# Community Development Block Grant Program Economic Development Guidelines

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A94-32151

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** January 5, 1995
- **Citation:** 60 FR 1922

## Text

SUMMARY: This rule establishes guidelines to assist Community
Development Block Grant (CDBG) recipients in evaluating and selecting
economic development activities for assistance with CDBG funds. The
guidelines deal with project costs and financial requirements and with
the public benefit provided by such activities. This rule also makes
certain other changes to facilitate the use of CDBG funds for economic
development objectives.

EFFECTIVE DATE: February 6, 1995.

FOR FURTHER INFORMATION CONTACT: James R. Broughman, Director, Office
of Block Grant Assistance, Room 7286, 451 Seventh Street, SW,
Washington, DC 20410. Telephone: (202) 708-3587; TDD: (202) 708-2565.
(These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION: One of the Department of Housing and Urban
Development's (HUD's) expressed goals is to provide an economic lift
for distressed cities. Toward this end, HUD has embarked on a course
designed to make the Community Development Block Grant (CDBG) program a
potentially major contributor to the provision of jobs, especially for
low-income persons residing in our poorest areas. To accomplish this
goal, the Department recognizes that it will need to change both the
perception and the reality concerning the usefulness of CDBG for
economic development objectives.
Section 806 of the Housing and Community Development Act of 1992
(the 1992 Act) requires the Secretary to establish, by regulation,
guidelines to assist CDBG recipients to evaluate and select economic
development activities for assistance with CDBG funds. The 1992 Act
also made further changes in the CDBG program affecting the use of
funds for economic development activities, particularly those carried
out under the national objective of benefiting low- and moderate-income
persons through the creation or retention of jobs. These changes
necessitate revisions to the CDBG regulations. HUD has also determined
that it is appropriate to take this opportunity to make certain other
changes to the regulations to facilitate the use of CDBG funds for
economic development objectives. These changes are designed to reduce
the administrative burden on grantees while, at the same time, focusing
efforts on assisting the residents of low- and moderate-income
neighborhoods.
A proposed rule regarding these issues was published on May 31,
1994, at 59 FR 28175. The rule gave the public 30 days in which to
submit comments. Fifty-one comments were received, and many of the
comments were extensive. The following types and numbers of commenters
were represented: 14 local government agencies, 7 state agencies, 12
national associations, 7 development organizations, 1 regional planning
agency, 3 private citizens, and 7 HUD Field staff.

Applicability of This Rule to the State CDBG Program

Separate regulatory language for the Entitlement and State CDBG
programs is contained in this rule. This preamble generally discusses
the changes for the two programs together, with differences between the
requirements for the two programs noted. Overall, such differences have
been kept to a minimum.
The State CDBG program regulations do not contain an explanatory
list of eligible activities, and relatively few terms are defined in
regulation. The changes to Secs. 570.201, 570.203, 570.204, 570.500 and
570.506 (and the accompanying preamble discussions thereof) are thus
not applicable to the State CDBG program, as there are no comparable
sections in the State regulations. In interpreting the list of eligible
activities found in Section 105 of the Housing and Community
Development Act of 1974, as amended, states may use the Entitlement
regulations as interpretive guidance.

Applicability of This Rule to the HUD-Administered Small Cities and
Insular Areas CDBG Programs

Portions of the Entitlement CDBG Program regulations are
incorporated by reference into the regulations for the HUD-Administered
Small Cities program and the Insular Areas CDBG program. Thus, the
changes to the Entitlement regulations also apply to the HUD-
Administered Small Cities and Insular Areas programs. Further
clarification will be provided (such as through annual Notices of
Funding Availability or other instructions) for those programs,
particularly regarding applications proposing a limited number of
activities subject to the public benefit guidelines.

Applicability of This Rule to the Indian CDBG Program

It has been determined by the Office of Native American Programs
that this regulation will not be applicable to the Indian Community
Development Block Grant (ICDBG) program. The nature of the ICDBG
program is so separate and distinct from the Entitlement or the State
and Small Cities program that it is in the best interest of the ICDBG
to address these issues separately. A specific rule will be proposed at
a later date to address the needs of the Indian Tribes and Alaskan
Native Villages served by the ICDBG program to comply with the
requirements of the Housing and Community Development Act of 1992.

Summary of Public Comments and HUD Responses

Assistance for Microenterprises

Issue. Three commenters requested that the maximum number of
employees permitted in order for a business to be considered a
microenterprise be increased. (2 local government agencies and 1 state
agency)
Response. The term ``microenterprise'' is defined by Section
807(c)(2) of the 1992 Act as a ``commercial enterprise that has five or
fewer employees, one or more of whom owns the enterprise.'' With this
statutory limitation, the maximum number of employees cannot be
increased.
Issue. Four commenters requested further clarification of the
definition of a microenterprise. Issues raised included: whether the
limitation on the number of employees applies to actual persons or
full-time-equivalent positions; the scope of the term ``commercial'';
and the length of time a CDBG-assisted microenterprise must remain
within the five-employee maximum. (2 national associations, 1 state
agency, and 1 private citizen)
Response. The Department interprets the statutory language
regarding the size limitations for a microenterprise as referring to
number of actual persons employed by the business, including the
owner(s).
As noted above, the statutory definition of a microenterprise
describes [[Page 1923]] such a business as a ``commercial enterprise. .
. .'' The Department does not believe that it was Congress' intent to
construe the term ``commercial'' so narrowly in this instance that it
would encompass only retail businesses. Rather, the HUD interprets this
term broadly to mean any ``entity engaged in commerce,'' subject to the
size limitations further imposed by the statutory definition of a
microenterprise. Definitions of the terms ``microenterprise'' and
``small business'' are being incorporated into the CDBG regulations at
Sec. 570.3 in this final rule.
In regard to the length of time a CDBG-assisted microenterprise
must remain within these size limitations, the same general rule that
applies to other CDBG activities would also apply to microenterprise
assistance. That is, the size limitation applies only at the time the
CDBG assistance is provided. There may often be the expectation that,
in the future, the business will grow beyond five employees; that
expectation should not block assistance to a currently qualified
microenterprise. A grantee need not track the size of the business
throughout the term of any CDBG loan received, as the commenters feared
might be the case. However, it should be noted that when CDBG
assistance is provided on an ongoing basis, as may often be the case
for ``general support'' activities, such assistance ceases to qualify
under the microenterprise eligibility category at the point when the
business grows beyond the five-employee size limitation. Further
assistance to the business after that time must qualify under other
existing eligibility categories.
Issue. Two commenters requested that HUD further define the term
``persons developing microenterprises.'' (1 state agency and 1 private
citizen)
Response. HUD agrees that it is useful to include such a definition
in the regulations. Thus, a new paragraph Sec. 570.201(o)(3) has been
added to this final rule to provide such a definition. Generally, the
term ``persons developing microenterprises'' is defined as persons who
have expressed interest and who are, or after an initial screening
process are expected to be, actively working toward developing
businesses, each of which is expected to be a microenterprise at the
time it is formed. It should be noted that HUD does not expect that all
such persons will actually start a microenterprise; some ``fallout'' is
expected. However, patterns of excessive ``fallout'' rates in a
grantee's microenterprise activities may cause HUD to question whether
such activities truly serve ``persons developing microenterprises.''
Issue. Two commenters requested that HUD revise the regulations to
permit ``general support'' services to also be provided, outside of the
public service cap, to businesses larger than microenterprises. (1
state agency and 1 national association)
Response. The Department cannot accommodate the requested change.
Flexibility to provide such services outside the public service
category is only statutorily provided for microenterprise assistance
carried out under Section 105(a)(23) of the Housing and Community
Development Act of 1974, as amended, and, to a less direct extent,
qualified activities carried out under Section 105(a)(15) of the Act
(Sec. 570.204 of the Entitlement regulations). As noted above, the
statute also imposes the five-employee size limitation on
microenterprises.
Issue. Seven commenters requested that HUD clarify various aspects
of the ``general support'' portion of the microenterprise eligibility
provision. Issues raised included: whether there were any circumstances
in which such support activities would be considered public service
activities; whether ``general support'' could be provided to employees
of microenterprises who are not part-owners; whether ``general
support'' included costs related to the delivery of microenterprise
assistance; and whether the entities providing assistance under this
category would be those most attuned to the special needs of
microenterprises. (1 local government agency, 3 national associations,
2 development organizations, and 1 private citizen)
Response. As noted above, the statute limits the instances in which
``general support'' services may be provided to businesses outside the
public service eligibility category. In any circumstances which fall
outside the specified instances, the provision of such support services
would need to qualify as public service activities.
Under the microenterprise eligibility provision, the statute limits
the direct provision of ``general support'' to ``owners of
microenterprises and persons developing microenterprises.'' Thus,
``general support'' cannot be provided directly to employees of
microenterprises who are not part-owners. However, there may often be
other ways of structuring the activity to achieve essentially the same
end result. For example, financial assistance may be provided to the
microenterprise owner under Sec. 570.201(o)(1)(i) to permit the owner
to provide certain benefits to his/her employees if that can be shown
to assist in the ``development, stabilization, or expansion'' of the
microenterprise. Alternatively, the extent of financial assistance
provided to the microenterprise owner for the capital needs of the
business could be sized taking into account the owner's cost of
providing such benefits for his/her employees.
The term ``general support'' as it is used in the statute and
Sec. 570.201(o)(1)(iii) is not intended to specifically include the
activity administrator's cost of delivering microenterprise assistance
to owners of microenterprises and persons developing them. As with any
CDBG activity, it is recognized that there are various necessary costs
associated with carrying out a microenterprise assistance activity. As
the commenters note, these may include the costs of outreach and
screening, curriculum development, coordination with other agencies,
formation and management of peer lending groups, and certain staff
training and development. As with any other CDBG activity, such costs
directly related to carrying out the microenterprise assistance
activity are considered eligible as part of that activity, without
being categorized as ``general support.'' Such ``activity delivery''
costs are not considered to be general administrative costs that would
be subject to the 20 percent cap.
In regard to the nature of the entities carrying out activities
under this eligibility category and their familiarity with the needs of
microenterprises, HUD has interpreted the statutory provision as
broadly as possible in developing this rule. This should permit
grantees significant flexibility in determining how, and by whom,
microenterprise assistance activities should be carried out, based on
local needs and priorities. The specific selection of service providers
is a matter of local discretion.
Issue. Four commenters recommended that some form of
``appropriate'' test be required for microenterprise assistance carried
out under the new eligibility category or that the rule include some
language stating that such assistance must be reasonable and necessary.
(2 local government agencies, 1 state agency, and 1 HUD Field staff
person)
Response. As noted in the preamble to the proposed rule, this new
microenterprise eligibility category was added to the Act as a new
Section 105(a)(23). This new paragraph of the statute does not contain
any requirement that assistance for such activities be determined to be
``appropriate.'' In addition, this new paragraph is not included among
those eligibility categories listed as covered by [[Page 1924]] the
economic development ``guidelines'' to be established pursuant to the
new Section 105(e) of the statute, as added by Section 806(a) of the
1992 Act. HUD does not believe that adding any regulatory requirements
to this eligibility category that are not required by statute is
warranted. As with any other CDBG activity, however, grantees are free
to develop more restrictive local policies as they feel are appropriate
to meeting their local needs and objectives. Also, pursuant to
Secs. 570.200(a)(5) and 570.502 of the CDBG regulations, all costs
incurred for CDBG assisted activities must be in conformance with the
applicable uniform administrative requirements. This includes the
requirement that the costs be necessary and reasonable for the proper
and efficient administration of the program. Thus, HUD does not believe
it is necessary to include any special language in this regard in
Sec. 570.201(o).
Issue. A concern was raised over the fact that no revision to the
Section 108 Loan Guarantee regulations at Sec. 570.703 was proposed to
reflect the addition of microenterprise assistance as a separate
eligibility category. (1 HUD Field staff person)
Response. Activities eligible for assistance under the Section 108
Loan Guarantee program are specifically delineated at Section 108(a) of
the Act. While the 1992 Act added the separate microenterprise
eligibility category as a new Section 105(a)(23) of the statute, no
reference to this new paragraph was added to Section 108(a) of the
statute. Thus, this eligibility category is not directly eligible for
assistance using Section 108 Loan Guarantees. However, the provision of
direct assistance to microenterprises has long been, and continues to
be, eligible as a special economic development activity under Section
105(a)(17) of the Act (Sec. 570.203(b) of the Entitlement regulations).
Section 105(a)(17) is included at Section 108(a) among the list of
activities eligible for Loan Guarantee assistance under that section.
Therefore, grantees may use Section 108 Loan Guarantees to directly
assist microenterprises, subject to the statutorily required
``appropriateness'' determination and coverage under the economic
development ``guidelines'' (established in this final rule as a new
Sec. 570.209 of the Entitlement regulations and additions to
Sec. 570.482 of the State regulations). These ``guidelines'' take into
account the special needs and limitations arising from the size of such
businesses assisted under Sec. 570.203(b) as required by the new
Section 105(g)(1) of the statute (as added by Section 807(c)(1) of the
1992 Act).
Issue. One commenter asked whether (or how) certain assistance to
in-home day care providers might be eligible under the proposed
Sec. 570.201(o) or Sec. 570.203. The commenter noted that day care is
often provided by people within their own homes. Improvements to the
house may be necessary or beneficial to the provision of day care
services. The existing regulations do not provide guidance as to
whether improvements to a residence in this case should be classified
as rehabilitation or as assistance to a business.
Response. The Department agrees that this issue is not clear in the
existing regulations; the addition of the microenterprise assistance
eligibility section further muddies the issue, as many home day care
providers might also qualify as a microenterprise. Situations in which
businesses are operated from a residence are not limited to day care
provision. To address this comment, the Department has revised
Sec. 570.202 (eligible rehabilitation activities) of the Entitlement
regulations. With this revision, certain situations in which physical
improvements to a residence are undertaken to benefit a business
operated therein may be classified as housing rehabilitation.

Ensuring That Economic Development Projects Minimize Displacement

Issue. Section 907(a) of the National Affordable Housing Act of
1990 amended Section 105(a)(17) of the statute to require, in part,
that economic development projects assisted under this provision must
minimize, to the extent practicable, displacement of existing
businesses and jobs in neighborhoods. The proposed rule implemented
this provision by amending Sec. 570.203 of the Entitlement regulations
with language on displacement that was identical to that contained in
the statute. Six commenters addressed this issue, and several of them
recommended that further guidance be provided. However, few specific
recommendations were received. (3 national associations, 1 local
government agency, 1 private citizen, and 1 HUD Field staff person)
Response. HUD has determined that it is most appropriate to leave
the final rule provision as proposed on this issue. Within the
parameters of the statutory language, grantees will have flexibility to
demonstrate compliance with this requirement as appropriate for their
circumstances. One possible way in which a grantee could demonstrate
compliance with this requirement is by conducting an analysis for each
covered economic development project to determine that any displacement
of existing businesses and jobs that is likely to occur as a result of
the economic development project, both in the neighborhood in which the
project is located and in other surrounding neighborhoods, is
justifiable given an examination of possible alternatives.

Additional Changes to Sec. 570.203, Special Economic Development
Activities

Issue. A total of eight commenters addressed the new paragraph (c)
that was proposed to be added to Sec. 570.203 of the Entitlement
regulations to specifically address items that may be considered
activity delivery costs in conjunction with special economic
development activities assisted under this section. The Department's
principal purpose in proposing the addition of this paragraph was to
permit certain job training and placement activities in direct
conjunction with otherwise assisted CDBG special economic development
activities to be considered part of the ``delivery cost'' of those
special economic development activities. All eight commenters supported
this general concept, but five of them requested modification or
clarification of the provision. The recommended modifications included:
extending this provision to include construction jobs created as part
of CDBG projects; extending it to include all ``CDBG-eligible''
economic development projects rather than just actual ``CDBG-assisted''
projects; limiting the job training and placement activities permitted
under this provision to actual low- and moderate-income persons; and
reclassifying the outreach and monitoring portions of this provision as
general administrative costs subject to the 20 percent cap.
Clarification was also requested as to whether there were any
circumstances where the job training activities discussed would still
be considered a public service. (3 local government agencies, 3
national associations, and 2 development organizations)
Response. HUD has determined that it is not appropriate to extend
the coverage of this provision to include job training for construction
jobs created as part of all CDBG projects in general. This new economic
development services provision specifically applies only to activities
qualifying as special economic development activities under the CDBG
program. Costs for training and apprenticeship programs directly
related to the construction for these activities can generally be
considered to be covered under this provision. Costs of such programs
for other types of [[Page 1925]] CDBG projects can often be considered
as activity delivery costs of the respective projects to which they
pertain.
In regard to the comment that the proposed provision should be
extended to include all ``CDBG-eligible'' economic development projects
rather than just otherwise ``CDBG-assisted'' projects, the Department
has determined that this recommendation has merit. Under the CDBG
program, grant funds may be used to assist an activity ``in whole or in
part,'' as noted at Sec. 570.200(a) of the Entitlement regulations.
There are many cases in which ``activity delivery'' costs are the only
portion of an activity's overall costs that are paid for with CDBG
funds. Thus, Sec. 570.203(c) has been revised in this final rule to
reflect the recommended change. In order to qualify under this
provision, job training and placement activities must still constitute
activity delivery costs for an economic development project that would
otherwise be eligible for further assistance under Sec. 570.203. HUD
considers this to permit such training activities only where the
grantee has an agreement with a specific business(es) to actually
employ the person(s) trained. This provision does not authorize
programs that will merely create a ``pool'' of trained persons from
which a business(es) may possibly hire. (Such activities must continue
to qualify as public service activities under Sec. 570.201(e) of the
Entitlement regulations unless they meet the requirements of the new
Sec. 570.201(o) or Sec. 570.204.) It should also be noted that the use
of CDBG funds for activity delivery costs qualifying under
Sec. 570.203(c) constitutes CDBG assistance to the related economic
development project, regardless of the funding sources for any other
portion of the project. Thus, that project becomes subject to all
applicable CDBG requirements, including national objective and public
benefit requirements.
In regard to the comment that the job training and placement
activities permitted under this provision should be limited to actual
low- and moderate-income persons, the Department has decided not to
adopt this recommendation. Such a proposal confuses the distinction
between eligibility and national objective requirements. As activity
delivery costs, job training and placement activities carried out under
Sec. 570.203(c) are considered part of the economic development project
to which they relate. Thus, they are generally considered to qualify
under the same national objective as that economic development project.
Such CDBG special economic development activities can qualify under a
variety of national objective provisions; they are not limited to
creating or retaining jobs for low- and moderate-income persons.
This comment has raised an issue, however, that HUD found to merit
further consideration. Under existing regulations, with very few
exceptions, the majority of persons benefiting from a CDBG-assisted
activity must be low- and moderate-income persons. HUD is aware of
various proposals under which certain entities have indicated a
willingness to train low- and moderate-income persons for jobs and/or
provide such persons with other employment opportunities, but these
entities cannot agree that 51 percent of all assisted persons will be
low or moderate income. HUD believes that such proposals can often
provide valuable opportunities for employment of low- and moderate-
income persons and that a way should be found to permit CDBG funds to
assist such efforts. Thus, HUD is amending the low- and moderate-income
limited clientele national objective requirements in this final rule
[with a new Sec. 570.208(a)(2)(iv) in the Entitlement regulations and a
new Sec. 570.483(b)(2)(v) in the State regulations] to authorize the
use of CDBG funds for such activities that provide training and/or
other employment support services in limited circumstances. This
provision is discussed more fully in detail in the national objective
portion of this preamble.
There also appears to be some general confusion regarding what can
be considered as activity delivery costs and what must be classified as
general administration subject to the 20 percent cap. Apart from the
job training and placement activities discussed above, most of the
remaining types of activities delineated in the proposed
Sec. 570.203(c) are already considered to be activity delivery costs
eligible under the currently-existing Sec. 570.203. The proposed new
paragraph only provides a more specific statement of this point. One
commenter specifically took issue with the outreach and monitoring
portions of this provision, arguing that such activities should be
considered part of general administration. HUD agrees that
``monitoring'' should be considered a general administration activity,
and thus, that term has been deleted from the new Sec. 570.203(c) in
this final rule. However, reasonable outreach efforts by grantees to
obtain applicants for available assistance and the direct management of
resulting activities are routinely considered part of the delivery cost
of such activities. The commenter compares the above type of outreach
and marketing efforts to activities designed to help inform low-income
residents about CDBG. If that reference is to activities that are
designed to make residents generally aware of the CDBG program and how
they may participate in determining what types of activities the
community funds, such a comparison is imprecise. Rather, the type of
outreach and marketing efforts included under the new Sec. 570.203(c)
would be comparable to activities designed to make residents aware of
how they could apply for assistance under specific activities, such as
a housing rehabilitation program.

Special Activities by Community-Based Development Organizations
(CBDOs)--Sec. 570.204 (Section 105(a)(15) of the Act)

Issue. Six commenters addressed the eligible activities and project
definition sections of the proposed rule changes at Sec. 570.204 (a)
and (b). Most of these commenters requested clarification of the
proposed definitions and discussion of eligible activities. (2 national
associations, 1 local government agency, 1 private individual, and 2
HUD Field staff persons)
Response. HUD has not accepted the recommendation from one national
association to add language to the beginning of Sec. 570.204(a) to
specifically state that the recipient may provide CDBG funds to a
subrecipient under this section ``if permitted by state or local law.''
Compliance with applicable state or local laws is a requirement for
recipients in carrying out all CDBG activities; thus, there is no need
to make a special statement here.
In response to the various requests for clarification of the
definitions for the projects made eligible by Section 105(a)(15) of the
Act, HUD has made minor changes to those definitions included in
Sec. 570.204(a) (1), (2), and (3) in this final rule. For the
definition of a ``community economic development project,'' this
includes a cross-reference to the Consolidated Plan rule at 24 CFR
91.1(a)(1)(iii), which describes the types of activities HUD generally
considers to aid in ``expanding economic opportunities,'' which is part
of the primary objective of the CDBG program as delineated at Section
101(c)(1) of the Act. The definition also notes the general conditions
under which the construction or rehabilitation of housing may be
included as part of a ``community economic development
project.'' [[Page 1926]]
One commenter, a private citizen, raised a question as to whether a
``project'' qualifying under Sec. 570.204 included only activities for
which there is funding committed and which are occurring now or whether
it could include proposed future activities for which no funding has
yet been secured. HUD has determined that specific limits on the scope
of a project cannot easily be prescribed in this regard. Thus, it has
not been addressed in the text of this final rule. HUD expects
recipients to use a plausible interpretation of the term ``project''
and only include activities that are to be carried out within a
reasonable period of time. Such an interpretation should at least
exclude activities which have not yet received necessary conceptual
approvals from the local government.
HUD has also revised the reference to permitted services under
Sec. 570.204. Two commenters, a private citizen and a HUD Field staff
person, requested clarification of this provision. Also, under a
similar expansion of service activities as part of the new
microenterprise eligibility category at Sec. 570.201(o), one of those
same commenters raised a concern about potential abuse of the expanded
flexibility if the requirements were not clearly defined. HUD has
reconsidered the proposed provision and has determined that it is
appropriate to limit the type of services that may be excluded from the
public service cap by qualifying under this section to those (1) that
are specifically designed to increase economic opportunities by
supporting the development of permanent jobs, or (2) services of any
type carried out under this section pursuant to a strategy approved by
HUD under the provisions of Sec. 91.215(e). To reflect this change, the
proposed paragraph Sec. 570.204(a)(5) has been deleted, the proposed
paragraph Sec. 570.204(b)(2) has been renumbered to (b)(3), and a new
paragraph Sec. 570.204(b)(2) has been added to this final rule. In the
State program regulations, proposed Sec. 570.482(c)(2) has been
deleted, and a new paragraph Sec. 570.482(d) has been added to discuss
the eligibility of employment-related services and microenterprise
support services.
Issue. One commenter recommended that the Department consider the
eligible project carried out by the qualified organization under
Sec. 570.204 to be a single eligible activity instead of ``only a loose
grouping of other eligible activities.'' The commenter recommends that
this approach be reflected throughout the regulations, including
national objective requirements, the economic development guidelines,
and record keeping requirements. (1 HUD Field staff person)
Response. In regard to eligibility requirements under Sec. 570.204,
it already is the overall project that is assessed to determine if it
qualifies as one of the three types of projects authorized by this
section. Problems arise when trying to apply this approach for
assessing compliance with national objective requirements, economic
development guidelines, and other applicable requirements, however,
because of statutory requirements that must be applied to specific
types of activities that may be part of the qualified project. For
example, Section 105(c)(3) of the Act limits the manner in which any
housing activities may be considered to benefit low- and moderate-
income persons. Also, Section 105(e) of the Act, as added by Section
806(a) of the 1992 Act, subjects economic development activities to
compliance with the public benefit requirements. Beyond such statutory
restrictions, the Department also believes that requiring detailed
information on what the organization is actually doing with the CDBG
funds helps ensure accountability to both the local citizens and HUD.
However, HUD has determined that the commenter's recommendation does
have a certain degree of merit. Thus, HUD has made certain changes to
the CDBG regulations in this final rule to ease grantees' burden in
tracking national objective compliance for certain activities that may
qualify for eligibility under this category. These changes are
discussed further in the respective national objective portions of this
preamble.
Issue. In regard to the types of entities that qualify under
Sec. 570.204, one commenter noted that such entities are commonly
referred to by practitioners as ``community-based development
organizations (CBDOs)'' or ``community development corporations
(CDCs).'' (1 national association)
Response. HUD has determined that is appropriate, in adopting a
single generic name for the entities that may qualify under
Sec. 570.204, to use a name that is commonly understood by
practitioners. It was also apparent from various comments that the
proposed rule's use of the term ``local development corporations
(LDCs)'' in this regard caused some confusion with some commenters
thinking HUD was ``picking'' one of the entities in the current rule
over the others. Use of the ``CDC'' term noted by the above commenter
could create confusion with existing entities funded under other
Federal programs. Therefore, to reduce confusion, the term ``community-
based development organization (CBDO)'' is now used in this final rule
as the generic term to describe all entities that may qualify under
Sec. 570.204.
Issue. Five commenters addressed the proposed revision to the
definition of the term ``subrecipient'' at Sec. 570.500(c). The
proposed revision was intended only to expand that current provision to
include for-profit entities that are now specifically authorized by
statute to carry out microenterprise assistance activities under the
new eligibility provision implemented in this final rule by a new
Sec. 570.201(o) in the Entitlement regulations [Section 105(a)(23) of
the Act]. Most of the commenters recommended that HUD not consider any
entities carrying out activities under the new microenterprise category
as ``subrecipients'' but rather as ``end beneficiaries.'' These
commenters also requested a similar change in classification for
entities receiving CDBG assistance under Sec. 570.204 of the
Entitlement regulations [Section 105(a)(15) of the Act]. Other
commenters asked only for a clarification of the proposed revision to
Sec. 570.500(c). (1 local government agency, 1 development
organization, and 3 HUD Field staff persons)
Response. The comments regarding entities carrying out activities
under the new microenterprise category will be discussed later in this
preamble in further discussion of the revision to Sec. 570.500(c) in
this final rule. This specific section will only respond to these
comments as they relate to entities receiving CDBG assistance under
Sec. 570.204 of the Entitlement regulations (Section 105(a)(15) of the
Act). The Department has re-examined the status of these entities
within the context of the statutory language at Section 105(a)(15).
This section of the statute authorizes the provision of CDBG assistance
to certain qualified entities to carry out specific types of projects.
Upon review, HUD has determined that the comments questioning the
status of these entities as subrecipients have merit. The Department
has determined that, similar to for-profit businesses carrying out
economic development projects, the entities carrying out qualified
activities under Sec. 570.204 (Section 105(a)(15) of the Act) can be
considered not to be an intermediary organization in the grant
assistance chain acting for the grantee, but rather as being
specifically eligible to receive CDBG assistance itself. While these
entities are not true ``end beneficiaries'' as the commenters argue
(that term applies to the persons served by the activities), they are
not strictly intermediaries either. Thus, the Department has determined
that such [[Page 1927]] eligible entities carrying out qualified
activities under this section will no longer be considered as
subrecipients under the CDBG program. In this final rule,
Sec. 570.500(c) has been amended, in part, to reflect this change.
Issue. Two commenters addressed the general jurisdictional
limitations for organizations qualifying under this section as proposed
at Sec. 570.204(c)(1)(i). One of these, a national association,
recommended that these regulations mirror the Community Housing
Development Organization (CHDO) requirements which permit an entity to
operate in a rural ``multi-county area (but not a whole state).'' The
other commenter, a local government agency, recommended that the
proposed regulatory language be amended to read:
``. . . primarily within an identified geographic area of operation
within the jurisdiction of the recipient. . . .'' The commenter argues
that this would permit an organization with a successful track record
to share its experience by consulting or entering into a joint venture
to support a project in other areas. (1 national association and 1
local government agency)
Response. HUD has determined not to accept the ``multi-county''
recommendation because maintaining local community control of a
organization qualifying under Sec. 570.204 is crucial. Also, it should
be noted that truly rural organizations would not be subject to these
regulatory restrictions anyway. This is because Section 807(f) of the
1992 Act expanded the list of organizations eligible to carry out
activities in nonentitlement areas under Section 105(a)(15) of the
Housing and Community Development Act of 1974, as amended. ``Nonprofit
organizations serving the development needs of the communities of
nonentitlement areas'' now qualify under Section 105(a)(15) of the Act.
Since the State CDBG program regulations contain no listing of eligible
activities, no regulatory language is needed to implement that change.
In regard to the second comment above regarding jurisdictional
limitations, the Department agrees with the commenter's reasoning and
has revised Sec. 570.204(c)(1)(i) to reflect the recommended language
in this final rule. In this regard, however, HUD does note that it
interprets the term ``primarily'' as it is used in this section to mean
that most of the organization's projects are located, funds are used,
and staff time is expended on a project or projects within the
identified geographic area of operation and that outside projects are
largely incidental to the organization's activities and purposes.
Issue. One commenter recommended that HUD provide a definition for
the term ``particular attention'' as it is used in the new
Sec. 570.204(c)(1)(ii) regarding addressing the needs of low- and
moderate-income persons. (1 national association)
Response. The ``particular attention'' language as used in the
above-noted section comes from those statutes that have been referenced
for several years in the CDBG regulations at Sec. 570.204(c)(3)
defining local development corporations. The Department is not aware of
any significant problems with conflicting interpretations of this
language, which is the commenter's stated concern. Thus, the rule has
not been modified to include a formal definition of this term. In
general, HUD would expect the charter, bylaws, etc., of the CBDO to
reflect a commitment to meeting the needs of low- and moderate-income
persons.
Issue. In reference to the new Sec. 570.204(c)(1)(iii), another
commenter expressed ``serious reservations'' about allowing for-profit
organizations to qualify under this section of the regulations. (1
development organization)
Response. The statute at Section 105(a)(15) and the CDBG
regulations at Sec. 570.204 have long permitted for-profit
organizations under this section with the inclusion of Small Business
Investment Companies. The rule now includes only a clearer statement of
what already is permitted. The rule does provide a stipulation that any
monetary profits to a CBDO's shareholders or members must be only
incidental to its operations.
Issue. Four commenters addressed the board structure requirements
under Sec. 570.204(c)(1)(iv). Concerns raised included an objection to
excluding organizations composed solely of institutional members from
qualifying under this section and comments both for and against the
inclusion of business owners in defining permitted board structures.
One of the commenters also recommended that HUD permit the low- and
moderate-income presumptions added by the 1992 Act to be used under
this section in determining whether a sufficient percentage of board
members are low- and moderate-income persons. (1 local government
agency, 2 development organizations, and 1 national association)
Response. HUD has determined that all of the comments regarding the
inclusion of institutions and business owners on the boards of
qualifying CBDOs have some merit. Thus, the Department has refined the
requirements at Sec. 570.204(c)(1)(iv) in this final rule to permit
consideration of both institutional board members and business owners,
but only to the extent that the entities that they represent are both
located in and serve the CBDO's geographic area of operation. In regard
to the comment about permitting the presumption of low- and moderate-
income residents status under this section, it is noted that the
presumptions at Section 105(c)(4) of the HCD Act, as added by Section
806(e) of the 1992 Act, apply only to activities qualifying under the
national objective of job creation or retention for low- and moderate-
income persons. Permitting them to be used in determining compliance
with the board structure requirements of this section would include too
broad of a spectrum of organizations to qualify under this provision.
Thus, the Department has rejected this comment.
Issue. Three commenters addressed the proposed Sec. 570.204(c)(2)
that provided further ways in which an organization might qualify as an
eligible CBDO under this section. These commenters requested
clarification of when this paragraph would apply, and two of the
commenters specifically requested that HUD expand the jurisdictional
restrictions imposed on CHDOs, as designated by the HOME program,
qualifying under this paragraph. (1 national association, 1 development
organization, and 1 HUD Field staff person)
Response. HUD's intent in the proposed Sec. 570.204(c)(2) was to
give organizations that did not meet the general qualification
requirements of (c)(1) certain additional ways of qualifying as a CBDO
under this section of the CDBG regulations. It was not intended that
qualifying organizations would have to meet both (c) (1) and (2); an
entity can qualify under either standard. HUD has revised the
introductory language to Sec. 570.204(c)(2) in this final rule to
clarify that intent. An understanding of this approach is critical in
assessing the requirements that a CHDO under the HOME program must meet
in order to qualify under Sec. 570.204 of the CDBG Entitlement
regulations. A CHDO qualifying under the HOME program may or may not
meet the general qualification requirements for a CBDO under the CDBG
Entitlement program, as delineated at Sec. 570.204(c)(1) of this final
rule. If a CHDO meets those requirements, it may have an area of
operation as large as the jurisdiction of the recipient, just as any
other qualified CBDO. The more restrictive jurisdictional limits at
Sec. 570.204(c)(2)(iii) are only applicable to [[Page 1928]] CHDOs that
cannot meet the general CDBG Entitlement qualification requirements for
CBDOs. An example of such an entity would be a CHDO that meets only the
minimum HOME percentage requirement for low- and moderate-income
persons on its board (33 percent) and cannot show that it has
sufficient types of representatives on that board to meet the 51
percent standard delineated in Sec. 570.204(c)(1)(iv).
In assessing the comments on this issue, HUD has determined that it
is appropriate to provide organizations with an additional alternative
for qualifying as a CBDO under this section of the CDBG regulations.
Thus, in this final rule, HUD has added a new Sec. 570.204(c)(3) under
which an organization that does not qualify under either
Sec. 570.204(c) (1) or (2) may also be determined to qualify as an
eligible entity under this section if the grantee demonstrates to the
satisfaction of HUD, through the provision of information regarding the
organization's charter and by-laws, that the organization is
sufficiently similar in purpose, function, and scope to those entities
qualifying under the above-referenced paragraphs. The Department
intends to have this determination made at the HUD Field Office level.
Also in this regard, it should be noted that HUD expects that many
Community Development Financial Institutions meeting the criteria in
Title I, Subtitle A of the Riegle Community Development and Regulatory
Improvement Act of 1994 (P. L. 103-325, enacted September 23, 1994)
will qualify as CBDOs under Sec. 570.204 of the CDBG Entitlement
regulations. The above-referenced subtitle comprises the Community
Development Banking and Financial Institutions Act. The purpose of this
subtitle is to create a Community Development Financial Institutions
Fund to promote economic revitalization and community development
through investment in, and assistance to, CDFIs, including enhancing
the liquidity of such institutions. The CDFI Fund is to be a wholly-
owned Government corporation that will not be affiliated with any other
agency of the Federal Government. In this final rule, HUD is adding to
the Entitlement regulations a definition of the term CDFI that
references the above-noted new legislation. A CDFI is generally defined
at Section 103 of that Act as an entity that (i) has a primary mission
of promoting community development; (ii) serves an investment area or a
targeted population; (iii) provides development services in conjunction
with equity investments or loans, directly or through a subsidiary or
affiliate; (iv) maintains accountability to residents of its investment
area or targeted population; and (v) is not a government agency or
instrumentality. An ``investment area'' is defined as an area that
either (i) meets objective criteria of economic distress developed by
the Fund and has significant unmet needs for loans or equity
investments; or (ii) is located in a designated Empowerment Zone or
Enterprise Community. These CDFI criteria are similar to those now set
forth in Sec. 570.204(c).
It should again be noted that the requirements of Sec. 570.204 only
apply to the qualification of CBDOs serving Entitlement jurisdictions
under the CDBG program. As discussed earlier in this preamble, Section
807(f) of the 1992 Act expanded the list of organizations eligible to
carry out activities in nonentitlement areas under Section 105(a)(15)
of the HCD Act. Any nonprofit organization serving the development
needs of nonentitlement areas now qualifies under Section 105(a)(15) of
the Act for the State CDBG program.
Issue. One commenter also recommended that HUD allow a limited
partnership in which the managing general partner is an eligible CBDO
to qualify under Sec. 570.204. The commenter argues that the use of
low-income tax credits (LITCs) necessitates a limited partnership
structure and that adding the limited partnership itself as a
qualifying entity would remove the necessity of having two levels of
contracts--one between the grantee and the CBDO and one between that
CBDO and the limited partnership. (1 local government agency)
Response. Limited partnerships are single purpose entities which
exist to syndicate and develop one project. It would be difficult to
construe the definitions of the statutorily eligible entities to
include limited partnerships. Thus, HUD has decided against expressly
adding a provision to the regulations to include the type of limited
partnership described by the commenter. However, in cases in which the
activities of an LIHTC limited partnership are controlled by a
Sec. 570.204 qualified entity, usually by that entity either serving as
the general partner of the limited partnership or establishing such an
entity as a subsidiary, the Department has accepted that CDBG
assistance may be provided by the Sec. 570.204 qualified entity to the
limited partnership for the purpose of carrying out all or part of the
eligible project. The Department will continue to explore ways of
removing unnecessary administrative burdens for such projects.
Issue. Specifically in regard to qualified entities in
nonentitlement areas, one commenter (a state agency) took issue with
the discussion of such entities contained in the preamble to the
proposed rule. The state agency disagreed with HUD's statutory
interpretation that the term ``nonprofit organizations serving the
development needs of communities in non-entitlement areas'' excludes
units of general local government. This interpretation, according to
the state, would restrict the use of CDBG funds by certain State-
sanctioned local entities.
Response. The Department has chosen not to accept this comment. The
preamble to the proposed rule noted that a public nonprofit
organization which meets Internal Revenue Service requirements for
nonprofit status may qualify under Section 105(a)(15) of the Act. The
Department does not define a number of terms (``neighborhood
revitalization project'', ``community economic development project'',
``energy conservation project'', ``carrying out an activity'') which
are significant to the discussion of CBDOs above, in order to give
States maximum flexibility to implement Section 105(a)(15) within the
context of their particular situations.

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

Issue. A total of seven commenters addressed the proposed revisions
to Sec. 570.208(a)(1)(i) of the Entitlement regulations and
Sec. 570.483(b)(1)(i) of the State regulations dealing with activities
qualifying under the national objective of benefiting low- and
moderate-income persons as area benefit activities. This revision
relates specifically to a proposed presumption of compliance for
special economic development activities that may be carried out under
Sec. 570.203 [Sections 105(a) (14) and (17) of the HCD Act] by a
community development financial institution (CDFI) meeting certain
criteria. Concerns raised by the commenters included statements both
for and against the proposed presumption; requests for clarification of
the types of entities that would qualify as CDFIs; and requests for
revisions to the ``primarily residential'' and other aspects of the
regulation. (1 local government agency, 1 state agency, 1 development
organization, 1 national association, 1 private citizen, and 2 HUD
Field staff persons)
Response. Supporting the development and growth of CDFIs can be a
critical component in the comprehensive revitalization of
[[Page 1929]] distressed neighborhoods because they often address the
financing needs of these areas that are otherwise unmet. Existing CDFIs
have demonstrated their ability to identify and respond to community
needs for equity investments, loans, and development services. Thus,
HUD has decided to include a modified version of the proposed
presumption in this final rule.
First, it is important to define the types of entities that may
qualify as CDFIs, as some of the commenters noted. As noted earlier in
this preamble, HUD is herein adding to the CDBG regulations a
definition of the term CDFI that references the Title I, Subtitle A of
the Riegle Community Development and Regulatory Improvement Act of 1994
(P. L. 103-325, enacted September 23, 1994). Secondly, HUD has
determined that it is more appropriate to create separate paragraphs in
Sec. 570.208 of the Entitlement regulations and Sec. 570.483 of the
State regulations to reflect the options that may be used for
activities carried out by certain CDFIs, rather than to simply include
the proposed presumption in Sec. 570.208(a)(1)(i) and
Sec. 570.483(b)(1). Thus, in this final rule, HUD has added new
paragraphs under the ``additional criteria'' section of the national
objective requirements at Sec. 570.208(d)(6) of the Entitlement
regulations and Sec. 570.483(e)(4) of the State regulations to list the
options that may be used for CDBG activities carried out by any CDFI
whose charter limits its investment area to a primarily residential
area consisting of at least 51 percent low- and moderate-income
persons. The new paragraphs Sec. 507.208(d)(6)(i) and
Sec. 570.483(e)(4)(i) cross reference with additional new paragraphs
Sec. 570.208(a)(1)(v) and Sec. 570.483(b)(1)(iv) of the Entitlement and
State regulations, respectively. Pursuant to these paragraphs, job
creation or retention activities carried out by CDFIs meeting the above
criteria may be presumed to meet the low- and moderate-income area
benefit criteria. It should be noted that with the area benefit
presumption applied in this manner, the ``exception criteria'' for
Entitlement communities cannot be used in this regard. Thus, in order
to take advantage of the area benefit presumption, the CDFI's
investment area must be at least 51 percent low- and moderate-income
regardless of the community's usual area benefit threshold requirement.
HUD has determined that it is also appropriate to offer a similar
benefit for job creation or retention activities carried out under
certain other circumstances. Thus, in this final rule, HUD has also
added Sec. 570.208(d)(5) in the Entitlement regulations, which is
cross-referenced in Sec. 570.208(a)(1)(v). Under this provision, job
creation or retention activities undertaken in an area pursuant to a
HUD-approved economic revitalization strategy developed in accordance
with the authority of Sec. 91.215(e) of the Consolidated Plan final
rule may be presumed to meet the low- and moderate-income area benefit
criteria. It should be noted that in order to reduce the potential for
abuse of this provision, HUD is limiting this form of area benefit
presumption to areas that are primarily residential and contain a
percentage of low- and moderate-income residents that is no less than
the percentage computed by HUD pursuant to Sec. 570.208(a)(1)(ii) but
in no event less than 51 percent. This means that the required low- and
moderate-income percentage for the area may be significantly higher
than that which the community generally uses for its area benefit
activities. For those communities that generally use the ``exception
criteria,'' the required low- and moderate-income percentage for this
area benefit presumption is 51 percent. For a community that generally
is required to meet 51 percent for regular area benefit activities, the
required low- and moderate-income percentage for this area benefit
presumption is that percentage level of low- and moderate-income
persons in the last census block group in the community's highest
quartile of block groups ranked in order of proportion of low- and
moderate-income persons, as computed by HUD pursuant to
Sec. 570.208(a)(1)(ii).
The Department will develop guidelines for determining when
grantees should be authorized to take advantage of the benefits of this
economic revitalization strategy area approach. These guidelines will
be distributed to both grantees and HUD Field Office staff.
In developing this approach for the Entitlement program, the
Department became aware of significant issues concerning how the
economic revitalization strategy provision might be applied to the
State program. Therefore, the Department is not implementing comparable
regulation language for the State program at this time. In order to
gain public comment, the economic revitalization strategy area concept
for states will be the subject of a future proposed rule. In the
meantime, the Department welcomes any comments or suggestions on how
the economic revitalization strategy area approach might be applied to
the State CDBG program.
Two commenters expressed concern about the requirement in
Sec. 570.208(a)(1)(i) that limits the use of the low- and moderate-
income area benefit provision in general to only those activities that
serve areas that are ``primarily residential.'' It should be noted this
requirement is a long-standing provision of the CDBG regulations and
has served the program well. Thus, HUD has decided not to make any
changes to that requirement in this final rule. One of the commenters,
a HUD Field staff person, recommended that a specific exception to the
``primarily residential'' requirement be made for projects qualifying
under Sec. 570.204 of the Entitlement regulations [Section 105(a)(15)
of the HCD Act] because the types of projects made eligible under that
section, including ``neighborhood revitalization'' and ``community
economic development,'' appear to lend themselves to an area-wide
benefit test. Such a change has not been incorporated into this final
rule. The activities most often carried out under Sec. 570.204 [Section
105(a)(15)] involve the provision of housing, and Section 105(c)(3) of
the HCD Act specifically precludes the use of a low- and moderate-
income area benefit national objective claim for such activities.
However, in recognition of the merit of the recommendation, HUD has
made certain changes in this final rule to ease grantees' burden in
tracking low- and moderate-income national objective compliance for
housing activities in certain areas. These changes are more fully
discussed later in this preamble.
One commenter, a national association, expressed support for a
supposed ``revision to permit area benefit . . . without requiring that
the area be defined in terms of census tracts or other official
boundaries.'' The commenter appears to misunderstand current
requirements. While the CDBG regulations do require entitlement
grantees to use, to the greatest extent feasible, the most recently
available decennial census data to support the low- and moderate-income
character of the area (and Sec. 570.208(a)(1)(iv) has been modified to
incorporate a reference to the new Sec. 570.208(a)(1)(v) in this
regard), there is no current requirement that the service area be
defined along census tract or other official boundaries. The language
included in this regard in Sec. 570.208(a)(1)(i) (for Entitlements) and
Sec. 570.483(b)(1) (for States) in the proposed rule is unchanged from
current requirements. [[Page 1930]]

National Objective Compliance by Microenterprise Assistance Activities

Issue. A total of 15 commenters addressed the proposed new
Sec. 570.208(a)(2)(iii) to be added to the Entitlement regulations and
the proposed new Sec. 570.483(b)(2)(iv) to be added to the State
regulations to specifically provide the limited clientele national
objective option for activities qualifying under the new
microenterprise assistance eligibility category. Many of these
commenters specifically supported the provision, and a few specifically
opposed it. Various commenters requested revisions to or clarification
of certain aspects of the provision, most of which related to the
manner in which jobs created by such activities would be considered (2
local government agencies, 3 state agencies, 4 national associations, 4
development organizations, 1 private citizen, and 1 HUD Field staff
person).
Response. As discussed in the preamble to the proposed rule,
activities carried out under the new microenterprise eligibility
category are not statutorily subject to the same low- and moderate
income national objective limitations as are generally applicable to
special economic development activities carried out under Sec. 570.203
[and Sections 105(a)(14) & (17) of the HCD Act]. Thus, the low- and
moderate-income limited clientele method of meeting a national
objective becomes an option for activities carried out under the new
microenterprise eligibility category. While many commenters
specifically supported the subject proposed provision, a few commenters
specifically opposed it, particularly the fact that only 51 percent of
the owners of microenterprises and persons developing them would be
required to be low- and moderate-income persons. Thus, there would be
the potential to permit sizable numbers of non-low- and moderate-income
persons to receive financial assistance to develop a for-profit
business. HUD has found these arguments to be compelling. Thus, the
Department has revised the subject limited clientele provision in this
final rule to restrict its use to qualify only those assisted owners of
microenterprises and persons developing microenterprises who are low-
and moderate-income persons. This change should not be a significant
issue for many of the microenterprise activities assisted under the
CDBG program. Many such programs are designed to provide a means to
help disadvantaged persons become more economically self-sufficient and
are thus often targeted to persons who meet income qualification
criteria at least as restrictive as the CDBG definition of low and
moderate income. Also, to allow for some continuity of service to a
low- or moderate-income person initially assisted under a
microenterprise activity who later may no longer meet the income
guidelines after the microenterprise actually becomes operational, the
Department has retained the option that permits, for purposes of
meeting this national objective requirement, any person determined to
be of low or moderate income to be presumed to continue to qualify as
such for up to a three-year period before that person would have to
requalify. The language in this final rule also clarifies that under
this new limited clientele provision, it is only owners of
microenterprises and persons developing microenterprises that are
considered for national objective purposes and not employees of such
businesses who are not part-owners.
While the new limited clientele provision has been restricted to
only low- and moderate-income persons, activities qualifying under the
new microenterprise eligibility category that may serve non-low- and
moderate-income entrepreneurs may still be assisted under the criteria
for creation and/or retention of jobs principally for low- and
moderate-income persons. Under that national objective claim, all
employees of a microenterprise, including the owner(s), are considered,
and a grantee can use the new presumptions added by Section 806(e) of
the 1992 Act for determining a person's status as a low- or moderate-
income person, as implemented in this final rule at Sec. 570.208(a)(4)
of the Entitlement regulations and Sec. 570.483(b)(4) of the State
regulations. These presumptions cannot be used under the new limited
clientele provision because the 1992 Act added them as a new Section
105(c)(4) of the HCD Act which refers only to activities qualifying
under the national objective of job creation or retention for low- and
moderate-income persons.
One commenter asked that HUD specifically name examples of low- and
moderate-income clientele. Certain such examples that apply to all
activities benefiting low- and moderate-income persons are included in
Sec. 570.506(b) of the Entitlement regulations.
Two commenters requested clarification as to whether HUD's
proposing the limited clientele provision for microenterprise
assistance activities means that ``cost per job'' created will not be a
primary consideration in the evaluation of a CDBG-funded
microenterprise program. ``Cost per job'' is not a primary HUD
consideration for any microenterprise assistance activities carried out
under the new separate microenterprise eligibility category. Such a
calculation only comes into play in the public benefit standards
(established elsewhere in this final rule), which are not statutorily
applicable to activities carried out under the new microenterprise
eligibility category. As with any CDBG activity, however, grantees have
the flexibility to add additional local criteria for activity
evaluation. Also, given the general requirement that all costs charged
to the CDBG program must be necessary and reasonable for the proper and
efficient administration of the program, HUD expects grantees to
consider cost in relation to results for all activities and to take
steps to curb unusually high costs.

National Objective Compliance for Employment Support Activities

As delineated earlier in this preamble under the discussion of the
new Sec. 570.203(c) economic development services provision in the
Entitlement regulations, HUD is aware of various proposals under which
certain entities have indicated a willingness to train low- and
moderate-income persons for jobs and/or provide such persons with other
employment opportunities, but these entities cannot agree that 51
percent of all assisted persons will be low- or moderate-income. HUD
believes that such proposals can often provide valuable opportunities
for employment of low- and moderate-income persons and that a way
should be found to permit CDBG funds to assist such efforts. Thus, HUD
is amending the low- and moderate-income limited clientele national
objective requirements in this final rule [with a new
Sec. 570.208(a)(2)(iv) in the Entitlement regulations and a new
Sec. 570.483(b)(2)(v) in the State regulations] to authorize the use of
CDBG funds for such activities that provide training and/or other
employment support services in limited circumstances. In order to
qualify under this provision, CDBG assistance for the project must be
limited to the provision of such training and/or supportive services;
the percentage of the total project cost borne by CDBG may not exceed
the percentage of all persons assisted who are low or moderate income.
HUD has included this provision under the limited clientele category
rather than the job creation or retention national objective category
because while such use of CDBG funds solely for job training and/or
supportive services can often be considered to [[Page 1931]] ``involve
employment'' of low- and moderate-income persons (reference Section
105(c)(1) of the Act), they cannot generally be considered to directly
``create'' or ``retain'' jobs as those terms are used in the CDBG
regulations.

National Objective Standards for Low- and Moderate-Income Housing
Activities

As noted under the low- and moderate-income area benefit discussion
earlier in this preamble, HUD has added in this final rule new
paragraphs Sec. 570.208(d)(5) and (6) in the Entitlement regulations
and Sec. 570.483(e)(4) in the State regulations. These paragraphs lay
out various national objective options for activities undertaken in
certain lower-income areas either by a CDFI or (in Entitlement
communities) pursuant to a HUD-approved economic revitalization
strategy. Paragraph (ii) of each of these new sections refers to
housing activities carried out under these circumstances, and they are
cross referenced in Sec. 570.208(a)(3) in the Entitlement regulations
and Sec. 570.483(b)(3) in the State regulations in this final rule. As
noted earlier, Section 105(c)(3) of the Act limits the manner in which
housing activities may be considered to benefit low- and moderate-
income persons, and it precludes the use of an area benefit claim for
such activities. As an alternative, the new provisions in this final
rule permit all housing activities carried out under the delineated
limited circumstances to be grouped together and considered as a single
structure for purposes of complying with the low- and moderate-income
housing national objective requirements. (For example, a grantee
providing rehabilitation assistance to 10 single-family housing units
in such an area could classify all 10 units as meeting the low- and
moderate-income benefit national objective if at least six of the units
were occupied by low- and moderate-income persons.) For the calculation
of the overall low- and moderate-income benefit level of a grantee's
CDBG program, such housing is still subject to the limitation on
benefit to low- and moderate-income persons relative to activity costs,
pursuant to Sec. 570.200(a)(3)(iv) of the Entitlement regulations and
Sec. 570.484(b)(4) of the State regulations.

National Objective Standards for Benefiting Low- and Moderate-Income
Persons Through the Creation or Retention of Jobs

Presumptions Added by 1992 Act

Issue. A total of 19 commenters addressed the general manner in
which HUD proposed to implement the presumptions for determining an
employee's status as a low- and moderate-income person that were added
to the HCD Act as a new Section 105(c)(4) by Section 806(e) of the 1992
Act for job creation and retention activities. Of the total number of
commenters, 11 clearly indicated their support for the proposed change,
and five stated their opposition. Most of the support comments were
based on the reduced burden and ``less intrusive'' means for
determining the low- and moderate-income status of employees. Most of
the comments opposing the proposed change referenced the fact that the
proposed rule used only the minimum test for Empowerment Zone and
Enterprise Community census tract. Concern was particularly expressed
that there was no reference to the ``pervasive poverty, unemployment,
and general distress'' requirement for Empowerment Zone and Enterprise
Communities. (6 local government agencies, 6 national associations, 1
state agency, 3 development organizations, 2 private citizens, and 1
HUD Field staff person)
Response. After a thorough review of all of the above comments and
the applicable statutory references at Title XIII, Chapter I,
Subchapter C, Part I of the Omnibus Budget Reconciliation Act of 1993
regarding the eligibility criteria for Empowerment Zones and Enterprise
Communities, HUD has determined that the presumptions added by the 1992
Act should be implemented in a more stringent manner than was set forth
in the proposed rule. The Department particularly agrees with those
commenters who noted that the ``pervasive poverty, unemployment, and
general distress'' eligibility requirement for Empowerment Zone and
Enterprise Communities should be reflected in the implementation of the
subject low- and moderate-income presumptions for job creation and
retention activities under the CDBG program. Thus, a new paragraph
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new
paragraph Sec. 570.483(b)(4)(v) of the State regulations have been
added to define the requirements a census tract (or block numbering
area) must meet in order to qualify for the presumptions added by the
1992 Act. Under these provisions, a census tract must, in part,
demonstrate pervasive poverty and general distress by meeting at least
one of three delineated standards. Two of these standards relate to the
poverty levels in the various block groups comprising the census tract.
The third standard provides a grantee with the option of requesting a
determination from HUD that a census tract meets the ``pervasive'' test
based on other objectively determinable signs of general distress. The
Department intends to have the subject determinations made at the HUD
Field Office level.
A conforming change to the new Sec. 570.506(b)(7) of the
Entitlement regulations regarding records that need to be maintained
for the subject presumptions is also included in the final rule.
Issue. A total of 10 commenters responded to HUD's specific request
for comment as to whether tighter presumption standards should be
established for census tracts that comprise or include any part of a
community's central business district (CBD), as discussed in the
Empowerment Zone and Enterprise Community legislation. Six of the
commenters wanted no special standards for CBDs. Four of the commenters
argued that there must be tighter standards for such areas given the
statutory eligibility criteria for Empowerment Zones and Enterprise
Communities (4 local government agencies, 3 national associations, 1
development organization, and 2 private citizens).
Response. After a thorough review of all of the above comments and
the applicable statutory references, HUD has determined that tighter
presumption standards must be established for CBDs. The statutory
arguments are compelling. Thus, in the new paragraph
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new
paragraph Sec. 570.483(b)(4)(v) of the State regulations added by this
final rule, HUD has included language similar to that which appears in
the Empowerment Zone and Enterprise Community regulations regarding
this issue, establishing a 30 percent poverty standard for any census
tract that includes any portion of a CBD (as that term is used in the
most recent Census of Retail Trade).
Issue. Two commenters recommended that HUD revise the proposed rule
language to include census tracts that qualify for Empowerment Zone or
Enterprise Community eligibility under that program's special rules
relating to the determination of poverty rates for census tracts with
small populations, particularly those tracts that are more
[[Page 1932]] than 75 percent zoned for commercial or industrial use (1
local government agency and 1 development organization).
Response. HUD has determined that it is not appropriate to revise
the regulations implementing the CDBG presumptions to include such
tracts in general. While the Empowerment Zone/Enterprise Community
legislation does permit these tracts to be considered as passing the
minimum poverty tests, this is done mainly in the context of qualifying
the tract as part of an overall area to be designated. Because the CDBG
presumptions apply only on an individual census tract basis, the
Department has determined that including such tracts without limitation
would unduly broaden the scope of the subject presumptions. However, it
is recognized that many federally designated Empowerment Zones and
Enterprise Communities could include such census tracts. Thus, the new
paragraph Sec. 570.208(a)(4)(v) of the Entitlement regulations and a
new paragraph Sec. 570.483(b)(4)(v) of the State regulations added in
this final rule to implement the CDBG presumptions permit any census
tract that is part of a federally designated Empowerment Zone or
Enterprise Community to qualify for the CDBG presumption regardless of
whether it meets the other general criteria delineated in the
regulation.
Issue. Several commenters raised other concerns that relate to the
statutory bases for the subject presumptions of a person's low- and
moderate-income status for CDBG activities carried out under the
national objective of job creation or retention. Issues raised
included: concerns regarding the use of census tract data instead of
block group or ``neighborhood'' data; a recommendation to permit
communities to use data obtained through a survey; questions as to why
one of the presumptions only applied to the residence of the employee
while the other applied to either the employee's residence or the
location of the assisted business; and concerns about the
interpretation of the terms ``assisted business'' and ``job under
consideration'' as used in the proposed rule, as opposed to the term
``assisted activity'' as used in the Act (4 national associations and 1
private citizen).
Response. Section 105(c)(4) of the Act, as added by Section 806(e)
of the 1992 Act, which expressly authorizes the subject low- and
moderate-income presumptions for job creation and retention activities,
specifically refers to ``census tracts.'' Thus, overall tract data must
be used in determining these presumptions. In regard to the presumption
that is determined by the tract meeting what Section 105(c)(4) calls
``Federal enterprise zone eligibility criteria,'' it is noted that the
Empowerment Zone/Enterprise Community legislation requires poverty
rates to be determined using the most recent decennial census data
available. Thus, this requirement is carried over into a new paragraph
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new
paragraph Sec. 570.483(b)(4)(v) of the State regulations added in this
final rule to implement the related CDBG presumption. The other CDBG
presumption, which is based on the low- and moderate-income character
of the census tract in which an employee resides, does not carry with
it the specific requirement that the most recent decennial census data
available must be used. Thus, while HUD expects grantees to follow the
general CDBG rule of using such census data to the fullest extent
feasible, it would be possible for a grantee to conduct a survey to
support a census tract's qualification for that presumption. However,
given the statutory ``census tract'' language noted above, the area for
which such a survey would be undertaken must coincide with the census
tract boundary. It is further noted that this latter presumption only
applies to a census tract in which an employee resides and not to the
location of the assisted economic development project because of the
statutory language in Section 105(c)(4).
In expressing concern over the possible interpretation of the terms
``assisted business'' and ``job under consideration,'' as used in the
regulations implementing the broader presumption, one commenter gave
two examples. First, the commenter states that assistance to a ``branch
office'' located in a qualified tract should be able to use the
presumption resulting from ``Federal enterprise zone eligibility
criteria'' even if the business' principal office is located elsewhere.
This is entirely consistent with the language included in the new
paragraph Sec. 570.208(a)(4)(iv) of the Entitlement regulations and the
new paragraph Sec. 570.483(b)(4)(iv) of the State regulations. In using
the term ``assisted business'' in those portions of the rule, HUD does
not intend to imply that the business' main office or corporate
headquarters must be located in a qualified tract in order to use the
presumption. The regulatory language is designed to provide sufficient
restrictions to prohibit businesses from establishing only a ``shell''
office to make use of the location presumption while the actual
activity being assisted is in fact being carried out elsewhere.
Assistance to legitimate ``branch offices'' is not restricted under the
regulatory language. As a second example, the commenter states that a
``job training center or small business assistance office'' should be
able to use the presumption even though such a facility ``helps people
who do not yet have businesses nor specific `jobs under
consideration'.'' It is not clear how this second example would be able
to use the presumption given the statutory language at Section
105(c)(4). Based on that provision, the new presumptions can only be
used for activities qualifying under the national objective of job
creation or retention for low- and moderate-income persons. Job
training centers or business assistance offices such as those which
appear to be described in the commenter's second example generally
would not qualify under that national objective and would thus not be
able to use the presumption.
Issue. Two commenters raised questions about how the subject
presumptions would be implemented. The first question relates to
whether the presumptions based on an employee's residence could be used
together with the traditional way of documenting an employee as a low-
or moderate-income person in order to meet the overall 51 percent low-
and moderate-income requirement for jobs created or retained by a
particular assisted business. One of the commenters also asked what
documentation HUD will require to verify that jobs are created when the
presumption on the basis of the location of the business is used. (1
state agency and 1 private citizen)
Response. In regard to the first question, it is entirely
permissible for a grantee, in a single activity, to combine counting
employees presumed to be low- and moderate-income persons on the basis
of their residence with those employees documented as being such
persons under more traditional means. Any concerns that this could
possibly lead to the company and/or the grantee being accused of
``singling out certain individuals'' for requests for income
information (as one of the commenters states), is as unfounded as the
``privacy'' concerns certain persons have raised for several years in
discussions of this section of the CDBG regulations. In regard to the
second question, a grantee qualifying a business based on its location
must still obtain sufficient documentation to demonstrate that jobs are
actually created or retained by the activity. This documentation would
be [[Page 1933]] similar to that which the grantee currently receives
for such activities, with the exception that any employee income
information would be omitted.
Issue. Two commenters recommended that the final rule contain
language which would make it easy for low- and moderate-income people
to challenge an ``unwarranted presumption.'' They recommend that HUD
reiterate the regulatory ``substantial evidence to the contrary''
language in this section of the regulations and add wording that would
encourage residents to submit challenges and direct HUD to quickly
respond to such challenges. (1 national association and 1 development
organization)
Response. HUD cannot accommodate this recommendation. The subject
presumptions of a person's low- and moderate-income status for job
creation or retention activities is specifically authorized by statute.
It does not matter if the presumption appears ``unwarranted'' in a
specific case; if the activity meets the requirements delineated in
Section 105(c)(4) of the Act, it is entitled to use the presumption.
There is a distinct difference between these presumptions and those
that are HUD has otherwise established only on a regulatory basis under
the limited clientele standards.

Job Creation or Retention by Public Infrastructure Improvements

The Department proposed another amendment to Sec. 570.208(a)(4) of
the CDBG Entitlement regulations and Sec. 570.483(b)(4) of the State
regulations concerning the requirements for demonstrating national
objective compliance by CDBG-assisted infrastructure improvements.
Eight entities commented on this proposed change: 4 states, 2 national
associations, one HUD staff person and one citizen. Nearly all
commenters supported HUD's efforts to provide more flexibility in this
area. Several comments suggested specific revisions to HUD's proposal.
Issue. Communities often over-design public facilities to
accommodate future growth; this frequently makes sense for the
community. However, CDBG funds should only be used to pay costs
associated with the capacity needed by presently-identified businesses,
or else the grantee should track future job creation for three years.
Response. The Department has chosen not to accept this suggestion.
As noted in the preamble to the proposed rule, the Department proposed
shortening the three-year tracking period to one year because it has
received numerous comments from states that the existing State CDBG
regulations are unduly burdensome. The Department believes it would be
cumbersome for HUD staff to attempt to identify and prorate
construction costs associated with current vs. future capacity needs;
this could place HUD staff in the role of second-guessing grantees'
engineering reports.
Issue. Two commenters requested that projected, rather than actual,
job creation/retention be compared to the $10,000 CDBG cost-per-job
threshold. Because grantees cannot be completely certain how many jobs
will actually be created, there may be instances where the projected
cost per job is less than $10,000, but the actual cost per job is over
$10,000.
Response. The Department concurs with these comments. The
Department is concerned that grantees might intentionally overstate the
projected number of jobs so as to take advantage of the less stringent
requirements for projects whose per-job cost is less than $10,000.
However, it is impossible for job creation or retention estimates to be
100% accurate. As the proposed regulations are worded, a grantee could
be retroactively held responsible for tracking a wider universe of
businesses for job creation/retention if the actual cost per job was
over $10,000, even though the projected cost per job was under $10,000.
In the final regulations, references to actual vs. projected job
creation/retention have been eliminated. Instead, the regulations refer
to jobs ``to be created or retained.''
In the regulations on public benefit documentation, the Department
indicates that, where a grantee shows a pattern of substantial
variation between projected and actual benefits received, a grantee
will be expected to take actions to improve the accuracy of its
projections. The Department has not included comparable language in
this section. If, for purposes of this section, a grantee's projections
show a pattern of substantial variation from actual job creation/
retention, the Department will expect grantees to take steps to improve
the accuracy of their projections.
Issue. One commenter recommended that, rather than requiring
grantees to conduct an assessment of businesses in the service area of
the public facility or improvement, the rule should require an
``appropriate'' review for public improvement projects undertaken to
create or retain jobs.
Response. The Department does not accept this comment, for two
reasons. This suggestion confuses requirements for meeting a national
objective with requirements for demonstrating the eligibility of an
activity. Equally significant is that the new statutory requirements
regarding evaluating and selecting economic development projects
effectively replace the ``appropriate'' determinations previously
required. The Guidelines for Evaluating Project Costs and Financial
Requirements are not applicable to public improvement projects; a
grantee may choose to develop guidelines for evaluating public
improvement projects if it wishes. The Department has chosen to apply
the public Benefit standards only to those public improvement projects
(undertaken to create or retain jobs) for which the projected cost per
job is $10,000 or more.
Issue. HUD should restrict the use of CDBG funds in situations
where economic development infrastructure activities cross privately-
owned property. This would be construed as a potential windfall to the
private property owner or company.
Response. The Department has chosen not to accept this
recommendation. HUD is unaware of any evidence that this is a
significant problem in the CDBG program. As the commenter acknowledges,
states and localities have legal mechanisms to govern hookup access to
public utilities.
Issue. One commenter noted that the proposed Entitlement and State
regulation language differs regarding businesses with which agreements
must be signed; the commenter prefers the language in the proposed
State CDBG regulation.
Response. The Department has revised the relevant sections [which
are now Sec. 570.483(b)(4)(vi)(F) and Sec. 570.208(a)(4)(vi)(F) to
provide greater consistency between the two paragraphs. In revamping
this section of the regulations, the Department has eliminated
references to agreements with businesses.
Issue. Two states urged the Department to delete portions of the
proposed regulations: the requirement for conducting an assessment of
businesses in the service area of the public facility or improvement;
the requirement that job creation should be tracked for each business
until the business' job creation/retention obligation is fulfilled;
and, where the cost per job is $10,000 or more, applying the time
period for tracking businesses to just the business(es) with signed
agreements for which the improvement is undertaken.
Response. Based on relevant statutory language in the Housing and
Community Development Act, the Department disagrees with the
implication that documentation regarding national objectives should
cease once the originally-projected [[Page 1934]] number of jobs has
been created. Furthermore, these recommendations would eliminate the
distinction in requirements between activities in which the cost per
job is $10,000 or more and those in which the cost per job is under
$10,000. Based on the data from the State CDBG program, the $10,000 per
job created/retained threshold appears to be significantly above the
median costs for public facility/improvement projects of this sort; few
projects should thus be subject to the stricter requirements. The
Department believes that stricter requirements are appropriate for
projects costing $10,000 per job or more, because less public benefit
is being obtained per CDBG dollar expended.
However, the Department has taken seriously the underlying desire
for simplicity, and as a result has worked to streamline this section
of the regulations. Eliminated in the final regulations is the
requirement that the recipient undertake an assessment of all
businesses in the service area of the public facility/improvement to
determine which businesses may create/retain jobs as a result of the
public facility/improvement. Grantees are cautioned, however, that
should the CDBG per-job cost of the project be $10,000 or more, the
recipient must still aggregate jobs created/retained by all businesses
which locate or expand in the service area of the public improvement/
facility. Grantees will thus need some mechanism for identifying such
businesses.
Issue. One state requested that the proposed public improvement-job
creation requirements for the State program be made retroactively
applicable to projects funded by states after December 9, 1992. That
was the effective date of the current State CDBG regulations, in which
the existing requirements concerning public improvement-job creation
activities were first effected.
Response. A recent U.S. Supreme Court decision casts uncertainty on
the constitutionality of retroactive rulemaking. The Department feels
an attempt to provide some retroactive flexibility through the rule-
making process could be legally problematic. States may, as always,
request a waiver of the existing regulations for individual cases.
Other Job Creation/Retention Issues
Issue. One commenter raised a concern regarding the provision at
the new Sec. 570.208(a)(4)(vi)(B) of the Entitlement regulations which
permits the aggregation of jobs for loan funds administered by a
subrecipient where CDBG pays only for the staff and overhead and loans
are made exclusively from non-CDBG funds. The commenter recommended
that HUD change the phrase ``. . . jobs created by all the businesses
receiving loans during each program year'' to ``. . . jobs projected by
all the businesses receiving . . .'' This recommendation is based on
the claim that during the early years of a program's operation, ``few
jobs may actually have been created, even though many loans have been
`committed.''' (1 private citizen)
Response. The commenter appears to misunderstand the subject
provision. The regulation does not measure the number of jobs actually
created in each program year. Instead, it measures all the jobs created
as a result of the CDBG assistance by all the businesses that receive
loans in each program year, regardless of when the jobs are actually
created.
In developing this final rule, HUD has pursued additional job
aggregation options in consideration of the many comments received in
support of less burdensome job tracking. Also, in considering the
comments on the public benefit standards, HUD has determined that it is
appropriate to offer certain flexibility for activities that serve
important national interests. Thus, in this final rule, HUD is
delineating three additional instances under which jobs created or
retained may be aggregated for purposes of determining compliance with
national objective requirements. Aggregation of jobs is now also
permitted for (1) activities providing technical assistance to for-
profit businesses; (2) activities meeting the criteria in the public
benefit standards at Sec. 570.209(b)(2)(v) of the Entitlement
regulations and Sec. 570.482(f)(3)(v) of the State regulations; and (3)
for activities carried out by a CDFI. To reflect this,
Sec. 570.208(a)(4)(vi) of the Entitlement regulations and
Sec. 570.483(b)(4)(vi) of the State regulations have been amended. In
this regard, it should also be noted new paragraphs Sec. 570.208(d)(7)
and Sec. 570.483(e)(5), added to the Entitlement and State regulations
respectively, require that for an activity that may meet the standards
for more than one of these options, the grantee may elect only one
option under which to qualify the activity. No ``double counting'' is
permitted.
Issue. One commenter raised a concern regarding the requirement
regarding the criteria now at Sec. 570.208(a)(4)(iii) and
Sec. 570.483(b)(4) making jobs ``available to'' low- and moderate-
income persons, particularly the ``no special skills'' requirement
unless the business agrees to hire unqualified people and then provide
training. The commenters argues that HUD should not ``presume'' that
low- and moderate-income persons have no education because many such
persons may have a community college or vocational technical education
and still be underemployed or poorly paid because of various factors.
The commenter also notes that in certain cases, the jobs to be created
by an assisted activity will not actually be created for a year or
more, which would provide time for necessary training before the
business completes its hiring process. (1 national association)
Response. The reference requirement is important to ensure that no
special skill or education requirements form a barrier to low- and
moderate-income persons being considered for the jobs under the
``available to'' option under Sec. 570.208(a)(4). If a community knows
that there is a pool of more skilled low- and moderate-income persons
available, it can always choose to demonstrate compliance with the
national objective requirement under the ``held by'' option where skill
level is not considered. The new low- and moderate-income presumptions
should also make it easier for grantees to use the ``held by'' option.
In regard to the issue of the timing of the training versus hiring, the
Department wants to ensure that any training claimed under the new
``economic development services'' provision at Sec. 570.203(c) of the
Entitlement regulations and Sec. 570.482(d) of the State regulations is
limited to persons whom the respective business has actually agreed to
employ and not to include training just to provide a general ``pool''
of persons from which a business may possibly hire. This is important
in distinguishing ``economic development services'' that qualify as
part of the ``delivery costs'' of a related economic development
project from more generic public service activities that qualify under
Sec. 570.201(e) of the Entitlement regulations. It is noted that under
this final rule, activities qualifying under either of these
eligibility categories can also take advantage of the new low- and
moderate-income limited clientele option at Sec. 570.208(a)(2)(iv) of
the Entitlement regulations and Sec. 570.483(b)(2)(v) of the State
regulations in certain circumstances.
Request for Comment on Certain Other Job Creation/Retention Issues Not
Contained in the Proposed Rule
In addition to a discussion of specific regulatory revisions, the
preamble to the May 31, 1994, proposed rule also contained a specific
request for public comment on certain other issues which HUD is
examining in an attempt to [[Page 1935]] determine whether further
changes should be proposed regarding the national objective standards
for benefiting low- and moderate-income persons through the creation or
retention of jobs. These issues included: (1) whether any further low-
and moderate-income presumptions should be made for job creation or
retention activities; (2) whether any modification should be made to
the CDBG job retention requirement to document that jobs claimed as
being retained would actually be lost without the CDBG assistance; and
(3) whether any modification should be made to the requirement in job
retention activities that, except for some allowance for jobs that may
become available through turnover, the low- and moderate-income
standards are applied at the time the assistance is provided, which is
while the employees still have the income from the jobs that they are
subject to lose. (Please refer to the preamble to the proposed rule
published in the Federal Register on May 31, 1994, for a more complete
discussion of these issues.)
A sizable amount of public comment in response to these issues was
received. Many of the comments offered interesting suggestions, and HUD
will be publishing an additional proposed rule in response to some of
the recommendations provided. Such items must go through the proposed
rulemaking process in order to provide the general public with an
opportunity to comment on them before they would be published for
effect. The public comments received on these issues based on the
request contained in the preamble to the May 31, 1994, proposed rule
will be discussed fully in the preamble to the new proposed rule.

National Objective Standards for Addressing Slums or Blight on an Area
Basis

The proposed rule included a revision to Sec. 570.208(b)(1)(ii) of
the Entitlement regulations and Sec. 570.483(c)(1)(ii) of the State
regulations. This proposal would allow designated slum/blighted areas
to qualify under the slum/blight national objective if the area
exhibited pervasive economic disinvestment in the form of high turnover
or vacancy rates in previously occupied commercial or industrial
buildings.
In addition, the Department sought comment on whether instances of
environmental contamination should be considered as evidence of
blighting conditions. No specific regulatory language was proposed in
that area, however.
The Department received valuable input on both topics relating to
the slum/blight national objective. As a result, the Department has
decided to propose additions to the slum/blight criteria to accommodate
environmental contamination, and to revise its initially proposed
criteria regarding pervasive economic disinvestment. The existing
regulations would be significantly restructured to accommodate these
changes.
The Department has decided to publish a new set of proposed
regulations dealing with the slum/blight national objectives. The
comments received by the Department on slum/blight issues will be
discussed in the preamble to those new proposed regulations.

Guidelines for Evaluating and Selecting Economic Development Activities
for CDBG Assistance

The proposed rule contained language implementing section 806(a) of
the 1992 Act at a proposed new Sec. 570.209 in the Entitlement
regulations and additions to Sec. 570.482 in the State regulations. The
proposed regulations described guidelines for evaluating certain
economic development activities assisted with CDBG funds. These
guidelines consist of two parts: guidelines and objectives for
evaluating project costs and financial requirements, the use of which
are not mandatory, and public benefit standards, which are mandatory.
Numerous comments were received on various aspects of this section
of the proposed regulations. The comments can be categorized into
groups of issues, and will be discussed by category of issue.

Underwriting Guidelines--General

The proposed rule described HUD's Guidelines and Objectives for
Evaluating Project Costs and Financial Requirements (the ``underwriting
guidelines''); the proposed guidelines themselves were published as a
separate Federal Register notice on the same day. Sixteen commenters
commented on HUD's proposed Guidelines and Objectives for Evaluating
Project Costs and Financial Requirements: 5 local governments, 4
national associations, 2 States, 3 HUD Field Office staffs, one citizen
and one business development entity. Four commenters expressed overall
support for the approach proposed to be taken by the Department in
implementing the requirements of the 1992 Act.
Issue. Three commenters stated that the underwriting guidelines
themselves should be included in the text of the regulations, rather
than in a separate Federal Register notice. By not being part of the
regulations themselves, commenters felt that the guidelines would be
more easily overlooked or forgotten about in future years.
Response. These issues were carefully considered by the Department
in developing the proposed rule. The rule stated that the use of the
underwriting guidelines proposed at Sec. 570.209(a) and Sec. 570.482(e)
is not mandatory. To further demonstrate this point, the specific
elements of the underwriting guidelines were not included within the
text of the proposed rule itself. Instead, they were proposed to be
published in a concurrent but separate Federal Register notice.
Outweighing the conmmenters' concerns is the fact that, while Congress
directed that the guidelines be published by regulation, the use of the
underwriting guidelines is not mandatory. To publish non-binding
guidance within a set of otherwise binding regulations would be
contradictory and confusing. In disseminating information on the final
regulations, the Department will take steps to include the guidelines
along with the final regulations, to help ensure that the Federal
Register notice does not get overlooked.
Issue. Three widely divergent comments were received regarding the
applicability of the underwriting guidelines to microenterprise and
small business assistance programs. One commenter argued that
``appropriate determinations'' should not be required on a loan-by-loan
basis for microenterprise activities, but could be addressed by overall
program design. Another argued that the underwriting guidelines should
apply to microenterprise assistance activities, so that communities
will have a stronger regulatory framework upon which to develop their
own guidelines for evaluating microenterprise loans. A third commenter
stated that small businesses which do not qualify as microenterprises
should be given some relief from the underwriting criteria and
financial documentation requirements.
Response. The 1992 Act specifies that HUD is to develop guidelines
for evaluating and selecting economic development activities funded
under sections 105(a) (14), (15) and (17) of the Act. Microenterprise
assistance activities were made separately eligible under the new
Sec. 105(a)(23) of the 1992 Act, and thus were not subjected to the
underwriting guidelines by Congress. The Department feels it is
inappropriate to extend coverage of the underwriting guidelines to
programs which provide assistance exclusively to microenterprises and
which are eligible under Sec. 105(a)(23). Grantees may
[[Page 1936]] develop their own underwriting guidelines for the
evaluation of microenterprise assistance programs. However, if a
grantee designs a program to provide assistance to both
microenterprises and other small businesses, the public benefit
standards and underwriting guidelines apply to the entire program, and
grantees will be expected to evaluate each instance of assistance
individually. Regarding the third comment, both the proposed and the
final regulations state that different levels of review and financial
documentation are appropriate for different sizes of projects and
businesses; grantees are encouraged to develop guidelines which take
into consideration the size of the business being assisted.
From the first of these comments, as well as from several comments
addressed elsewhere in this preamble, it is clear that the relationship
between the financial guidelines, the public benefit standards and the
``appropriate determination'' requirements (which the Department has
heretofore relied on) is not understood. In the 1987 ``Stokvis Memo''
and in the 1992 ``Kondratas Memo'', the Department outlined its policy
for implementing the statutory requirement that assistance to private
for-profit entities must be ``appropriate to carry out an economic
development project''. The Department believes that the new
underwriting guidelines and public benefit standards, taken together,
effectively comprise a methodology for determining that such assistance
is appropriate, and supplant the previously-required ``appropriate
determinations''.
It is important to note that the financial and public benefit
standards cover a wider range of activities than did the ``appropriate
determinations'', including all economic development activities funded
under sections 105(a) (14) and (15) of the Act. Grantees are encouraged
to develop guidelines to cover the evaluation and selection of other
types of economic development activities, beyond those statutorily
required. However, HUD will not evaluate or enforce locally-developed
guidelines covering economic development activities other than those
described in the regulations.
Issue. Three commenters expressed apprehension about a statement
contained in the preamble to the proposed regulations. The Department
noted that, in cases where an activity receiving CDBG financial
assistance fails to meet other applicable program requirements, such as
the public benefit standards or the national objective requirements,
HUD will consider the extent to which the recipient conducted prudent
underwriting in determining appropriate sanctions to be imposed on the
recipient for such noncompliance. Commenters questioned the consistency
of this statement with statutory language, felt this represented a
``gotcha'' mentality by HUD, and opened the door to HUD ``second-
guessing'' grantees' underwriting decisions.
Response. Commenters are correct in noting that the Department is
prohibited from basing a determination of project ineligibility on the
failure of a project to meet the objectives of the underwriting
guidelines. The Department will not monitor grantees' projects for
compliance with HUD's underwriting guidelines. The proposed
underwriting guidelines also state, however, that the Department
expects that grantees will engage in some form of underwriting of
projects, regardless of whether or not a grantee adopts HUD's
guidelines. The intent of the preamble statement was not to suggest
that HUD would ``second-guess'' local underwriting guidelines or
decisions about specific projects pursuant to them. When the Department
discovers cases of noncompliance with other program requirements (such
as national objectives or eligibility), it has flexibility to determine
the appropriate action to resolve the noncompliance. In cases of
noncompliance with other program requirements, the Department reserves
the right to examine whether the grantee conducted any underwriting on
the activity in question. If a grantee performed no underwriting
whatsoever (or purely perfunctory underwriting) on a project that
fails, the Department may look to see whether even rudimentary
underwriting would have disclosed to the grantee that the project was
likely to fall into noncompliance. Similarly, the Department will also
consider whether a grantee's underwriting disclosed that a project was
likely to fail, but the grantee chose to fund the project anyway for
reasons unrelated to underwriting decisions.
Issue. One HUD staff person inquired about the relationship between
the public benefit standards and the underwriting guidelines. The
commenter asked what HUD would do in a case where a grantee followed
established underwriting guidelines, yet knowingly chose to fund a
project which exceeded the public benefit standards (particularly the
individual activity standards).
Response. Having complied with a grantee's underwriting standards
would not recuse this project from failure to meet the regulatory
requirements for public benefit. In such a situation, the Department
may still consider the extent to which underwriting was performed in
assessing what corrective action is appropriate to resolve the
noncompliance.
Issue. One correspondent requested clarification or examples of
what is meant by the statement that guidelines also apply to
``activities carried out under the authority of Sec. 570.204 that would
otherwise be eligible under Sec. 570.203.''
Response. The Department's position is, and has been, that all
activities involving assistance to a for-profit business are subject to
the same requirements (including the underwriting guidelines, the
public benefit standards, and the previously- required ``appropriate
determinations''). Provision of CDBG assistance to a for-profit
business through a non-profit subrecipient does not exempt such an
activity from the underwriting guidelines or public benefit standards.
In the final regulations, this principle is clarified and illustrated
with an example.
Issue. Three commenters raised questions about the treatment of
non-financial or indirect assistance to businesses in the underwriting
guidelines. Two commenters felt that by not specifically addressing the
level of underwriting documentation needed for technical assistance
activities, the proposed regulations imply that the same degree of
analysis is required for technical assistance to a business as for
direct financial assistance. Two commenters also urged the department
to accept yearly aggregation of technical assistance activities for
demonstrating compliance with national objectives.
Response. The Department concurs with the comments regarding
technical assistance activities. The underwriting guidelines published
today specifically mention that different levels of underwriting
documentation may be appropriate for technical assistance activities,
given the nature and dollar value of assistance being provided to
businesses. The Department has also added a provision to the national
objectives requirements for low- and moderate-income benefit, to allow
job creation/retention to be aggregated for technical assistance
activities.
Certain indirect forms of assistance to business, such as land
acquisition or certain public improvement projects, are not statutorily
subject to the underwriting guidelines. The Department believes that,
while not mandatory, grantees should evaluate all forms of assistance
to businesses, to ensure that the project represents an appropriate use
of the grantee's funds. Grantees are encouraged to develop
[[Page 1937]] underwriting guidelines which include other economic
development activities beyond those subject to the regulations.
Issue. Several comments were received on the wording of several of
the objectives in the guidelines. These comments generally spring from
the commenters' professional opinions on the desirable design features
or outcomes of individual programs.
Response. Because the underwriting guidelines are not mandatory,
the Department has chosen not to adopt most of these suggestions.
Commenters are encouraged to incorporate their ideas into their local
guidelines.

Public Benefit Standards

HUD heard from 20 different commenters on the public benefit
standards (and how they would be applied) in the proposed regulations:
3 local governments, 2 states, 8 national associations, 2 development
organizations, one citizen and 4 HUD staff. Comments on public benefit
fell into four categories of concern: the overall approach and
terminology used; the individual activity standards; activities
providing insufficient public benefit; and the aggregate standards.
While numerous questions and concerns were raised, individual
commenters also expressed general support for various aspects of the
proposed approach to public benefit: the concept of aggregating public
benefit; the flexibility provided by multiple approaches to measuring
public benefit; and the concept of allowing certain categories of
activities to be excluded from the aggregate dollar standards.
It was also very clear that many commenters did not understand the
relationship among the different public benefit standards. Confusion
was also expressed about the meaning of various terms used in the
proposed regulations, which apparently added to confusion over the
relationships among the standards. To overcome this confusion, the
Department has substantially rewritten and reorganized the final
regulations sections on public benefit.

Overall Approach and Terminology

Issue. Three different commenters asked for clarification of
various terms such as ``tests'', ``criteria'', ``portfolio'' and
``obligated''. One asked what constituted an ``activity'' for purposes
of aggregation: an individual loan? All activity in one particular loan
program run by a grantee? Would a grantee with 10 different programs
subject to the public benefit standards develop 10 aggregate numbers,
or one? Another asked for confirmation that the public benefit
measurement period differs from the time period in which job creation/
retention is measured for national objectives documentation.
Response. In the final regulation, the Department has attempted to
use more precise wording. The term ``obligated'' here has the same
meaning as it does elsewhere in the CDBG program--a formal commitment
of funds to fund a specific activity, such as a signed contract with a
business, or written notification of loan approval. The term ``test''
has been replaced with ``standard''; each numerical measure by which
activities are judged (individually or in aggregate) is a standard. Use
of the term ``portfolio'' has been avoided in discussing the aggregate
standards. Use of the term ``criteria'' is limited to describing the
``important national interests'' activities which may be excluded from
the aggregate standards.
The comment regarding the measurement period for public benefit vs.
national objectives is correct. For most covered activities designed to
create/retain jobs, each provision of assistance to a business is
judged separately for whether it meets a national objective; each
business is discretely tracked for job creation/retention until the
business has fulfilled its jobs commitment. In contrast, public benefit
for any given business is judged at the time assistance is first
obligated to the business; the levels of public benefit determined at
the time funds are obligated are then aggregated for all instances of
assistance provided by a grantee through all covered activities. (The
period of time over which activities are aggregated varies among the
Entitlement, State, Insular and HUD-Administered CDBG programs.) Thus,
for any given business, job creation/retention is primarily measured
prospectively for public benefit and retrospectively for national
objectives purposes. (However, this explanation does not apply
universally; as the regulations note, certain types of activities may
be aggregated differently. In addition, grantees are to keep
comparative documentation on the projected vs. actual public benefit
from projects.)
Issue. A number of commenters voiced various objections to the
overall approach to public benefit: the proposed standards are
arbitrary and simplistic, and invite ``second-guessing'' of projects by
HUD; more study is needed in this area before specific standards are
proposed; the standards focus too much on the cost per job and assume
that more jobs per CDBG dollar is a more important outcome than job
quality; the standards ignore present or future values of assistance
provided; the standards focus too much on individual activities,
ignoring overall program outcomes; the standards focus too much on
aggregate benefits, ignoring individual activities.
Response. As discussed in the preamble to the proposed regulations,
the Department considered all of these issues in developing the
proposed public benefit standards. More sophisticated measurement
systems involve greater complexity, and may increase the documentation
burden on grantees and/or reduce flexibility. The Department strives to
effect a system which is flexible enough to encompass the great variety
of individual programs and individual activities which exist across the
CDBG program, and yet ensures at least some modicum of public benefit
will be obtained from any given activity. The Department has made
revisions to the public benefit standards in response to comments, but
has chosen not to radically change the overall approach.
Issue. Two commenters (including one state) suggested that each
community (or the state) be allowed to establish its own public benefit
standards; HUD could then monitor communities or states for compliance
with their standards.
Response. The Department believes these suggestions are
inconsistent with the statute. The 1992 Act specified that HUD is to
develop, by regulation, guidelines to ensure that public benefit is
appropriate relative to the amount of CDBG assistance provided. The
commenters' approach could increase, not decrease, grantee complaints
about HUD ``second guessing'' local decisions.

Individual Activity Standards

Issue. Five commenters opined that the proposed $100,000-per-job
individual activity standard is much too high to ensure reasonable
public benefit for any given activity; various figures between $12,000
and $50,000 were suggested as replacements. On the other hand, one
commenter expressed concern that the $100,000 standard could preclude
use of CDBG funds for massive real estate redevelopment projects or
capital-intensive industrial projects; other public benefits from such
projects may well justify the expenditure of CDBG funds even when the
cost per job is high.
Response. After weighing these arguments, the Department has
decided to lower the individual activity per-job standard to $50,000.
This should still provide flexibility to undertake vitally important
projects with high capital costs per job created or retained;
[[Page 1938]] grantees may request a waiver of regulations for projects
which would exceed this level. The ``CDBG cost per job'' and the ``CDBG
cost per low- and moderate-income person served'' standards are
designed to establish absolute upper limits for what HUD would consider
to be reasonable on an individual project basis. Grantees are free to
set lower per-job maximums for their own projects, if they wish.
Another example of high-cost projects which the Department has
become aware of is the removal of environmental contaminants as part of
a redevelopment project. The use of CDBG funds for such ``brownfields
remediation'' activities is of growing interest among grantees.
Projects of this nature can present high costs relative to the amount
of public benefit as defined in these regulations. However, grantees
may have additional flexibility in structuring the use of CDBG funds to
treat environmental conditions. For example, publicly-owned land may be
cleaned up before title is transferred to a private owner. In this way,
the environmental remediation activity would not be subject to the
public benefit standards.
Issue. Two commenters opined that the proposed $1,000 per area-
resident standard is similarly too high to ensure reasonable public
benefit; one recommended $50 instead.
Response. The Department has decided to leave the per-area-resident
standard as proposed. A lower figure could hinder economic development
activities in small communities or sparsely-po

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-32151. Public record. Not legal advice.