Head Start Program

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Part 1309

RIN 0970-AB31

Head Start Program

AGENCY: Administration on Children, Youth and Families (ACYF),

Administration for Children and Families (ACF), HHS.

ACTION: Final rule.

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SUMMARY: The Administration on Children, Youth and Families is issuing

this final rule to implement the statutory provision that authorizes

Head Start grantees to use grant funds to purchase facilities in which

to operate Head Start programs.

EFFECTIVE DATES: March 10, 1999. The information collection

requirements of Secs. 1309.10, 1309.40 and 1309.41 shall be effective

on the day they are approved by the Office of Management and Budget

(OMB). The OMB approval numbers and date of approval of the information

collection requirements will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Douglas Klafehn, Deputy Associate

Commissioner, Head Start Bureau, Administration for Children, Youth and

Families, P.O. Box 1182, Washington, DC 20013; (202) 205-8572.

SUPPLEMENTARY INFORMATION:

I. Program Purpose

Head Start is authorized under the Head Start Act (42 U.S.C. 9801

et seq.). It is a national program providing comprehensive

developmental services to low-income preschool children, primarily age

three to the age of compulsory school attendance, and their families.

To help enrolled children achieve their full potential, Head Start

programs provide comprehensive health, nutritional, educational, social

and other services. Also, section 645A of the Head Start Act provides

authority to fund programs for families with infants and toddlers.

Programs receiving funds under the authority of this section are

referred to as early Head Start programs.

Head Start programs are required to provide for the direct

participation of the parents of enrolled children in the development,

conduct, and direction of local programs. Parents also receive training

and education to foster their understanding of and involvement in the

development of their children. In fiscal year 1997 Head Start served

approximately 794,000 children through a network of over 2,000 grantee

and delegate agencies.

While Head Start is intended to serve primarily children whose

families have incomes at or below the poverty line, or who receive

public assistance, Head Start regulations permit up to ten percent of

the children in local programs to be from families who do not meet

these low-income criteria. Tribal grantees can exceed this limit under

certain conditions. The Act also requires that a minimum of ten percent

of the enrollment opportunities in each program be made available to

children with disabilities. Such children are expected to participate

in the full range of Head Start services and activities with their non-

disabled peers and to receive needed special education and related

services.

II. Purpose of the Rule

The Administration for Children and Families (ACF) is establishing

a final rule governing the purchase of facilities by Head Start

grantees. The purpose of this Rule is to implement the statutory

authority of Head Start grantees to use grant funds to purchase

facilities in which to operate Head Start programs. This authority,

found in section 644(f) of the Head Start Act (42 U.S.C. 9839), was

granted in October 1992. The Act allows grantees to apply for grant

funds to purchase facilities to carry out Head Start programs and

directs the Secretary to establish uniform procedures for Head Start

agencies to request such funds. Additional authority for this Rule is

found in section 644(c) of the Head Start Act, which mandates the

Secretary to prescribe rules or regulations to supplement section

644(f). In March 1994 Congress added provisions to section 644(f)

allowing grantees to apply for approval of facility purchases made

after December 31, 1986.

III. Summary of the Major Provisions of the Final Rule

A summary the major provisions of the final rule is as follows. The

rule:

Specifies what information must be included in the written

application grantees must submit to request to use grant funds to

purchase a facility, including what must be included in the cost

comparison which grantees must submit as part of their application;

Requires certain measures to be taken to protect the

Federal interest in facilities purchased in whole or in part with ACF

grant funds;

Requires that grantees which acquire facilities with grant

funds obtain specified types of insurance and maintain the property

acquired in a manner consistent with the purpose for which funds were

provided and in compliance with applicable building codes and

standards; and

Includes within the definition of ``facility'' modular

units, and requires grantees which seek funding to purchase a modular

unit to comply with these regulations, which include provisions

applicable only to the purchase of modular units.

IV. Rulemaking History

On December 1, 1994, the Department published a Notice of Proposed

Rulemaking (NPRM) in the Federal Register (59 FR 61575), proposing to

establish a rule to implement the

[[Page 5940]]

statutory provision authorizing the use of Head Start grant funds for

the purchase of facilities to be used to operate Head Start programs.

Copies of the proposed rule were mailed to all Head Start grantees and

delegate agencies. Interested persons were given 60 days in which to

comment on the proposed rule. During the sixty day comment period the

Department received comments from twelve respondents. The respondents

included seven Head Start grantees and five public and private agencies

interested in Head Start facility matters.

Prior to publication of the NPRM Congress amended the Head Start

Act to authorize Head Start grantees to use grant funds to construct

and make major renovations to their facilities. This amendment to the

Head Start Act, section 644(g), became effective in 1994. Proposed

procedures to implement this new authority are set out in a Notice of

Proposed Rulemaking published elsewhere today in this Federal Register.

The procedures on construction and major renovation when made final

will amend this final rule so that 45 CFR part 1309 will cover, in one

single rule, the use of grant funds to purchase, construct and make

major renovations to Head Start facilities.

Section-by-Section Discussion of the Comments Received

Of the twelve parties who submitted comments to the NPRM, three

were general expressions of support for the proposed rule. Only those

sections for which comments were made or to which technical changes

were made are discussed below. The discussion of the sections follow

the order of the NPRM table of contents and a notation is made wherever

the section designations have been changed or deleted in the final

rule.

Section 1309.2--Approval of Previously Purchased Facilities

Comment: We received one comment on the application of these

procedures to facilities purchased prior to the enactment of the

statute authorizing the use of grant funds to purchase facilities. The

respondent states that the wording on previous purchases is confusing

and the provision itself unfair and should not be included in the rule

because all previous purchases should have met the requirements in

place at the time the facilities were purchased.

Response: In March 1994, Congress added to the Head Start Act the

provision allowing grantees to apply for facility purchases made after

December 31, 1986. This requires that the rule refer to both

prospective purchases and purchases already made, which results in

wording that is necessarily somewhat awkward in places. To address this

we have changed the definition of ``Purchase'' Sec. 1309.3 by adding at

the end ``Purchase also refers to an approved purchase of a facility

which commenced between December 31, 1986, and October 7, 1992, as

permitted by the Head Start Act and Sec. 1309.2 of this part''. This

has allowed the deletion of most of the references to previously

purchased facilities in the rule. Where clarity of a particular

provision of the rule required explicit reference to previously

purchased facilities, that phrase was left in the provision in

question.

Section 1309.3--Definitions

Comment: One comment to this section, asking for further definition

of the phrase ``modular units,'' was received. The comment states that

in the past many trailers, mobile classrooms, and modular units have

been used by Head Start grantees, and questions have arisen as to when

they were to be considered ``equipment'' and when they were considered

``real property subject to the full facility purchase requirements.''

Response: Section 644(f) of the Head Start Act, which this rule

implements, states that the ``Secretary shall establish uniform

procedures for Head Start agencies to request approval to purchase

facilities * * * to be used to carry out Head Start programs.'' The Act

makes no distinction between ``equipment'' and ``real property,'' or

between temporary and permanent facilities. The policy of this rule,

which we believe is consistent with the meaning of the Act, is that the

purchase of modular units is subject to the provisions of the rule if

they will be used to operate a Head Start program.

The definition of ``useful life'' as defined in the NPRM is vague

and has been deleted.

For clarification purposes, we have added a definition of ``Head

Start center or a direct support facility for a Head Start program''

and made minor edits to several definitions. We revised the definition

of ``grantee'' to include reference to ``for-profit'' agency in

accordance with the Head Act Reauthorization Amendments in the Coats

Human Services Amendments of 1998, Pub. L 105-285.

Section 1309.10--Application

Comments--General: Several respondents to this section expressed

concern that grantees might lose a facility they propose to purchase

because of delays in securing ACF approval of their application. Two

suggestions were received for dealing with this concern. One respondent

proposes that there be an expedited approval process for facilities

which are defined, according to established criteria, as ``at risk of

being sold.'' The same respondent suggests that we establish

``parameters'' in making grant awards for facility purchases and allow

a replacement property meeting these ``parameters'' to be purchased

within 90 days if the original site is no longer available. Another

respondent proposes that the application process be divided into two

stages. The first stage would involve general approval of a facility

purchase for a particular grantee as a policy matter. At this stage,

the Department would determine whether the grantee's current space is

inadequate and whether a waiver of non-federal share would be approved

if requested, but would not be asked to approve the purchase of an

actual facility the grantee is proposing to buy. The second stage would

be a ``deal-specific'' approval, designed to allow decisions on a

proposed purchase to be made relatively quickly and predictably. In

this stage, requests for purchase of particular buildings would be

reviewed, based on cost comparisons, environmental impact studies, and

the condition of the proposed facility.

Response: We do not agree that it would be advisable to apply any

special circumstances for the review of an application for a property

``at risk of being sold'' as suggested by one respondent. The decisions

made by the responsible HHS approving official should not be hastened

by the pressure of another buyer's interest in a property, but should

be made based upon the merits of the application.

However, the concern expressed by the respondents that the review

of applications for facility purchases be conducted expeditiously is

understandable. In response to these concerns, a new Sec. 1309.12

entitled ``Timely decisions'' has been added to the final rule. Section

1309.12 states that ``The responsible HHS official shall promptly

review and make final decisions regarding completed applications under

this part.''

In order to expedite the application review process, we strongly

encourage all grantees considering the purchase of a facility to

discuss their facility needs with the responsible HHS official prior to

submitting the formal application or beginning negotiation for the

purchase of the facility. As part of these discussions, the grantee and

HHS approving official would consider whether the grantee's current

space is

[[Page 5941]]

adequate and whether funds to complete the purchase and meet any

ongoing financing commitments are available, or would be available at

the time purchase is made. We believe that as a result of these early

discussions, the grantee would be in a better position to submit a

complete application which could receive prompt review.

Once a formal application is received by ACF, under these final

rules, ACF would complete the review of the application within 60 days

of receipt of the application. To the extent that the grantee works

closely with ACF in this process, the review may be completed in less

than 60 days. Applicants may contact their Regional Administrator to

request a review of their initial determination.

Grantees are cautioned that they should not take any irrevocable

action, such as entering into a purchase contract, until they have

received a written confirmation of the Department's final decision that

Head Start funds may be used to purchase the facility.

Comment--Section 1309.10(g): We received one comment on paragraph

(g) of Sec. 1309.10, which concerns grantees which apply for grant

funds to purchase a facility based on the fact that a lack of

alternative facilities will prevent the operation of the program. The

respondent expresses a concern that this criterion is too strict and

should be changed to allow a purchase if the purchase of the facility

will improve program operation.

Response: This respondent's suggestion cannot be adopted. Section

644(f)(2)(C) of the Head Start Act mandates that a grantee seeking

approval to use grant funds to purchase a facility demonstrate either

that the proposed purchase will result in savings when compared to the

costs that would be incurred to acquire the use of an alternative

facility to carry out the program, or that there are no alternative

facilities and the lack of alternative facilities will prevent the

operation of the program. These two criteria are specific and we are

thus unable to disregard the language of the statute in favor of the

much broader criterion suggested in the comment. However, a

clarification was added to this paragraph which requires that the

statement explaining how it was determined that there is or was a lack

of alternative facilities, be supported, whenever possible, by a

written statement from a licensed real estate professional in the

grantee's area.

Comments--Section 1309.10(i): Paragraph (i) of Sec. 1309.10, which

requires facility purchase applications to include information on the

effect the purchase would have on the grantee's ability to meet the

non-Federal share requirement, received one comment, which proposes

that the non-Federal share requirement be waived for up to three years

for programs which lose non-Federal contributions as a result of buying

a facility, and that programs be allowed to use the full amount of non-

federal contributions received in one year for a facility toward

meeting the requirement for non-Federal share in future years.

Response: Non-Federal contributions, which are required by section

640(b) of the Head Start Act, are provided on a budget period basis.

The commentor is suggesting that grantees who are relying heavily on

accruing non-Federal share by occupying a building free of cost or at

below market cost would lose this non-Federal share when purchasing a

facility and may require several years to establish their required non-

Federal match. However, there is no provision for providing blanket

waiver requests across budget periods. Waiver requests must be

submitted annually and are considered on a case-by-case basis against

the statutory criteria.

Comment--Section 1309.10(j): A comment on paragraph (j) of

Sec. 1309.10 asks that we allow the requirement of certification by a

licensed engineer to be fulfilled by the state official who reviews the

plans and inspects child care facilities for licensing. The respondent

states that in rural areas it is sometimes difficult to obtain

professional services such as those of an engineer.

Response: The requirement of this paragraph is not that a private

engineer make the certification, but that a person qualified to do so

certifies that the building is structurally sound. With this in mind we

have made a change in the language of this section to allow, in

addition to licensed engineers, licensed architects to make the

certification. While this change does not specifically address the

suggestion made in the comment, it does broaden the categories of

professionals who may make the certification, which should alleviate

the difficulty some grantees might have experienced in obtaining this

service. And, we reiterate that any engineer or architect qualified to

judge the structural soundness of buildings of this type may make the

certification. This in no way restricts grantees to using engineers or

architects from the private sector.

Comment--Section 1309.10(k): The provision in paragraph (k) of

Sec. 1309.10 on one-time fees and expenses which are not subject to the

limit on administrative costs received two comments. One respondent

suggests that the words ``loan fees and related expenses'' be added to

the illustrative list of one-time expenses in this paragraph. The other

respondent states that expenses related to ownership, such as mortgage

payments and maintenance costs, should be considered program costs not

subject to the administrative costs limitation. If this cannot be done,

the respondent states, the Department should recognize that waivers of

the administrative cost limitation will have to be granted in these

cases.

Response: We have adopted the first respondent's suggestion to add

the words ``loan fees and related expenses'' to the illustrative list

of one-time expenses in this paragraph. The suggestion of the second

respondent has not been adopted. Grantees must analyze and categorize

their costs as either development and administrative or program,

depending on the nature and function of the expense, but may categorize

costs as dual benefit costs if they are both administrative and

programmatic in nature (see 45 CFR 1301.32). Space and related costs

are frequently dual benefit costs, but categorization of costs must be

done by each grantee based on the circumstances involved. The granting

of waivers of the limitation on administrative costs is governed by 45

CFR 1301.32(g), which limits the granting of such waivers to situations

in which development and administrative costs are being incurred but

the provision of program services has not begun or has been suspended.

Comments--Section 1309.10(n): We received two comments on paragraph

(n) of Sec. 1309.10, which requires the application to include an

assessment of the impact of the proposed acquisition on the human

environment pursuant to the National Environmental Policy Act (NEPA) if

the acquisition involves significant renovation or a significant change

in land use. One respondent requested that we define more clearly

``significant change in land use'' and ``human environment,'' and a

second respondent asked that we define as clearly as possible when the

NEPA applies.

Response: We recognize that Head Start grantees may have little or

no experience with the NEPA and that more information and guidance is

needed to help provide an understanding of the law and its implementing

regulations. This guidance will be furnished to grantees and will

include a discussion of such terms as ``significant change in land

use'' and ``human environment.''

[[Page 5942]]

Since publication of the NPRM a draft report of the Office of

Inspector General of the Department of Health and Human Services on

Head Start facility purchases has pointed out that ACF needs to have,

as part of the information submitted by a grantee seeking approval of

the use of grant funds to purchase a facility, information concerning

possible environmental hazards present in the facility and land. The

draft report states that ``The presence of environmental hazards can

result in facilities that are unusable because the facilities cannot be

licensed as safe for children'' and ``cleanup of hazards may be too

costly and cause delays in using the Head Start facility.'' We agree

with these statements and have added the phrase ``and a report showing

the results of tests for environmental hazards present in the facility,

ground water and soil, (or justification why such testing is not

necessary)'' to paragraph (n) of Sec. 1309.10 of the final rule.

Clarifying language was added to paragraph (h) in order to require

the disclosure of information about ``balloon'' or other unconventional

mortgage arrangements to ensure that future mortgage obligations can be

met.

Section 1309.11--Cost Comparison

Comment--General: A comment was received which proposes that

grantees which purchase facilities be required to take training in

facilities management and preventive maintenance, and establish a

funded reserve of up to five to ten percent of project cost for major

repairs, with the unexpended balance of the fund from each year carried

over to the next year.

Response: We will encourage grantees which purchase facilities to

use their training and technical assistance funds to purchase needed

training. The use of grant funds to establish or pay into a reserve or

contingency fund is prohibited by the Office of Management and Budget

Circular A-122.

Comment--Section 1309.11(c): A comment was received proposing to

add a provision to paragraph (c) of Sec. 1309.11 to increase the

operating budgets of programs that have spent little or nothing on

their current facilities. The same respondent suggests that, to

increase the funds available to pay for facilities, a predictable

federal source of funds be established to provide equity grants in the

range of 20 to 25 percent of total project costs.

Response: Congress, when it amended the Head Start Act to authorize

the purchase of facilities with Head Start grant funds, did not

separately appropriate or earmark funds for this purpose. The

legislative history of this section indicates that it was not the

intent of Congress to fund facility purchases at the expense of

enrollment or the provision of services to Head Start children and

families.

Comment--Section 1309.11(d): One respondent expressed a concern

that the cost comparison section does not include any discussion of the

capitalization of mortgage payments for a facility.

Response: Paragraph (d)(2) of Sec. 1309.11 specifies mortgage

payments as an ongoing cost which must be separately delineated in the

application. Nothing in the cost comparison section or any other part

of the final rule is meant to discourage grantees from obtaining bank

or other financing and from using grant funds to pay mortgages (both

principal and interest). In fact, grantees are encouraged to obtain

loans to finance facility purchases, since in most cases ACF will be

unable to provide more than a part of the funds needed to purchase a

facility unless the debt is amortized.

Comment--Section 1309.11(e): The ten year period for the cost

comparison in the case of the proposed purchase of modular units drew a

comment from one respondent, who states that it is arbitrary to allow a

twenty year comparison for other-than-modular buildings and only a ten

year comparison for modular units.

Response: ACF believes it is reasonable to impose a shorter

comparison period for the purchase of modular units because they are on

average less durable than traditional buildings. As was said in the

preamble to the NPRM, the time periods for the comparison were chosen

to achieve simplicity and consistency in the preparation and review of

the applications, taking into account several factors, including the

expected useful life of the facility and the period of the loan which

may be needed to make the purchase.

Comment--Section 1309.11(f): There was one comment to paragraph (f)

of Sec. 1309.11 which states that if the facility is to be used for

purposes in addition to the operation of the Head Start program,

charges for use of the facility must be made by the grantee. The

Preamble to the NPRM states that this paragraph prohibits shared

ownership of facilities purchased with Head Start grant funds, and the

respondent expresses the view that shared ownership should be allowed

where costs are shared proportionately between the Head Start program

and other entities.

Response: As a result of the comments in response to the NPRM, we

have reconsidered our previous statement that we would not consider

requests for funding which involved co-ownership of a facility. We will

consider such proposals under the following circumstances where: the

federal interest in the property can be fully protected; co-ownership

will not impair the use of the property for Head Start purposes either

now or in the future; and co-ownership does not create a prospect that

the Federal government will be called on to undertake extensive or

burdensome action to protect its interest in the property. One way to

meet the first test is for a grantee to propose to purchase ownership

of a unit in a project organized as condominium. Commercial as well as

residential facilities can be organized as condominiums. The Head Start

grantee would own a separate interest in the portion of the facility it

uses to conduct its program, and a share in the undivided interest in

the common elements of the project. The separation of the grantee's

interest in the space which is used for its programs from that of other

co-owners will limit the difficulties raised by the entanglement of the

Federal interest with those of the facility's non-grantee owner.

While we continue to have these concerns about co-ownership, here

in the final rule we are taking a more flexible approach to this

question and will allow co-ownership, subject to approval of the

responsible HHS official. This approval may be withheld if the official

has reason to question the financial capability of the proposed co-

owner to meet debt obligations it assumes to pay for the purchase.

Section 1309.21--Recording of Federal Interest and Other Protection of

Federal Interest

Two comments were received on Sec. 1309.21 of the NPRM. This

section of the NPRM has been redesignated as Secs. 1309.21 and 1309.22

in the final rule to separate and clarify the provisions dealing with

protection of the Federal interest (Sec. 1309.21 of the final rule) and

those concerning the rights and responsibilities of various parties in

the case of a grantee's default on a mortgage (Sec. 1309.22 of the

final rule). Section 1309.22 of the NPRM has been renumbered

Sec. 1309.23 of the final rule.

Comment--Section 1309.21(a): There was one comment on paragraph (a)

of Sec. 1309.21 of the NPRM (redesignated as paragraph (d) in the final

rule), which concerns the protection of the Federal interest in

facilities purchased with grant funds. The respondent states that the

exact nature of the federal interest should be specified in the final

rule.

[[Page 5943]]

Presumably, the respondent states, the interest will take the form of a

restrictive covenant running with the land, which would generally not

affect the lien priority of a lender's acquisition loan, as opposed to

a lien instrument which could affect the lien priority of a lender's

loan.

One respondent states that the final rule should, to the extent

possible, standardize and describe the procedures ACF will use to

authorize facility purchases which involve mortgages, provide a

projected time frame for approval by ACF, and identify the criteria

(i.e., loan structure and terms) ACF will employ in approving a

mortgage. The respondent also suggests that the final rule expressly

state that any lien priorities of HHS are subordinate to those of a

lender providing an acquisition loan.

Response: In response to the first comment existing regulations and

case law establish that the Federal Government has a beneficial

ownership interest in all funds on hand with the grantee and property

purchased with grant funds. The Federal Government's beneficial

ownership interest can affect the lender's priority unless the Federal

Government subordinates its interest. There has been a practice in

other grant programs to allow banks to take a first lien position on

property acquired by a grantee using a blend of grant and mortgage

funds where necessary to obtain mortgage financing. If ACF and the

mortgagee or creditor agree to subordinate ACF's Federal interest to

the mortgagee's or creditor's interest in the property, that agreement

must be set forth in a written subordination agreement that is signed

by the responsible HHS official and that complies with 45 CFR 1309.21

and any other applicable Federal law.

A new paragraph (a) in Sec. 1309.21 allows for a subordination of

interest subject to several qualifications. Paragraph (b) of this

section imposes restrictions on the use and disposition of the property

and paragraph (c) prohibits the use of the facility for other than the

purpose for which the facility was funded without the written approval

of the responsible HHS official. The provisions contained in paragraphs

(b) and (c) of section 1309.21 are based on the provisions found in 45

CFR parts 74 and 92 and respond to the comment suggesting that ACF

explain the requirements for mortgage loan agreements. The new

Sec. 1309.22 was added to state the requirements for loan agreements in

assigning rights and responsibilities in the event of grantee's default

on mortgage, withdrawal or termination.

In Sec. 1309.21, a new paragraph (f) describes certain provisions

that must be included in subordination agreements in which the interest

of the Federal Government in the subject facility has been

subordinated. (A ``subordination agreement'' is an agreement by which

one party agrees that its interest in real property should have a lower

priority than the interest of another party.) The regulations provide

that, in the event of a default under a mortgage in which the Federal

Government has subordinated its interest, the lender must notify the

Department as provided in the regulation, and that the notification

must include a statement prominently displayed at the top of its first

page that ``The Federal Interest in certain real property or equipment

used for the Head Start program may be at risk, immediately give this

notice to the appropriate government official.'' This notification is

necessary to ensure that the Federal Government will receive adequate

notice that the Federal interest in the property is at risk.

Comment--Section 1309.21(d)--(Section 1309.31(b) and (c) of the

final rule): One comment was received on this paragraph, which concerns

protection of the Federal interest in modular units which are purchased

with grant funds and which are not permanently affixed to the land, or

which are affixed to land which is not owned by the grantee. The

respondent states that the final rule should more clearly define ``not

permanently affixed to the land,'' and should clarify what approvals

would be needed in the event the modular unit must be moved to another

location.

Response: Paragraph (d) of Sec. 1309.21 of the NPRM has been

redesignated paragraph (b) of Sec. 1309.31 of the final rule with the

paragraph that comprised Sec. 1309.31 in the NPRM designated as

paragraph (a). This rule is not the appropriate place to try to

precisely state when modular units are or are not ``permanently affixed

to the land.'' For our purposes, the plain meaning of these words will

suffice. The respondent's second point, concerning the moving of

modular units to another location, raises a valid question and has been

addressed by the addition of the sentence ``A modular unit which has

been approved for installation in one location may not be moved to

another location without the written permission of the responsible HHS

official'' to new paragraph (c) in this section.

Comment--Section 1309.21(e)--(Section 1309.22 in final rule): One

respondent states that the final rule should, to the extent possible,

standardize and describe the procedures ACF will use to authorize

facility purchases which involve mortgages, provide a projected time

frame for approval by ACF, and identify the criteria (i.e., loan

structure and terms) ACF will employ in approving a mortgage.

Response: Section 1309.21(e) of the NPRM has been substantially

revised. This section of the final rule reflects suggestions made in

the comment and our experience dealing with lenders who have loaned

money to Head Start grantees to finance the purchase of facilities.

Section 1309.22(a) of the final rule contains provisions required in a

mortgage agreement, signed by a grantee which is borrowing money to

finance the purchase of a facility, regarding circumstances in which

the grantee defaults on the loan or ceases to be the designated Head

Start agency. The purpose of this section is to make sure that Head

Start facilities continue to be available to provide services to

children and families in the community and are not lost to Head Start

because of the failure of a grantee to meet its mortgage commitments,

or because the grantee leaves the program. In carrying out this purpose

we have sought to be reasonable and fair to all parties involved,

including the lender, while protecting HHS's interest in the property.

The final rule includes a description of the terms which must be

included in the mortgage agreement for a facility purchased with Head

Start grant funds. These are agreements which must be followed if the

grantee defaults or the grantee agency ceases to be the designated Head

Start agency. While no attempt is made to specify all the terms which

such agreements must contain, Sec. 1309.22(a) does establish certain

required provisions of these agreements. For example, such agreements

must provide that in the case of a default by the grantee ACF has the

right to ensure the default is cured by the grantee or another agency

designated by ACF. The successor grantee would assume obligations and

rights under the loan and mortgage agreements with the lender. The

assumption of obligations under the loan is subject to the approval of

the mortgagee or creditor, which may not be unreasonably withheld. ACF

is requiring that the agreement provides ACF 60 days upon notification

by the grantee of default to ensure the default is cured. The 60 day

period is an increase over the 30 day period required in the NPRM. ACF

is lengthening the required period before foreclosure because it is

likely that the agency will need the full 60 days in some instances

[[Page 5944]]

to intervene. The Head Start program's response will require

determining why the grantee did not fulfill its obligations under the

mortgage, whether it has the capacity to resolve the problem without

the intervention of the Head Start program, whether additional

assistance is needed, and whether the grantee's failure is grounds for

summary suspension. If the grantee is suspended, an interim grantee

will have to be identified which will continue to operate the Head

Start program.

ACF has revised the language in paragraph (c) to provide that the

mortgagee or creditor shall pay ACF that percentage of the proceeds

from the foreclosure sale of the property attributable to the Federal

share in the value of the property. The new language more clearly

states the requirement for calculating the amount of the sale proceeds

due the Federal Government. The Federal share of a facility purchased

with Head Start grant funds and sold after foreclosure by a lender is

calculated based on the amount of the Federal contribution to the cost

of acquiring the facility. For a facility purchased through use of a

mortgage the amount of the Federal contribution includes grant funds

used for the down payment on the facility, payments on the principal

and interest on the mortgage and the cost of any renovations.

Section 1309.22--Insurance, Bonding and Maintenance (Sec. 1309.23 of

Final Rule)

Comments: One comment to Sec. 1309.22(a)(i) of the NPRM (now

Sec. 1309.23 of the final rule) states that it is assumed that this

provision is not intended to prevent lenders from obtaining standard

mortgagee title insurance coverage to safeguard their interests in the

facility. A second respondent suggests that, in addition to title

insurance and physical destruction insurance, other insurance, such as

general liability and builder's risk insurance, will be needed to

reflect ownership and contractual obligations. This comment states that

physical destruction insurance should cover the ``replacement value''

rather than the ``full appraised value of the facility,'' since an

appraisal may not reflect the actual cost of the facility and its

contents.

Response: The assumption of the first respondent is correct. With

respect to the second comment, we have changed Sec. 1309.22(a) of the

NPRM (Sec. 1309.23(a) of the final rule) to require grantees to provide

the same insurance coverage as they provide to other property owned by

them, but not less than the coverage delineated in this rule, and

physical destruction insurance for the full replacement value of the

facility. General liability insurance is covered by 45 CFR 1301.11(a),

which requires private Head Start grantees and delegate agencies to

carry reasonable amounts of student accident insurance, liability

insurance for accidents on their premises, and transportation liability

insurance.

Section 1309.33--Inspection

Comment: This section, which concerns the inspection of modular

unit installations, received one comment, which suggests that we allow

state officials to do these inspections. The reason is the same as the

reason for the comment made to Sec. 1309.10(j), above, that in rural

areas it may be difficult to obtain engineers to do the inspections.

Response: Our response here is the same as it for the similar

comment to Sec. 1309.10(j): We have changed the language of the NPRM to

allow architects as well as engineers to make the inspections, but have

not otherwise altered the NPRM. As with Sec. 1309.10(j), we wish to

make it clear that any engineer or architect qualified to judge the

soundness of the modular unit and its installation--whether working in

the private or public sector--may make the certification.

Section 1309.41--Record Retention

Comment: A comment was received stating that it should be

explicitly stated that the record-keeping requirements of this section

are not meant to apply to lenders.

Response: The NPRM states that all records pertinent to the

purchase must be maintained by the grantee for the period stated. Since

this is clear by itself, we state here only that this requirement

applies to Head Start grantees only and has no application to lenders.

Section 1309.42--Audit of Mortgage; Five Year Appraisal--(Reference to

Five Year Appraisal Has Been Deleted From the Final Rule)

Comment: A comment on this section, which requires an appraisal of

the value of a facility purchased with grant funds at least once every

five years, states that the appraisal will be unnecessary and a poor

use of program money.

Response: Upon reconsideration, we agree with the respondent that

the requirement of an appraisal of the property at least once every

five years is unnecessary and not the best use of scarce grant funds.

We have deleted this requirement.

Section 1309.43--Use of Grant Funds to Pay Fees

We received no comments on this section and made no technical

changes.

Section 1309.44--Program Income (Deleted From the Final Rule)

Comments: Two comments on this section disagree with the mandate of

this section that program income, other than income from the sale of

equipment or real property purchased with grant funds, be deducted from

the total allowable costs of the budget period in which the income was

produced.

Response: Generally, grantees are authorized to use program income

under the additional costs alternative (which allows the use of the

income to further eligible program objectives) unless there are

persuasive reasons not to allow this alternative. The NPRM, however,

limits the use of income derived from a facility purchased with grant

funds to the deductive alternative, which requires the income to be

deducted from the grantee's total costs for the budget period. Upon

reflection, we are no longer convinced that there are persuasive

reasons to limit grantees' flexibility on the use of this program

income as a general rule, and this section has been deleted to reflect

this change. Questions regarding program income from the sale or rental

of real property purchased with grant funds will be answered by

reference to the applicable provisions of 45 CFR part 74 or part 92. We

wish to encourage grantees to collocate services with other service

providers in the community and to use the facility, and program income

generated from it, to further the goals and objectives of the program.

Section 1309.45--Independent Analysis (Redesignated Sec. 1309.44 in

This Final Rule)

Comment: One comment to this section was received, which proposed

that this analysis should be conducted within 45 days to avoid the risk

of grantees losing lenders and facilities.

Response: We appreciate that the independent analysis should not

unduly delay a decision on the application. On the other hand if there

were an unusually complicated transaction presented it would not be

advisable to abandon the analysis because the 45 day period had

expired. We therefore view this 45 day period as a goal which we expect

to achieve in the future except under unusual circumstances.

This section has been redesignated Sec. 1309.44 as a result of the

deletion of the NPRM section on program income.

[[Page 5945]]

V. Impact Analysis

Executive Order 12866

Executive Order 12866 requires that regulations be drafted to

ensure that they are consistent with the priorities and principles set

forth in the Executive Order. The Department has determined that this

rule is consistent with these priorities and principles. This Final

Rule implements the statutory authority for Head Start grantees to

apply to use grant funds to purchase facilities. Congress made no

additional appropriation to fund this new authority, however, and so

any money spent toward the purchase of facilities for Head Start

programs is money that would have been spent otherwise by the program

or other programs from the same appropriation amount.

Regulatory Flexibility Act of 1980

The Regulatory Flexibility Act (5 U.S.C. CH. 6) requires the

Federal government to anticipate and reduce the impact of rules and

paperwork requirements on small businesses. For each rule with a

``significant economic impact on a substantial number of small

entities'' an analysis must be prepared describing the rule's impact on

small entities.

Small entities are defined by the Act to include small businesses,

small non-profit organizations and small governmental entities. While

these regulations would affect small entities, they would not affect a

substantial number. Furthermore, the cost of the application process

and other activities undertaken as a result of these regulations will

not have a significant economic impact because the Head Start program

covers 80% of the allowable costs of grantees under the program. The

remaining costs associated with compliance are part of the share of

costs grantees agree to meet from their own resources when they enter

the Head Start program. For these reasons, the Secretary certifies that

this rule will not have a significant impact on substantial numbers of

small entities.

Paperwork Reduction Act

Under the Paperwork Reduction Act of 1995, Pub. L. 104-13, all

Departments are required to submit to the Office of Management and

Budget (OMB) for review and approval any reporting or record-keeping

requirement inherent in a proposed or final rule. This final rule

contains information collection and record-keeping requirements in

Secs. 1309.10 (application), 1309.40 (copies of documents), and 1309.41

(record retention) which have been submitted to OMB for review and

approval in accordance with the Paperwork Reduction Act.

The respondents to the information collection requirements in the

rule are Head Start grantees who may be State or local non-profit

agencies or organizations. The Department needs to require this

collection of information in order to assure that grantees who apply

for approval to purchase a facility with Head Start funds have followed

certain necessary legal and administrative procedures. Also these

collection of information requirements are necessary for monitoring

purposes.

The grantees who will be affected by these requirements will be

those who request approval and are approved to purchase facilities for

the purpose of operating a Head Start program. Based on the average

number of grantees who have requested approval from the Department

since the statutory authority became effective, October 7, 1992, the

estimated annual number of grantees that will be affected is 200.

The actual submittal of an application (Sec. 1309.10) from a

grantee to purchase a facility is a one time activity which is preceded

by a number of preparatory activities. We estimate the time it will

take to prepare the application in accordance with the requirements of

this rule is 40 hours per grantee, calculated over a period of time. On

an annual basis, the total hours estimated for submittal of

applications from grantees are 8,000.

For copies of documents (Sec. 1309.40) and record retention

(Sec. 1309.41) activities, we estimate the number of hours to be 1 hour

per grantee and the total annual hours for all grantees who submit

applications to be 200.

The Administration for Children and Families (ACF) will consider

comments by the public on these proposed collections of information in:

Evaluating whether the proposed collections are necessary

for the proper performance of the functions of ACF, including whether

the information will have practical utility;

Evaluating the accuracy of ACF's estimate of the burden of

the proposed collections of information;

Enhancing the quality, usefulness, and clarity of the

information to be collected; and

Minimizing the burden of the collection of information on

those who are to respond.

OMB is required to make a decision concerning the collection of

information contained in this final rule between 30 and 60 days after

publication of this document in the Federal Register. Therefore, a

comment is best assured of having its full effect if OMB receives it

within 30 days of publication. Written comments to OMB for the proposed

information collection should be sent directly to the following: Office

of Management and Budget, Paperwork Reduction Project, 725 17th Street,

NW, Washington, DC 20503, Attn: Wendy Taylor.

List of Subjects in 45 CFR Part 1309

Acquisition, Facilities Purchase, Head Start, Real Property,

Modular Units.

(Catalog of Federal Domestic Assistance Program Number 93.600,

Project Head Start)

Dated: August 3, 1998.

Olivia A. Golden,

Assistant Secretary for Children and Families.

Approved: October 28, 1998.

Donna E. Shalala,

Secretary.

For the reasons set forth in the Preamble, 45 CFR Chapter XIII is

amended by adding Part 1309 as follows:

PART 1309--HEAD START FACILITIES PURCHASE

Subpart A--General

Sec.

1309.1 Purpose and application.

1309.2 Approval of previously purchased facilities.

1309.3. Definitions.

Subpart B--Application Procedures

1309.10 Application.

1309.11 Cost comparison.

1309.12 Timely decisions.

Subpart C--Protection of Federal Interest

1309.20 Title.

1309.21 Recording of Federal interest and other protection of

Federal interest.

1309.22 Rights and responsibilities in the event of grantee's

default on mortgage, or withdrawal or termination.

1309.23 Insurance, bonding, and maintenance.

Subpart D--Modular Units

1309.30 General.

1309.31 Site description.

1309.32 Statement of procurement procedure for modular units.

1309.33 Inspection.

1309.34 Costs of installation of modular unit.

Subpart E--Other Administrative Provisions

1309.40 Copies of documents.

1309.41 Record retention.

1309.42 Audit of mortgage.

1309.43 Use of grant funds to pay fees.

1309.44 Independent analysis.

Authority: 42 U.S.C. 9801 et seq.

Subpart A--General

Sec. 1309.1 Purpose and application.

This part prescribes regulations implementing sections 644(c) and

644(f)

[[Page 5946]]

of the Head Start Act, 42 U.S.C. 9801 et seq., as it applies to

grantees operating Head Start programs under the Act. It describes the

procedures for applying for Head Start grant funds to purchase

facilities in which to operate Head Start programs, and the conditions

under which grant funds may be awarded to purchase facilities. It also

specifies the measures which must be taken to protect the Federal

interest in facilities purchased with Head Start grant funds.

Sec. 1309.2 Approval of previously purchased facilities.

Head Start grantees which purchased facilities after December 31,

1986, and before October 7, 1992, may request retroactive approval of

the purchase by submitting an application which conforms to the

requirements of this Part and the Act. Grant funds may be used to pay

facility purchase costs incurred only after the responsible HHS

official approves an application for a previously purchased facility.

Sec. 1309.3 Definitions.

As used in this part,

ACF means the Administration for Children and Families in the

Department of Health and Human Services, and includes the Regional

Offices.

Acquire means to purchase in whole or in part with Head Start grant

funds through payments made in satisfaction of a mortgage agreement

(both principal and interest), as a down payment, for professional

fees, for closing costs, and for any other costs associated with the

purchase of the property that are usual and customary for the locality.

Act means the Head Start Act, 42 U.S.C. section 9801, et seq.

ACYF means the Administration on Children, Youth and Families, a

component of the Administration for Children and Families in the

Department of Health and Human Services.

Facility means a structure such as a building or modular unit

appropriate for use by a Head Start grantee to carry out a Head Start

program.

Grant funds means Federal financial assistance received by a

grantee from ACF to administer a Head Start program pursuant to the

Head Start Act.

Grantee means the local public, private non-profit or for-profit

agency designated to operate a program pursuant to 42 U.S.C. 9836 or 42

U.S.C. 9840a.

Head Start center or a direct support facility for a Head Start

program means a facility used primarily to provide Head Start services

to children and their families, or for administrative or other

activities necessary to the conduct of the Head Start program.

Modular unit means a portable prefabricated structure made at

another location and moved to a site for use by a Head Start grantee to

carry out a Head Start program.

Purchase means to buy an existing facility, either outright or

through a mortgage. Purchase also refers to an approved purchase of a

facility, commenced between December 31, 1986 and October 7, 1992, as

permitted by the Head Start Act, and by Sec. 1309.2 of this part.

Real property means land, including land improvements, structures

and appurtenances thereto, excluding movable machinery and equipment.

Responsible HHS official means the official who is authorized to

make the grant of financial assistance to operate a Head Start program,

or such official's designee.

Subpart B--Application Procedures

Sec. 1309.10 Application.

A grantee which proposes to use grant funds to purchase a facility

must submit a written application to the responsible HHS official. The

application must include the following information:

(a) A legal description of the site of the facility, and an

explanation of the appropriateness of the location to the grantee's

service area, including a statement of the effect that purchase of the

facility has had or will have on the transportation of children to the

program, on the grantee's ability to collaborate with other child care,

social services and health providers, and on all other program

activities and services.

(b) Plans and specifications of the facility, including information

on the size and type of structure, the number and a description of the

rooms and the lot on which the building is located (including the space

available for a playground and for parking).

(c) The cost comparison described in Sec. 1309.11 of this part.

(d) If minor renovations are necessary to make the facility

suitable to carry out the Head Start program, a description of the

renovations, and the plans and specifications required by paragraph (b)

of this section for the facility as it will be after renovations are

complete.

(e) The intended uses of the facility, including information

demonstrating that the facility will be used principally as a Head

Start center or a direct support facility for a Head Start program. If

the facility is to be used for purposes in addition to the operation of

the Head Start program, the grantee must state what portion of the

facility is to be used for such other purposes.

(f) Assurance that the facility complies (or will comply after

completion of the renovations described in paragraph (d) of this

section) with local licensing and code requirements, the access

requirements of the Americans with Disabilities Act (ADA), if

applicable, and section 504 of the Rehabilitation Act of 1973. The

grantee also will assure that it has met the requirements of the Flood

Disaster Protection Act of 1973, if applicable.

(g) If the grantee is claiming that the lack of alternative

facilities will prevent or would have prevented operation of the

program, a statement of how it was determined that there is or was a

lack of alternative facilities. This statement must be supported,

whenever possible, by a written statement from a licensed real estate

professional in the grantee's service area. If a grantee requesting

approval of the previous purchase of a facility is unable to provide

such statements based on circumstances which existed at the time of the

purchase, the grantee and the licensed real estate professional may use

present conditions as a basis for making the determination.

(h) The terms of any proposed or existing loan(s) related to the

purchase of the facility and the repayment plans (detailing balloon

payments or other unconventional terms, if any) and information on all

other sources of funding of the purchase, including any restrictions or

conditions imposed by other funding sources.

(i) A statement of the effect that the purchase of the facility

would have on the grantee's meeting of the non-Federal share

requirement of section 640(b) of the Head Start Act, including whether

the grantee is seeking a waiver of its non-Federal share obligation

under that section of the Act.

(j) Certification by a licensed engineer or architect that the

building is structurally sound and safe for use as a Head Start

facility. If minor renovations are necessary to make the facility

suitable for use to carry out a Head Start program, the application

must include a certification by a licensed engineer or architect as to

the cost and technical appropriateness of the proposed renovations.

(k) A statement of the effect that the purchase of a facility would

have on the grantee's ability to meet the limitation on development and

administrative costs in section 644(b) of the Head Start Act. One-time

fees and expenses necessary to the purchase, such as the down payment,

the cost of necessary minor renovations, loan fees and related

[[Page 5947]]

expenses, and fees paid to attorneys, engineers, and appraisers, are

not considered to be administrative costs.

(l) A proposed schedule for acquisition, renovation and occupancy

of the facility.

(m) Reasonable assurances that the applicant will obtain, or in the

case of a previously purchased facility, has obtained a fee simple or

such other estate or interest in the site sufficient to assure

undisturbed use and possession for the purpose of operating the Head

Start program. If the grantee proposes to purchase a facility without

also purchasing the land on which the facility is situated, the

application must describe the easement, right of way or land rental it

will obtain or has obtained to allow it sufficient access to the

facility.

(n) An assessment of the impact of the proposed acquisition on the

human environment if it involves significant renovation or a

significant change in land use, including substantial increases in

traffic in the surrounding area due to the provision of Head Start

transportation services, pursuant to section 102(2)(C) of the National

Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) and its

implementing regulations (40 CFR parts 1500-1508), and a report showing

the results of tests for environmental hazards present in the facility,

ground water, and soil (or justification why such testing is not

necessary). In addition, such information as may be necessary to comply

with the National Historic Preservation Act of 1966 (16 U.S.C. 470f)

must be included.

(o) Assurance that the grantee will comply with the requirements of

the Uniform Relocation Assistance and Real Property Acquisition

Policies Act of 1970, as amended (42 U.S.C. 4601 et seq. and 49 CFR

part 24), and information about the costs that may be incurred due to

compliance with this Act.

(p) A statement of the share of the cost of purchase that will be

paid with grant funds.

(q) For a grantee seeking approval of a previous purchase, a

statement of the extent to which it has attempted to comply and will be

able to comply with the provisions of Sec. 1309.22(a) of this part.

(r) Such additional information as the responsible HHS official may

require.

Sec. 1309.11 Cost comparison.

(a) A grantee proposing to purchase a facility with grant funds

must submit a detailed estimate of the cost of the proposed purchase,

including the cost of any necessary minor renovations, and must compare

the cost of purchasing the proposed facility to the cost of renting an

alternative facility.

(b) All costs of purchase and ownership must be identified,

including, but not limited to, professional fees, minor renovation

costs, moving expenses, additional transportation costs, maintenance,

taxes, insurance, and easements, rights of way or land rentals. An

independent appraisal of the current value of the facility proposed to

be purchased or previously purchased, made by a professional appraiser,

must be included.

(c) The comparison described in paragraph (a) of this section must

compare the cost of the proposed facility to the cost of the facility

currently used by the grantee, unless the grantee has no current

facility, will lose the use of its current facility, intends to

continue to use its current facility after it purchases the new

facility, or has shown to the satisfaction of the responsible HHS

official that its existing facility is inadequate. Where the grantee's

current facility is not used as the alternate facility, the grantee

must use for comparison a facility (or facilities) available for lease

in the grantee's service area and which are usable as a Head Start

facility (meaning a facility large enough to meet the foreseeable needs

of the Head Start grantee, and which complies with local licensing and

code requirements and the access requirements of the Americans With

Disabilities Act, if applicable, and section 504 of the Rehabilitation

Act of 1973) or which can be made useable through minor renovation, the

cost of which shall be included in the cost comparison. In the case of

an application for approval of the previous purchase of a facility, the

cost of the present facility must be compared to the cost of the

facility used by the grantee before purchase of its current facility.

If the facility used by the grantee before the purchase of its present

facility was deemed inadequate by the responsible HHS official, the

grantee had no previous facility, or if the grantee continued to use

its previous facility after the current facility was purchased the

alternative facility shall be an available, appropriate facility (or

facilities) of comparable size that was available for rent in the

grantee's service area at the time of its purchase of the current

facility.

(d) The grantee must separately delineate the following expenses in

the application:

(1) One-time costs, including, but not limited to, the down

payment, professional fees, moving expenses, the cost of site

preparation and installation of a modular unit, and the costs of

necessary minor renovations; and

(2) Ongoing costs, including, but not limited to, mortgage

payments, insurance premiums, maintenance costs, and property taxes. If

the grantee is exempt from the payment of property taxes, this fact

must be stated.

(e) The period of comparison is twenty years, except that for the

purchase of a modular unit the period of comparison is ten years. For a

proposed purchase the period of comparison begins on the date on which

the proposal is made. For approvals of previous purchases, the period

of comparison begins on the date the purchase of the facility took

place.

(f) If the facility is to be used for purposes in addition to the

operation of the Head Start program, the cost of use of that part of

the facility used for such other purposes must be allocated in

accordance with applicable Office of Management and Budget cost

principles.

Sec. 1309.12 Timely decisions.

The responsible HHS official shall promptly review and make final

decisions regarding completed applications under this part.

Subpart C--Protection of Federal Interest

Sec. 1309.20 Title.

Title to facilities acquired with grant funds vests with the

grantee upon acquisition, subject to the provisions of this part.

Sec. 1309.21 Recording of Federal interest and other protection of

Federal interest.

(a) The Federal Government has an interest in all real property and

equipment purchased with grant funds for use as a Head Start facility.

The responsible HHS official may agree to subordinate the Federal

interest in such property to that of a lender which finances the

purchase of the property subject to the conditions set forth in

paragraph (f) of this section.

(b) Facilities acquired with grant funds may not be mortgaged or

used as collateral, or sold or otherwise transferred to another party,

without the written permission of the responsible HHS official.

(c) Use of the facility for other than the purpose for which the

facility was funded, without the express written approval of the

responsible HHS official, is prohibited.

(d) Immediately upon purchasing a facility with grant funds, or

receiving permission to use funds for a previously purchased facility,

the grantee shall

[[Page 5948]]

record a Notice of Federal Interest in the appropriate official records

for the jurisdiction in which the facility is located. The Notice shall

include the following information:

(1) The date of the award of grant funds for the purchase of the

property to be used as a Head Start facility, and the address and legal

description of the property to be purchased;

(2) That the grant incorporated conditions which include

restriction on the use of the property and provide for a Federal

interest in the property;

(3) That the property may not be used for any purpose inconsistent

with that authorized by the Head Start Act and applicable regulations;

(4) That the property may not be mortgaged or used as collateral,

sold or otherwise transferred to another party, without the written

permission of the responsible HHS official;

(5) That these grant conditions and requirements cannot be altered

or nullified through a transfer of ownership; and

(6) The name (including signature) and title of the person who

completed the Notice for the grantee agency, and the date of the

Notice.

(e) Grantees must meet all of the requirements in 45 CFR parts 74

or 92 pertaining to the purchase and disposition of real property, or

the use and disposal of equipment, as appropriate.

(f) In subordinating its interest in a facility purchased with

grant funds, the responsible HHS official does not waive application of

paragraph (d) of this section and Sec. 1309.22. A written agreement by

the responsible HHS official to subordinate the Federal interest must

provide:

(1)(i) The lender shall notify the Office of the Regional

Administrator, Administration for Children and Families, the Office of

the Commissioner, Administration on Children, Youth and Families,

Washington, D.C., and the Office of the General Counsel, Department of

Health and Human Services, Washington, DC, or their successor agencies,

immediately, both telephonically and in writing of any default by the

Head Start grantee;

(ii) Written notice of default must be sent by registered mail

return receipt requested; and,

(iii) The lender will not foreclose on the property until at least

60 days after the required notice by the lender has been sent.

(2) Such notice will include:

(i) The full names, addresses, and telephone numbers of the lender

and the Head Start grantee;

(ii) The following statement prominently displayed at the top of

the first page of the notice: ``The Federal Interest in certain real

property or equipment used for the Head Start Program may be at risk.

Immediately give this notice to the appropriate government official'';

(iii) The date and nature of the default and the manner in which

the default may be cured; and

(iv) In the event that the lender will be exercising its remedy of

foreclosure or other remedies, the date or expected date of the

foreclosure or other remedies.

(3) Head Start grantees which purchase facilities with respect to

which the responsible HHS official has subordinated the Federal

Interest to that of the lender must keep the lender informed of the

current addresses and telephone numbers of the agencies to which the

lender is obligated under paragraph (b) of this section to give notice

in the event of a default.

Sec. 1309.22 Rights and responsibilities in the event of grantee's

default on mortgage, or withdrawal or termination.

(a) The mortgage agreement, or security agreement in the case of a

modular unit which is proposed to be purchased under a chattel

mortgage, shall provide in the case of default by the grantee or the

withdrawal or termination of the grantee from the Head Start program

that ACF may intervene. In the case of a default, the mortgage

agreement or security agreement must provide that ACF may intervene to

ensure that the default is cured by the grantee or another agency

designated by ACF and that the lender shall accept the payment of money

or performance of any other obligation by ACF's designee, for the

grantee, as if such payment of money or performance had been made by

the grantee. The agreement shall also provide that ACF will have a

period of 60 days after notification by the grantee of default in which

to intervene to attempt to cure the default. The agreement shall

further provide that in the event of a default, or the withdrawal or

termination of the grantee the mortgage may be assumed by an

organization designated by ACF. The mortgagee or creditor will have the

right to approve the organization designated to assume the mortgage,

but such approval will not be withheld except for good reason. The

provisions required for inclusion in mortgages must be included in the

mortgages of previously purchased facilities unless a convincing

justification for not doing so is shown by the Head Start grantee.

(b) The grantee must immediately provide the responsible HHS

official with both telephonic and written notification of a default of

any description on the part of the grantee under a real property or

chattel mortgage.

(c) In the event that a default is not cured and foreclosure takes

place, the mortgagee or creditor shall pay ACF that percentage of the

proceeds from the foreclosure sale of the property attributable to the

Federal share as defined in 45 CFR 74.2, or, if part 92 is applicable,

to ACF's share as defined in 45 CFR 92.3. If ACF and the mortgagee or

creditor have agreed that ACF's Federal interest will be subordinated

to the mortgagee's or creditor's interest in the property, that

agreement must be set forth in a written subordination agreement that

is signed by the responsible HHS official and that complies with

Sec. 1309.21 and any other applicable Federal law.

Sec. 1309.23 Insurance, bonding and maintenance.

(a) At the time of acquiring a facility or receiving approval for

the previous purchase of a facility, the grantee shall obtain insurance

coverage for the facility which is of the same type as the coverage it

has obtained for other real property it owns, which includes student

liability insurance and which at least meets the requirements of the

coverage specified in paragraphs (a)(1) and (2) of this section as

follows:

(1) A title insurance policy which insures the fee interest in the

facility for an amount not less than the full appraised value as

approved by ACF, or the amount of the purchase price, whichever is

greater, and which contains an endorsement identifying ACF as a loss

payee to be reimbursed if the title fails. If no endorsement naming ACF

as loss payee is made, the grantee is required to pay ACF the title

insurance proceeds it receives in the event of title failure; and

(2) A physical destruction insurance policy, including flood

insurance where appropriate, which insures the full replacement value

of the facility from risk of partial and total physical destruction.

The insurance policy is to be maintained for the period of time the

facility is owned by the grantee.

(b) The grantee shall submit copies of such insurance policies to

ACF within five days of acquiring the facility or receiving approval

for the previous purchase of a facility. If the grantee has not

received the policies in time to submit copies within this period, it

shall submit evidence that it has obtained the appropriate insurance

[[Page 5949]]

policies within five days of acquiring the facility or receiving

approval for the previous purchase of a facility, and it shall submit

copies of the policies within five days of its receipt of them.

(c) The grantee must maintain facilities acquired with grant funds

in a manner consistent with the purposes for which the funds were

provided and in compliance with State and local government property

standards and building codes.

Subpart D--Modular Units

Sec. 1309.30 General.

In addition to the special requirements of Secs. 1309.31-1309.34 of

this part, the proposed purchase or request for approval of a previous

purchase of a modular unit is subject to all of the requirements of

this part with the following exceptions:

(a) Section 1309.10(j) of this part, which requires a certification

by a licensed engineer or architect of the structural soundness of a

facility prior to approval of an application for grant funds, is

replaced by Sec. 1309.33; and

(b) Section 1309.21(d) of this part does not apply to the proposed

purchase of modular units if the land on which the unit is installed is

not owned by the grantee.

Sec. 1309.31 Site description.

(a) An application for the purchase or approval of a previous

purchase of a modular unit must state specifically where the modular

unit will be installed, and whether the land on which the modular unit

will be installed will be purchased by the grantee. If the grantee does

not propose to purchase land on which to install the modular unit or if

the previously purchased modular unit is located on land not owned by

the grantee, the application must state who owns the land on which the

modular unit is or will be situated and describe the easement, right-

of-way or land rental it will obtain or has obtained to allow it

sufficient access to the modular unit.

(b) Modular units which are purchased with grant funds and which

are not permanently affixed to land, or which are affixed to land which

is not owned by the grantee, must have posted in a conspicuous place

the following notice: ``On (date), the Department of Health and Human

Services (DHHS) awarded (grant number) to (Name of grantee). The grant

provided Federal funds for conduct of a Head Start program, including

purchase of this modular unit. The grant incorporated conditions which

included restrictions on the use and disposition of this property, and

provided for a continuing Federal interest in the property.

Specifically, the property may not be used for any purpose other than

the purpose for which the facility was funded, without the express

written approval of the responsible DHHS official, or sold or

transferred to another party without the written permission of the

responsible DHHS official. These conditions are in accordance with the

statutory provisions set forth in 42 U.S.C. 9839; the regulatory

provisions set forth in 45 CFR part 1309, 45 CFR part 74 and 45 CFR

part 92; and Administration for Children and Families' grants policy.''

(c) A modular unit which has been approved for purchase and

installation in one location may not be moved to another location

without the written permission of the responsible HHS official.

Sec. 1309.32 Statement of procurement procedure for modular units.

(a) An application for the purchase of a modular unit must include

a statement describing the procedures which will be used by the grantee

to purchase the modular unit.

(b) This statement must include a copy of the specifications for

the unit which is proposed to be purchased and assurance that the

grantee will comply with procurement procedures in 45 CFR parts 74 and

92, including assurance that all transactions will be conducted in a

manner to provide, to the maximum extent practical, open and free

competition. A grantee requesting approval of a previous purchase of a

modular unit also must include a copy of the specifications for its

unit.

Sec. 1309.33 Inspection.

A grantee which purchases a modular unit with grant funds or

receives approval of a previous purchase must have the modular unit

inspected by a licensed engineer or architect within 15 calendar days

of its installation or approval of a previous purchase, and must submit

to the responsible HHS official the engineer's or architect's

inspection report within 30 calendar days of the inspection.

Sec. 1309.34 Costs of installation of modular unit.

Consistent with the cost principles referred to in 45 CFR part 74

and 45 CFR part 92, all reasonable costs necessary to the installation

of a modular unit the purchase of which has been approved by the

responsible HHS official are payable with grant funds. Such costs

include, but are not limited to, payments for public utility hook-ups,

site surveys and soil investigations.

Subpart E--Other Administrative Provisions

Sec. 1309.40 Copies of documents.

Certified copies of the deed, loan instrument, mortgage, and any

other legal documents related to the purchase of the facility or to the

discharge of any debt secured by the facility must be submitted to the

responsible HHS official within ten days of their execution.

Sec. 1309.41 Record retention.

All records pertinent to the purchase of a facility must be

retained by the grantee for a period equal to the period of the

grantee's ownership of the facility plus three years.

Sec. 1309.42 Audit of mortgage.

Any audit of a grantee which has purchased a facility with grant

funds shall include an audit of any mortgage or encumbrance on the

facility. Reasonable and necessary fees for this audit are payable with

grant funds.

Sec. 1309.43 Use of grant funds to pay fees.

Consistent with the cost principles referred to in 45 CFR part 74

and 45 CFR part 92, reasonable fees and costs associated with and

necessary to the purchase of a facility (including reasonable and

necessary fees and costs incurred prior to the submission of an

application under Sec. 1309.10 of this part or prior to the purchase of

the facility) are payable with grant funds, but require prior, written

approval of the responsible HHS official.

Sec. 1309.44 Independent analysis.

(a) The responsible HHS official may direct the grantee applying

for funds to purchase a facility to obtain an independent analysis of

the cost comparison submitted by the grantee pursuant to Sec. 1309.11

of this part, or the statement under Sec. 1309.10(g) of this part, or

both, if, in the judgment of the official, such an analysis is

necessary to adequately review a proposal submitted under this part.

(b) The analysis shall be in writing and shall be made by a

qualified, disinterested real estate professional in the community in

which the property proposed to be purchased is situated.

(c) Section 1309.43 of this part applies to payment of the cost of

the analysis.

[FR Doc. 99-2860 Filed 2-5-99; 8:45 am]

BILLING CODE 4184-01-P