, ``Identity of Interest (IOI) Disclosure Certificate,'' and

FmHA 1944-31, ``Identity of Interest (IOI) Qualification Form,''

completed by the Agent as ``applicant,'' are attached and made part

of this agreement.

* * * * *

Attachments: Management plan, Loan resolution or agreement,

Identity of Interest Disclosure Certificate, Identity of Interest

Qualification Form.

Exhibit B-8 of Subpart C [Amended]

9. Exhibit B-8 of subpart C is amended by revising in the first

column the words ``Identity of Interest (IOI) Disclosure Certificate

Memorandum'' to read ``Forms FmHA 1944-30, `Identity of Interest (IOI)

Disclosure Certificate,' and FmHA 1944-31, `Identity of Interest (IOI)

Qualification Form'.''

PART 1944--HOUSING

10. The authority citation for part 1944 continues to read as

follows:

Authority: 7 U.S.C., 1989; 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR

2.23; 7 CFR 2.70.

Subpart E--Rural Rental and Rural Cooperative Housing Loan

Policies, Procedures, and Authorizations

11. Section 1944.205 is amended by removing the definition for

``Irrevocable letter of credit;'' by adding the definitions for

``Servicing office'' and ``Servicing official;'' and by revising the

definition for ``Initial operating capital'' to read as follows:

Sec. 1944.205 Definitions.

* * * * *

Initial operating capital. Cash to pay for costs such as property

and liability insurance premiums, fidelity coverage premiums if an

organization, utility hookup deposits, maintenance equipment, movable

furnishings and equipment, printing lease forms, and other initial

operating expenses. The initial operating capital will be at least 2

percent of the total development cost of the project.

* * * * *

Servicing office. FmHA servicing office or other place designated

by the FmHA State Director where loan requests are processed.

Servicing official. FmHA servicing official or other FmHA staff

member designated by the State Director to be responsible for

processing loan requests.

* * * * *

12. Section 1944.211 is amended by removing paragraph (a)(6)(iii);

by redesignating paragraph (a)(6)(iv) as paragraph (a)(6)(iii); and by

revising paragraphs (a)(4), (a)(6)(i) and (a)(6)(ii) to read as

follows:

Sec. 1944.211 Eligibility requirements.

(a) * * *

(4) With the exception of a nonprofit organization, consumer

cooperative or public body, provide from its own resources the borrower

contribution required by Sec. 1944.213 (b) of this subpart. This

contribution must be in the form of cash, land, or a combination

thereof.

* * * * *

(6) * * *

(i) The applicant will provide a detailed list of all materials and

equipment needed to be funded by the initial operating capital

including, but not limited to, property and liability insurance

premiums, fidelity bond premiums when the applicant is an organization,

utility hook-up charges and deposits, maintenance and other equipment,

lease forms, furnishings, loan payments that may become due during

construction, purchase of office equipment and furniture, community

room furnishings, other movable equipment and furnishings, congregate

items referenced in Sec. 1944.224 of this subpart, advertising

expenses, management fees, etc. The list will be approved by the

servicing office based upon similar projects in the State. The initial

2 percent operating and maintenance (O&M) expenses, plus any amounts

needed for these items above the 2 percent, must be provided in cash.

(ii) The O&M cash will be deposited into the general operating

account in accordance with the provisions of the loan agreement or loan

resolution. FmHA will be provided with documentation of the deposit

prior to the start of construction or loan closing (whichever is first)

and such funds will be used for authorized purposes only.

* * * * *

13. Section 1944.212 is amended by adding paragraph (c)(3)(iii) and

by revising the introductory text of paragraph (b), paragraphs (c)(1),

(c)(2), (c)(3)(ii), (g), (i), and the introductory text of paragraph

(j) to read as follows:

Sec. 1944.212 Loan and grant purposes.

* * * * *

(b) Purchase and rehabilitate existing buildings only when the loan

for such rehabilitation does not exceed by 5 percent the loan for new

construction in the same area and when moderate or substantial

modifications, repairs or improvements to the structures are necessary

to meet the requirements of decent, safe, and sanitary living units.

* * * * *

(c) * * *

(1) Loan funds used to purchase land may not exceed the estimated

market value of the site in its present condition as shown by a current

appraisal in accordance with FmHA Instruction 1922-B (available in any

FmHA office).

(2) With prior written approval of the State Director, loan funds

may be used to buy land from a member of a broadly-based nonprofit

applicant/organization.

(3) * * *

(ii) The cost of the excess land is a reasonable portion of the

loan; and

(iii) The site density requirements of Sec. 1944.215(a)(6) of this

subpart are met.

* * * * *

(g) Purchase and install ranges, refrigerators, drapes, blinds/

shades, drapery rods, and clothes washers and dryers. Laundry

facilities are required in all projects and clothes washers and dryers

should be provided in a central laundry room. Normally, a minimum of

one washer and dryer should be provided for every 8 to 12 units in a

project. Clothes washers and dryers may not be installed in individual

units if the installation is not customary in the area for the size of

project and type of housing involved. In any case, both central and

individual laundry facilities will not be provided in a single project.

* * * * *

(i) Pay related costs such as fees and charges for market studies,

tax credit application, legal (costs pertaining to the closing of the

FmHA loan only), archeological, architectural, engineering,

environmental, and other appropriate technical and professional

services. The fees and charges may be paid to an applicant or officer,

director, trustee, stockholder, member, or agent of the applicant

provided those fees and charges are reasonable and typical for the area

and are earned and the identity of interest is disclosed. Legal,

technical, and professional fees do not include the costs incurred in

the formation or incorporation of the limited profit applicant, costs

of syndication, or the payment of a loan packaging or development fee.

(j) Provide loan funds to enable a nonprofit group or public body

to pay fees for technical assistance received from a nonprofit

organization, with housing and/or community development experience, to

assist it in the formation or incorporation and development and

packaging of its loan docket and project, as well as legal, technical

and professional fees incurred in the formation or incorporation of the

applicant entity.

* * * * *

14. Section 1944.213 is amended by removing paragraph (c)(12); by

redesignating paragraphs (b)(4), (b)(5), and (b)(6) as paragraphs

(b)(5), (b)(6), and (b)(7), respectively; by adding paragraph (b)(4);

and by revising paragraphs (c)(6), (c)(10), the introductory text of

paragraph (d), paragraph (d)(1)(ii), and the introductory text of

paragraph (e)(1) to read as follows:

Sec. 1944.213 Limitations.

* * * * *

(b) * * *

(4) The examples set forth in Exhibit A-13 of this subpart

(available in any FmHA office) provide clarity in determining the

proper loan amount for various types of loans.

* * * * *

(c) * * *

(6) Facilities contrary to cost containment measures defined in

Sec. 1944.215 (a) of this subpart.

* * * * *

(10) Land which the applicant or a member of an applicant/

organization owns or land which is owned by any other organization in

which any member of the applicant/organization has an interest, or has

had an interest within the last 3 years, including any commission due

on the sale thereof, except as authorized in Sec. 1944.212(c)(2) of

this subpart.

* * * * *

(d) Obligations incurred before loan closing. When an applicant

files a preapplication for a loan, the servicing official will advise

the applicant not to start construction or incur any indebtedness until

the loan is closed, except for those cases involving interim financing;

the guidelines outlined in Sec. 1944.235(c)(1) of this subpart will

then apply. During the period of preapplication review and processing,

applicants will not take any actions with respect to their applications

which would have an adverse impact on the environment or limit the

choice of reasonable alternatives. This requirement does not preclude

the applicant from developing preliminary plans or designs or

performing other work necessary to support an application for Federal,

State, or local permits or assistance. If the applicant incurs debts

for work, materials, land purchase, or other authorized fees and

charges before the loan is closed, the State Director may authorize the

use of loan funds to pay the debts when all of the following conditions

exist and debts were authorized in writing by FmHA prior to their being

incurred (market studies will be exempt from this requirement):

(1) * * *

(ii) Prior to the date of preapplication as part of a

predevelopment loan specifically intended as temporary financing from a

public agency or nonprofit organization and the State Director secures

prior concurrence from the National Office; or

* * * * *

(e) * * *

(1) No increase in per unit development cost will be approved,

whether the circumstance causing the cost increase occurs before,

during, or after the construction period, unless these conditions were

unforeseen factors beyond the owner's control and the increase in cost

was approved by FmHA in writing before the expense was incurred. (In

case of an emergency, the requirement that the cost be approved by FmHA

in writing before the expense is incurred is waived as long as the

servicing official is notified by the next working day.) Such costs

are:

* * * * *

15. Section 1944.215 is amended in paragraph (b)(1)(iii) by adding

the words ``(available in any FmHA office)'' at the end of the

paragraph; by revising in paragraph (h)(1) the words ``What is

Cooperative Housing?'' to read ``A Guide to Cooperative Housing''; and

by revising paragraph (a), the introductory text of paragraphs (b) and

(b)(1), paragraph (b)(1)(i), and the introductory text of paragraph (e)

and by adding paragraph (w)(3) to read as follows:

Sec. 1944.215 Special conditions.

(a) Cost containment. To achieve affordable rents and occupancy

rates (not considering rental assistance or similar subsidies), all

development costs will be economical in nature and not include costs

for unnecessary or elaborate design features. Cost containment is not

to be interpreted as accepting poor design or cheap construction.

Projects must provide the features and amenities necessary for the

lifestyles of the tenants and members. Consideration must be given to

the cost/benefit ratio when evaluating, recommending, or requiring

specific design features or construction techniques. Life cycle cost

analysis will be employed to determine the types of materials which

will reduce operation/maintenance costs even though their initial costs

are higher. Operation and maintenance costs factored into proposed

operating budgets will be adjusted accordingly. The following

guidelines are to be followed when developing projects:

(1) Each State architect/engineer (A/E) will compile and maintain

data on costs of all projects. Total project estimates will be compared

with estimates available through the Marshall & Swift computer program.

These estimates, along with the line item costs recorded in FmHA's

Automated Multi-Housing Accounting System (AMAS) cost tracking system,

will be used to establish a benchmark for future project costs. Any

proposal that exceeds these costs must be carefully evaluated for

possible cost reductions. The borrower will be responsible for

resolving the differences in cost to bring the project into line with

the lesser of the cost tracking system or Marshall & Swift estimates.

Final determinations must be realistic, interrelated to maintenance and

operation costs, and based upon local conditions and common sense. The

State will consider circumstances such as high land costs, remote rural

areas, etc., which could present a problem in achieving such an

alignment of costs. The AMAS cost tracking system will be used to

record both estimates and actual line item costs. At the time the

preapplication estimates are being examined by FmHA, the percentages

for builder's profit, general overhead, and general requirements will

be calculated to determine if they are within the allowable percentages

established in this paragraph. They will again be calculated at the

time the final estimates are submitted to FmHA. Estimated amounts in

excess of the allowable percentages will be reduced to the appropriate

percentage. Once the final estimates are approved by FmHA, payment of

builder's profit, general overhead, and general requirements will not

exceed the estimated amounts. Allowable percentages for builder's

profit, general overhead, and general requirements will not exceed 10

percent, 4 percent, and 7 percent, respectively. This will not be

interpreted to mean that, if historical percentages for these costs

were below 10, 4, and 7, respectively, FmHA will allow the costs to be

increased automatically. Adequate justification and documentation will

be required to approve an increase to 10, 4, or 7 percent for cases

where any of the costs were previously below those levels.

(2) The elimination or reduction of unnecessary delays in

application processing can contribute to cost containment through lower

interest and other business expenses on land, inventory, tests, design

studies, etc. When reasonable processing timeframes are established,

known and followed, appropriate time can be planned for preparing

quality application and construction documents. This can result in

better instructions to the builder, fewer errors and lower construction

costs.

(3) Most materials and systems are available in a range of

qualities and prices. The construction documents will be carefully

reviewed for specifications that require qualities or grades higher

than necessary. These specifications will be accepted only if fully

justified and no reasonable alternatives are available.

(4) Designs which employ standard building material dimensions and

reduce waste will be used.

(5) Sites will require a minimum amount of site development work.

The State Director may authorize a site requiring higher than normal

site development costs only if:

(i) The proposed site and site development costs are less than the

cost of the normal site and site development costs; or

(ii) There are no other sites available in the market area with a

lower combined cost.

(6) All project site densities (units per acre) will be within the

following ranges, regardless of site conditions unless local zoning

requirements dictate otherwise:

------------------------------------------------------------------------

Minimum Maximum

------------------------------------------------------------------------

One-story buildings................................... 10 14

Two-story buildings................................... 14 18

Three or more story buildings......................... 18 22

------------------------------------------------------------------------

(i) For example: A 24-unit project composed of two-story buildings

must have a site of at least 1.3 acres. FmHA will finance the purchase

and development of larger sites, but not more than 1.7 acres. Ranges

for projects with a mixture of building heights can be interpolated.

(ii) An exception may be made to this provision only if the site in

question is the only site available in the market area and its size,

shape, or condition makes a portion of the site unsuitable for

building. An exception to this requirement must be granted by the State

Director or a designee. The applicant must provide written

documentation that no other sites are available.

(7) Sound judgment and common sense must also be used in

construction inspections and final acceptance of projects. Field staff

involved in these activities must be careful not to impose additional

or unreasonable requirements on the builder that will increase

construction costs. States should consider hiring enough construction

inspectors to provide more than the required inspections and to allow

multiple unscheduled and unannounced visits. The State Office may also,

with National Office authorization, contract for inspection services to

deter deviations from the FmHA-accepted construction documents.

Prefinal and final inspections must be conducted by qualified FmHA

personnel.

(8) Buildings will not include numerous wall and roof breaks,

unusual designs requiring excessive corners and foundation off-sets, or

that require more exterior entrances than absolutely necessary. Designs

will not be considered acceptable that place dining facilities in

structures attached to the main building when these amenities can be

less expensively included within the main structure.

(9) Buildings will not include roof slopes less than 3/12 nor

greater than 6/12 unless otherwise required by local authorities or in

order to accommodate severe weather conditions.

(10) The use of repeat designs will be required from applicants

whose architects have designed projects previously approved by FmHA.

This does not mean ``cloned'' projects are required throughout the

State and/or region. When a repeat design is being used in the same

community, the exterior facade (such as color, siding material, etc.)

must be noticeably changed except in the case of subsequent phases. The

State Office architect will ensure that sufficient differences are

included in the proposed plans which will preclude the appearance of

``cloned'' designs. ``Predesigned'' buildings must fit the basic

existing contours of the proposed site.

(11) The following facilities are considered nonessential and will

not be included in the loan unless required by local codes or

ordinances:

(i) Garages/covered parking;

(ii) Bay/box/picture or similar type windows;

(iii) Fireplaces;

(iv) Community room furniture;

(v) Sliding glass/atrium or similar type doors;

(vi) Materials atypical for the area;

(vii) Atriums/solariums;

(viii) Saunas;

(ix) Whirlpools;

(x) Gyms (facilities to accommodate physical exercises may be

included in elderly projects without regard to this restriction); and

(xi) Swimming pools.

(12) Other design features which will only be accepted if

determined customary for the area are:

(i) Patios/balconies (minimum size which will accommodate

handicapped accessibility);

(ii) Washer and dryer hookups in individual units; and

(iii) Washers and dryers in individual units.

(13) The following is a list of allowable amenities according to

the type of units:

----------------------------------------------------------------------------------------------------------------

Family Elderly Congregate Group home

----------------------------------------------------------------------------------------------------------------

Active outdoor recreation....................... Yes........... No............ No............ Yes.

Carpet.......................................... Yes........... Yes........... Yes........... Yes.

Central laundry facilities...................... Yes........... Yes........... Yes........... Yes.

Community rooms................................. No............ Yes........... Yes........... Yes.

Dishwashers..................................... No............ Yes........... Yes\1\........ \1\Yes.

Drapes/blinds/shades............................ Yes........... Yes........... Yes........... Yes.

Elevators for 2-story elderly................... No............ Yes........... Yes........... No.

Garbage disposals............................... No............ No............ Yes\1\........ \1\Yes.

Lawn sprinklers--financing will depend on geographic area. .....................................................

----------------------------------------------------------------------------------------------------------------

\1\In central kitchens only.

(14) Total on-site parking spaces per living unit will be within

the following ranges unless otherwise required by local authorities:

Note: Additional spaces for visitors, staff, or health care

workers may be provided.

------------------------------------------------------------------------

Family Elderly Congregate Group

------------------------------------------------------------------------

Min Max Min Max Min Max Min Max

------------------------------------------------------------------------

1.0.... 1.5 0.5 1.0 0.25 1.0 0.25 0.5

------------------------------------------------------------------------

(15) Management, maintenance, and community rooms should be in

accordance with Guide 2 of subpart A of part 1924 of this chapter

(available in any FmHA office). Laundry rooms should be no larger than

necessary to accommodate equipment, circulation (including handicapped

accessibility) and areas for sorting and folding clothes.

(b) Type of housing. All housing will be designed to:

(1) Be economically constructed and not of elaborate design or

materials. All new construction will conform with the applicable

development standards of Sec. 1924.5(d)(1) of subpart A of part 1924 of

this chapter. The gross square foot living area of new units will be

within the ranges listed below. Living area is defined as: All enclosed

space for the unit (except unfinished storage space for outdoor items

and space needed for heating and/or cooling equipment) and measured

from the exterior surface of the framing of exterior walls and the

center line of interior party or corridor walls. States should

establish ranges within these dimensions to be commensurate with unit

sizes in the local market. For example, when conventional units in the

market are at the low end of FmHA's range scale, FmHA will also build a

comparably smaller unit.

------------------------------------------------------------------------

Minimum/

maximum

Type of unit living

area (sq.

ft.)

------------------------------------------------------------------------

0-Bedroom Unit.............................................. 350-500

1-Bedroom Unit.............................................. 500-650

2-Bedroom Unit.............................................. 650-800

3-Bedroom Unit.............................................. 800-950

4-Bedroom Unit.............................................. 950-1100

------------------------------------------------------------------------

(i) An additional 100 to 120 square feet of living area may be

added to the 4-bedroom unit guideline for each bedroom in excess of

four. Floor areas for living and dining rooms should comply with Guide

2 of subpart A of part 1924 of this chapter (available in any FmHA

office). The maximum square footage in congregate housing units will

not exceed 110 percent of the minimum square footages listed above.

* * * * *

(e) Loan resolution or loan agreement. The loan resolution or loan

agreement contains provisions of policy and procedure which should be

carefully read, fully understood by the applicant, and executed by the

applicant prior to loan approval. If any provisions are not appropriate

to a particular case, proposed substitute language must be approved by

FmHA and OGC. Subpart C of part 1930 of this chapter provides for the

maintenance of certain accounts and the pledge of housing income as

security. It contains regulatory provisions governing and giving FmHA

power to impose requirements regarding the housing and related

operations of the applicant. All sections and requirements determined

applicable by OGC will form part of any other loan resolution or

agreement that may be submitted by the applicant. These are:

* * * * *

(w) * * *

(3) Feasibility for projects receiving tax credits will require a

more extensive examination since tax credits are predicated on renting

to very-low income persons. Applicants choosing to apply for tax

credits will be responsible for identifying the amount of tax credits

it anticipates requesting from the State, as well as the income

percentage on which the credits will be based, and the percentage of

units targeted for tax credit eligible persons. The market study must

substantiate the presence of persons whose incomes would qualify for

tax credits who cannot afford the basic rent and those persons whose

incomes are tax credit eligible but who are still able to afford the

basic rent.

* * * * *

Sec. 1944.222 [Amended]

16. Section 1944.222 is amended in paragraph (g) by adding the

words ``from the current owner of public record'' at the end of the

first sentence.

Sec. 1944.224 [Amended]

17. Section 1944.224 is amended in paragraph (a)(3)(i) by revising

the reference to ``Sec. 1944.211 (a)(6)(ii)'' to read ``Sec. 1944.211

(a)(6)(i).''

18. Section 1944.231 is amended by removing the definitions for

``District Director'' and ``District Office'' in paragraph (a), by

redesignating paragraphs (e)(2) through (e)(4) as paragraphs (e)(3)

through (e)(5), respectively, by adding a paragraph (e)(2), and by

revising the introductory text of paragraph (e) to read as follows:

Sec. 1944.231 Processing preapplications.

* * * * *

(e) Determining eligibility and feasibility. After rating the

preapplication, if the priority processing point score is sufficient to

potentially authorize issuance of an AD-622 inviting a formal

application within the next 24 months (except for RCH preapplications),

the servicing official will review the proposal to determine

eligibility, feasibility, and compliance with loan purposes, policies,

and regulations. Eligibility/feasibility reviews will be completed in

priority point score order. Where a tie in priority point score exists,

the order of review will be determined in accordance with paragraph

(c)(5) of this section. In cases where the market study is incomplete

or not in accordance with Exhibit A-8 of this subpart, applicants will

be required to have the study supplemented to agree with FmHA

requirements. The time involved in supplementing the market study will

cause the preapplication to be delayed in determining feasibility.

* * * * *

(2) In those cases where the need for new rental units is

questioned by the servicing official, another market study may be

obtained by the servicing office at its discretion through contract

with a market analyst. The same market analyst who provided an

assessment for the applicant will not be used. Issuance of all AD-622s

in that market area will be delayed until the FmHA market study has

been completed and its contents reviewed by FmHA.

* * * * *

19. Section 1944.235 is amended by removing paragraph (a)(1); by

redesignating paragraphs (a)(2) through (a)(5) as paragraphs (a)(1)

through (a)(4), respectively; by revising newly redesignated paragraph

(a)(2) and the introductory text of paragraph (c)(1); and by adding

paragraphs (b)(3) and (c)(1)(viii) to read as follows:

Sec. 1944.235 Actions subsequent to loan approval.

(a) * * *

(2) Ensure that the servicing office has on file evidence that a

deposit has been made to the general operating account of an amount of

initial operating capital sufficient to cover the expected start-up

costs.

* * * * *

(b) * * *

(3) Monetary default by original applicant/entity. An obligation

may be transferred to any person or applicant eligible to receive an

RRH loan when the original applicant/entity is in monetary default

which has or may result in foreclosure by the interim lender, and:

(i) The applicant/entity assuming the obligation, or the interim

lender, removes any liens filed against the property;

(ii) There have been no deviations from the FmHA approved plans and

specifications;

(iii) The transferee will not be composed of any principals of the

transferor;

(iv) The transfer will be in the best interest of the FmHA and

prospective tenants;

(v) The applicant/entity and all members thereof whose obligations

are transferred will not be considered eligible for further

participation in the RRH program for at least 5 years from the date of

the transfer of the FmHA loan obligation; and

(vi) Prior approval is obtained from the National Office.

(c) * * *

(1) Interim financing. When the amount of the loan exceeds $50,000,

the applicant may obtain interim financing from commercial or public

sources for the construction period if it can be obtained at reasonable

interest rates, fees, and terms, and in the best financial interests of

the Government. Interim financing will be obtained to preclude the

necessity for multiple advances of FmHA funds. The interim lender must

be authorized to operate in the State in which the project will be

located and must have an established record of providing financing to

entities other than FmHA-financed projects. Since the interim lender is

responsible for inspecting construction along with FmHA, the borrowing

entity (including any of its identity of interest entities) cannot

provide interim financing to its own project. Interim financing will be

used subject to the following:

* * * * *

(viii) Because interest rates can fluctuate between the time

construction estimates are finalized and completion of construction,

any excess funds remaining from interim financing will be returned on

the FmHA loan. Also, interim funds remaining because of early

completion of construction will be returned. The leftover interest may

be used for certain other eligible loan purposes critical to the

completion of the project which were unknown to the applicant and

contractor at the time the loan was approved, provided prior National

Office concurrence is obtained.

* * * * *

Sec. 1944.236 [Amended]

20. Section 1944.236 is amended in paragraph (c)(3) by revising the

reference ``Sec. 1944.215 (d)'' to read ``Sec. 1944.215 (c).''

21. Section 1944.237 is amended by revising paragraphs (a) and

(c)(2) to read as follows:

Sec. 1944.237 Subsequent loans.

(a) A subsequent loan is made to an applicant/borrower to complete,

improve, repair, and/or make modifications to the project initially

financed by FmHA, or for equity and/or other purposes when authorized

by the provisions of subpart E of part 1965 of this chapter to avert

prepayment. A subsequent loan to develop additional units must be rated

and ranked in accordance with the priority point system contained in

Sec. 1944.231 of this subpart. Other subsequent loan requests do not

have to compete for funding under the priority point system.

* * * * *

(c) * * *

(2) If the initial investment and 2 percent O and M amounts are

sufficient to cover only the initial FmHA loan, the applicant/borrower

must provide the additional respective amounts to cover the subsequent

loan. The 2 percent O and M amounts must be in the form of cash as

described in Sec. 1944.211 (a)(6) of this subpart. The required amount

of the initial investment is described in Sec. 1944.213 (b) of this

subpart.

* * * * *

22. Exhibit A of subpart E is amended by revising paragraph VIII to

read as follows:

Exhibit A of Subpart E--How To Bring Rental and Cooperative Housing to

Your Town

* * * * *

VIII Exhibits

The following exhibits may be used when applicable and, if

necessary, adapted to meet the specific needs of applicants.

Exhibit

A-1 Legal Services Agreement

A-2 Survey of Existing Rental Housing

A-3 Rental Housing Survey

A-4 Cooperative Housing Survey

A-5 Housing Survey Summary

A-6 Housing Allowances for Utilities and Other Public Services

A-7 Information to be Submitted with Preapplication for a Rural

Rental Housing (RRH) or a Rural Cooperative Housing (RCH) Loan

A-8 Outline of Professional Market Study

A-9 Information to be Submitted with Application for Rural

Rental Housing (RRH) and Rural Cooperative Housing (RCH) Loans

A-10 Administrative Process for Combining Farmers Home

Administration (FmHA) Assistance with Low-Income Housing Tax Credits

A-11 Processing Guidelines for Loans for Equity to Avert

Prepayment

A-12 Market Study Checklist (available in any FmHA office)

A-13 Work Sheet for Loan Calculation (available in any FmHA

office)

A-14 Information to be Submitted for Subsequent Loans

(available in any FmHA office)

23. Exhibit A-7 of subpart E is amended by adding the words

``subpart V,'' after the words ``part 3015,'' in paragraph VII; by

adding paragraph II.J; and by revising the introductory text of

paragraph I.A., and paragraphs I.A.(3), I.A.(6), the introductory text

of paragraph I.A.(7), I.H., II.A., the introductory text of paragraph

II.B., paragraphs II.C., II.F., the last sentence of paragraph II.G,

III.C., and IV.F to read as follows:

Exhibit A-7 of Subpart E--Information to be Submitted With

Preapplication for a Rural Rental Housing (RRH) or a Rural Cooperative

Housing (RCH) Loan

* * * * *

I. * * *

A. Financial Statements for Rental Projects--Each applicant must

submit a current, signed, and dated financial statement. The

financial statement must reflect sufficient financial capacity to

meet the applicant's equity capital and initial operating capital

requirements. Applicants may contribute cash, free and clear title

to the building site, or a combination of both as an equity

contribution. The initial operating capital must be furnished in

cash.

* * * * *

(3) A financial statement will be required for limited partners

in a limited partnership who will have 10 percent or more ownership.

* * * * *

(6) When the applicant and/or general partner(s) have multiple

applications pending and/or when the State Director is uncertain of

the applicant's ability to provide the necessary borrower

contribution required by Sec. 1944.213 (b) of this subpart, 2

percent initial capital contribution and/or other assets needed for

a sound loan, the State Director may request the applicant to submit

additional financial information relative to its financial position.

This information may be obtained from 6- to 12-month projected pro

forma statements with supporting schedules.

(7) All financial statements submitted must contain the

following statement immediately preceding the signature line:

* * * * *

H. Farmers Home Administration (FmHA) requires that applicants

disclose identities of interest that will exist in the development

of the proposed housing. Forms FmHA 1944-30, ``Identity of Interest

(IOI) Disclosure Certificate,'' and 1944-31, ``Identity of Interest

(IOI) Qualification Form,'' (available in any FmHA office) will be

completed and submitted as part of the preapplication package.

* * * * *

II. * * *

A. Economic justification and project size should be based on

the housing need and demand from eligible prospective tenants or

members who are permanent residents of the community and its

surrounding trade area. Since the intent of the program is to

provide adequate housing for the eligible permanent residents of the

community, temporary residents of a community (such as college

students in a college town, military personnel stationed at a

military installation within the trade area, or others not claiming

their current residence as their legal domicile) should be

discounted in determining need and project size. The market study

will reflect the types and sizes of units which are needed in the

market area. For example, if the full market analysis shows a need

for one-bedroom, two-bedroom, three-bedroom, and four-bedroom units,

the preapplication must contain a percentage of three- and four-

bedroom units to correspond to the need expressed by the market

study in order to accommodate the larger families. The need will not

be based on persons who own their own homes but will be derived

from:

(1) Persons migrating into the area;

(2) Persons dwelling in family units who desire to move into

their own units (elderly persons living with family members will

only be considered if evidence of their interest in moving into the

project is furnished with the market study);

(3) Conservative estimate (not to exceed 20 percent) of

households living in substandard rental housing (lacking complete

plumbing facilities or 1.01 or more persons per room). (A higher

percentage will be allowed only if it can be clearly documented by

signed survey sheets, developed expressly for this purpose, that

occupants of more than 20 percent of the occupied substandard rental

units are willing and able to move into the proposed project.);

(4) Demolition of rental stock;

(5) Allowance for a 5 percent vacancy rate in the growth of

households since the last census; and

(6) Conservative estimate (not to exceed 20 percent) of

households experiencing rent overburden provided the analyst has

made a determination there are sufficient households in the market

area to occupy any rental units vacated by those lower income

persons who choose to move into the proposed project from the

existing units.

B. A detailed study based upon data obtained from census

reports, State or county data centers, individual employers,

industrial directories, or chambers of commerce is required. FmHA

personnel will utilize the market study checklist found at Exhibit

A-12 of this subpart (available in any FmHA office) as a means for

measuring market study credibility. The study will include:

* * * * *

C. Exhibit A-8 of this subpart outlines the information which

professional rental market studies will be required to follow. The

qualifications of the person preparing the market study should

include some housing or demographic experience. The market study

will be used by FmHA in evaluating market feasibility but will not

be the sole factor in such a determination. The data and information

provided in the market study will be used to supplement FmHA's

knowledge of the market area and to facilitate rational judgment

concerning the need for new rental units. Other considerations will

be FmHA's experience with the housing market in the State and local

area and U. S. Department of Housing and Urban Development's (HUD's)

analysis of market feasibility for the proposed units.

* * * * *

F. The analyst must affirm that he/she actually made an on-site

visit to the market area and that failure to do so may result in

denial of further participation in the section 515 program by the

analyst.

G. * * * The Cooperative Housing Survey form located at Exhibit

A-4 of this subpart and in ``A Guide to Cooperative Housing'' may be

used for this purpose.

* * * * *

J. Identification of the amount of tax credit units anticipated

to be requested from the State Agency, the income percentage on

which the credits will be based, and the percentage of project units

targeted for tax credit eligible persons. This information is needed

to determine the levels of incomes in the market area which will

support the basic rents while also qualifying the borrower for tax

credits.

III. * * *

C. The applicant will provide evidence of having control of the

proposed site either by ownership or by executing an option to buy

with the current owner of public record.

IV. * * *

F. A detailed cost breakdown of the project on Form FmHA 1924-

13, ``Estimate and Certificate of Actual Cost,'' will be prepared

and submitted by all applicants. In addition to completing the

individual line it

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