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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A98-24284

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** September 11, 1998
- **Citation:** 63 FR 48926

## Text

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-24284. Public record. Not legal advice.