Multifamily Housing Mortgage and Housing Assistance Restructuring Program (Mark-to-Market) and Renewal of Expiring Section 8 Project- Based Assistance Contracts

SUMMARY: This interim rule implements recently-enacted legislation that

created a Mark-to-Market Program through which section 8 rents for

multifamily projects with HUD-insured or HUD-held mortgages will be

reduced. The purpose of the program is to preserve low-income rental

housing affordability while reducing the long-term costs of Federal

rental assistance, including project-based assistance, and minimizing

the adverse effect on the FHA insurance funds. The Mark-to-Market

Program will be implemented through Mortgage Restructuring and Rental

Assistance Sufficiency Plans to be developed for individual projects by

Participating Administrative Entities selected by HUD. The interim rule

also implements legislation for renewal of section 8 project-based

assistance contracts for projects outside of the Mark-to-Market

Program.

DATES: Effective Date: October 13, 1998.

Comment Due Date: October 26, 1998.

ADDRESSES: Interested persons are invited to submit comments regarding

this interim rule to the Office of the General Counsel, Rules Docket

Clerk, Room 10276, Department of Housing and Urban Development, 451

Seventh Street, S.W., Washington, DC 20410. Communications should refer

to the above docket number and title. A copy of each communication

submitted will be available for public inspection and copying during

regular business hours (7:30 a.m.-5:30 p.m. eastern time) at the above

address. HUD will not accept comments sent by facsimile (FAX). (In

addition, see the Paperwork Reduction Act heading under the Findings

and Certifications section of this preamble regarding submission of

comments on the information collection burden.) See SUPPLEMENTARY

INFORMATION section for electronic access and filing information.

FOR FURTHER INFORMATION CONTACT: Dan Sullivan, Department of Housing

and Urban Development, 451 7th St., Washington DC 20410. Telephone:

202-708-0547. (This is not a toll-free number.) For hearing- and

speech-impaired persons, this number may be accessed via TTY by calling

the Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutes

The Multifamily Assisted Housing Reform and Affordability Act of

1997, title V of Pub. L. 105-65 (approved October 27, 1997), 42 U.S.C.

1437f note (MAHRA), was enacted to reduce the cost of Federal housing

assistance, enhance HUD's administration of such assistance, and to

ensure the continued affordability of units in certain multifamily

housing projects. The projects involved are projects with: (1) HUD-

insured or HUD-held mortgages; and (2) contracts for project-based

rental assistance from HUD, primarily through the section 8 program,

for which the average rents for assisted units exceed the rent of

comparable properties. MAHRA authorizes a new Mark-to-Market Program

designed to preserve low-income rental housing affordability while

reducing the long-term costs of Federal rental assistance, including

project-based assistance from HUD. This will be accomplished by (1)

reducing project rents to no more than comparable market rents (with

certain exceptions discussed below), (2) restructuring the HUD-insured

or HUD-held financing so that the monthly payments on the first

mortgage can be paid from the reduced rental levels, (3) performing any

needed rehabilitation of the project, and (4) ensuring competent

management of the project. The project will be subject to long-term use

affordability restrictions.

MAHRA is intended to provide a long-term solution to the rapidly

growing cost to the Federal Government of assisting affordable rental

housing. Over 800,000 housing units in approximately 8,500 multifamily

projects have been financed with FHA-insured mortgages and supported by

project-based section 8 housing assistance payment (HAP) contracts. In

many cases, these HAP contracts currently provide for rents for

assisted units which substantially exceed the rents for comparable

unassisted units in the local market. Starting in Fiscal Year 1996,

those contracts began to expire, and Congress and the Administration

have been providing one-year extensions of expiring contracts. While

annual HAP contract extensions for these projects maintain an important

housing resource, they come at great expense. Every year more contracts

expired, compounding the cost of annual extensions. In 1996, HUD

estimated that in 10 years the annual cost of renewing the contracts on

current terms would rise to approximately $7 billion, or one-third of

HUD's budget. If the section 8 assistance were simply reduced or

eliminated, there would be an increased likelihood that these projects

would be unable to meet their financial obligations including operating

expenses, current and future capital needs, and debt service payments

on FHA-insured or HUD-held mortgages.

To begin to address this growing problem, Congress authorized

demonstration programs. The initial demonstration (the 1996

demonstration) was authorized by section 210 of the Departments of

Veterans Affairs and Housing and Urban Development, and Independent

Agencies Appropriations Act, 1996, as a demonstration for Fiscal Years

1996 and 1997 for 15,000 units in projects with insured mortgages and

section 8 contracts with rents in excess of fair market rents. Section

210 authorized HUD to designate third parties to act on its behalf in

connection with the demonstration. The Department published notices

regarding the 1996 demonstration at 61 FR 34664 (July 2, 1996) and 61

FR 28757 (July 25, 1996).

Congress repealed the 1996 demonstration authority and replaced it

with the demonstration authorized by sections 211 and 212 of the

Departments of Veterans Affairs and Housing and Urban Development, and

Independent Agencies Appropriations Act, 1997 (the 1997 demonstration)

for projects with insured mortgages and project-based assistance

contracts expiring in Fiscal Year 1997 with aggregate rents in excess

of 120 percent of fair market rents (see HUD's Guidelines published at

62 FR 3566, January 23, 1997). The 1997 demonstration was limited to

50,000 units. HUD relied on third-party designees to perform many

important functions.

In section 522(b) of the Departments of Veterans Affairs and

Housing and Urban Development, and Independent Agencies Appropriations

Act, 1998, Congress extended the 1997 demonstration, without any volume

limitation, to projects with contracts expiring in Fiscal Year 1998.

The new 1998 demonstration is generally the same as the 1997

demonstration, with certain modifications, and is a transitional

program to permit time for HUD to prepare this rule and take other

necessary steps to implement a Mark-to-Market Program for projects with

above-

[[Page 48927]]

market rents and contracts expiring in Fiscal Year 1999 and later (see

HUD guidelines at 63 FR 36130, July 1, 1998).

MAHRA builds on the demonstration program with similar objectives

and many similar provisions, but also some significant differences.

Organizationally, MAHRA establishes a new Office of Multifamily Housing

Assistance Restructuring (OMHAR) within HUD to develop and actively

manage, administer, and oversee the Mark-to-Market Program through a

decentralized structure of Participating Administrative Entities

(PAEs). OMHAR will establish the framework of the Program through

regulations and will manage the program by selecting and monitoring

Participating Administrative Entities (PAEs). In recognition of limited

HUD resources, MAHRA gives PAEs the role of negotiating with the owners

of individual projects and developing the Mortgage Restructuring and

Rental Sufficiency Plans (``Restructuring Plans'') that will establish

the future responsibilities of the owner, the PAE and HUD for projects

that are marked-to-market. PAEs will be State housing finance agencies

or local housing agencies, or nonprofit or for-profit entities in

partnership with public entities. OMHAR may itself act as the PAE with

respect to selected projects. OMHAR will prescribe the specific

responsibilities of each PAE in Portfolio Restructuring Agreements to

be negotiated.

MAHRA also contains substantive differences from the previous

demonstrations. For example, it includes projects with HUD-held

mortgages in addition to HUD-insured mortgages and requires (as does

the 1998 demonstration) a second mortgage with deferred payment from

net cash flow after accounting for all project expenses.

Section 524 of MAHRA authorizes renewal of section 8 project-based

assistance contracts for projects without Restructuring Plans under the

Mark-to-Market Program, including renewals that are not eligible for

Plans and those for which the owner do not request Plans. Renewals must

be at rents not exceeding comparable market rents except for certain

exception projects.

B. Current Implementation of MAHRA

While determining the best way to implement MAHRA, HUD sought ideas

from a wide variety of non-proprietary, nationally-based organizations

with diverse viewpoints and interests. HUD received many ``concept

papers'' from these organizations presenting many different

perspectives of which HUD needed to be aware. These concept papers do

not represent HUD policy or any official advisory committee, but were

useful in helping to focus HUD's attention on the most important issues

to be decided in development of the Mark-to-Market Program. The concept

papers are available to the public on the Mark-to-Market Internet web

site identified below.

In February 1998, after review of the concept papers, HUD officials

attended a series of meeting where they heard the views from members of

a working group representing the organizations that had developed the

concept papers. Although none of this interim rule is the product of

the working group members, the views expressed to HUD were of great

benefit in ensuring that HUD was exposed to the widest possible variety

of viewpoints on issues and concerns of those to be affected by the

Mark-to-Market Program. Notes from these working group sessions are

also available on the web site.

HUD is drafting a Program Manual to give program participants

operational guidance to supplement this interim rule and the final

rule. The Manual will be made publicly available as soon as it is

completed. This interim rule will take effect 30 days after publication

and commenters should not delay submitting comments in anticipation of

any additional material that may be in the Manual.

HUD has taken two other steps toward preliminary implementation of

the Mark-to-Market Program. As part of HUD's ``SuperNOFA'' for Economic

Development and Empowerment Program published on April 30, 1998 in the

Federal Register (63 FR 23876), HUD announced the availability of

funding for Intermediary Technical Assistance Grants (ITAG) and

Outreach and Training Grants (OTAG). These programs will assist tenant

and local community groups, State and local governments, and other

groups with funding for technical assistance so they can participate

meaningfully in the Mark-to-Market Program. State-or community-wide

nonprofit or public entity intermediaries to distribute these funds are

selected competitively.

HUD has also issued a Request for Qualifications (RFQ) for eligible

entities interested in being Participating Administrative Entities, 63

FR 44102, August 17, 1998. When this interim rule takes effect, HUD

expects to have made substantial progress toward having a PAE

infrastructure in place and will begin assigning assets (eligible

projects with expiring section 8 contracts) as soon as each PAE

executes its Project Restructuring Agreement (PRA) with HUD. HUD will

provide training for PAEs.

Beginning in October 1998, HUD also expects to begin extending, on

an interim basis as provided in the rule, contracts expiring in Fiscal

Year 1999 for eligible projects pending either development of requested

Restructuring Plans or full review of requests for renewal under

section 524 of MAHRA.

On July 21, 1998, the Treasury Department issued Revenue Ruling 98-

34 clarifying the tax impact of the mortgage restructuring required for

the Mark-to-Market Program. This ruling (published in 1998-31 I.R.B. at

page 12, August 3, 1998) reduces uncertainty and is expected to

mitigate many concerns of owners who are eligible to participate in the

Mark-to-Market Program.

MAHRA provides that before publication of final regulations HUD is

to conduct at least three public forums at which organizations

representing various groups identified in MAHRA may express views

concerning HUD's proposed disposition of recommendations from those

groups. The Department expects to conduct these forums within several

weeks after publication of this interim rule, with tentative locations

in New York, Chicago, and San Francisco. The exact location and date,

and an information contact, will be posted on the Mark-to-Market web

site (see below).

HUD will make additional information on the Mark-to-Market Program

available on HUD's Internet web site, currently at http://www.hud.gov/

fha/mfh/pre/premenu.html. Among other information, HUD will provide a

list of addresses of HUD HUBs that have jurisdiction over the Program,

a list of PAEs that have been selected, and a list of potentially-

eligible projects.

MAHRA directs HUD to issue this interim rule, which (in addition to

MAHRA) will serve as the legal authority for the Mark-to-Market Program

and for extension of expiring section 8 project-based contracts until

OMHAR issues the required final rule. HUD will not process contract

renewals under this rule until October 1, 1998. HUD intends to issue

one or more Notices with additional information on contract renewal

procedures. OMHAR will develop and issue a final rule as required by

MAHRA as soon as feasible after it has considered the public comments

to be submitted regarding this interim rule. The Program will operate

based on this interim rule until the final rule takes effect.

[[Page 48928]]

II. Content of Part 401

Two new parts are added to title 24 of the Code of Federal

Regulations. Part 401 covers the new Mark-to-Market Program including

renewals of section 8 contracts under the Program. Part 401 also covers

the determination of whether an eligible project will be given a

contract renewal without a Restructuring Plan. Part 402 covers section

8 contract renewals without a Restructuring Plan (i.e., outside of the

Mark-to-Market Program).

Part 401 is divided into the following subparts:

Subpart A--General Provisions; Eligibility

Subpart B--Participating Administrative Entity (PAE) and Portfolio

Restructuring Agreement (PRA)

Subpart C--Restructuring Plan

Subpart D--Implementation of the Restructuring Plan after Closing

Subpart E--Section 8 Requirements for Restructured Projects

Subpart F--Owner Dispute of Rejection and Administrative Appeal

Specific sections in these subparts are discussed below under the

section headings.

Subpart A--General Provisions; Eligibility

Section 401.1 What is the Purpose of Part 401?

Section 401.1 explains that part 401 contains the regulations

implementing the Mark-to-Market legislation, including the renewal of

section 8 assistance for restructured projects. The section references

sections 511(b) and 512(2) of MAHRA which detail the purpose and scope

of the Mark-to-Market Program. In general, the Program is intended to

enhance HUD's administration and oversight of projects with section 8

assisted housing through delegation of certain functions to State

housing finance agencies and local housing agencies and other nonprofit

and for-entities as Participating Administrative Entities (PAEs).

Pursuant to Portfolio Restructuring Agreements (PRAs), PAEs will

develop Restructuring Plans for assigned projects to ensure continued

availability of affordable multifamily housing through reduction of

rents, restructuring of mortgage obligations if required, needed

rehabilitation, and assurance of competent management, with the

objective of reducing the long-term costs to the Government for such

housing and minimizing the adverse effect on the FHA insurance funds.

The Program includes projects with HUD-insured and HUD-held mortgages,

HUD-provided project-based rental assistance contracts that expire on

October 1, 1998 or later, and rents that are above comparable market

rents (eligible projects) subject to exceptions described in

Sec. 401.100.

Section 401.2 What Special Definitions Apply to This Part?

Section 401.2 identifies the statute (MAHRA) which created the

Mark-to-Market program. It also identifies the terms that are defined

in MAHRA and used in the rule, and defines the following additional

terms that are used in the rule: affiliate, applicable Federal rate,

community-based nonprofit organization, comparable market rents,

disabled family, elderly family, eligible project, HUD, NHA, owner,

PAE, PCA, PRA, priority purchaser, Rental Assistance Assessment Plan,

Restructured Rent, Restructuring Plan, section 541(b) claim, section 8,

tenant organization, and unit of local government. In the definition of

HUD, it is explained that HUD means the Director of OMHAR for matters

that MAHRA specifically assigns to OMHAR. Otherwise, HUD means the

Department of Housing and Urban Development generally, acting through

the Secretary and other responsible organizations and officials of the

Department. FHA mortgage insurance matters are the responsibility of

the Assistant Secretary for Housing-Federal Housing Commissioner, who

is also responsible for most section 8 project-based assistance. The

Assistant Secretary for Public and Indian Housing is responsible for

project-based moderate rehabilitation contracts and for tenant-based

assistance (vouchers and certificates). HUD's new Real Estate

Assessment Center and Enforcement Center are also likely to have a role

in carrying out some HUD functions under the rule. The rule does not

attempt to sort out these responsibilities within HUD, which are

covered by internal delegations of authority.

Section 401.99 What Actions Must an Owner Take to Request a Section 8

Contract Renewal?

Section 401.99 explains three procedures to be followed by owners

who request renewals of section 8 project-based assistance contracts.

If the owner of an eligible project requests a Restructuring Plan the

owner must, at least 3 months before the project-based assistance

contract expires (or as soon as practicable if the contract will expire

less than 3 months after the effective date of this interim rule),

certify to HUD that, to the best of the owner's knowledge, project

rents exceed comparable market rents and neither the owner nor any

affiliate is suspended or debarred (or that the owner proposes a

voluntary sale of the project). HUD will assign the project to a PAE

which will contact the owner. The owner will submit an application to

the PAE with the information necessary to enable the PAE to begin

development of a Restructuring Plan. The owner must also contact the

mortgagee to determine the mortgagee's willingness to consider a

modification of the first mortgage as part of the Restructuring Plan.

Both the owner and the mortgagee are expected to cooperate with the PAE

in the development of the Plan, as provided in Sec. 401.402. The PAE

will perform an underwriting analysis. After development of a

Restructuring Plan and mutual execution of a Restructuring Commitment,

the PAE will coordinate the closing using standard form documents

(which will be made available to the owner for review at the beginning

of the restructuring process.)

If the owner of an eligible project does not request a

Restructuring Plan, the owner must submit to HUD the certification

described above in the same time frame with the following additional

items: a comparable market rent analysis indicating that the rents are

above comparable market rents (using the approach described in

Sec. 401.410); the prior fiscal year's annual audited financial

statement for the project; and the owner's evaluation of the physical

condition of the project. The request will be considered in accordance

with Sec. 401.601. Finally, because part 401 is limited to projects

eligible for a Restructuring Plan, this section refers the owner to

Sec. 402.5 if the project is not eligible for restructuring but the

owner wants project-based assistance renewed.

Section 401.100 Which Projects are Eligible for a Restructuring Plan

Under This Part?

Section 401.100 incorporates the statutory requirements in section

512(2) of MAHRA for an eligible project. The section explains that

project rent exceeds the rent of comparable properties, as required by

section 512(2)(A), if the gross potential rent revenue (i.e., at 100

percent occupancy) for the project-based assisted units in the project

at current gross rents exceeds the gross potential rent for those units

(at 100 percent occupancy) using comparable market rents.

Section 401.100 excludes projects identified in section 514(h) of

MAHRA: (1) projects with primary financing or mortgage insurance from

State or local governments or their agencies or instrumentalities; (2)

projects for the elderly financed under the HUD section 202 program or

the Department of

[[Page 48929]]

Agriculture's section 515 program; or (3) projects with section 8

moderate rehabilitation contracts for single room occupancy dwellings.

Because of the express prohibition in section 514(h)(1) of MAHRA,

under current law the interim rule does not permit a Restructuring Plan

for any project with State or local government primary financing. HUD

is aware that Congress is considering amendment of section 514(h) to

exclude only those projects with State or local primary financing that

are identified in section 524(a)(2)(B) of MAHRA. If the law is so

amended, the effect of that change would be automatically reflected in

this section without the need for revision.

Section 401.101 Which Owners Are Ineligible for a Restructuring Plan?

Section 401.101 states that an owner's request for a Restructuring

Plan will not be considered if the owner or an affiliate is debarred or

suspended, unless a sale or transfer is proposed. (Section 401.480

discusses project sales or transfers.) The owner may follow the dispute

and administrative appeal procedures in subpart F. The owner may

dispute whether there is debarment or suspension, under procedures set

forth in Sec. 401.645, but may not reopen the question of whether a

debarment or suspension was properly imposed. The owner's request may

also be rejected later as provided in Sec. 401.403.

Subpart B--Participating Administrative Entity (PAE) and Portfolio

Restructuring Agreement (PRA)

Except for situations when HUD will itself undertake the functions

of the PAE for a project due to lack of any other qualified PAE, HUD

will select a PAE and enter into a Portfolio Restructuring Agreement

with the PAE. The PAE obtains the necessary information about the

project that will enable it to develop a viable Restructuring Plan for

ensuring that the goals of MAHRA are met for a project, and becomes

responsible for ensuring implementation of the Plan after HUD approval.

The PAE maintains communications with all affected parties including

the owner, tenants, the community, and HUD. The specific role of each

PAE will be detailed in its PRA with HUD. HUD's Program Manual will

contain detailed guidance on the information collection process,

including the information needed and the respective roles of the PAE,

owner, mortgagee/servicer and others.

Section 401.200 Who May Be a PAE?

Section 512(10) of MAHRA permits a public agency (including a State

housing finance agency or a local housing agency), a nonprofit

organization, or a for-profit entity, to act as a PAE. The PAE may not

have any outstanding violations of civil rights laws, determined in

accordance with criteria in use by HUD. Section 513(b)(7)(A) of MAHRA

requires that any for-profit entity serving as a PAE do so in

partnership with a public entity, which may include HUD. Section

513(b)(6)(B) of MAHRA requires the prior approval of HUD for any

delegation or transfer of responsibilities by a State housing finance

agency or a local housing agency. Section 401.200 of the rule includes

all of these provisions, with the additional requirements that a

nonprofit PAE also partner with a public purpose entity and that all

delegations be approved by HUD in the PRA. This section also clarifies

that a partnership must meet all legal requirements for a partnership.

Section 401.201 How Does HUD Select PAEs?

Section 401.201 explains that HUD will select PAEs in accordance

with the statutory selection criteria and additional selection criteria

established by HUD. The selection method will be determined by HUD, and

may be through a request for qualifications (RFQ). As discussed in Part

I of this Supplementary Information, HUD's initial selections will be

through an RFQ.

The rule gives a one-time priority to qualified State housing

finance agencies and local housing agencies by giving them exclusive

consideration for an initial period after HUD has received responses to

the initial RFQ. During the initial period, HUD will consider other

entities as PAEs only to the extent that HUD has been unable to

identify qualified State housing finance agencies or local housing

agencies who are interested in serving as PAEs, or that projects have

not been assigned to a qualified agency. If more than one qualified

agency responding to the initial RFQ expresses interest for projects in

the same jurisdiction, HUD will provide the responding agencies an

opportunity to agree on an allocation of responsibility between

themselves before HUD will make a selection in accordance with section

513(b)(2) of MAHRA. If no PAE is selected for a project in the Mark-to-

Market program due to lack of qualified interested entities, HUD will

itself serve as PAE.

Section 401.300 What Is a PRA?

In accordance with section 513(a)(2) of MAHRA, Sec. 401.300

describes the PRA as an agreement between HUD and the PAE to define

their respective rights and responsibilities in connection with

development and implementation of Restructuring Plans. The PRA must

contain the matters required by section 513(a)(2) of MAHRA. The

following sections in this subpart B explain some of the statutory

requirements for a PRA and other requirements of HUD.

Section 401.301 Business Arrangements

Section 401.301 lists some of the basic elements regarding business

arrangements under the PRA. The PRA must specify: (a) the

responsibilities of each partner of the PAE in carrying out the PRA;

(b) the resources each partner will provide to accomplish its

responsibilities; and (c) all compensation to each partner, direct or

indirect.

Section 401.302 PRA Administrative Requirements

Section 513(a)(2)(A) of MAHRA characterizes the PRA as a

``cooperative agreement''. Generally, a cooperative agreement is used

when

(1) The principal purpose of the relationship is to transfer a

thing of value to the State, local government, or other recipient to

carry out a public purpose of support or stimulation authorized by a

law of the United States instead of acquiring (by purchase, lease, or

barter) property or services for the direct benefit or use of the

United States Government; and

(2) Substantial involvement is expected between the executive

agency and the State, local government, or other recipient when

carrying out the activity contemplated in the agreement.

(31 U.S.C. 6306.) HUD has concluded that Congress did not intend

the PRA to be a ``cooperative agreement'' within this strict definition

so that certain legal provisions that ordinarily apply to such

cooperative agreements are not directly applicable to PRAs. The primary

purpose of the PAE lies not in using public funds to carry out the

purposes of MAHRA, but in enlisting the resources and expertise that

Congress felt were lacking at HUD. At the same time, the PAE is not a

mere provider of services to HUD. It is performing an independent,

statutorily-defined role. It appears that Congress used the term

``cooperative agreement'' in a general sense to emphasize that HUD was

not simply procuring the services of a PAE, nor making a grant to a

PAE, but that HUD should not otherwise be constrained by the ordinary

consequences of designating a legal instrument as a cooperative

agreement.

[[Page 48930]]

MAHRA itself is very specific on the purpose and contents of a

Portfolio Restructuring Agreement and the unique relationship that it

creates. Thus, HUD has concluded that it would be inappropriate to

subject a PRA to 24 CFR parts 84 (``Grants and Agreements with

Institutions of Higher Education, Hospitals, and Other Non-profit

Organizations'') and 85 (``Administrative Requirements for Grants and

Cooperative Agreements to State, Local and Federally-Recognized Indian

Tribal Governments''). Similarly, the PRA is not subject to procurement

contract requirements.

All PAEs are subject to recordkeeping and inspection and audit of

records as provided in this section. Reporting requirements for the PAE

will be contained in the PRA.

Section 401.303 PRA Indemnity Provisions for SHFAs and HAs

Section 401.303 implements section 513(a)(2)(G) of MAHRA, which

requires the PRA to provide that HUD indemnify a PAE against lawsuits

and penalties for action taken pursuant to the PRA (except for willful

misconduct or negligence), but only if the PAE is a State housing

finance agency or a local housing agency. HUD interprets the statutory

indemnification as extending only to agencies that are named as the PAE

in the PRA, and not to agencies that may have partnered with another

public or private entity that is named as the PAE. The indemnification

also does not extend to partners of agencies named as PAEs, even if the

partners are agencies that would receive indemnification if named in

the PRA as PAE. Section 401.303 makes clear that HUD's obligation to

indemnify is contingent upon the availability of funds that may legally

be used for this purpose.

Section 401.304 PRA Provisions on PAE Compensation

Section 401.304 provides that the PRA will contain provisions on

compensation to the PAE regarding a base fee and reimbursement of

expenses, and may provide for incentive fees. The function of the PAE

is a unique one for which there is little experience in determining

appropriate fees that will both attract competent entities and result

in cost-effective performance. In the interim rule, HUD is deferring

setting any limits on the actual amount or method of calculation of the

base fee and incentive fee. The RFQ for prospective PAEs asks them to

provide an estimate of the required fee. As a result of reviewing this

information, negotiating the actual fee arrangements for initial PAEs

and refining the precise duties of PAEs in the initial PRA development

process, and considering the information and ideas received through the

public comment process on the interim rule, HUD intends to include in

the final rule more specific provisions on the amount and method of

calculation of the base fee and incentive fee. Fees may be different

for the public body PAEs selected in ``Phase I'' of the RFQ process

than for those selected for ``Phase II''.

Section 401.307 Ongoing Responsibility of PAE

Section 401.307 states that the PRA must provide for ongoing

activities necessary to implement the Restructuring Plan. This may be

accomplished through later amendments once the Plan is developed.

Section 401.309 PRA Term and Termination Provisions; Other Remedies

The PRA will have a term of 1 year, to be renewed for successive

terms of 1 year with the mutual agreement of both parties subsequent to

HUD review of performance. The PRA will provide for final compensation

to the PAE and allocation of existing responsibilities if the PRA is

not renewed. A PRA will be subject to termination by HUD at any time

for cause, with any final compensation for matters performed by the PAE

to that point to be paid by HUD as provided in the PRA, subject to

HUD's right of set-off. If cause for termination exists, HUD may order

an immediate transfer of some or all of the PAE's duties to another PAE

designated by HUD, with a temporary waiver of termination pending

satisfactory completion of an orderly transfer. During the term of a

PRA, or notwithstanding any termination of a PRA, HUD may seek its

actual, direct, and consequential damages from any PAE failure to

comply with its obligations under the PRA. The remedies under

Sec. 401.309 are cumulative and in addition to any other remedies or

rights HUD may have under the terms of the PRA, at law, or otherwise.

Section 401.310 Conflicts of Interest

Section 401.310 addresses conflicts of interest for a PAE and

related persons included in the definition of ``restricted person'': a

management official, controlling party or other party under common

control, or employee, agent or contractor of the PAE performing

services under the PRA. A conflict of interest exists when a PAE or

restricted person either (1) has personal, business, or financial

interests or relationships that would lead a reasonable and

knowledgeable person to question the integrity or impartiality of those

acting for the PAE; or (2) in a lawsuit, is an adverse party either to

HUD or to the owner of a project under the PAE's PRA. In general, HUD

will avoid dealing with a PAE with a conflict of interest. The conflict

may be eliminated by the PAE, or may be waived by HUD. Waiver will be

reserved for situations when HUD's interest in the PAE's participation

outweighs the concern that a reasonable person may question the

integrity of HUD's operations.

This section sets forth procedures for addressing conflict of

interest questions that arise before and after selection of a PAE.

Conflicts of interest after selection may, if left uncorrected, lead to

declaration of default under the PRA and termination, and other

remedies described in Sec. 401.313.

Section 401.311 Standards of Conduct

A PAE and restricted persons are subject to minimum ethical

standards set forth in section 401.311. The standards prohibit matters

such as solicitation by the PAE of items of value from a person with an

interest in the performance of the PAE, improperly using property that

is under the PAE's charge because of the PRA, using its status as PAE

for the benefit of a third party except as contemplated by the PRA, or

making unauthorized commitments on behalf of HUD. Section 401.311 cites

relevant criminal provisions of the U.S. Code.

Section 401.312 Confidentiality of Information

Section 401.312 requires the PAE and restricted persons to protect

avoid misuse of confidential information.

Section 401.313 Consequences of PAE Violations; Finality of HUD

Decision

Section 401.313 makes clear the severe consequences that may follow

from violation by a PAE or restricted persons of Secs. 401.310-.312. As

appropriate, HUD may declare a PAE in default under an existing PRA,

terminate a PRA under the termination-for-cause provision of

Sec. 401.309(b), remove a PAE's eligibility for award of a PRA or to

receive projects for restructuring, become liable for damages to HUD

arising from termination, or exercise any other rights HUD may have. A

HUD decision is final with no further administrative review available.

[[Page 48931]]

Section 401.314 Environmental Review Responsibilities

Section 401.314 states that HUD is legally required to retain any

environmental review responsibilities under 24 CFR part 50, and that

any required environmental review will occur before HUD executes a

Restructuring Commitment (see Sec. 401.405). Without delegating any

decision-making authority to the PAE, HUD may include in the PRA a

provision providing for PAE completion of forms/or and checklists to

assist HUD in complying with its requirements under environmental

regulations.

Subpart C--Restructuring Plan

Section 401.400 Required Elements of a Restructuring Plan

Section 401.400 provides overall guidance on what a Restructuring

Plan must contain. A Restructuring Plan is required for each project

undergoing restructuring under the Mark-to-Market Program. The PAE

develops the Plan. Subpart C provides detailed guidance for major

elements of a Restructuring Plan in addition to those specifically

mentioned in MAHRA.

Section 401.401 Consolidated Plans

Section 401.401 describes the circumstances under which HUD may

consider a Consolidated Restructuring Plan for multiple projects.

Section 401.402 Cooperation with Owner and Qualified Mortgagee in

Restructuring Plan Development

Section 401.402 provides guidance for implementation of the

requirement in section 514(a)(2) of MAHRA for PAE cooperation with the

project owner and qualified mortgagee in development of the

Restructuring Plan. The owner is expected to submit a proposal to the

PAE with the basic elements of a restructuring that the owner finds

acceptable. The owner must actively work with the PAE and other

necessary third parties to develop that restructuring, if acceptable to

the PAE, or a modified or substitute restructuring proposed by the PAE.

If the owner fails to cooperate to the satisfaction of the PAE, and HUD

agrees, the PAE will refuse to continue with development of a

Restructuring Plan. The PAE will ensure that the owner contacts the

qualified mortgagee to obtain project history and to explore

modification of the existing mortgage if feasible. If the qualified

mortgagee does not cooperate in modifying the mortgage, the PAE and the

owner may continue to develop a Plan to restructure the loan using

alternative financing.

Section 401.403 Rejection of a Request for a Restructuring Plan

Because of Actions or Omissions of the Owner or Affiliate or Project

Condition

Section 401.403 implements part of section 516(a) of MAHRA.

(Section 516(a) is also implemented by Secs. 401.101 and 402.7.) Under

Sec. 401.403, the PAE is responsible for a further more complete and

ongoing assessment of owner and project eligibility while a

Restructuring Plan is developed. The PAE must advise HUD, and may elect

not to continue with consideration of the Restructuring Plan or the

closing on the Plan (see Sec. 401.407), if at any time any of the

following conditions exist: (1) the owner or an affiliate is debarred

or suspended; (2) the owner or an affiliate has engaged in material

adverse financial or managerial actions or omissions as described in

section 516(a) of MAHRA, which may include actions that have resulted

in imposition of a Limited Denial of Participation (LDP) or a proposed

debarment under 24 CFR part 25, or outstanding violations of civil

rights laws; or (3) the project does not meet the housing quality

standards in Sec. 401.453. HUD may reject an owner's request for a

Restructuring Plan for any of these reasons.

An ineligible owner may agree to development of a Restructuring

Plan involving sale or transfer of the project. In subpart F, the rule

provides a procedure for owner dispute and administrative review of

rejection under this section.

Section 401.404 Proposed Restructuring Commitment

Section 401.404 requires the PAE to submit a completed

Restructuring Plan and proposed Restructuring Commitment to HUD for its

review and approval before delivering it to the project owner. The

proposed Commitment will incorporate the Restructuring Plan and include

standard terms and the following project-specific information: (1) the

lender, loan amount, interest rate and term of mortgages or any

unsecured financing for the restructuring and rehabilitation, and any

credit enhancement; (2) amount of any payment of a section 541(b) claim

by HUD; (3) type of section 8 assistance and the restructured section 8

rents; (4) any required rehabilitation and the source of the owner

contribution, and escrow arrangements; (5) the use of project accounts

for other than rehabilitation; (6) terms of any sale or transfer of the

project; (7) a schedule of sources and uses of funds and project

account balances; and (8) other conditions to the commitment required

by HUD.

Section 401.405 Restructuring Commitment Review and Approval by HUD

Section 401.405 provides for HUD to approve the Plan as submitted,

require changes as a condition for approval, or reject the Plan. HUD

will inform the PAE of the reasons for rejection. The subpart F dispute

and appeal procedure will apply. At a minimum, HUD review will address

any provisions of the Plan and the proposed Restructuring Commitment

involving the disposition of accounts of the Treasury of the United

States, in according with various provisions of MAHRA that make clear

that HUD retains control of such accounts. HUD review may be either

technical or administrative depending on amount of payment of claim,

rehabilitation cost and any other pertinent provisions of the PRA.

Section 401.406 Execution of Restructuring Commitment

The PAE will deliver to the owner for execution a proposed

Restructuring Commitment as the final element of a HUD-approved

Restructuring Plan. If the owner executes the HUD-approved

Restructuring Commitment, the PAE will prepare for closing under

Sec. 401.407. An owner that does not execute a Restructuring Commitment

has 10 days to appeal the terms of the Restructuring Commitment and

seek a modification under subpart F.

Section 401.407 Closing Conducted by PAE

Section 401.407 provides that the PAE must arrange for the closing

after the owner has executed the Restructuring Commitment. All

necessary legal documents will be executed at the closing, using

standard legal instruments acceptable to HUD with modifications only as

necessary to comply with applicable State or local law or as approved

by HUD. If the project will continue to have a mortgage insured or held

by HUD, the regulatory agreement between HUD and the owner will be

retained and any necessary amendments to reflect the Restructuring Plan

will be executed at closing. HUD's Program Manual will provide detailed

guidance on how a closing should be conducted and how closing documents

should be distributed.

Section 401.408 Affordability and Use Restrictions Required

Section 401.408 implements section 514(e)(6) of MAHRA, which

requires the Restructuring Plan to provide for

[[Page 48932]]

affordability and use restrictions on the project, for a term of at

least 30 years, consistent with the long-term physical and financial

viability and character of the project as affordable housing. These

affordability restrictions will be reflected in recorded covenants (a

Use Agreement) running with the land. The PAE has the discretion to

require restrictions for a longer, but not a shorter, period. The

project must continue to be used for residential use with no reduction

in the number of residential units without HUD approval.

During a period when at least 20 percent of the units in a project

receive project-based assistance, the affordability restrictions

applicable to such assistance will apply. When the Restructuring Plan

provides for continuation of project-based assistance, section 515 of

MAHRA requires HUD (directly or through a PAE) to offer to renew or

extend expiring contracts, subject to availability of appropriated

funds. The owner is required to accept the offers.

At any time when fewer than 20 percent of the units in a project

receive project-based assistance, the Use Agreement will require

conformance to the rent and the tenant income profile used in the Low

Income Housing Tax Credit Program (LIHTC) for any project that is

restructured (i.e., either rents set for 20 percent of the units at 30

percent of 50 percent of median income or for 40 percent of the units

at 30 percent of 60 percent of median income.) Where the LIHTC rent and

income profile is more restrictive than the market rents at the time of

restructuring, the underwriting analysis will take this into account.

The type and size of units that satisfy the affordability requirements

must be comparable to the entire project.

The Use Agreement will specify which interested parties in addition

to HUD and the PAE will have rights of enforcement; they may include

tenants, tenant organizations, and affected units of local government,

but HUD will retain the right to approve amendments to the Use

Agreement without requiring the consent of the other parties with

enforcement rights. The Use Agreement will contain appropriate

financial and other reporting requirements for the owner, as determined

by HUD, to ensure that HUD and the PAE have adequate information to

enforce compliance with the Agreement.

Section 401.410 Standards for Determining Comparable Market Rents

Section 401.410 provides guidance to the PAE for determining

comparable market rents. An owner should also follow this guidance when

making a preliminary determination of eligibility under

Secs. 401.99(a)(1) and 402.6(b). The PAE uses comparable market rents

both for purposes of confirming the eligibility of the project (because

it cannot develop a Restructuring Plan for a project at or below

comparable market rents) and for purposes of determining the initial

rents under a section 8 contract renewal when rents must be reduced to

comparable market rents. The determination of whether rents in a

project are comparable to market rents considers only the rents for

units in the project that receive project-based assistance.

Comparable market rents are defined (based on the definition of

``comparable properties'' in section 512(1) of MAHRA) as the rents

charged for similar multifamily projects in the same market area, where

practicable, that (1) are not receiving project-based assistance (for

this purpose only, the term includes section 202/811 projects for the

elderly and persons with disabilities in addition to the statutory

definition) and (2) are determined by the PAE to be similar to the

project as to neighborhood (including risk of crime), type of location,

access, street appeal, age, property and unit amenities, utilities, and

other characteristics including rent control and others considered

relevant by the PAE (e.g., the impact of affordability restrictions

which could constrain a project's net operating income.) If a project

used as a comparable needs rehabilitation to meet the non-luxury

standard that a Mark-to-Market project must meet after rehabilitation

(see Sec. 401.452), appropriate adjustments should be made. The PAE

must define the market broadly enough to include a reasonable number of

projects (at least three) that have a high degree of similarity using

the factors identified in the rule. If necessary, the PAE should use

non-comparable housing stock in the market, with appropriate

adjustments, if necessary to identify an adequate number of comparable

properties. If this is inadequate, comparable properties outside the

market with appropriate adjustments may be considered. The PAE should

set comparable market rent at 90 percent of section 8 Fair Market Rents

only as a last resort if no meaningful comparison of projects is

possible following the guidance in this section.

Section 401.411 Guidelines for Determining Exception Rents

Section 401.411 applies to cases where section 514(g)(2) of MAHRA

permits the use of ``exception rents'' instead of comparable market

rents. Exception rents may be used in the Restructuring Plan only if

the PAE has determined that the housing needs of the tenants and the

community cannot be adequately addressed through a Restructuring Plan

that provides for comparable market rents, and if comparable market

rents would provide an income inadequate to operate the project

(negative Net Operating Income or NOI projects).

Exception rents are those that exceed rent levels at comparable

market rents but that do not exceed 120 percent of the fair market rent

for the market area. For up to five percent of the units with contracts

expiring in the fiscal year, HUD may waive the 120 percent requirement

on a project-by-project basis upon on a PAE documented determination of

special need. The PAE's determination of special need must address why

the housing needs of the tenants and the community could not be

adequately addressed through implementation of the comparable market

rent limitation typical of projects undergoing a Restructuring Plan.

The PAE may approve exception rents only for negative NOI projects,

which could not support all operating expenses if rents were based on

the comparable market rent. In order to receive exception rents, these

negative NOI projects must be determined by the PAE to be positive

social assets in the community whose operating expense levels and lack

of debt service capacity are not a function of bad management. They

should be unique, appropriately situated, and affordable housing, with

no other comparable housing alternatives available in the submarket. If

they were not restructured at exception rents, the outcome would be

displacement of those who would experience difficulty in finding

comparable housing, such as the elderly, persons with disabilities and

large families.

When exception rents are used, the rent is a budget-based rent

based on the factors listed in section 514(g)(3) which include debt

service (allowed only on the second mortgage under Sec. 401.461 or to

support a rehabilitation loan included in the Restructuring Plan),

project operating expenses, a PAE-determined allowance for losses due

to vacancies and uncollected rents, a PAE-determined allowance for a

reasonable rate of return to the owner (which may be established to

provide incentive for owners who meet the housing quality standards in

Sec. 401.453 and the property management standards in Sec. 401.484),

contributions to adequate reserves, and other necessary project

operating expenses as determined by the PAE.

[[Page 48933]]

For each fiscal year, HUD approval of exception rents is limited to

20 percent of the units with contracts expiring in the fiscal year

unless HUD grants a waiver based on a PAE documentation of special

need.

Section 401.412 Adjustment of Rents With Operating Cost Adjustment

Factor (OCAF)

Section 401.412 explains the adjustment of rents for contract

renewals under a Restructuring Plan using an operating cost adjustment

factor (OCAF) as required by section 514(e)(2) of MAHRA. The OCAF will

be derived from an analysis of the change in operating expenses in

various geographic areas, and will be published by HUD annually. An

OCAF may be positive or negative. The OCAF methodology for determining

adjusted rent levels is also applied to calculation of rent levels

outside of Restructuring Plans under Secs. 402.4 and 402.5 except when

HUD determines to apply budget-based adjustments as permitted by those

sections. Under Sec. 401.412, adjusted rent levels are calculated by

multiplying an adjusted base rent level for the project by the OCAF.

The adjusted base rent level is the difference between the current

aggregate project rents and the debt service.

For the section 8 moderate rehabilitation program (other than for

single room occupancy dwellings under section 441 of the Stewart B.

McKinney Homeless Assistance Act), rents for contracts renewed under

Sec. 402.5 will be adjusted by applying an OCAF to the base rent, minus

any costs associated with debt service for the cost of property

acquisition. The OCAF will be applied to rents for each unit size

assisted under the renewal contracts.

Section 401.420 When Must the Restructuring Plan Require Project-based

Assistance?

Section 401.420 implements section 515(c)(1) of MAHRA, which

provides for mandatory renewal of project-based assistance in a

Restructuring Plan for projects in tight rental markets, projects

occupied predominantly (at least 50% of units) by elderly or disabled

families, and cooperative housing projects. The rule provides that a

tight rental market exists when the PAE determines that the market-wide

vacancy rate is at or below 6 percent.

Sction 401.421 Rental Assistance Assessment Plan

Consistent with section 515(c)(2) of MAHRA, Sec. 401.421 requires

the PAE to develop (after consultation with the owner) a Rental

Assistance Assessment Plan for any project not covered by Sec. 401.420

to determine whether assistance should be renewed for a project as

project-based assistance or whether some or all of the assisted units

should be converted to tenant-based assistance. Section 515(c)(2)(B)

requires an assessment of the impact of converting to tenant-based

assistance and the impact of extending project-based assistance on

eight specific areas described in section 515(c)(2)(B). The PAE must

consider the cost of providing assistance, comparing the applicable

payment standard for tenant-based assistance to the project's adjusted

rent levels determined under Sec. 401.410 or Sec. 401.411. In addition,

the PAE must consider the other matters listed in section 515(c)(2)(B)

of MAHRA to be assessed as part of the Plan, and the applicable

Consolidated Plan developed under part 91 of this title. In addition to

these statutory considerations, Sec. 401.421 requires a PAE to consider

the local Consolidated Plan under 24 CFR part 91. The PAE may allow up

to 5 years for a conversion to tenant-based assistance if needed for

the financial viability of the project. In accordance with section

515(c)(2)(C) of MAHRA, the PAE must report at least semi-annually to

HUD on projects for which the Restructuring Plan either: (1) provides

for renewal of project-based assistance even though tenants generally

supported tenant-based assistance; or (2) provides for renewal with

tenant-based assistance.

Section 401.450 Owner Evaluation of Physical Condition

The Restructuring Plan must provide for rehabilitation of the

project necessary to achieve the property standards set forth in

Sec. 401.452. The first step in developing this part of the Plan is an

evaluation by the owner of the physical condition and rehabilitation

needs of the project, which is provided to the PAE as part of the PAE's

initial data collection for the project. The evaluation must contain

the following information:

(1) All work items needed to bring the project to the property

standard in Sec. 401.452, including deferred maintenance and any needed

repairs including work items likely to be needed in the next 12 months;

(2) The capital repair or replacement items that will be necessary

to maintain the long-term physical integrity of the property;

(3) Plans for funding rehabilitation needs under the Restructuring

Plan, including the source of required non-project funds to be

contributed by the owner; and

(4) An estimate of the initial deposit, if any, and the estimated

monthly deposit to the reserve for replacement account for the next 20

years.

Section 401.451 PAE Physical Condition Analysis (PCA)

Under Sec. 401.451, the PAE is responsible for an independent

evaluation of the rehabilitation needs (a Physical Condition Analysis,

or PCA) of the project, and for reviewing and certifying to the

accuracy of the owner's evaluation (which may be modified to address

deficiencies identified by the PAE.) Both the project's immediate

physical condition and rehabilitation needs, and its long term

maintenance and replacement needs, must be evaluated and addressed in

the PAE's review. The owner must immediately complete any work items

needed to address physical needs that are immediate threats to health

or safety. If this is not done, the PAE must evaluate the project's 35

eligibility for a Restructuring Plan under Sec. 401.403, which permits

rejection of certain projects in poor condition. The rule allows

rejection of the request for a Restructuring Plan if the PAE cannot

certify the owner's evaluation. Based on the completed PCA, the PAE

also must consider rejecting a request for a Restructuring Plan even if

there are no remaining immediate health and safety threats, if the PAE

cannot determine that proceeding with a Restructuring Plan with

necessary rehabilitation is more cost-effective in terms of Federal

resources than rejecting the Request for a Restructuring Plan under

Sec. 401.403(b)(3) and providing tenant-based assistance for displaced

tenants under Sec. 401.602. HUD will provide guidance to PAEs for

making the cost-effectiveness determination. The PAE must also advise

HUD of the impact on tenants and the community of not proceeding with

the Restructuring Plan. Rejections under this section may be disputed

and appealed under subpart F.

Section 401.452 Property Standards for Rehabilitation

The standard for rehabilitation is a non-luxury standard adequate

for the rental market intended at the original approval of the project-

based assistance. The physical needs identified should be those

necessary for the project to retain its original market position as an

affordable project in decent, safe and sanitary condition (recognizing

any evolution of standards appropriate for such a project). The

rehabilitation should include those improvements the project requires

to rent at all in the non-subsidized market, resulting in a marketable

project that competes on

[[Page 48934]]

rent rather than on amenities. Rehabilitation must be in accordance

with 24 CFR part 8, which contains requirements for accessibility to

persons with disabilities, to the extent applicable. Where a range of

options exists, the least costly options for rehabilitation should be

chosen within that range, when both capital and operating costs are

taken into consideration.

Section 401.453 Housing Quality Standards

Section 401.453 requires the owner to maintain the project in a

decent safe and sanitary condition based on the housing quality

standards identified in Sec. 401.453. These standards apply as long as

the Use Agreement under Sec. 401.408 is in effect. Whenever the project

is receiving project-based assistance, the applicable standards will be

the physical condition standards for HUD housing under 24 CFR 5.703,

published on September 1, 1998 (63 FR 46566). Otherwise, local codes

will serve as the standards as long as local codes are as strict as HUD

standards and do not severely restrict housing choice in the view of

the PAE. In addition, any unit in which the tenant receives tenant-

based assistance must comply with the housing quality standards of the

section 8 tenant-based programs (24 CFR 982.401). Section 401.453 also

requires the Restructuring Plan to provide for necessary replacement

reserves.

Section 401.460 Modification or Refinancing of First Mortgage

Section 401.460 explains the standards for restructuring with a

modified or refinanced first mortgage. This section provides for a

variety of approaches to restructuring, which may include modification

of the insured mortgage or refinancing with or without FHA insurance or

other credit enhancement. The first mortgage will be a fully

amortizing, level payment mortgage with a principal amount sustainable

at rent levels that do not exceed the lower of section 8 rents allowed

under the Mark-to-Market Program or rents permitted under the Use

Agreement under Sec. 401.408. Interest rates and other terms must be

competitive in the market.

As part of sizing the first mortgage, the PAE should take into

account any need for financing needed rehabilitation. The determination

of the modified or refinanced first mortgage amount and the claim

payment amount are directly related, and the claim payment under

Sec. 401.471 may be increased, in order to make proceeds from a

refinanced first mortgage available for rehabilitation. A similar

adjustment in the first mortgage amount is permitted in the case of

HUD-held mortgage debt although no claim payment is involved.

In the Program Manual, HUD will provide detailed guidance for PAE

underwriting of the first and second mortgage. The PAE will be fully

responsible for the second mortgage underwriting, while underwriting

the first mortgage will also require the involvement of the mortgagee

(and HUD, if refinancing involves FHA mortgage insurance or risk-

sharing.) Due to the significant potential for conflicts of interest if

the PAE provides the first mortgage financing, HUD will apply an

exceptionally high level of review whenever this is proposed as part of

the Restructuring Plan.

The monthly payment for the first mortgage under the Mark-to-Market

Program will not exceed the current first mortgage payment. Interest

rates and other terms must be competitive. Fees and costs above normal

processing fees for a modification and refinancing will be paid by the

owner from non-project funds and will not be financed through the first

mortgage.

Credit enhancement for the refinanced mortgage may be provided for

in the Restructuring Plan but is not required. If FHA continues to

provide credit enhancement through mortgage insurance, any new

insurance for a refinanced first mortgage will be provided under the

usual FHA legal requirements but insurance for the refinanced mortgage

will be documented through amendment of the existing insurance contract

under section 517(b)(3) of MAHRA rather than through a new insurance

contract. FHA will issue the commitment and endorse the mortgage for

insurance, but may adapt its procedures to make appropriate use of the

PAE.

If FHA credit enhancement for a refinanced first mortgage is

provided through risk-sharing under 24 CFR part 266, the usual legal

requirements under part 266 will apply but the PAE will need special

HUD approval if it seeks to engage in risk-sharing for the project, and

the conflict of interest provisions in Sec. 401.700 will apply. This

will involve, for example, more detailed HUD involvement in

underwriting than would otherwise be applicable under part 266.

Credit enhancement may also be provided by a non-FHA party. The

rule recognizes that there may be a conflict between the credit

enhancer's usual requirements and the requirements of the interim rule.

Although all non-statutory provisions in the interim rule are subject

to waiver under 24 CFR 5.110, the interim rule advises that HUD will

consider waiver to accommodate a provider of credit enhancement only if

the waiver will not materially impair achievement of the purposes of

MAHRA and if the waiver is essential to meet the legitimate business or

legal requirements of the provider of credit enhancement.

Some projects eligible for the Mark-to-Market Program are subject

to more than one FHA-insured loan. A common combination is a section

236 first mortgage (often quite small) and a section 241(f) second

mortgage. The feasibility of a Restructuring Plan for these projects

will depend heavily on how the Plan deals with the junior insured

mortgage. MAHRA does not deal expressly with this situation, but HUD

has concluded that MAHRA permits restructuring of both insured

mortgages. A section 541(b) claim might also be paid in connection with

the existing insured second mortgage if needed, because section

517(b)(1) does not limit the payment of claim to a single insured

mortgage. The modified or refinanced first mortgage required by

Sec. 401.460 would secure the debt that remained owing on the existing

insured mortgages after payment of claims. Section 517(a)(1)(B) of

MAHRA requires a second mortgage under a Restructuring Plan (discussed

under Sec. 401.461) in an amount that does not exceed the difference

between the first mortgage under Sec. 401.460 and the indebtedness

under the existing insured debt. The result could be the replacement of

both of the existing insured first and second mortgages with both a

first mortgage with payments sustainable through the rents allowed by

the Restructuring Plan and a second mortgage with deferred payments,

with the sum of the two mortgage amounts not exceeding the sum of all

insured mortgage amounts before restructuring.

There may be projects with multiple insured mortgages that can be

successfully restructured without the need for full payment of claim on

the existing insured first mortgage. In that case, the existing insured

second mortgage could be left unchanged, modified, or refinanced, if

subordinated to the new second mortgage required by MAHRA (see

discussion under the next section.)

Section 401.461 HUD-Held Second Mortgage

Section 401.461 provides standards for the new second mortgage that

must be given to HUD whenever the insured or HUD-held mortgage debt is

written down through payment of a claim. The

[[Page 48935]]

new second mortgage is limited to an amount that the PAE reasonably

expects to be repaid by the owner based on objective criteria such as

the amount of anticipated net cash flow, trending assumptions,

amortization provisions, and expected residual value of the project. It

will bear simple interest of at least 1 percent but no more than the

applicable Federal rate determined by the Department of the Treasury.

The term will be concomitant with the term of the first mortgage under

Sec. 401.460 or, if there is none, the term will be set by HUD. The

mortgage will become due and payable earlier in accordance with

Sec. 401.461(b)(3) if the first mortgage is terminated or paid in full

(unless HUD provides otherwise in the case on a nominal first mortgage

amount), if the mortgage is assumed by a purchaser of the project in

violation of HUD guidelines, or if the owner fails to cure a statutory

violation or a violation of a HUD requirement. Acceleration by HUD may

be appealed under subpart F.

At least 75 percent of the project's net cash flow after payment of

first mortgage debt service and operating expenses must be used to pay

principal and interest on the second mortgage. The Restructuring Plan

may provide for up to 25 percent of net cash flow to be paid to an

owner who meets certain property management and housing quality

standards.

HUD will consider modification or forgiveness of the second

mortgage under the authority of section 517(a)(5) of MAHRA only if (1)

the project has been sold or transferred to a priority purchaser under

Sec. 401.480, and (2) HUD determines that modification or forgiveness

is necessary for recapitalization to preserve the project as affordable

housing.

If the amount of a partial claim under Sec. 401.471 exceeds the

principal amount of the second mortgage, Sec. 401.461(c) permits HUD to

require the owner to give an additional subordinate mortgage on the

project to HUD to secure repayment of the excess. This additional

mortgage will be subordinate to other HUD-held mortgages, will bear

interest at the same rate as the second mortgage under Sec. 401.461(a),

and will require no payments except payment in full when the second

mortgage under Sec. 401.461(a) is paid in full.

Section 401.471 HUD Payment of a Section 541(b) Claim

HUD payment of a section 541(b) claim is the means by which one or

more FHA-insured or HUD-held mortgages will be paid down to the level

of debt that can be supported at market rents. Section 541(b) of the

National Housing Act permits HUD to pay an insurance claim from the

appropriate insurance fund for a mortgage that is not in default. In

some cases, the debt than can be supported will remain in place through

a modification and reamortization of the existing mortgage debt. In

other cases it will be taken out by a new lender as a refinance of the

existing mortgage debt. All payments of claim will be made by HUD, from

the appropriate insurance fund, to the mortgagee on behalf of the

mortgagor. Section 517(b)(1) of MAHRA currently specifically directs

that a partial payment of claim be made under section 541(b) of the

National Housing Act, which authorizes partial payments on mortgages

not in default in connection with the Mark-to-Market Program. Section

517(b)(1) also specifically includes a full payment of a claim as a

possible restructuring tool, but there is no provision in the National

Housing Act equivalent to section 541(b) that expressly authorizes full

payment of claims for mortgages not in default. The ordinary authority

for making full payments of claims on FHA-insured multifamily mortgages

is section 207(g) of the National Housing Act, which applies only to

mortgages in default. HUD will not approve any Restructuring Plan

providing for a full payment of claim on a mortgage not in default

unless HUD is satisfied that there is legal authority to use the

appropriate FHA insurance fund to pay the claim. That may require a

technical legislative amendment. Until HUD is able to make such full

payments, any claim paid on a mortgage not in default would be a

partial claim that leaves at least a nominal amount of the insured

mortgage unpaid or paid from other sources, such as project accounts or

owner contributions.

Section 401.472 Rehabilitation Funding

Section 517(b)(7) of MAHRA identifies some potential sources for

funding needed rehabilitation of the project that are included in

Sec. 401.472. If project accounts (e.g., residual receipts, surplus

cash and replacement reserve accounts) have amounts that exceed the

initial deposit needed for the replacement reserve account, the excess

must be used for rehabilitation before the other sources are used.

Other potential sources include: (1) restructuring of the first

mortgage debt to facilitate additional borrowing for rehabilitation (as

discussed under Sec. 401.460); (2) grants under the rehabilitation

grant program under section 236(s) of the NHA (as discussed under

Sec. 401.473); and (3) increases in section 8 budget authority for

section 8 assistance contracts (to the extent HUD has determined that

funding from this source is available). Rehabilitation funding will be

disbursed through an escrow agent or other means determined by HUD.

HUD will implement section 517(b)(7)(B) of MAHRA by requiring the

owner to contribute from non-project funds at least 20 percent of the

total cost of rehabilitation. A reasonable proportion of the owner's

contribution must come from non-governmental resources. HUD will

provide further guidance in its Program Manual on the requirement for

owner contribution from non-governmental resources. HUD estimates the

requirement will be a minimum of 3 percent of the total cost of

rehabilitation.

The PAE may require a larger owner contribution for a particular

project. To the extent the owner voluntarily provides more than the

required 20 percent, the PAE may consider allowing in the Restructuring

Plan for more extensive rehabilitation and appropriate adjustments to

the reserves for replacement analysis. The PAE may exempt housing

cooperatives from the owner contribution requirement.

Section 401.473 HUD Grants for Rehabilitation Under Section 236(s) of

NHA

This section authorizes rehabilitation grants under Restructuring

Plans. HUD has concluded that rehabilitation grants under section

236(s) of the National Housing Act (NHA), as added by section 531 of

MAHRA, may be made available under authority of this interim rule for

Mark-to-Market projects. HUD's usual practice is to implement a new

grant program through either a proposed/final rule procedure or, if

that procedure allows insufficient time for obligation of appropriated

funds before they lapse, through a Notice of Funding Availability

(NOFA). However, by implementing the various requirements of the Mark-

to-Market Program, this interim rule will ensure that any use of

section 236(s) grant funds in connection with a Restructuring Plan,

before separate grant regulations are issued, is in accord with

statutory requirements as long as an appropriate grant agreement is

used by HUD. There is no requirement for a competitive grant process

using a NOFA under section 102 of the HUD Reform Act of 1989. HUD has

concluded there would be no public benefit in delaying the availability

of section 236(s) grant funds for Mark-to-Market projects until after a

separate rulemaking procedure was completed. HUD expects to pursue a

[[Page 48936]]

separate rulemaking procedure before any use of the section 236(s)

grant authority outside of the Mark-to-Market Program. Section 401.473

permits HUD to delegate grant administration of a section 236(s)

rehabilitation grant to a PAE that is a government entity, as provided

in section 236(s)(5) of the NHA (added by section 531 of MAHRA), and to

pay for grant administration from grant funds if they are available for

this purpose.

Section 401.474 Project Accounts

Section 401.474 permits the Restructuring Plan to provide for the

use of project accounts. Accounts of one project may be used for other

eligible projects if: (1) the projects are included in a consolidated

Restructuring Plan under Sec. 401.400(a)(2); and (2) the funds are used

to fund project rehabilitation or to reduce the amount of a claim paid

by HUD under Sec. 401.471. The Restructuring Plan may provide for up to

10 percent of the excess project funds to be paid to the owner after

completion of the rehabilitation required by the Restructuring Plan.

Section 401.480 Voluntary Sale or Transfer of Project

Section 401.480 covers the voluntary sale or transfer of a project

as part of the Restructuring Plan. An eligible owner may request sale

or transfer. If the owner is determined to be ineligible for a

Restructuring Plan under Sec. 401.101 or 401.403, a Restructuring Plan

can be developed only if it involves sale or transfer.

The owner must notify HUD or the PAE of the owner's intent to

transfer the property. If the owner is determined to be ineligible

under Sec. 401.101 or Sec. 401.403, this notice must be received by HUD

or the PAE within 30 days after the owner receives notice of rejection

and all objection and appeals procedures have been concluded, if

applicable. Otherwise, the owner should provide the notice as part of

its initial request for a Restructuring Plan or at any later time when

it is still feasible, in the determination of the PAE, to develop a

Restructuring Plan involving sale or transfer.

An ineligible owner must inform the PAE of any intention to accept

a purchase offer, subject to PAE approval and HUD approval of the

Restructuring Plan. The owner must also prepare a notice to potential

purchasers that describes the project and the procedure for submitting

purchaser offers. The notice must be in a form acceptable to HUD and

will be subject to review and approval by HUD or the PAE. The owner

must distribute and publish an approved notice as required by HUD.

This section gives a preference to certain ``priority purchaser''

groups, defined as tenant organizations, tenant-endorsed community-

based nonprofit organizations, and tenant-endorsed public agency

purchasers. HUD may also establish qualifications for priority

purchasers. If an owner has been rejected, the PAE must not develop a

Restructuring Plan involving a sale or transfer to a non-priority

purchaser unless it determines that there is no interested qualified

priority purchaser, or that no feasible Restructuring Plan can be

developed involving a sale or transfer to a qualified priority

purchaser.

All project sales are subject to PAE approval and HUD approval of

the Restructuring Plan.

Section 401.481 Subsidy Layering Limitations on HUD Funds

Section 401.481 explains the subsidy layering certification that a

PAE must make under section 514(e)(7) of MAHRA. The purpose of the

subsidy layering certification procedure is to ensure that any HUD

assistance provided to the owner of a project under the Restructuring

Plan is no more than is necessary to permit the project to continue to

house a tenant mix comparable in income to the tenant income mix of the

project before the Restructuring Plan is implemented, after taking into

account other Federal, State or local governmental assistance of any

kind such as grants, loans, guarantees, or tax credits or other tax

benefits.

HUD is generally required to make a subsidy layering certification

under section 102(d) of the HUD Reform Act of 1989 when HUD assistance

is provided. Section 911 of the Housing and Community Development Act

of 1992 provided for HUD delegation of the subsidy layering

certification requirements to certain State or local agencies (defined

in section 42 of the Internal Revenue Code of 1986 as ``housing credit

agencies'' or HCAs) for projects receiving a low-income housing tax

credit (LIHTC). MAHRA does not explicitly provide for assumption of

HUD's duties under section 102(d) by a PAE, but HUD does not consider

it Congress' intention to require HUD to duplicate the PAE's efforts by

performing separate section 102(d) subsidy layering certifications in

connection with HUD assistance that was included in a Restructuring

Plan approved by HUD with benefit of the PAE's subsidy layering

certification. That would be inconsistent with the express MAHRA

provision for a PAE subsidy layering certification, and with the

general approach of MAHRA in making the PAE responsible for the

analysis and development of Restructuring Plans for individual

projects. Therefore, HUD may rely on the PAE's certification and does

not need to perform a separate subsidy layering analysis.

If the PAE is an HCA with delegated authority under section 911, it

will perform the subsidy layering certification for MAHRA using

procedures substantially similar to the published HUD guidelines for

section 102(d) certifications under section 911. Such a PAE may, and

any other PAE must, submit for HUD approval other subsidy layering

certification procedures that follow the section 911 guidelines to the

extent feasible and appropriate.

The PAE's subsidy layering analysis should not restrict the

availability of HUD assistance solely because an owner is able to

obtain public resources, such as grants, for use as some or all of the

owner's required contribution toward rehabilitation costs (see

Sec. 401.472(b)) from public resources.

Sec. 401.483 Leasing Units to Certificate and Voucher Holders

Section 514(e)(9) of the Act only prohibits refusal to lease a

``reasonable number'' of units to section 8 voucher or certificate

holders because of their status as voucher or certificate holders. HUD

has determined that for a project under the Mark-to-Market Program, the

``reasonable number'' of units that should be available to voucher or

certificate holders is 100 percent of the units. Under Sec. 401.483,

the Restructuring Plan will not permit an owner to reject any

prospective tenants solely because of their status as holders of

vouchers or certificates.

Sec. 401.484 Property Management Standards

Section 401.484 implements part of section 518 of MAHRA, which

requires a PAE to establish management standards for a project pursuant

to HUD guidelines and consistent with industry standards. Section

401.484 also relates to implementation of sections 514(e)(4) and

517(a)(3) of MAHRA. HUD's guidelines set forth in this section require

the property manager to, at a minimum:

(1) Protect the physical integrity of the property over the long

term through appropriate requirements for preventative maintenance,

repair or replacement (compliance with this standard would be evidenced

by no unscheduled deferred maintenance,

[[Page 48937]]

complete maintenance records with work performed in a workmanlike

manner at competitive costs, and ``satisfactory'' reviews by HUD);

(2) Ensure the routine cleaning of the building and grounds;

(3) Maintain good relations with the tenants;

(4) Protect the financial integrity of the project by operating

with the budget provided by the owner, with competitive and reasonable

operating expenses and appropriate insurance;

(5) Take measures to achieve physical safety and maintenance of

insurance; and

(6) Comply with any other HUD management requirements including

termination of the management agent for cause.

HUD will provide additional guidance on management standards in the

program manual. The PAE's management standards must also conform to any

HUD guidelines and industry standards on conflicts of interest between

owners, managers and contractors.

Section 401.500 Required Notices to Third Parties; Section 401.501

Who Is Entitled To Receive Notices Under Sec. 401.500?

Under Secs. 401.500 and 401.501, a PAE must solicit and document

the consideration of tenant and local community comments. These

sections describe the procedures for ensuring that third parties

affected by the restructuring of a project through the Mark-to-Market

Program are kept informed and provided the opportunity to provide

comments at crucial stages of the process. Section 401.500 describes

two notices that will be used to keep interested third parties

informed: (1) a notice of intent to restructure and of a consultation

meeting in 20-60 days; and (2) a notice of the completed Restructuring

Plan . Each notice is to be given by the owner to: (1) each project

tenant, or a tenant association; (2) the Chief Executive Officer of the

unit of general local government; and (3) the Director of the Public

Housing Authority (PHA) with jurisdiction over the project. The PAE or

HUD may also identify any neighborhood representatives and other

affected parties that should receive one of more of these notices.

The PAE must also conduct a consultation meeting to receive oral

presentations and comments on the desired contents of a Restructuring

Plan, desired contents of a Rental Assistance Assessment Plan (if one

is required), and on any proposed transfer of the project. The PAE will

invite participation by at least the parties entitled to receive

notices.

Section 514(b) of MAHRA requires HUD to establish notice procedures

and hearing requirements for tenants and owners concerning the dates

for the expiration of project-based assistance contracts for any

eligible multifamily housing project. For projects being restructured

through the Mark-to-Market Program, HUD considers this provision

satisfied through the notice and consultation meeting provisions of

these sections. Specifically, Sec. 401.500(b)(1)(iv) requires notice of

the date of expiration for the contract (which may be a contract

extended during Restructuring Plan development under Sec. 401.600), and

the consultation meeting will give all interested parties an adequate

opportunity for a hearing on any concerns associated with expiring

project-based assistance.

HUD does not interpret section 514(b) as applicable if an owner of

an eligible project does not pursue restructuring under the Mark-to-

Market Program, either by choice, because of the exceptions in section

514(h) of MAHRA, or because the owner or project is rejected under

section 516. In particular, if a contract will not be renewed, HUD does

not consider that Congress intended to impose additional notice

requirements beyond the 180-day or 12-month notice of non-renewal

required by section 8(c)(9) of the U.S. Housing Act of 1937 or section

514(d) of MAHRA, respectively, whichever applies, and the 90-day notice

of rent increase under section 8(c)(8) of the 1937 Act (see

Sec. 401.602). If a contract is being renewed for a project not being

restructured, there would be no apparent purpose for a notice

requirement. In addition, HUD does not consider that Congress intended

to require a hearing for tenants and owners concerning the expiration

of contracts for projects not being restructured under the Mark-to-Mark

Program.

Subpart D--Implementation of the Restructuring Plan After Closing

Section 401.550 Monitoring and Compliance Agreement

Section 401.550 implements section 519 of MAHRA by providing for

periodic monitoring (including onsite inspections) and by generally

requiring PAEs to ensure that owners comply with approved Restructuring

Plans, including execution and recording of a Use Agreement. As long as

there is a PAE for the project that is qualified to be a section 8

administrator (i.e., a State or local housing agency), the PAE will be

responsible for monitoring and enforcement; if not, HUD will perform

those functions. The onsite inspections under this section will be

required to follow uniform inspection procedures of HUD in 24 CFR 5.705

published on September 1, 1998 (63 FR 46566). The GAO and HUD

(including HUD's Office of Inspector General) also may audit a project

with a Restructuring Plan pursuant to section 519(c) of MAHRA. HUD

intends to include in the final rule more specific provisions regarding

the means by which PAEs who are State or local housing agencies (i.e.,

``Phase I'' applicants under the RFQ) will enforce compliance with the

Restructuring Plans. HUD views the continuing involvement of the PAEs

in the monitoring and compliance process as an important enhancement of

HUD's own efforts. HUD welcomes the views of State and local housing

agencies and others regarding the availability of effective enforcement

tools that may be feasible and cost-effective means of ensuring long-

term compliance by project owners, including enforcement tools that

have been successfully used by the agencies.

Section 401.552 Servicing of Second Mortgage

HUD or its designee will be responsible for servicing the second

mortgage including the determination of the amount of the net cash flow

receivable by the owner. HUD may designate the PAE as servicer with its

consent.

Section 401.554 Contract Administration

Section 401.554 requires HUD to offer to any PAE qualified to be

the section 8 contract administrator the opportunity to serve as

contract administrator. The term ``qualified'' is intended to indicate

that a contract administrator must meet both statutory requirements of

the United States Housing Act of 1937 (e.g., be a public housing

agency) and any additional requirements of HUD established under the

applicable section 8 program by the responsible HUD officials. As

contract administrator, the PAE must offer to renew section 8 contracts

in accordance with the Restructuring Plan as provided in section 515(a)

of MAHRA.

A contract administrator for section 8 tenant-based assistance

provided under this rule has a significantly different and expanded

role far beyond the scope of a section 8 project-based administrator.

For instance, the section 8 tenant-based contract administrator is

responsible for administering the assistance throughout its

jurisdiction, not just in the particular project. The PAE and any other

[[Page 48938]]

prospective tenant-based contract administrators are advised to

carefully review the tenant-based program regulations at part 982, with

particular emphasis on Sec. 982.51 (``HA authority to administer

program'') and Sec. 982.153 (``HA responsibilities''). Any PAE

proposing to serve as contract administrator must understand that a

section 8 tenant-based assistance administrator's duties may extend

beyond the usual responsibilities of a contract administrator due the

need to ensure appropriate treatment of displaced tenants in accordance

with the ``portability'' provisions of MAHRA.

Subpart E--Section 8 Requirements for Restructured Projects

Section 401.595 Contract and Regulatory Provisions

Section 401.595 provides that the provisions of 24 CFR chapter VIII

(i.e., other section 8 program regulations) will apply only to the

extent, if any, provided in the contract. In accordance with section

515(c)(5) of MAHRA, 24 CFR part 983 will not apply.

Section 401.600 Will a Section 8 Contract be Extended if it Would

Expire While an Owner's Request for a Restructuring Plan is Pending?

Under Sec. 401.600, an owner that has requested development of a

Restructuring Plan may receive a section 8 contract extension at

current rents for the shortest reasonable period needed for the PAE to

complete a Restructuring Plan for the project (generally, not more than

9 months). Any extension of the contract beyond 1 year pending closing

on the Restructuring Plan would be at comparable market rents or

exception rents, but would not affect the project's continued

eligibility for the Mark-to-Market Program.

Although section 514(c) of MAHRA may be interpreted to require

immediate reduction to comparable market rents, HUD has concluded that

the provision is better reconciled with MAHRA as a whole if it is

interpreted to permit an extension at current rents for a reasonable

period, along the lines of the current Portfolio Reengineering

demonstrations, with further extensions at comparable market rents (or

exception rents, if applicable) if a Restructuring Plan is underway but

has not been developed and approved expeditiously. This will avoid the

abrupt disruption that section 514(c) appears designed to avoid when an

eligible owner has requested a Restructuring Plan.

Section 401.601 Consideration of an Owner's Request to Renew an

Expiring Contract Without a Restructuring Plan

Section 401.601 provides a procedure for considering an eligible

owner's request for renewal of an expiring contract without requesting

a Restructuring Plan. Because rents must exceed comparable market rents

for Sec. 401.100 to apply, this section of the interim rule does not

apply to projects with rents at or below comparable market rents.

HUD or the PAE will determine whether renewal under Sec. 402.4 at

rents that do not exceed comparable market rents would be sufficient to

maintain an adequate debt service coverage ratio on the first mortgage

and necessary project reserves. If so, the contract renewal will be

processed under new Sec. 402.4. If not, a Restructuring Plan must be

developed by a PAE before further consideration of the owner's request.

HUD is not defining ``adequate debt service'' in this interim rule but

intends to provide guidance to PAEs in the Program Manual.

Section 401.602 Tenant Protections if an Expiring Contract is not

Renewed.

The rule does not require an owner who is eligible to apply for a

Restructuring Plan under Sec. 401.100 and has an expiring project-based

contract to apply. The rule permits the owner not to request a

Restructuring Plan and not to renew the contract if the owner provides

the 180-day notice of non-renewal under section 8(c)(9) of the United

States Housing Act of 1937 and the 90-day notice of any resulting rent

increases under section 8(c)(8) of that Act. An owner who does not give

the proper notices must continue to permit residents to stay in their

units without increasing the tenant portion of the rent until a period

equivalent to the required notice period (180 or 90 days, as

applicable) has expired after the later of the date proper notice was

given or the date the contract expired. The same obligation applies if

the owner requested a Restructuring Plan but was rejected by HUD or the

PAE under Sec. 401.101 or 401.403.

An owner who has requested a Restructuring Plan and is not rejected

may not fail to renew an expiring contract without giving the 12-month

notice to HUD and tenants required by section 514(d) of MAHRA and the

90-day notice of any resulting rent increases under section 8(c)(8) of

the United States Housing Act of 1937. If the notice is not given, the

tenants have similar protections as discussed in the preceding

paragraph, except that 12 months applies instead of 180 days.

If a contract is not renewed, HUD will make tenant-based assistance

available to tenants in two circumstances. As provided in section

514(d) of MAHRA, HUD will make such assistance available to all tenants

residing in units assisted under the expiring contract if the owner

does not renew project-based assistance. As provided in section 516(d)

of MAHRA, HUD will make tenant-based assistance available to all

tenants residing in a project at the time HUD or the PAE reject an

owner or a project under Secs. 401.102 or 401.403 if: (1) the tenant is

a low-income family; or (2) the tenant is receiving tenant-based

assistance. Both tenant-based assistance, and the availability of funds

for moving expenses of displaced tenants, will depend on the

availability of funds under future appropriations Acts.

Section 401.605 Project-Based Assistance Provisions

Section 401.605 indicates that the project-based assistance

restructured rents will be determined under the Restructuring Plan.

Section 401.606 Tenant-Based Assistance Provisions

Section 401.606 complies with section 515(c)(3) of MAHRA by

providing that, if the Restructuring Plan provides for tenant-based

assistance, assistance under part 982 will be offered to each eligible

family assisted under the section 8 project-based assistance contract

on the date of expiration. The Department intends to revise as soon as

possible, by interim rule, the section 8 tenant-based regulations at

part 982 to incorporate the unique statutory provisions of section

515(c)(4) of MAHRA for the tenant-based assistance offered to families

through a Restructuring Plan.

Section 401.607 Contract Term

Renewals will be for a term determined by HUD by the appropriate

HUD office, but the owner is not required to accept a renewal beyond

the 30-year term of the use and affordability restrictions required

under the Mark-to-Market Program.

Subpart F--Owner Dispute of Rejection and Administrative Appeal

Section 401.645 How Does the Owner Dispute a Notice of Rejection?

Section 401.645 provides the owner an opportunity to dispute the

following: (1) when a request for a Restructuring Plan is rejected; (2)

when a request for a section 8 contract renewal is rejected; (3) when a

PAE cannot continue with a

[[Page 48939]]

Restructuring Plan because of lack of owner cooperation under

Sec. 401.402; and (4) when HUD rejects a proposed Restructuring

Commitment submitted by a PAE. HUD or the PAE will notify the owner of

the reasons for a rejection and provide a 30-day period to submit

written objections or cure the problem. If no objection is submitted,

the rejection is not subject to judicial review under section 516(c) of

MAHRA. If an objection is submitted, HUD or the PAE will send the owner

a final decision affirming, modifying, or reversing the initial

rejection with reasons for the decision. This final decision is

appealable under Sec. 401.650.

Section 401.650 When May the Owner Make an Administrative Appeal of a

Final Decision Under This Subpart?

An owner may appeal a final decision under Sec. 401.645(b) if

written objection was made. In addition, an owner may appeal a decision

of HUD to approve a Restructuring Commitment if the owner does not

execute the Commitment, and a decision of HUD to accelerate the HUD-

held second mortgage under Sec. 401.461(a).

Section 401.651 Appeal Procedures

Section 401.651 provides a simple, expeditious means through which

an owner may make a presentation (written, oral, and/or through a

representative) at a conference with an official of HUD who was not

involved in making the decision under appeal. The HUD or PAE official

who issued the decision under appeal will also participate.

An owner must appeal any decision within 10 days of receiving

notice of the decision. The appeal will be decided by a written

decision issued within 20 days of the conference. Days will be computed

as provided in 24 CFR 26.16, but the hearing procedures of part 26 of

this title do not otherwise apply. Although representation by legal

counsel is permitted, the appeal procedure under this part is intended

to be informal, without rules of evidence or presentation of witnesses.

Its purpose is to ensure that no pertinent facts have been overlooked

and to avoid serious errors of judgment.

Section 401.652 No Judicial Review

Section 401.652 states that the decision of a reviewing official

under Sec. 401.651 is a final determination for purposes of section

516(c) of MAHRA, which forbids judicial review of a final

determination.

III. Content of Part 402

Section 402.1 What is the Purpose of Part 402?

Section 402.1 explains that part 402 sets out the terms and

conditions under which HUD will renew project-based assistance section

8 contracts under section 524(a)(1) or (2) of MAHRA. Part 402 deals

exclusively with the renewal of section 8 contracts for projects

without a Restructuring Plan under the Mark-to-Market Program under

part 401. Therefore, either the Office of Housing or the Office of

Public and Indian Housing is responsible for the contract extension.

However, part 402 is included under the new CFR chapter for the Office

of Multifamily Housing Assistance Restructuring (OMHAR) because of

section 522(a)(1) of MAHRA, which provides that regulations

implementing subtitle A of MAHRA (including section 524) are to be

issued by the Director of OMHAR. Secretary Cuomo has signed this

interim rule as provided in section 522(a)(1) because no Director has

yet been appointed.

Section 402.2 Definitions

Section 402.2 applies the definitions in part 401 to part 402.

Section 402.3 Contract Provisions

Section 401.3 provides that the provisions of 24 CFR chapter VIII

(i.e., other section 8 program regulations) will apply only to the

extent, if any, provided in the contract. Part 983 of 24 CFR will not

apply, in accordance with section 515(c)(5) of MAHRA.

Section 402.4 Contract Renewals Under Section 524(a)(1) of MAHRA

Section 402.4 sets out the basic rule on section 8 contract

renewals for projects that are not involved in the Mark-to-Market

Program under part 401. If the project is eligible for the Mark-to-

Market Program under part 401, the owner's request for renewal will be

processed under Sec. 401.601 to determine whether a Restructuring Plan

is needed before a renewal proceeds under this part 402. This section

implements section 524(a)(1) of MAHRA by authorizing renewal at rents

that do not exceed market comparable rents, with future rent

adjustments using the operating cost adjustment factor (OCAF) as

provided for the Mark-to-Market Program under Sec. 401.412, except that

rents may be redetermined using a budget-based rent adjustment from

time-to-time at the discretion of HUD. OCAF and budget-based

adjustments may be positive or negative. If the owner of a project so

requests, Sec. 402.4 will not apply to a project in certain classes of

``exception projects'' identified in section 524(a)(2) of MAHRA, which

are covered in the next section.

Section 402.5 Contract Renewals Under Section 524(a)(2) of MAHRA

Section 402.5 concerns renewals under section 524(a)(2) of MAHRA,

only at the request of the owner, for the following classes of

``exception projects'':

(1) A project for which the primary financing or mortgage insurance

was provided by a unit of State government or a unit of general local

government (or an agency or instrumentality of either) and was not

insured under the NHA;

(2) A project for which the primary financing was provided by a

unit of State government or a unit of general local government (or an

agency or instrumentality of either) and the financing involved

mortgage insurance under the NHA, such that the implementation of a

Restructuring Plan is in conflict with applicable law or agreements

governing such financing;

(3) A project for the elderly financed under section 202 of the

Housing Act of 1959 or section 515 of the Housing Act of 1949;

(4) A project that has an expiring contract section 8 moderate

rehabilitation contract for single room occupancy dwellings; or

(5) A project that does not qualify as an eligible project under

part 401 of this chapter (i.e., because rents do not exceed comparable

market rents or because there is no HUD-insured or HUD-held mortgage).

(The second class of projects is described in section 524(a)(2)(B) of

MAHRA. Unless section 514(h) of MAHRA is amended, no projects will fall

in that category, as explained in Part II of this Supplementary

Information under Sec. 401.100.)

The first four categories are included in Sec. 402.5(b)(1); the

last category is included in Sec. 402.5(b)(2). The owner of an

exception project identified in Sec. 402.5(b) may request renewal under

either Sec. 402.4 or this Sec. 402.5. The owner of a project identified

in Sec. 402.5(b)(2) that has a HUD-insured or HUD-held mortgage may

proceed under this Sec. 402.5 only if the HUD analysis confirms that

project rents are below comparable market rents.

If the owner of an exception project requests renewal of project-

based assistance under this section, HUD is required (subject to a

right to reject under Sec. 402.7, and confirmation of rents levels for

a project under Sec. 402.5(b)(2))) to renew the expiring contract with

initial rents at the lesser of: (1) existing rents adjusted by an

operating cost

[[Page 48940]]

adjustment factor (OCAF) established by HUD; (2) a budget-based rent

determined in accordance with the statutory directions for determining

budget-based rent under the Mark-to-Market Program (except that HUD

rather than a PAE will determine operating expenses and HUD may adjust

the debt service component to reflect competitive interest rates); or

(3) in the case of a contract under the section 8 moderate

rehabilitation program (other than for a single room occupancy

dwelling), the base rent adjusted by applying an OCAF to the base rent,

minus any costs associated with debt service, with the OCAF to be

applied to rents for each unit size assisted under the renewal

contracts.

Rent adjustments at contract renewal will use the same OCAF allowed

under Sec. 401.412 for the Mark-to-Market Program, except that rents

may be redetermined using a budget-based rent adjustment from time-to-

time at the discretion of HUD. OCAF and budget-based adjustments may be

positive or negative. The HUD official responsible for the particular

section 8 program involved will determine the term of any initial and

subsequent renewals, subject to the availability of appropriated funds.

Section 402.6 What Actions Must an Owner Take to Request Section 8

Contract Renewal Under This Part?

Section 402.6 provides a procedure for requesting renewal under

part 402 which is similar to Sec. 401.99 for Mark-to-Market projects.

At least 3 months before the expiration date of any project-based

assistance on a project, or as soon as practicable if the contract

expires less than 3 months after the effective date of this interim

rule, the owner must submit to HUD (or the contract administrator for a

contract under the moderate rehabilitation program): (1) a

certification that neither the owner nor any affiliate is suspended or

debarred; (2) a comparable market rent analysis indicating that project

rents are above comparable market rents (using the same approach in

Sec. 401.410 for the Mark-to-Market Program) except for most exception

projects; and (3) if the owner is seeking renewal under Sec. 402.4, the

most recent annual audited financial statement for the project, and the

owner's evaluation of physical needs complying with Sec. 401.450. Rent

comparability is to be determined by an independent State-certified

general appraiser hired by the owner, using the guidance given to the

PAE under Sec. 401.410. An interim contract extension may be provided

when an owner's request for renewal under Sec. 402.4 or

Sec. 402.5(b)(2) is pending.

These procedures do not apply to renewals of section 8 moderate

rehabilitation contracts (other than contracts for single room

occupancy dwellings under section 441 of the Stewart B. McKinney

Homeless Assistance Act.) HUD's Assistant Secretary for Public and

Indian Housing will issue separate procedures.

Section 402.7 Refusal to Consider an Owner's Request for a Section 8

Contract Renewal Because of Actions or Omissions of Owner or Affiliate

To ensure that contracts are not renewed for unacceptable owners,

Sec. 402.7 permits HUD to reject a renewal request in a manner similar

to Sec. 401.403 for projects eligible for Mark-to-Market restructuring.

The dispute and administrative appeal provisions of subpart F of part

401 apply.

Section 402.8 Tenant Protections if an Expiring Contract is not

Renewed

Section 402.8 is similar to Sec. 401.602. If an owner fails to

renew an expiring contract for section 8 project-based assistance, the

owner must provide the 180-day advance notice of non-renewal under

section 8(c)(9) of the United States Housing Act of 1937 and the 90-day

notice of rent increase under section 8(c)(8) of that Act. An owner who

does not give the proper notice must continue to permit residents to

stay in their units without increasing the tenant portion of the rent

until 180 days (or 90 days, depending on which notice was not given in

a timely manner) after the later of the date proper notice was given or

the date the contract expires.

Electronic Access and Filing Addresses

If you wish to comment on this interim rule, you may submit

comments through HUD's Public Comment Webpage accessible through the

Internet at http://www.hud.gov/ogc/regcom2.htm/. That webpage will

enable you to create an e-mail message containing your comments. Your

comments will be sent to the Rules Docket Clerk and will be available

to any person. If you send your comment through the Public Comment

Webpage, please DO NOT also send a paper copy of your comment.

Findings and Certifications

Paperwork Reduction Act

The information collection requirements contained in Secs. 401.101,

401.102, 401.200, 401.202, 401.302, 401.403, 401.404, 401.405, 401.410,

401.421, 401.473, 401.480, 401.481, 401.500, 401.450, 401.451, 401.601,

401.602, 401.603, 401.651, 402.4 and 402.6 of this interim rule have

been submitted to the Office of Management and Budget (OMB) for

emergency review and approval in accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501-3520). In accordance with the

Paperwork Reduction Act, HUD may not conduct or sponsor and a person is

not required to respond to, a collection of information unless the

collection displays a valid control number. The OMB control number,

when assigned, will be published in the Federal Register, together with

any changes in the information collection requirements that may result

from the approval process. The OMB approval number will be assigned

before the rule takes effect.

In addition, HUD has submitted to OMB a request for non-emergency

approval for the information collection requirements of this interim

rule and for an extension of the approval of the information collection

requirements contained in the Request for Qualifications (RFQ)

published on August 17, 1998, at 63 FR 44102. (The information

collection requirements in the RFQ were approved by OMB on an emergency

basis through February 28, 1999 with OMB control no. 2502-0531.)

In accordance with 5 CFR 1320.5(a)(1)(iv), the Department is

setting forth the following concerning the collections of information:

(1) Title of the information collection proposal:

Multifamily Housing Mortgage and Housing Assistance Restructuring

Program (Mark-to-Market) Regulations and Request for Qualifications

(RFQ)

(2) Summary of the collection of information:

The rule and the RFQ seek information from entities that may become

participating administrative entities. The information concerns these

entities' capacity and experience relating to their respective

abilities to carry out the statutory functions of PAEs. The rule also

contains collections of information from owners relating to mortgage

restructurings.

(3) Description of the need for the information and its proposed

use:

The information is needed to determine the qualifications of

entities to become PAEs. It is also needed develop statutorily required

mortgage restructuring and rental assistance sufficiency plans.

Finally, the information includes notices and related documents that

implement various statutory procedures.

(4) Description of the likely respondents, including the estimated

number of likely respondents, and proposed frequency of response to the

collection of information:

[[Page 48941]]

Respondent will include entities applying for and that are PAEs,

owners of projects HUD-insured or -held mortgages with expiring Section

8 contracts. The estimated number of respondents and frequency of

response is included in paragraph (5), immediately below.

(5) Estimate of the total reporting and recordkeeping burden that

will result from the collection of information:

--------------------------------------------------------------------------------------------------------------------------------------------------------

Responses Total

Information collection Number of per annual Hours per Total Hours Regulatory

respondents respondent responses response reference

--------------------------------------------------------------------------------------------------------------------------------------------------------

Owner Request for MRRAS Plan............... ............................. 250 1 250 100 25,000 401.101

Owner cost/benefit analysis.. 235 1 235 1 ........... 401.480

Evaluation of rehabilitation 235 1 235 35 ........... 401.451

needs.

Owner request to renew Section 8 without an ............................. 160 1 160 15 2,400 402.4

MRRAS plan.

Owner submission in 140 1 140 40 5,600 402.6

connection with 524(a)

renewal.

Owner notice of non-renewal.. 20 1 20 2 40 401.602

PAE notice to owner of 10 1 10 15 150 401.603

refusal to consider request.

Owner appeal of a decision... 27 1 27 16 432 401.651

Owner's notice of intent to sell........... ............................. 25 1 25 1 25 401.481

Information needed to develop a HUD- ............................. 250 1 250 140 35,000 401.200

approved MRRAS plan. 401.403

401.404

Third party notice........... 250 1 250 3 750 401.405

Market comparable rent 250 1 250 40 10,000 401.410

determination.

Information needed to develop 250 1 250 10 2,500 401.421

a rental assistance plan.

Physical needs assessment.... 250 1 250 40 10,000 401.451

Third party notices.......... 250 1 250 2 500 401.601

PAE subsidy layering 250 1 250 20 5,000 401.500

certification.

PAE Notice of Refusal........ 25 1 25 10 250 401.102

Owner request for 20 1 20 3 60 401.102

administrative review.

Response to RFQ............................ ............................. 50 1 50 40 2,000 401.202

PAE Record Keeping......................... ............................. 45 ........... ........... 10 ........... 401.302

PAE reporting.............................. ............................. 45 ........... ........... 10 ........... 401.302

PAE reports on projects subject to RAA plan ............................. 45 1 45 30 1,350 401.450

Notice of rejection........................ ............................. 10 1 10 10 100 401.473

-----------------------------------------------------------------------------

Totals................................. ............................. ........... ........... 3,002 101,157

--------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments

from members of the public and affected agencies concerning the

collection of information in this interim rule and the Request for

Qualifications published on August 17, 1998, at 63 FR 44102 to:

(1) Evaluate whether the collection of information is necessary for

the proper performance of the functions of the agency, including

whether the information will have practical utility;

(2) Evaluate the accuracy of the agency's estimate of the burden of

the proposed collection of information;

(3) Enhance the quality, utility, and clarity of the information to

be collected; and

(4) Minimize the burden of the collection of information on those

who are to respond; including through the use of appropriate automated

collection techniques or other forms of information technology, e.g.,

permitting electronic submission of responses.

Interested persons are invited to submit comments regarding the

information collection requirements in this interim rule. Comments must

refer to this interim rule by name and docket number (FR-4298).

Comments on the emergency submission must be submitted by September

18, 1998. Comments on the regular non-emergency submission must be

submitted by November 10, 1998.

Submit comments to: Joseph F. Lackey, Jr., HUD Desk Officer, Office

of Management and Budget, New Executive Office Building, Washington, DC

20503; and

Reports Liaison Officer, Oliver Walker, Department of Housing and

Urban Development, 451 7th Street, SW, Room 9116, Washington, DC 20410.

Justification for Interim Rule and Shortened Comment Period

It is the general practice of the Department to provide a 60-day

public comment period on all rules in accordance with 24 CFR part 10.

However, section 522(a)(1) of MAHRA requires that this rule be issued

as an interim rule; i.e., as a rule that will take

[[Page 48942]]

effect without the benefit of public comments. Section 522(a)(2)

requires subsequent issuance of a final rule by October 27, 1998 or, if

later, 3 months after the Director of the Office of Multifamily Housing

Assistance Restructuring is appointed. Hence, the Department invites

public comment on the interim rule, but is providing a 45-day comment

period instead of the usual 60-day period in order to minimize the

period of operation under the interim rule as desired by Congress. The

comments received within the 45-day comment period will be considered

during development of a final rule that will supersede this interim

rule as soon as feasible. In order to provide the fullest and most

expedient access to the provisions of this interim rule, HUD will make

it available on the World Wide Web at http://www.hud.gov on the date of

publication in the Federal Register.

This interim rule also contains a partial implementation of the

rehabilitation grant authority of section 236(s) of the National

Housing Act, as added by section 531 of MAHRA. The interim rule

authority in section 522(a)(1) of MAHRA directly applies only to

subtitle A of MAHRA, and section 531 appears in subtitle B. However,

the Department has concluded that section 522(a)(1) is authority for a

limited implementation of section 236(s) through an interim rule as

part of the Mark-to-Market Program because a rehabilitation grant

included in a Restructuring Plan in compliance with part 401 will

necessarily comply with the statutory and other desirable regulatory

requirements for a section 236(s) grant. No public purpose would be

served by a separate rule that duplicated many of the part 401

requirements in the context of a grant made as part of a Restructuring

Plan, and HUD does not read the statute as requiring the separate rule.

Environmental Impact

A Finding of No Significant Impact with respect to the environment

was made in accordance with HUD regulations in 24 CFR part 50 that

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

1969 (42 U.S.C. 4223). The Finding is available for public inspection

between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules

Docket Clerk, Office of General Counsel, Room 10276, Department of

Housing and Urban Development, 451 7th Street, SW, Washington, DC

20410.

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this interim

rule under Executive Order 12866, Regulatory Planning and Review,

issued by the President on September 30, 1993. OMB determined that this

rule is a ``significant regulatory action,'' (but not economically

significant) as defined in section 3(f) of the Order. The interim rule

will have effects outside the government, such as rehabilitation costs

and associated benefits of improved housing. Based on experience under

earlier demonstration authority, HUD has estimated that these effects

outside of the Government do not total more than $100 million annually.

Any changes made in this rule subsequent to its submission to OMB

are identified in the docket file The docket file is available for

public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the

Office of the Rules Docket Clerk, Office of General Counsel, Room

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

SW, Washington, DC.

Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this interim rule before publication and

by approving it certifies that this rule does not have a significant

economic impact on a substantial number of small entities. The rule

implements recently-enacted legislation that created a Mark-to-Market

Program through which section 8 rents for multifamily projects with

HUD-insured or HUD-held mortgages will be reduced in order to preserve

low-income rental housing affordability while reducing the long-term

costs of project-based rental assistance and minimizing the adverse

effect on the FHA insurance funds. As the preamble to the rule

explains, section 8 assistance is costly to the Federal Government and

the cost is rising. To preserve affordable housing, the Congress

determined that reduction of section 8 assistance was necessary.

Reduction or elimination of section 8 assistance without some type of

transition or conversion process may mean that current projects

assisted by section 8 may be unable to meet their financial obligations

including operating expenses, current and future capital needs, and

debt service payments--particularly payments on FHA-insured mortgages.

To avoid this situation, the authorizing legislation and this interim

rule provides for a mortgage restructuring program.

In this interim rule, the Department strives to provide flexible

requirements in order to reduce any burden on small entities. Owners of

eligible projects that are small entities, who might otherwise be

unable to meet their monthly mortgage payments after HUD reduces

section 8 rents to comparable market rents as mandated by law, are

provided an opportunity to receive a reduction in monthly mortgage

payments if they request a mortgage restructuring under the rule. As

conditions of the mortgage restructuring the owners will be required to

rehabilitate the project so that it meets minimum standards of housing

quality and to provide for competent management. These are not new

economic burdens on owners, but are project matters which owners

already have a responsibility to address and should be addressing even

without mortgage restructuring. The only actions required of the owner

are those needed to ensure that a project provide decent and safe

housing to those intended to benefit from the Federal programs involved

(FHA mortgage insurance and section 8 housing assistance payments.)

Again, under existing HUD regulations and contracts, owners are now

subject to a decent, safe, and sanitary standard or a good repair

standard. Owners choosing to request a mortgage restructuring under

this interim rule will continue to serve the same tenant income mix as

before and will not be required to provide additional affordable

housing.

Some of the Participating Administrative Entities (PAEs) selected

under the interim rule, such as nonprofit organizations and for-profit

entities, may be small entities. In the interim rule HUD has chosen to

preserve for the PAE substantial discretion, within the limits of the

statute, to choose the most cost-effective way of undertaking the

mortgage restructuring of projects assigned to the PAE. No more

projects will be assigned to a PAE than a PAE is able and willing to

deal with. Each nonprofit and for-profit PAEs will partner with a

public entity to provide additional resources and reduce the burden of

undertaking restructurings.

Nothing in the interim rule imposes an adverse or disproportionate

burden on a small entity. Small entities are specifically invited,

however, to comment on whether this interim rule will significantly

affect them, in accordance with the instructions in the DATES and

ADDRESSES sections in the preamble of this interim rule. Such comments

will be considered when a final rule is developed.

[[Page 48943]]

Executive Order 12612, Federalism

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

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

contained in this interim rule do not have substantial direct effects

on States or their political subdivisions, or the relationship between

the Federal Government and the States, or on the distribution of power

and responsibilities among the various levels of government. As a

result, the interim rule is not subject to review under the Order.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-

4; approved March 22, 1995) (UMRA) establishes requirements for Federal

agencies to assess the effects of their regulatory actions on State,

local, and tribal governments, and the private sector. This rule does

not impose any Federal mandates on any State, local, or tribal

governments, or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 401

Grant programs-housing and community development, Housing, Housing

assistance payments, Housing standards, Insured loans, Loan programs-

housing and community development, Low and moderate income housing,

Mortgage insurance, Mortgages, Rent subsidies, Reporting and

recordkeeping requirements.

24 CFR Part 402

Housing, Housing assistance payments, Low and moderate income

housing, Rent subsidies.

For the reasons set forth in the preamble, 24 CFR is amended by

adding a new Chapter IV, which consists of parts 401 and 402, to read

as follows:

CHAPTER IV--OFFICE OF MULTIFAMILY HOUSING ASSISTANCE RESTRUCTURING,

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

PART 401--MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE

RESTRUCTURING PROGRAM (MARK TO MARKET).

PART 402--PROJECT-BASED SECTION 8 CONTRACT RENEWAL WITHOUT

RESTRUCTURING UNDER SECTION 524 (a) OF MAHRA.

PART 401--MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE

RESTRUCTURING PROGRAM (MARK-TO-MARKET)

Subpart A--General Provisions; Eligibility

Sec.

401.1 What is the purpose of part 401?

401.2 What special definitions apply to this part?

401.99 What actions must an owner take to request a section 8

contract renewal?

401.100 Which projects are eligible for a Restructuring Plan under

this part?

401.101 Which owners are ineligible for a Restructuring Plan?

Subpart B--Participating Administrative Entity (PAE) and Portfolio

Restructuring Agreement (PRA)

401.200 Who may be a PAE?

401.201 How does HUD select PAEs?

401.300 What is a PRA?

401.301 Business arrangements.

401.302 PRA administrative requirements.

401.303 PRA indemnity provisions for SHFAs and HAs.

401.304 PRA provisions on PAE compensation.

401.307 On-going responsibility of PAE.

401.309 PRA term and termination provisions; other remedies.

401.310 Conflicts of interest.

401.311 Standards of conduct.

401.312 Confidentiality of information.

401.313 Consequences of PAE violations; finality of HUD

determination.

401.314 Environmental review responsibilities.

Subpart C--Restructuring Plan

401.400 Required elements of a Restructuring Plan.

401.401 Consolidated Plans.

401.402 Cooperation with owner and qualified mortgagee in

Restructuring Plan development.

401.403 Rejection of a request for a Restructuring Plan because of

actions or omissions of owner or affiliate or project condition.

401.404 Proposed Restructuring Commitment.

401.405 Restructuring Commitment review and approval by HUD.

401.406 Execution of Restructuring Commitment.

401.407 Closing conducted by PAE.

401.408 Affordability and use restrictions required.

401.410 Standards for determining comparable market rents.

401.411 Guidelines for determining exception rents.

401.412 Adjustment of rents with operating cost adjustment factor

(OCAF).

401.420 When must the Restructuring Plan require project-based

assistance?

401.421 Rental Assistance Assessment Plan.

401.450 Owner evaluation of physical condition.

401.451 PAE Physical Condition Analysis (PCA).

401.452 Property standards for rehabilitation.

401.453 Housing quality standards.

401.460 Modification or refinancing of first mortgage.

401.461 HUD-held second mortgage.

401.471 HUD payment of a section 541(b) claim.

401.472 Rehabilitation funding.

401.473 HUD grants for rehabilitation under section 236(s) of NHA.

401.474 Project accounts.

401.480 Voluntary sale or transfer of project.

401.481 Subsidy layering limitations on HUD funds.

401.483 Leasing units to certificate and voucher holders.

401.484 Property management standards.

401.500 Required notices to third parties.

401.501 Who is entitled to receive notices under Sec. 401.500?

Subpart D--Implementation of the Restructuring Plan After Closing

401.550 Monitoring and compliance agreements.

401.552 Servicing of second mortgage.

401.554 Contract administration.

Subpart E--Section 8 Requirements for Restructured Projects

401.595 Contract and regulatory provisions.

401.600 Will a section 8 contract be extended if it would expire

while an owner's request for a Restructuring Plan is pending?

401.601 Consideration of an owner's request to renew an expiring

contract without a Restructuring Plan.

401.602 Tenant protections if an expiring contract is not renewed.

401.605 Project-based assistance provisions.

401.606 Tenant-based assistance provisions.

401.607 Contract term.

Subpart F--Owner Dispute of Rejection and Administrative Appeal

401.645 How does the owner dispute a notice of rejection?

401.650 When may the owner make an administrative appeal of a final

decision under this subpart?

401.651 Appeal procedures.

401.652 No judicial review.

Authority: 12 U.S.C. 1715z-1 and 1735f-19(b); 42 U.S.C. 1437f

note and 3535(d).

Subpart A--General Provisions; Eligibility

Sec. 401.1 What is the purpose of part 401?

This part contains the regulations implementing the authority in

the

[[Page 48944]]

Multifamily Assisted Housing Reform and Affordability Act of 1997

(MAHRA) for the Mark-to-Market Program including the renewal of

project-based assistance contracts for eligible projects without

restructuring. Section 511(b) of MAHRA details the purposes, and

section 512(2) details the scope, of the Program.

Sec. 401.2 What special definitions apply to this part?

(a) MAHRA means the Multifamily Assisted Housing Reform and

Affordability Act of 1997, title V of Pub. L. 105-65, 42 U.S.C. 1437f

note.

(b) Statutory terms. Terms defined in section 512 of MAHRA are used

in this part in accordance with their statutory meaning. These terms

are: comparable properties, expiring contract, expiration date, fair

market rent, mortgage restructuring and rental assistance sufficiency

plan, nonprofit organization, qualified mortgagee, portfolio

restructuring agreement, participating administrative entity, project-

based assistance, renewal, State, tenant-based assistance, and unit of

general local government.

(c) Other terms. As used in this part, the term--

Affiliate means an affiliate of the owner or an affiliate of the

purchaser, as such terms are defined in section 516(a) of MAHRA.

Applicable Federal rate has the meaning given in section 1274(d) of

the Internal Revenue Code of 1986.

Community-based nonprofit organization means a non-profit

organization that maintains at least one-third of its governing board's

membership for low-income residents from the local community, or for

elected representatives of community organizations that represent low-

income residents.

Comparable market rents has the meaning given in Sec. 401.410(b).

Disabled family has the meaning given in Sec. 5.403(b) of this

title.

Elderly family has the meaning given in Sec. 5.403(b) of this

title.

Eligible project means a project with a mortgage insured or held by

HUD, project-based assistance expiring on or after October 1, 1998, and

rents for assisted units exceeding comparable market rents; and

otherwise meeting the definition of ``eligible multifamily housing

project'' in section 512(2) of MAHRA.

HUD means the Director of the Office of Multifamily Housing

Assistance Restructuring (OMHAR) or a HUD official authorized to act in

lieu of the Director, when used in reference to provisions of MAHRA

that give responsibilities to the Director, and otherwise has the

meaning given in Sec. 5.100 of this title.

NHA means the National Housing Act, 12 U.S.C. 1702 et seq.

Owner means the owner of a project and any purchaser of the

project.

PAE means a participating administrative entity as defined in

section 512(10) of MAHRA, or HUD when appropriate in accordance with

section 513(b)(4) of MAHRA.

PCA means a physical condition assessment of a project prepared by

a PAE under Sec. 401.451.

PRA means a portfolio restructuring agreement as defined in section

512(9) of MAHRA.

Priority purchaser means a purchaser meeting qualifications

established by HUD that is:

(1) A tenant organization or

(2) A tenant-endorsed community-based nonprofit organization or

public agency.

Rental Assistance Assessment Plan means the plan described in

section 515(c)(2) of MAHRA.

Restructured rent means the rent determined at the time of

restructuring in accordance with section 514(g) of MAHRA.

Restructuring Plan means the Mortgage Restructuring and Rental

Assistance Sufficiency Plan described in section 514 of MAHRA.

Section 8 means section 8 of the United States Housing Act of 1937,

42 U.S.C. 1437f.

Section 541(b) claim means a claim paid by HUD under an insurance

contract under authority of section 541(b) of the National Housing Act,

12 U.S.C. 1735f-19(b).

Tenant organization means an organization that meets regularly,

whose officers are elected by a majority of heads of households of

occupied units, and whose membership is open to all tenants of a

project.

Unit of local government means the smallest unit of general local

government in which the project is located.

Sec. 401.99 What actions must an owner take to request a section 8

contract renewal?

(a) Requesting Restructuring Plan. An owner may request a section 8

contract renewal as part of a Restructuring Plan by, at least 3 months

before the expiration date of any project-based assistance or as soon

as practicable if the contract will expire before January 13, 1999,

certifying to HUD that to the best of the owner's knowledge:

(1) Project rents are above comparable market rents; and

(2) Neither the owner nor any affiliate is suspended or debarred,

or, if so, a voluntary sale transfer of the property is proposed in

accordance with Sec. 401.480.

(b) Eligible but not requesting Restructuring Plan. If an owner is

eligible for a Restructuring Plan but requests a renewal of project-

based assistance without a Plan, HUD will consider the request, in

accordance with Sec. 401.601 if, at least 3 months before the

expiration date of any project-based assistance or as soon as

practicable if the contract will expire before January 1, 1999, an

owner provides to HUD the certification required in paragraph (a) of

this section, and the following additional information:

(1) A comparable market rent analysis;

(2) The prior fiscal year's audited financial statement for the

project;

(3) An owner's evaluation of physical condition as provided in

Sec. 401.450; and

(4) Such other documents as the PAE or HUD may require.

(c) Not eligible for Restructuring Plan. Section 402.5 of this

chapter addresses renewal of project-based assistance for a project not

eligible for a Restructuring Plan.

Sec. 401.100 Which projects are eligible for a Restructuring Plan

under this part?

General eligibility. A Restructuring Plan may be requested by an

owner of an eligible project that:

(a) Has project-based assistance with an expiration date of October

1, 1998, or later;

(b) Has current gross potential rent for the project-based assisted

units that exceeds the gross potential rent for the project based

assisted units using comparable market rents; and

(c) Is not described in section 514(h) of MAHRA.

Sec. 401.101 Which owners are ineligible for a Restructuring Plan?

The request of an owner of an eligible project for a Restructuring

Plan will not be considered if the owner or an affiliate is debarred or

suspended under part 24 of this title, unless a sale or transfer of the

property is proposed in accordance with Sec. 401.480.

Subpart B--Participating Administrative Entity (PAE) and Portfolio

Restructuring Agreement (PRA)

Sec. 401.200 Who may be a PAE?

A PAE must qualify under the definition in section 512(10) of

MAHRA. It must not have any outstanding violations of civil rights

laws, determined in accordance with criteria in use by HUD. If the PAE

is a private entity, whether nonprofit or for-profit, it must enter

into a partnership

[[Page 48945]]

with a public purpose entity, which may include HUD. The formed entity

must meet all legal requirements for a partnership. A PAE may delegate

responsibilities only as stated in the PRA.

Sec. 401.201 How does HUD select PAEs?

(a) Selection of PAE. HUD will select qualified PAEs in accordance

with the criteria established in 513(b) of MAHRA and criteria

established by HUD. The selection method is within HUD's discretion,

including but not limited to a request for qualifications.

(b) Priority for public agencies. HUD will provide a one-time

priority period for State Housing Finance Agencies and local housing

agencies to qualify as the PAEs for their jurisdictions. If more than

one agency qualifies for the same jurisdiction, HUD will provide an

opportunity for the agencies to allocate responsibility for projects in

the jurisdiction. If the agencies are unable to agree, HUD will choose

a PAE in accordance with section 513(b)(2) of MAHRA.

(c) Qualification for PAE by nonprofit and for profit entities.

After the priority period expires, HUD will consider other eligible

entities as PAEs for jurisdictions in which no public agency has

qualified as the PAE, or for projects that have not been assigned to a

qualified public agency.

(d) No PAE for project. If HUD does not select a PAE for a project,

HUD may perform the functions of the PAE, or contract with other

qualified entities to perform those functions.

Sec. 401.300 What is a PRA?

A PRA is an agreement between HUD and a PAE that delineates rights

and responsibilities in connection with development and implementation

of a Restructuring Plan. The PRA must contain the matters required by

section 513(a)(2) of MAHRA, and Secs. 401.301 through 401.309, as well

as other terms and conditions required by HUD.

Sec. 401.301 Business arrangements.

If the PAE is in a partnership, the PRA must specify the following:

(a) The responsibilities of each partner regarding the

Restructuring Plan;

(b) The resources each partner will provide to accomplish its

designated responsibilities; and

(c) All compensation to each partner, whether direct or indirect.

Sec. 401.302 PRA administrative requirements.

(a) Inapplicability of certain requirements. Parts 84 and 85 of

this title and contract procurement requirements do not apply to a PRA.

(b) Recordkeeping. The PAE must keep complete and accurate records

of all activities related to the PAE's performance under the PRA. The

PAE must retain the records for at least 3 years after the PRA

terminates.

(c) Inspection of records and audit. Upon reasonable notice, the

PAE must permit the Comptroller General of the United States and HUD

(including representatives of the HUD Office of Inspector General) to

inspect, audit and copy any records required to be retained under this

section.

401.303 PRA indemnity provisions for SHFAs and HAs.

When a PRA requires HUD to indemnify a PAE in accordance with

section 513(a)(2)(G) of MAHRA, any payment under this indemnity is

contingent upon the availability of funds that are permitted by law to

be used for this purpose.

Sec. 401.304 PRA provisions on PAE compensation.

(a) Base fee. The PRA will provide for a base fee to be paid by

HUD.

(b) Incentives. The PRA may provide for incentives to be paid by

HUD for achievement of stated objectives.

(c) Expenses. The PRA will identify expenses incurred by the PAE

that will qualify for reimbursement by HUD.

Sec. 401.307 On-going responsibility of PAE.

The PRA must provide for on-going activities necessary to implement

the Restructuring Plan after the closing under Sec. 401.407.

Sec. 401.309 PRA term and termination provisions; other remedies.

(a) 1-year term with renewals. The PRA will have a term of 1 year,

to be renewed for successive terms of 1 year with the mutual agreement

of both parties. The PRA will provide for HUD to pay final compensation

to the PAE and to assign responsibility for continuing activities if

the PRA is not renewed.

(b) Termination for cause. A PRA will be subject to termination by

HUD at any time for cause, with payment required by HUD as provided in

the PRA only for matters performed by the PAE to the date of

termination. When cause for termination exists, HUD may order an

immediate transfer of some or all of the PAE's duties to another PAE

designated by HUD. HUD may temporarily waive its right of immediate

termination for cause in order to allow an orderly transfer of duties

and responsibilities under a PRA, without waiving the right of

termination after the transfer has been completed to HUD's

satisfaction. HUD will retain the right of set-off against any payments

due as well as such other rights afforded at law and in equity.

(c) Liability for damages. During the term of a PRA, or

notwithstanding any termination of a PRA, HUD may seek its actual,

direct, and consequential damages from any PAE failure to comply with

its obligations under the PRA.

(d) Cumulative remedies. The remedies under this section are

cumulative and in addition to any other remedies or rights HUD may have

under the terms of the PRA, at law, or otherwise.

Sec. 401.310 Conflicts of interest.

(a) Definitions. (1) Conflict of interest. A conflict of interest

is a situation in which a PAE or other restricted person has:

(i) A financial interest in a matter relating to the PRA;

(ii) One or more personal, business, or financial interests or

relationships which would cause a reasonable person with knowledge of

the relevant facts to question the integrity or impartiality of those

who are or will be acting under the PRA; or

(iii) Is taking an adverse position to HUD or to an owner whose

project is covered by a PRA in a lawsuit, administrative proceeding or

other contested matter.

(2) Control means the power to vote, directly or indirectly, 25

percent or more of any class of the voting stock of a company; the

ability to direct in any manner the election of a majority of a company

(or other entity's) directors or trustees; or the ability to exercise a

controlling influence over the company or entity's management and

policies. For purposes of this definition, a general partner of a

limited partnership is presumed to be in control of that partnership.

(3) Restricted person means a PAE; any management official of the

PAE; any legal entity that is under the control of the PAE, is in

control of the PAE or is under common control with the PAE; or any

employee, agent or contractor of the PAE, or employee of such agent or

contractor, who will perform or has performed services under a PRA with

HUD.

(b) General prohibitions. (1) The PAE may not permit conflicts of

interest to exist without obtaining a waiver in accordance with this

section.

(2) The PAE must establish procedures to identify conflicts of

interest and to ensure that conflicts of interest do not arise or

continue, subject

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to waiver under paragraph (c) of this section.

(3) HUD will not enter into PRAs with potential PAEs who have

conflicts of interest associated with a particular project, or permit

PAEs to continue performance under existing PRAs when such PAEs have

conflicts of interest, unless such conflicts have been eliminated to

HUD's satisfaction by the PAE or potential PAE or are waived by HUD.

(4) The PAE has a continuing obligation to take all action

necessary to identify whether it or any other restricted person has a

conflict of interest.

(c) Waivers. HUD will waive conflicts of interest only when, in

light of all relevant circumstances, the interests of HUD in the PAE's

or another restricted persons's participation outweigh the concern that

a reasonable person may question the integrity of HUD's operations.

(d) Conflicts of interest arising prior to PAE selection. (1)

Request for review of conflicts of interest. (i) A potential PAE, with

its request to HUD for consideration for selection as a PAE, must

identify existing conflicts of interest and may make a written request

for a determination as to the existence of a conflict of interest, may

request that the conflict of interest, if any, be waived, or may

propose how it could eliminate the conflict.

(ii) If, after submitting a request but prior to selection, a

potential PAE discovers that it has a conflict, it must notify HUD in

writing within 10 days of submitting the request or prior to selection,

whichever is earlier. The potential PAE may, with its notices, request

that the conflict be waived or may propose how it may eliminate the

conflict. The potential PAE may also request a determination as to the

existence of the conflict.

(2) Review by HUD. Subject to the restrictions set forth in this

section, HUD in its sole discretion may determine whether a conflict of

interest exists, may waive the conflict of interest, or may approve in

writing a PAE's proposal to eliminate a conflict of interest.

(e) Conflicts of interest that arise or are discovered after PAE

selection. (1) A PAE must notify HUD in writing within 10 days after

discovering that it or another restricted person has a conflict of

interest. Such notification must contain a detailed description of the

conflict of interest and state how the PAE intends to eliminate the

conflict. The PAE may also request a determination as to the existence

of a conflict.

(2) HUD will, after receipt of such notification or other discovery

of the PAE's conflict or potential conflict of interest, take such

action as it determines is in its best interests, which may involve

proceeding under Sec. 401.313 or as provided in paragraph (e)(2) of

this section. HUD may notify the PAE in writing of its findings as to

whether a conflict of interest exists and the basis for such

determination, whether or not a waiver will be granted, or whether

corrective actions may be taken in order to eliminate the conflict of

interest. Corrective action must be completed by the PAE not later than

30 days after notification is mailed by HUD unless HUD, at its sole

discretion, determines that it is in its best interests to grant the

PAE an extension in which to complete the corrective action.

(f) Reconsideration of decisions. Decisions issued pursuant to this

section may be reconsidered by HUD upon application by the PAE. Such

requests must be in writing and must contain the basis for the request.

HUD may, at its discretion and after determining that it is in its best

interests, stay any corrective or other actions previously ordered

pending reconsideration of a decision.

Sec. 401.311 Standards of conduct.

(a) Minimum ethical standards for PAEs. In connection with the

performance of any PRA and during the term of such PRA, a PAE or other

restricted person (as defined in Sec. 401.310) may not:

(1) Solicit for itself or others favors, gifts, or other items of

monetary value from any person who is seeking official action from HUD

or the PAE in connection with the PRA or has interests which may be

substantially affected by the restricted person's performance or

nonperformance of duties to HUD;

(2) Use improperly or allow the improper use of HUD property, or

property over which the restricted person has supervision or charge by

reason of the PRA;

(3) Use its status as PAE for its own benefit, or the financial or

business benefit of a third party, except as contemplated by the PRA;

or

(4) Make any unauthorized promise or commitment on behalf of HUD.

(b) 18 U.S.C. 201. Pursuant to 18 U.S.C. 201, whoever acts for or

on behalf of HUD in connection with the matters covered by this part is

deemed to be a public official. Public officials are prohibited from

soliciting or accepting anything of value in return for being

influenced in the performance of official actions. Violators are

subject to criminal sanctions.

(c) 18 U.S.C. 1001. Pursuant to 18 U.S.C. 1001, whoever knowingly

and willingly falsifies a material fact, makes a false statement or

utilizes a false writing in connection with a PRA is subject to

criminal sanctions. Other Federal civil statutes also apply to making

false statements to the United States.

(d) 18 U.S.C. 207. Former government employees are subject to the

prohibitions found at 18 U.S.C. 207.

Sec. 401.312 Confidentiality of information.

A PAE and every other restricted person (as defined in

Sec. 401.310) has a duty to protect confidential information and to

prevent its use to further a private interest other than as

contemplated by the PRA. As used in this section, confidential

information means information that a PAE or other restricted person

obtains from or on behalf of HUD or a third party in connection with a

PRA but does not include information generally available to the public

unless the information becomes available to the public as a result of

unauthorized disclosure by the PAE or another restricted person.

Sec. 401.313 Consequences of PAE violations; finality of

determination.

(a) Effect on PRA. If a PAE, potential PAE or other restricted

person (as defined in Sec. 401.310) violates Secs. 401.310, 410.311, or

401.312, HUD may:

(1) Find the PAE unqualified to enter into a PRA, or unqualified to

receive additional projects for restructuring under an existing PRA;

(2) Find the PAE in default under an existing PRA with the right of

termination for cause under Sec. 401.309; or

(3) Seek its actual, direct, and consequential damages from a PAE

whose conflicts of interest, failure to comply with confidentiality

requirements, or failure to comply with the minimum ethical standards

for PAEs that were the basis for termination of a PRA.

(b) Cumulative remedies. The remedies under this section are

cumulative and in addition to any other remedies or rights HUD may have

under the terms of the PRA, at law, or otherwise.

(c) Finality of determination. Any determination made by HUD

pursuant to this section is at HUD's sole discretion and is not subject

to further administrative review.

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Sec. 401.314 Environmental review responsibilities.

HUD will retain all responsibility for environmental review under

part 50 of this title. Any required review will be completed before any

HUD execution of the Restructuring Commitment under Sec. 401.405.

Subpart C--Restructuring Plan

Sec. 401.400 Required elements of a Restructuring Plan.

(a) General. A PAE is responsible for the development of a

Restructuring Plan for each project included in its PRA.

(b) Required elements. The Restructuring Plan must contain a

narrative that fully describes the restructure transaction. The

Restructuring Plan must include the elements required at Section 514 of

MAHRA. The Restructuring Plan must describe the use of any

restructuring tools listed at section 517(a) and (b) of MAHRA, and must

contain other requirements as determined by HUD.

Sec. 401.401 Consolidated Plans.

A PAE may request HUD to approve a Consolidated Restructuring Plan

that presents an overall strategy for more than one project included in

the PRA. HUD will consider approval of a Consolidated Restructuring

Plan for projects having common ownership, geographic proximity, common

mortgagee or servicer, or other factors that contribute to more

efficient use of the PAE's resources. Notwithstanding the more

efficient use of a PAE's resources, HUD will not approve any

Consolidated Restructuring Plans that have a detrimental effect on

tenants or the community, or a higher cost to the Federal government.

Sec. 401.402 Cooperation with owner and qualified mortgagee in

Restructuring Plan development.

A PAE must comply with section 514(a)(2) of MAHRA by using its best

efforts to seek the cooperation of the owner and qualified mortgagee or

its designee in the development of the Restructuring Plan. If the owner

fails to cooperate to the satisfaction of the PAE and HUD agrees, the

PAE must notify the owner that the PAE will not develop a Restructuring

Plan. This notice will be a final decision subject to dispute and

administrative appeal under subpart F of this part. If the qualified

mortgagee does not cooperate in modifying the mortgage, the PAE and

owner may continue to develop a Restructuring Plan to restructure the

loan using alternative financing.

Sec. 401.403 Rejection of a request for a Restructuring Plan because

of actions or omissions of owner or affiliate or project condition.

(a) Ongoing determination of owner and project eligibility.

Notwithstanding an initial determination to accept the owner's request

for a Restructuring Plan, the PAE is responsible for a further more

complete and ongoing assessment of the eligibility of the owner and

project while the Restructuring Plan is developed. The PAE must advise

HUD if at any time any of the grounds for rejection listed in paragraph

(b) of this section exist.

(b) Grounds for rejection. HUD may elect not to permit continued

consideration of the Restructuring Plan if at any time before closing

under Sec. 401.407:

(1) The owner or an affiliate is debarred or suspended under part

24 of this title;

(2) HUD or the PAE determines that the owner or an affiliate has

engaged in material adverse financial or managerial actions or

omissions as described at section 516(a) and (b) of MAHRA, including

any outstanding violations of civil rights laws in connection any

project of the owner or affiliate; or

(3) HUD or the PAE determines that the project does not meet the

housing quality standards in Sec. 401.453 and that the poor condition

of the project is not likely to be remedied in a cost-effective manner

through the Restructuring Plan.

(c) Dispute and appeal. An owner may dispute a rejection under this

section and seek administrative review under the procedures in subpart

F of this part.

Sec. 401.404 Proposed Restructuring Commitment.

A PAE must submit a Restructuring Plan and a proposed Restructuring

Commitment to HUD for approval, prior to submitting the Commitment to

the owner for execution. The proposed Restructuring Commitment must be

in a form approved by HUD, incorporate the Restructuring Plan, and

include the following:

(a) The lender, loan amount, interest rate, and term of any

mortgages or unsecured financing for the mortgage restructuring and

rehabilitation, and any credit enhancement;

(b) The amount of any payment of a section 541(b) claim;

(c) The type of section 8 assistance and the section 8 restructured

rents;

(d) The rehabilitation required, the source of the owner

contribution, and escrow arrangements;

(e) The uses for project accounts;

(f) The terms of any sale or transfer of the project; and

(g) A schedule setting forth all sources and uses of funds to

implement the Restructuring Plan, including setting forth the balances

of project accounts before and after restructuring; and

(h) Other terms and conditions prescribed by HUD.

Sec. 401.405 Restructuring Commitment review and approval by HUD.

HUD will either approve the Restructuring Commitment as submitted,

require changes as a condition for approval, or reject the Plan. If the

Plan is rejected, HUD will inform the PAE of the reasons for rejection.

HUD's rejection of the Plan is subject to the dispute and

administrative appeal provisions of subpart F of this part.

Sec. 401.406 Execution of Restructuring Commitment.

When HUD approves the Restructuring Commitment, the PAE will

deliver the Restructuring Commitment to the owner for execution. The

Restructuring Commitment becomes binding upon execution by the owner.

An owner who does not execute the Restructuring Commitment may appeal

its terms and seek modification under subpart F of this part.

Sec. 401.407 Closing conducted by PAE.

After the owner has executed the Restructuring Commitment, the PAE

must arrange for a closing to execute all documents necessary for

implementation of the Restructuring Plan. The PAE must use standard

documents approved by HUD, with modifications only as necessary to

comply with applicable State or local laws, or such other modifications

as are approved in writing by HUD.

Sec. 401.408 Affordability and use restrictions required.

(a) General. The Restructuring Plan must provide that the project

will be subject to affordability and use restrictions in a Use

Agreement acceptable to HUD. The Use Agreement must be recorded and in

effect for at least 30 years. It must include at least the provisions

required by this section.

(b) Use restriction. The project must continue to be used for

residential use with no reduction in the number of residential units

without prior HUD approval.

(c) Affordability restrictions. Except during a period when at

least 20 percent of the units in a project receive project-based

assistance:

(1) At least 20 percent of the units in the project must be leased

to families whose adjusted income does not exceed 50 percent of the

area median income as

[[Page 48948]]

determined by HUD, with adjustments for household size, at rents no

greater than 30 percent of 50 percent of the area median income; or

(2) At least 40 percent of the units in the project must be leased

to families whose adjusted income does not exceed 60 percent of the

area median income as determined by HUD, with adjustments for household

size, at rents no greater than 30 percent of 60 percent of the area

median income.

(d) Comparable configuration. The type and size of the units that

satisfy the affordability restrictions of paragraph (c) of this section

must be comparable to the type and size of the units for the project as

a whole.

(e) Owner obligation to accept assistance. Subject to the

availability of appropriated funds, the owner of the project must

accept any offer of project-based or tenant-based assistance renewal or

extension so long as the offer is in accordance with the terms and

conditions specified in the Restructuring Plan.

(f) Reporting. The Use Agreement must contain appropriate financial

and other reporting requirements for the owner.

(g) Enforcement and amendment. The Use Agreement will be

enforceable by interested parties to be specified in the Agreement,

which may include HUD, the PAE, project tenants, organizations

representing project tenants, and the unit of local government.

(h) Modifications. HUD will retain the right to approve

modifications of the Use Agreement agreed to by the owner without the

consent of any other party, including those having the right of

enforcement.

Sec. 401.410 Standards for determining comparable market rents.

(a) When are comparable market rents required? The Restructuring

Plan must establish restructured rents at comparable market rents

unless the PAE finds that exception rents are necessary under

Sec. 401.411.

(b) Comparable market rents defined. Comparable market rents are

the rents charged for properties that the PAE determines to be

comparable properties as defined in section 512(1) of MAHRA, except

that projects assisted under part 891 of this title may not be taken

into account. For purposes of section 512(1), other relevant

characteristics include any applicable rent control and other

characteristics determined by the PAE.

(c) Methodology for determining comparable market rents. If the PAE

is unable to identify at least three comparable properties within the

local market, the PAE may:

(1) Use non-comparable housing stock within that market from which

adjustments can be made; or

(2) If necessary to go outside the market, use comparable

properties as far outside the local market as it finds reasonable, from

which adjustments can be made.

(d) Using FMR as last resort. If the PAE is unable to identify

enough properties under para

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