Use of Public Housing Capital Funds for Financing Activities, 65198-65212 [2010-26404]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 75, Number 203 (Thursday, October 21, 2010)]
[Rules and Regulations]
[Pages 65198-65212]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-26404]



[[Page 65197]]

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Part IV





Department of Housing and Urban Development





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24 CFR Part 905



Use of Public Housing Capital Funds for Financing Activities; Final 
Rule

Federal Register / Vol. 75 , No. 203 / Thursday, October 21, 2010 / 
Rules and Regulations

[[Page 65198]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 905

[Docket No. FR-4843-F-02]
RIN 2577-AC49


Use of Public Housing Capital Funds for Financing Activities

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Final rule.

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SUMMARY: This final rule implements a program to allow public housing 
agencies (PHAs) to use proceeds of their Capital Fund program for 
financing activities, including payment of debt service and housing 
development and modernization activities. A PHA may grant a security 
interest in future Capital Fund grants, subject to the appropriation of 
those funds by Congress. This final rule follows a July 18, 2007, 
proposed rule that addressed the use of public housing Capital Funds 
and Operating Funds for financing activities, and takes into 
consideration the public comments received on that rule.
    This final rule addresses only the use of public housing Capital 
Funds for financing activities. Given the public comment received on 
the proposed rule, HUD determined that further consideration must be 
given to HUD's proposal for use of operating funds for financing 
activities. The final rule makes changes to the proposed rule in 
response to public comments, including a streamlined approval process 
for standard and high-performing PHAs that have borrowings against 
their Capital Funds within certain limits, or that propose to use their 
Capital Fund financing proceeds in a mixed-finance development. The 
final rule, also in response to comment, provides greater specificity 
than the proposed rule with respect to submission requirements for 
requests for Capital Fund financing transactions.

DATES: Effective date: December 20, 2010.

FOR FURTHER INFORMATION CONTACT: Jeffrey Riddel, Director, Office of 
Capital Improvements, Office of Public and Indian Housing, Department 
of Housing and Urban Development, 451 7th Street, SW., Washington, DC 
20410-8000; telephone number 202-708-1640, extension 4999 (this is not 
a toll-free number). Hearing- or speech-impaired individuals may access 
this number through TTY by calling the toll-free Federal Information 
Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 9 of the U.S. Housing Act of 1937 (1937 Act) (42 U.S.C. 
1437g) states that Capital Funds can be used for activities including 
``development, financing, and modernization'' (see 42 U.S.C. 
1437g(d)(1)(A)). Section 30 of the 1937 Act provides that HUD may 
authorize a PHA to mortgage or otherwise grant a security interest in 
any public housing project or other property of the PHA upon such terms 
and conditions as the Secretary may prescribe. (See 42 U.S.C. 1437g(g), 
which sets limitations on the use of Capital Funds.)
    Under section 9(g)(3)(A) of the 1937 Act (42 U.S.C. 
1437g(g)(3)(A)), Capital Funds may not be used for new construction of 
housing units if such construction would result in a net increase from 
the number of public housing units owned, assisted, or operated by the 
PHA on October 1, 1999. There are two exceptions to this statutory 
requirement. First, section 9(g)(3)(B) of the 1937 Act (42 U.S.C. 
1437g(g)(3)(B)) provides an exception for units that are affordable for 
low-income families in excess of this limitation, but the Capital Fund 
formula shall not provide additional funding for the specific purpose 
of construction and operation of housing in excess of this limitation. 
Second, section 9(g)(3)(C) of the 1937 Act (42 U.S.C. 1437g(g)(3)(C)) 
provides an exception to the Capital Fund formula limitation for the 
operation and modernization of mixed-finance housing, or housing that 
otherwise leverages significant other investment, if the estimated cost 
of the useful life of the project is less than the estimated cost of 
providing tenant-based section 8 assistance for the same period of 
time.
    In any financing transaction that involves pledges of future 
appropriations of Capital Funds, the Antideficiency Act (31 U.S.C. 
1431) applies. The Antideficiency Act states, in relevant part, as 
follows: ``An officer or employee of the United States Government or of 
the District of Columbia government may not make or authorize an 
expenditure or obligation exceeding an amount available in an 
appropriation or fund for the expenditure or obligation; involve either 
government in a contract or obligation for the payment of money before 
an appropriation is made unless authorized by law. * * * ''
    Because funds cannot be obligated in advance of an appropriation 
being made, any financing commitments based on Capital Fund 
expenditures over a period of years must explicitly be made subject to 
the availability of appropriated funds.
    More detailed information regarding the background of this 
rulemaking, including HUD's initial proposal, can be found in the 
preamble of the proposed rule published on July 18, 2007, at 72 FR 
39546-39547.

II. This Final Rule

    As noted in the ``Summary'' of this final rule, the proposed rule 
published on July 18, 2007, addressed the use of both public housing 
Capital Funds and Operating Funds for financing activities; this final 
rule proceeds to promulgate regulations for the Capital Fund Financing 
Program (CFFP) only. Public comments raised issues on the Operating 
Fund Financing Program (OFFP) component of the July 18, 2007, proposed 
rule, such that HUD determined further consideration must be given to 
those comments before promulgating final regulations on the OFFP 
component. HUD, however, is ready to proceed with issuing final 
regulations for the Capital Fund component of the July 18, 2007, 
proposed rule.
    Some of the key changes made to the CFFP component at this final 
rule stage include the following:
     The entire section is recodified as subpart E of part 905, 
and section numbers redesignated accordingly, so that, for example, 
proposed Sec.  905.700 is in this final rule Sec.  905.500.
     This final rule permits PHAs to pledge up to 100 percent 
of their replacement housing factor (RHF) funds for debt service, 
provided that such pledge constitutes no more than 50 percent of the 
PHA's combined future Capital Funds (i.e., formula funds and RHF 
funds). Acceleration of Capital Fund-financed debt is allowed, but only 
with HUD approval. HUD will allow PHAs to pledge 100 percent of their 
RHF due, in part, to the fact that the maximum term that PHAs can 
underwrite RHF for is 10 years, which is the maximum period of time a 
PHA can receive a tier of RHF. This is half the maximum term of 20 
years permitted where PHAs pledge Capital Fund formula funds for the 
payment of debt service, and therefore considerably more conservative. 
The 50 percent cap is being established to limit the amount of RHF 
funds that PHAs can pledge. This limitation will be triggered for those 
PHAs where RHF makes up such a significant portion of their overall 
Capital Fund that the pledge will cause the total amount pledged to 
exceed 50

[[Page 65199]]

percent of the PHA's combined future Capital Funds and RHF funds. The 
table below provides examples of the potential impact of the 50 percent 
cap.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Max debt
                                                                                                        service                     Debt
                                                                 Capital                    Total         from         Debt       service
                                                                   fund      RHF grants    capital      capital      service        from      Total debt
                                                                 formula                 fund grants  fund grants    from RHF     formula      service
                                                                  grant                                  (50% of      grants       grant
                                                                                                         total)
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Scenario 1...................................................       $5,000         $500       $5,500       $2,750         $500       $1,667       $2,167
Scenario 2...................................................        1,000          500        1,500          750          500          250          750
Scenario 3...................................................          500          500        1,000          500          500            0          500
Scenario 4...................................................          200          500          700          350          350            0          350
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(1) In Scenario 1, because the RHF is much less than the Capital Fund formula grant, the PHA can leverage 100 percent ($500) of its projected RHF and 33
  percent ($1,667) of its projected Capital Fund formula grants.
(2) In Scenario 2, the 50 percent cap is triggered. The PHA will leverage 100 percent ($500) of its projected RHF, but may leverage no more than 25
  percent ($250) of its projected Capital Fund formula grants because borrowing more would exceed the 50 percent cap.
(3) In Scenario 3, the 50 percent cap is triggered. The PHA will be able to leverage 100 percent ($500) of its RHF, but will not be able to leverage any
  Capital Fund formula grants because borrowing more would exceed the 50 percent cap.
(4) In Scenario 4, the 50 percent cap is triggered. The cap results in the PHA being able to use only a portion of its RHF and none of its Capital Funds
  formula grants for debt service because borrowing more would exceed the 50 percent cap. This is due to the fact that the Capital Fund formula grants
  represent only a small portion of the PHA's overall funding.

     Where the proposed rule would have permitted PHAs to 
pledge ``more than'' 33 percent of its projected future annual Capital 
Fund grants for debt service upon a showing to HUD that the PHA has 
sufficient Capital Fund grants to meet its needs, it was silent on the 
issue of existing grants. The final rule makes explicit that PHAs may 
pledge up to 33 percent of its future Capital Fund grants, and may 
pledge 100 percent of its RHF grants, provided that such pledge 
constitutes no more than 50 percent of the PHA's combined future 
Capital Funds (i.e., formula grant funds and RHF funds). Subject to a 
reasonableness test, PHAs may pledge more than 33 percent of their 
existing Capital Fund grants.
     A streamlined procedure is provided for mixed-finance 
proposals and Capital Fund Financing Proposals from PHAs: (1) That are 
standard or high performers under the Public Housing Assessment System 
(PHAS) and have cumulative CFFP transactions of less than $2 million, 
or (2) that are high PHAS performers and have cumulative CFFP 
transactions of less than $20 million. For standard or high performing 
PHAs, management assessments under the following regulations--24 CFR 
905.505(e), fairness opinions under 24 CFR 905.505(k), and 
demonstration of construction management and financial controls under 
24 CFR 905.505(l)--may not be required as part of the Capital Fund 
Financing Proposal. HUD retains the discretion to require assessments, 
opinions, or controls in certain cases. In addition, physical needs 
assessments and quarterly reporting have been removed as requirements 
for PHAs that use the CFFP in mixed-finance transactions, and for PHAs 
that size their CFFP based only upon the projected receipt of RHF. 
Finally, as part of its processing of Capital Fund Financing Proposals 
on a case-by-case basis, HUD had been requiring PHAs to include in 
their cover letter the status of other HUD approvals needed to utilize 
CFFP proceeds, such as the approval of development proposals where the 
proceeds are proposed to be used for development. This final rule 
removes that information as a required part of the Capital Fund 
Financing Proposal. In the future, HUD will make the determination of 
required approvals based upon the PHA's description of the proposed use 
of proceeds. HUD will condition any CFFP Financing approvals upon the 
receipt of any other HUD approvals needed to use the proceeds.
     In response to comments to clarify the requirements of a 
Capital Fund Financing Proposal in the rule, and limit the number of 
requirements for PHAs to make submittals in accordance with terms and 
conditions as determined by HUD, Sec.  905.510(b) is revised to list 
the submittal requirements for a Capital Fund Financing Proposal. The 
Capital Fund Financing Proposal requirements as presented in this final 
rule are based upon the proposal requirements for the program as it is 
currently being implemented on a case-by-case basis. In addition to the 
streamlining for certain transactions referenced above, changes in this 
final rule from what HUD has required on a case-by-case basis for all 
proposals include: (1) The cover letter is no longer required to 
include a narrative on the status of ancillary approvals required to 
use the CFFP proceeds; and (2) an effective cost of financing schedule 
is no longer required to be submitted as part of the CFFP Financing 
Proposal.
     The 40-year use restriction in section 9(d)(3) of the 1937 
Act (42 U.S.C. 1437g(d)(3)) is stated at Sec.  905.505(c). This section 
follows the statutory language and provides for exceptions as 
``provided in'' the 1937 Act. Such exceptions would include, for 
example, demolition of obsolete units under section 18 of the 1937 Act 
(42 U.S.C. 1437p) and required conversion under section 33 of the 1937 
Act (42 U.S.C. 1437z-5).
     The required contents of the transmittal letter under 24 
CFR 905.510(b)(1) are specified. The letter must contain a description 
of the proposed financing and use of proceeds, the percentage of 
Capital Funds being dedicated to debt service, the percentage of the 
PHA's public housing units benefiting from the financing the impact of 
the financing on the public housing portfolio, and any additional 
information that may be required.
     Financing schedules, including debt service and sources 
and uses, are required by Sec.  905.510(b)(3) of this final rule.
     A Capital Fund Plan currently consisting of a CFP Annual 
Statement/Performance and Evaluation Report (form HUD-50075.1, and CFP 
5-Year Action Plan (form HUD-50075.2) are described in Sec.  905.505(h) 
and (n). The PHA must provide evidence that the PHA has conformed to 
the requirements related to the Declaration of Trust (DOT) as described 
in Sec.  905.505(c)(4) and mentioned in Sec.  905.510(b)(6).
     The PHA must provide a board resolution authorizing the 
PHA to finance a loan up to a specified amount, to provide all the 
security interests required by the loan, and authorizing the Executive 
Director of the PHA to

[[Page 65200]]

negotiate and execute required legal documents as required by Sec.  
905.510(b)(7).
     The PHA must provide an opinion of counsel stating that 
the PHA has authority to enter into the transaction and that the 
transaction complies with the 1937 Act, Federal regulations, and the 
applicable Annual Contributions Contract (ACC) as described in Sec.  
905.510(b)(7).
     If a PHA is proposing direct debt service payments through 
HUD's Line of Credit Control System (LOCCS), the PHA must execute a 
Capital Fund Financing Amendment to the ACC as required by Sec.  
905.510(b)(8).

III. Summary of Public Comments

    The public comment period closed on September 17, 2007, and HUD 
received 21 public comments. HUD received public comments from a 
variety of sources, including private citizens, six PHAs, three trade 
associations, four law firms, and several housing development 
consultants. A summary of the issues raised and HUD's responses to 
these issues are as follows.
    Comment: The proposed rule will not succeed as long as the 
Operating Fund and Capital Fund are so severely underfunded.
    Response: These comments concern appropriation levels, and are 
therefore outside of the scope of this rule. Furthermore, there exists 
a multiplicity of sources that PHAs can combine with Capital Funds to 
help meet the needs of their public housing portfolio. These include 
public housing sources, such as energy performance contracts, as well 
as nonpublic housing sources such as low income housing tax credits 
(LIHTCs), funds from the Federal Home Loan Banks' Affordable Housing 
Program, and local funds. Creative, proactive housing authorities can 
utilize Capital Funds and Capital Fund financing in conjunction with 
other sources to meet the needs of their public housing portfolios.
    In regard to the Operating Fund, HUD received many comments from 
respondents that, at current levels of pro-ration, the OFFP is not 
feasible. These comments warrant careful consideration. In order to 
provide the level of rigor necessary to meaningfully respond to the 
comments received on the OFFP, and yet not encumber the processing of 
the CFFP rule, HUD has decided to decouple the processing of the CFFP 
rule from the OFFP rule.
    Comment: Private lenders must accept the risk of continued and 
sufficient congressional appropriations to pay off the debt. Given the 
uncertain level of congressional funding for the Capital Fund and 
Operating Fund programs, lenders will likely charge higher fees and 
impose additional credit enhancements or performance standards, 
resulting in higher costs to finance capital improvements.
    Response: While it is true that the Antideficiency Act (31 U.S.C. 
1431) requires all future-year financing to be subject to the 
availability of appropriations, investors have developed a level of 
comfort with the CFFP. Certainly, the CFFP has been more stable than 
other similar investments in the recent past. Since HUD began 
implementing the CFFP in 2000, rates have remained remarkably stable. 
The CFFP has been structured in a way so that most transactions receive 
unenhanced, underlying AA \1\ ratings from Standard & Poor's. Other 
costs for CFFP transactions have been comparable to similar financing 
mechanisms in the marketplace. While investor perception may change if 
appropriations decrease below current levels, to date the CFFP has 
provided a financing tool with pricing similar to financing options 
available to HUD's multifamily portfolio.
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    \1\ In the Standard & Poor's rating system, an AA rating is the 
second-highest rating (AAA being the highest), and indicates that 
the obligor's capacity to meet its financial commitment on the 
obligation is very strong. Unenhanced, underlying ratings refer to 
debt obligations not supported by financial guarantees, structuring 
techniques, multiple-party features, or other external credit 
support. See https://www.standardandpoors.com.
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    Comment: The process for approving Capital Fund financing 
arrangements is too extensive and cumbersome and may require an entire 
year or more from planning through closing. Commenters made 
recommendations to simplify the approval process by making it similar 
to that of mixed-finance housing programs; to eliminate the requirement 
for a fairness opinion for transactions borrowing less than $2 million; 
to eliminate the requirement for third-party management reviews as 
duplicative and costly; and to eliminate management assessments for any 
transaction where the Capital Funding being financed is less than $20 
million, and the PHA is not classified as a poor-performing PHA.
    Similarly, several commenters stated that PHAs have experienced 
delays in getting HUD approvals and that these delays add costs or may 
negatively impact the deals. These commenters recommended that HUD 
establish clear time frames for the review and approval process, 
recommending a range of dates such as 30, 45, or 60 days. The 
commenters all noted that clear timelines will improve the willingness 
of private partners to enter into these transactions.
    Response: HUD initially implemented the CFFP on a case-by-case 
basis, to allow maximum flexibility in initial implementation of the 
program, and provide PHAs and HUD an opportunity to learn from 
collective experience at the inception of the program. However, one of 
the consequences of this approach was that the process of reviewing and 
approving transactions took longer than HUD believes would have 
otherwise been the case if HUD had initiated implementation of the 
program through rulemaking. HUD believes that rulemaking will make 
implementation more standardized and consistent, but, if done earlier, 
might have hampered the ability to more expeditiously implement changes 
during the early evolution of the program. HUD now has sufficient 
experience both to implement rulemaking, and to ensure a more 
streamlined review process. Reviews now take approximately 2 to 3 
months on average, the same length of time as in the Mixed-Finance 
Development Program, for which HUD's regulations are found in 24 CFR 
part 941, subpart F. However, there continue to exist opportunities to 
further streamline the process and make it more efficient.
    This final rule therefore makes the following streamlining changes:
    (1) The rule removes the effective cost of financing schedule as a 
program requirement. HUD will continue to make this tool available to 
PHAs as a mechanism whereby they can complete an ``apples-to-apples'' 
comparison of different financial structures. Nonetheless, PHAs remain 
obligated pursuant to 2 CFR part 225 (cost principals for state, local, 
and Tribal governments, OMB Circular A-87) to assure the cost 
reasonableness of their financial transactions, and the reasonableness 
of the proposal remains a requirement for approval.
    (2) Management assessments (proposed Sec.  905.705(e)), fairness 
opinions (proposed Sec.  905.705(k)), and information about financial 
and construction management controls (proposed Sec.  905.705(l)) are no 
longer required where Capital Fund Financing Proposals being pursued as 
part of mixed-finance transactions, the PHA is a standard or high 
performer under PHAS and is undertaking a CFFP transaction of less than 
$2 million cumulatively, or the PHA is a high performer under PHAS and 
is undertaking less than $20 million in cumulative CFFP transactions. 
HUD retains the discretion to require assessments, opinions, or 
controls in

[[Page 65201]]

certain cases. The removal of submittal requirements for financial and 
construction management controls applies only to the demonstration of 
such controls within the Capital Fund Financing Proposal itself. PHAs 
still must adhere to public housing requirements in regard to the use 
of CFFP proceeds.
    (3) Proposed Sec.  905.705(c)(5) (final Sec.  905.505(c)(4)) has 
been modified for CFFP use with a mixed-finance project such that the 
evidence of Declarations of Trust (DOTs) will be part of the mixed-
finance evidentiary approval process.
    (4) Proposed Sec.  905.705(h)(2) (final Sec.  905.505(h)(2)) has 
been modified to remove the requirement for the submission of a budget 
detailing the use of CFFP proceeds for certain PHAs. This requirement 
has been eliminated for PHAs that size their loans based only upon RHF 
funds, as well as those that use the CFFP proceeds as part of a mixed-
finance transaction. CFFP approval letters for these transactions will 
be conditioned upon the approval of the related development proposal.
    (5) Proposed Sec.  905.705(p) (final Sec.  905.505(p)) has been 
revised to eliminate quarterly reporting requirements under this 
program where the CFFP proceeds are being used as part of a mixed-
finance transaction, and for PHAs that size their transactions based 
only upon RHF funds.
    (6) This final rule removes proposed Sec.  905.710(b)(4). Proposed 
Sec.  905.710(b)(4) would have requested redundant information.
    Comment: HUD's submission and reporting requirements for this 
program are excessive. Commenters stated that HUD is bringing fewer 
resources to the project but is imposing requirements as though funding 
the entire project. They recommended that HUD reporting requirements be 
proportional to its financial stake in the project and that they 
reflect a more business-like approach to partnering with the private 
sector.
    Response: This final rule reduces reporting requirements for PHAs 
that combine CFFP with mixed-finance projects. PHAs that pursue mixed-
finance projects have both HUD and investor reporting requirements 
associated with the mixed-finance transaction, and HUD agrees that the 
CFFP reporting requirements could be reduced. In fact, this final rule 
streamlines those requirements, as described above in the preamble.
    However, for non-mixed-finance projects, quarterly reporting is 
still necessary. Unlike Capital Funds, CFFP proceeds do not appear in 
the Line of Credit Control System (LOCCS). Therefore, quarterly reports 
are the only mechanism at HUD's disposal by which it can monitor the 
project.
    Comment: Several items in the rule provide that requirements must 
be accomplished by the PHA ``in a form and manner to be determined by 
HUD'' or that additional ``terms and conditions'' may be determined by 
HUD. HUD should work with PHAs and other outside parties to clarify 
these points before the rule is published as a final rule.
    Response: HUD agrees with the comment that a clearly defined set of 
rules will result in a more efficient process for assembling Capital 
Fund Financing Proposals, and for HUD's review of those proposals. 
Since the Capital Fund Financing Proposal process which HUD has 
implemented on a case-by-case basis is a defined process with known 
submittal requirements, this final rule revises Sec.  905.710 (now 
Sec.  905.510 in the final rule) to state the general submittal 
requirements, while retaining HUD's administrative discretion in 
approving Capital Fund Financing Proposals that may present unique or 
complex financing for modernization and development.
    This final rule revises Sec.  905.510(b)(1) to describe in more 
detail the requirements for the transmittal letter and Sec.  
905.510(b)(2) to provide the requirement for incorporating a table of 
contents and contact information in the proposal. This final rule also 
revises Sec.  905.510(b)(3) to reflect the required financing schedules 
that must be submitted. These include the debt service schedule, 
sources and uses schedule, and portfolio schedule. The effective-cost-
of-financing schedule was dropped as a submittal requirement, although 
HUD will continue to make it available on its Web site to assist PHAs 
in assessing the overall financial costs of different financial 
structures.
    This final rule revises Sec.  905.510(b)(4) to summarize other 
submittal items required pursuant to proposed Sec.  905.705 that were 
not delineated elsewhere in proposed Sec.  905.710. New Sec.  
905.510(b)(6) incorporates the requirement for evidence regarding DOTs. 
New Sec.  905.510(b)(7) incorporates the requirement for a board 
resolution and a counsel's opinion. New Sec.  905.510(b)(8) states the 
requirement for a Capital Fund Financing Amendment to the ACC be 
executed as part of the CFFP transaction. This final rule revises 
proposed Sec.  905.705(j) to specify requirements associated with 
variable rate transactions. This final rule also revises proposed Sec.  
905.705(n) (final Sec.  905.505(n)) to state specific additional 
requirements that are also included in the Capital Fund Financing 
Amendment to the ACC.
    Comment: HUD should establish safe harbors for financing 
transactions with Capital Funds. Such safe harbors could include: The 
PHA has not been designated as troubled, the PHA has not defaulted on 
loan or obligations secured by Capital Funds, the PHA has described the 
proposed transaction in its PHA plan, the PHA pledges no more than one-
third of its annual allocation of Capital Funds under section 9(d) of 
the 1937 Act, the PHA is in compliance with obligation and expenditure 
requirements under section 9(j) of the 1937 Act, and the PHA submits a 
fairness opinion of an independent qualified third party.
    Response: Cost controls and safe harbor standards work well for 
transactions where industry norms are established and readily 
identifiable and few variations are expected, such as with development 
or management fees. Financing does not lend itself to such standards 
being established. Interest rates change daily. As recent events in the 
area of mortgage financing have demonstrated, the financial markets, 
including the home financing market, can be turbulent, if not volatile. 
Safe harbor standards are simply not workable in this environment.
    Instead of safe harbor standards, the CFFP establishes a 
requirement for an independent third-party fairness opinion, with 
certain exceptions where there are other indications of reduced risk. 
The requirement for a fairness opinion, as opposed to cost control and 
safe harbor standards, permits HUD to maintain flexibility in 
implementing the program. This approach allows PHAs to structure 
financial transactions that best meet their needs, provided that the 
fairness opinion establishes that the transaction is fair and 
reasonable given current market conditions.
    HUD believes that the streamlining process introduced in this rule 
(and described elsewhere in this preamble) will also assist with the 
issue. HUD's review process for complete Capital Fund Financing 
Proposals now averages approximately 2 to 3 months, and this shorter 
process time should allow PHAs to lower costs and respond to market 
conditions, which HUD believes is a better solution than safe harbor 
standards for this purpose.
    Comment: The rule will provide little assistance to small PHAs. HUD 
should consider other forms of incentive to assist those PHAs.
    Response: HUD recognizes and appreciates that the relative cost of 
financing is more expensive for smaller

[[Page 65202]]

PHAs. As a result, HUD has revised the rule to streamline procedures 
for smaller PHAs based on the size of their financings.
    For those PHAs that are standard or high performers with cumulative 
borrowings of less than $2 million, the requirement for the submission 
of management assessments and fairness opinions, and a demonstration of 
construction management and financial controls is limited. HUD reserves 
the right to require a fairness opinion or return the proposal if 
financing costs are outside of what HUD considers anticipated norms. 
This streamlining should assist small PHAs in reducing the costs of 
financing.
    Comment: The proposed rule refers to mortgaging public housing 
properties under section 30 of the 1937 Act (42 U.S.C. 1437z-2), but 
does not establish regulations for mortgaging public housing property. 
HUD should implement provisions related to mortgaging public housing 
property. Also, in implementing section 30 of the 1937 Act, HUD should 
allow PHAs to subordinate the DOT. Otherwise, the rule risks devaluing 
PHA real estate and destroying the potential utility of section 30 of 
the 1937 Act. Other comments stated that HUD should remove this 
authority. One commenter states that the authority is not needed and 
lenders might unnecessarily require pledges of real estate collateral; 
another states that the granting of security interests in public 
housing property other than Capital Funds is already addressed in 24 
CFR part 941, subpart F (mixed-finance development).
    Response: HUD may provide more detailed guidance to PHAs regarding 
mortgaging their properties in the future. In the meantime, this final 
rule does not remove the basic authority to mortgage real property. 
While it is true that in entering into financing transactions PHAs 
should aggressively represent their interest with financing providers, 
the overall success of the CFFP program is demonstrated by the fact 
that HUD has approved more than $3 billion in CFFP transactions to 
date. These transactions have been structured on an appropriations-
based financing model; that is, where future appropriations, not real 
estate, represents the security interest provided to lenders. Since the 
appropriations-based financing approach has been accepted by the 
housing finance market, lenders will have no basis to unnecessarily 
demand pledges of real estate collateral.
    Comment: The proposed rule missed the opportunity to encourage 
innovative financing for public housing that is more in line with 
financing for other rental housing. The rule should allow PHAs to 
pledge public housing Operating Funds, Capital Funds, rents, and the 
underlying property. Another commenter remarked that banks evaluate 
market-rate apartments on their ability to generate sufficient rents to 
cover expenses and have sufficient funds remaining to cover the debt, 
and if not, on the ability of the property to generate sufficient sales 
proceeds to pay off the loan and cover expenses in the event of a 
foreclosure. That commenter further stated that, given the nature of 
public housing, lenders cannot view PHAs or their stand-alone projects 
as market-rate financing, but rather that private and public housing 
are at opposite ends of the financing spectrum. Other commenters noted 
that, at current proration levels, PHAs will not have the cash flow 
necessary to support financing.
    Response: HUD recognizes that public housing financing is quite 
different from financing in the private sector. Since, in operating 
pro-formas (standard financial projections), changes in revenue have 
disproportionate impacts on net operating income (NOI), changes in the 
current appropriations level could cause the NOI to be volatile. The 
potential for volatility in the NOI, and thus, by extension, the debt 
coverage ratio, should PHAs undertake conventional NOI-based financing, 
present additional constraints on adopting a private sector model.
    Moreover, the unique regulatory environment in which public housing 
operates essentially precludes the adoption of a private sector model. 
While, pursuant to asset management, PHAs must now undertake project-
based accounting, except for mixed-finance projects, the public housing 
property in any PHA's portfolio is all owned by a single legal entity, 
namely the PHA. This is entirely different than the private sector 
model, where separate properties are normally owned by distinct legal 
entities, even if ultimately controlled by an individual or other 
overarching entity.
    Furthermore, HUD has approved more than $3 billion in Capital Fund 
Financing Proposals involving almost 200 PHAs, many of these amongst 
the largest PHAs in the country. The CFFP model is based upon a PHA-
wide pledge, and is not property specific. Given the nature of the 
covenants involved in CFFP transactions, it would not be possible for 
PHAs that have undertaken those transactions to provide mortgages in 
underlying properties without first refinancing their CFFP debt. Thus, 
a property-based approach would be further precluded for any PHA that 
has already undertaken a CFFP.
    Comment: Proposed Sec.  905.705(c)(5), which would require that an 
effective DOT be recorded in the first position, will severely hamper 
the amount of private funds that can be leveraged, because the lender 
would discount the value of any land and improvements pledged as 
security, due to the lender's security interest being subordinate to 
the DOT.
    Response: HUD's experience shows that there is limited value in 
allowing PHAs to provide security interests in real estate as part of 
the CFFP. As noted elsewhere, the appropriations-based CFFP program has 
demonstrated broad market acceptance, as well as strong ratings and 
attractive pricing from the investment community. The CFFP regularly 
achieves ratings of AA, which is a similar or better rating than that 
provided to strong multifamily housing projects, and has been used to 
leverage substantial funding.
    Comment: The rule fundamentally errs in treating borrowings secured 
by RHF funds as identical to borrowings secured by Capital Funds. There 
is no reason why the leveraging of RHF funds should be subject to any 
greater HUD review than the direct expenditure of them. Another 
commenter stated that HUD should allow for 80 percent pledging of the 
RHF funds, and allow the market to determine if 80 percent is an 
acceptable risk.
    Response: In general, HUD agrees that CFFP transactions that are 
sized assuming that only RHF funds will be used for the payment of debt 
service could be treated differently than CFFP transactions that are 
underwritten to include formula funds for the payment of debt service. 
However, generally, transactions that size loans based upon the receipt 
of RHF funds have always also included formula funds for the payment of 
debt service. Moreover, transactions that pledge RHF funds have always 
also included a pledge of formula funds. To date, there has not been a 
financing transaction involving RHF funds that isolates the remainder 
of the Capital Fund (i.e., formula funds) from the transaction, for 
debt service payments or for security purposes. Thus, there is not a 
clear distinction between the two types of transactions.
    Nonetheless, HUD agrees that the rule should allow for different 
treatment of proposals where the sizing of the loan is based only upon 
the use of RHF funds for the payment of debt service, if such a 
transaction occurs. This final rule revises proposed Sec.  905.705(g) 
(final Sec.  905.505(g)) to provide that

[[Page 65203]]

transactions structured in the above-noted manner shall not be required 
to complete or submit a physical needs assessment as part of their CFFP 
Financing Proposal.
    In addition to the above, while RHF funds and loan proceeds for 
such transaction must still be identified in schedules in the PHA's CFP 
Annual Statement/Performance and Evaluation Report and CFP Five-Year 
Action Plan, those schedules are not required to be submitted as part 
of the Capital Fund Financing Proposal. This final rule revises 
proposed Sec.  905.705(h) to remove the requirement for PHAs that size 
their loans based only upon the future receipt of RHF to submit a 
budget as part of their Capital Fund Financing Proposal (final Sec.  
905.505(h)(2)).
    Finally, HUD agrees that RHF funds should be treated differently 
than formula funds, for underwriting purposes. Therefore, this final 
rule revises Sec.  905.505(i)(2) (redesignated from proposed Sec.  
905.705(i)(2)) to permit PHAs to pledge up to 100 percent of their RHF 
funds for debt service, provided that this constitutes no more than 50 
percent of the PHA's combined Capital Funds (i.e., formula funds and 
RHF funds). HUD will allow PHAs to pledge 100 percent of their RHF due, 
in part, to the fact that the maximum term PHAs can underwrite RHF for 
is 10 years, which is the maximum period of time a PHA can receive a 
tier of RHF. This is half the maximum term of 20 years permitted where 
PHAs pledge Capital Fund formula funds for the payment of debt service, 
and, therefore, considerably more conservative. The 50 percent cap is 
being established to limit the amount of RHF funds PHAs can pledge in 
addition to formula Capital Funds. This limitation will be triggered 
for those PHAs where RHF funds make up a significant portion of their 
overall Capital Fund such that pledging RHF funds could exceed the 50 
percent overall cap.
    Comment: One commenter questioned the practical value of proposed 
Sec.  905.705(i)(1), given that proposed Sec.  905.705(i)(2) permits a 
PHA to pledge more than 33 percent of its annual Capital Fund grant 
upon a showing that is essentially duplicative of the physical needs 
assessment required by proposed Sec.  905.705(g).
    Response: HUD agrees that some further explanation of these related 
sections is necessary. Accordingly, this final rule removes proposed 
Sec.  905.705(i)(2) and adds Sec.  905.505(i)(3), to make explicit 
HUD's policy that, as long as it is reasonable to do so, a PHA may 
exceed 33 percent when pledging its existing Capital Fund grant. The 
PHA is necessarily more limited as to pledges of future Capital Fund 
grants because of the possibility of other capital needs arising. This 
final rule also revises proposed Sec. Sec.  905.705(i)(1) and 
905.705(i)(3) as final Sec. Sec.  905.505(i)(1) and 905.505(i)(2), to 
clarify that PHAs may exceed the 33 percent of future projected Capital 
Funds threshold only if they are utilizing RHF grants to size their 
financing. These revised sections allow PHAs utilizing RHF funds to 
exceed 33 percent leverage in their overall future Capital Funds (PHAs 
are permitted to pledge up to 50 percent of their overall future 
Capital Fund, including formula funds and RHF funds), in order to 
leverage up to 100 percent of their RHF funds.
    Comment: In the context of a project using an LIHTC, operating 
agreements and CFP Annual Statement/Performance and Evaluation Reports 
should allow the use of these funds to pay the annual LIHTC fund 
investment management fee specified in the respective operating 
agreement governing the investment of these LIHTC funds in a 
development or modernization activity. The investment management fee 
should be specified in the initial operating agreement, should not 
escalate faster than the consumer price index, and should initially not 
exceed $8,000 annually.
    Response: As a cost of financing, the fee would be a permissible 
Capital Fund expenditure, provided it is proportional to the ratio of 
public housing units to non-public housing units in the project.
    Comment: The time deadlines for HUD review of documentation should 
be waived in a mixed-finance development transaction. The rule should 
permit PHAs to submit executed copies of the required legal documents 
to HUD when they become available.
    Response: Submission of executed closing documents to HUD is 
required so that HUD may upload the debt service schedule into LOCCS. 
However, as a business practice for Capital Fund Financing Proposals 
that are part of mixed-finance transactions, HUD regularly conditions 
its CFFP approval on the receipt of approval of the mixed-finance 
program. This final rule revises Sec.  905.715(b)(2) to reflect this 
business practice. Section 905.515(b)(2), as revised by this final 
rule, requires closing documents to be submitted within 60 days of the 
date of HUD's approval letter; that letter sets conditions that must be 
met prior to closing (rather than using the closing date). HUD 
continues to make efforts to reduce paper submittal requirements, and 
now requires that only one hard copy of the Capital Fund Financing 
Proposal be submitted. The remaining copies can be submitted as 
electronic copies.
    Comment: Given the condition of HUD's information management and 
program systems, PHAs may be prevented from participating in the CFFP 
due to erroneous or missing information in HUD's PHAS.
    Response: HUD disagrees. The PHAS has consistently provided data in 
a time frame sufficient to permit the timely conclusion of financing 
transactions.
    Comment: Given the $18 billion backlog of capital needs, it is 
unreasonable to require PHAs to complete a physical needs assessment at 
the project level that covers the PHA's entire public housing portfolio 
before seeking approval of a CFFP or OFFP transaction. No PHA can 
legitimately demonstrate an ability to address all the capital needs of 
its stock.
    The requirement of a physical needs assessment should be removed 
and HUD should rely on information in the CFP Annual Statement/
Performance and Evaluation Report and CFP Five-Year Action Plan. Rather 
than conducting a physical needs assessment, PHAs should be required to 
consider alternative sources of financing. The physical needs 
assessment should be permissive rather than mandatory.
    Proposed Sec.  905.705(g) should be clarified to indicate how 
current the physical needs assessment must be.
    Response: This final rule revises proposed Sec.  905.705(g) to 
remove the requirement that PHAs demonstrate, based on the physical 
needs assessment, that they can maintain their public housing portfolio 
over the term of the financing. Instead, this final rule, responsive to 
public comments, requires that the PHA demonstrate that the financing 
will not negatively impact the ability of the PHA to meet the ongoing 
needs of its public housing portfolio over the term of the financing. 
In order to make this analysis, PHAs will need to project their future 
funding, and the demand for that funding from both capital and non-
capital activities. PHAs that borrow more than $2 million cumulatively 
and are not leveraging non-public housing funds must demonstrate that 
they have considered leveraging. As noted previously, PHAs that size 
their loans based only upon the receipt of future RHF, or that use 
their CFFP as part of mixed-finance transactions, are not required to 
meet the requirements of proposed Sec.  905.705(g) (final Sec.  
905.505(g)).
    In response to comments that HUD should not require a physical 
needs assessment at all, but rather require PHAs to seek alternative 
means of financing, or make the physical needs

[[Page 65204]]

assessment permissive, HUD notes that CFFP loans result in PHAs 
obligating a significant portion of long-term future funding streams to 
pay off the loans. For this reason, long-term capital planning is an 
essential part of undertaking the obligations and commitments 
associated with CFFP financing. However, the underlying point, that 
PHAs should consider alternative financing sources when structuring 
their CFFP transactions, is valid, as it maximizes funding for the PHA. 
Therefore, this final rule revises final Sec.  905.505(g) such that 
PHAs that borrow in excess of $2 million and do not leverage non-public 
housing funds must state why the proposed borrowing is appropriate in 
light of other alternatives available.
    In response to the comment that the rule should clarify the timing 
of the physical needs assessment, at present, the requirements stated 
in 24 CFR 968.315 apply. PHAs must conduct a new physical needs 
assessment at least once every 5 years.
    Comment: One commenter noted that the rule's prohibition on the use 
of financing proceeds for central office cost center costs raises 
numerous questions, including whether the application is a central 
office or project cost, whether HUD is suggesting that property 
managers set up affiliates to perform developer duties, and how the 
project-based requirements would be met if the proceeds were used for 
predevelopment or new development purposes. Several commenters 
recommended that proposed Sec.  905.705(h)(4) be eliminated. Another 
commenter stated that the provisions should be changed to permit PHAs 
to use CFFP financing proceeds to pay for costs directly incurred by 
the central office cost center.
    Response: The limitation concerning the use of CFFP proceeds for 
administrative and central office cost center costs effectively 
precludes PHAs from doubling the amount of Capital Funds that PHAs can 
use for administrative costs. Currently, and under the revised rules 
issued pursuant to asset management, administrative and central office 
cost center costs are eligible costs under the CFFP. Administrative and 
cost center costs are generally among the first costs set aside by PHAs 
each year as they budget their use of Capital Funds. Therefore, any 
Capital Funds used by PHAs to pay debt service will already be the net 
of administrative or central office cost center costs. Since CFFP debt 
is repaid from Capital Funds, if the rule permitted PHAs to use CFFP 
proceeds for these costs as well, the rule would in effect be doubling 
the ceiling on such use of Capital Funds, by allowing the PHA to take 
the fee once from the CFFP proceeds, and then a second time from the 
Capital Funds used to repay the CFFP financing.
    PHAs should use their Capital Funds to cover any eligible 
administrative costs associated with CFFP transactions, within the 
allowable limits. The rule proposed in Sec.  905.705(h)(4) an exception 
to the use of CFFP proceeds for administrative costs for mixed-finance 
projects.
    In response to public comments, the final rule revises proposed 
Sec.  905.705(h)(4) (final Sec.  905.505(h)(5)) to add a clarification 
that CFFP proceeds may be used, in addition to for the modernization 
and construction of public housing dwelling units, for the development 
or modernization of non-dwelling space. However, PHAs that have 
significant physical needs in their public housing dwellings should 
take measures to ensure that they meet the test in Sec.  905.505(g) if 
they propose to use CFFP proceeds for non-dwelling facilities.
    This final rule also revises proposed Sec.  905.705(h)(4) (final 
Sec.  905.505(h)(5)) to clarify that CFFP proceeds may be used to 
reimburse predevelopment costs only to the extent that those costs were 
incurred in accordance with regulatory requirements. Section 941.302 
limits predevelopment costs for traditional public housing to 3 percent 
of total development costs. Section 941.612 specifies the process for 
drawing down funds for predevelopment costs for mixed-finance 
transactions.
    Comment: Individual projects may not be able to fund the debt 
service, and the asset management project level may change with ongoing 
demolition, redevelopment, and realignment. As a result, the 
regulations should be expanded to include a method to use Capital Funds 
for debt service at the agency level.
    Response: This CFFP final rule permits PHAs to size their financing 
either on the project level, or on an agency level. The pledge of CFFP, 
however, is at an agency level. Further, this final rule allows PHAs to 
size their loans based on a pledge of up to 100 percent of their RHF 
funds (final Sec.  905.505(i)(2)). This revision should provide 
considerable resources to PHAs that wish to utilize the CFFP to realign 
their public housing portfolio.
    Comment: One commenter recommended that HUD define the term ``costs 
already incurred'' in proposed Sec.  905.705(h)(4).
    Response: This final rule removes the phrase ``cost already 
incurred'' from proposed Sec.  905.705(h)(4) (final Sec.  
905.505(h)(5)), and clarifies the language in Sec.  905.505(h)(5) of 
this final rule to specify that CFFP proceeds may reimburse only 
predevelopment costs incurred in accordance with regulatory 
requirements.
    Comment: Proposed Sec.  905.705(j)(1) should permit CFFP financing 
terms anywhere from 30 to 40 years.
    Response: Given the nature of appropriations-based financing, terms 
in excess of 20 years are difficult to support. By way of reference, 
the restrictive covenant associated with the use of Capital Funds for 
modernization is limited to 20 years. This final rule revises the 
language in Sec.  905.505(j)(l) to clarify the limitation of the term 
to 20 years.
    Comment: One commenter recommended that Sec.  905.705(j)(2) be 
clarified to provide that ``any loan with mandatory debt service 
payments shall have a cap on such payments and shall be self-
amortizing.'' Another commenter recommended that the prohibition on 
acceleration be removed. The commenter stated that such a restriction 
could negatively impact the marketability of the program.
    Response: All CFFP transactions have mandatory debt service 
payments, and pursuant to Sec.  905.705(j)(1) they are fully 
amortizing. HUD's policy in implementing the CFFP has been not to 
permit acceleration provisions. Given that HUD has approved more than 
$3 billion in Capital Fund Financing Proposals, there is broad market 
acceptance of the program, including HUD's policy on acceleration. 
Nonetheless, there may be circumstances in which a PHA proposes and can 
justify the inclusion of an acceleration provision in a CFFP 
transaction. This final rule revises Sec.  905.505(j)(2) to allow for 
that possibility.
    Comment: The requirement for a fairness opinion will add 
significant expense to a PHA's financing of a new development. 
Financial markets are competitive and if a PHA has thoroughly 
``shopped'' its financing needs, the PHA will receive a fair and 
competitive rate. Therefore, this requirement should be removed.
    One commenter recommended that HUD require a fairness opinion only 
if the opinion has a conclusive effect and if redundant determinations 
regarding commercial fairness will not be made by HUD. Another 
commenter recommended that the fairness opinion be limited to a 
determination that the ``interest rate, points and costs are reasonable 
given market conditions.''
    Response: The requirement for a fairness opinion permits HUD to 
maintain flexibility in implementing the

[[Page 65205]]

program. This approach allows PHAs to structure financial transactions 
that best meet their needs, provided that the fairness opinion 
establishes that the transaction is fair and reasonable given current 
market conditions.
    HUD will continue its general requirement to have independent 
third-party fairness opinions completed. However, this final rule 
eliminates that requirement for several types of transactions that 
present a reduced risk. For example, fairness opinions are eliminated 
for borrowings of less than $2 million, because of the relatively small 
amount of funds at risk; for high performers up to $20 million, because 
high performers have a demonstrated ability to effectively implement 
their public housing program; and in mixed-finance transactions, 
because PHAs in mixed-finance transactions are generally represented by 
a strong development team and have increased regulatory oversight under 
the mixed-finance program. In any of these cases, HUD can require a 
fairness opinion if the transaction does not meet industry norms. This 
final rule adds Sec.  905.507(a)(2) to eliminate the requirement for a 
fairness opinion for standard or high-performing PHAs that have 
cumulative CFFP transactions of less than $2 million, PHAs that were 
high performers under PHAS and have cumulative CFFP borrowings of less 
than $20 million, and PHAs that propose to use their CFFP proceeds as 
part of a mixed-finance transaction. Notwithstanding these changes, if 
HUD determines that the interest or other costs are not in line with 
industry norms, HUD may require a fairness opinion or return the 
application.
    Regarding the request to limit fairness opinions, fairness opinions 
are already limited to the business terms of financing transactions. As 
such, they are a low-cost and efficient mechanism for ensuring the 
reasonableness of the financing terms given current market conditions. 
HUD does not currently contemplate further reducing the scope of 
fairness opinions.
    Comment: For pooled bond transactions or a single bond transaction, 
the fairness opinion should be required only for transactions above $10 
million.
    Response: This final rule relaxes requirements for fairness 
opinions. PHAs that have cumulative CFFP borrowings under $2 million, 
high-performing PHAs with cumulative CFFP borrowings of less than $20 
million, and all PHAs using the proceeds to undertake mixed-finance 
transactions generally are not required to submit fairness opinions.
    HUD does not anticipate establishing separate criteria for bond 
pools. PHAs participating in bond pools are treated in the same manner 
as PHAs that submit stand-alone Capital Fund Financing Proposals. As 
such, the standards for requiring or waiving the submission of a 
fairness opinion will be the same for all PHAs, whether or not they 
participate in a pooled bond transaction.
    Comment: The requirements for construction management and financial 
controls at proposed Sec.  905.705(l) are duplicative of the 
requirement that PHAs obtain approval for changes for work items at 
proposed Sec.  905.705(m) and add unnecessary layers of administrative 
requirements.
    Response: Proposed Sec.  905.705(l) (final Sec.  905.505(l)) is 
aimed at obtaining representations from PHAs that they have sufficient 
construction management and financial controls in place to offer 
protections from fraud, waste, or abuse. Proposed Sec.  905.705(m) 
(final Sec.  905.505(m)) is a mechanism whereby PHAs may obtain 
approval from HUD for modifications to their approved budgets. 
Obtaining such approvals from HUD does not substitute for the value of 
effective internal controls on the part of the PHA.
    Nonetheless, toward the underlying goal of streamlining the 
regulations where possible, this final rule at Sec.  905.507 removes 
this requirement for assurances regarding construction management and 
financial controls for PHAs that meet the following criteria: PHAs that 
have cumulatively less than $2 million in CFFP financing and are 
standard or high performers, as well as high-performing PHAs that have 
cumulatively less than $20 million in CFFP financing, and all PHAs 
using the proceeds to undertake mixed-finance transactions.
    Comment: Proposed Sec.  905.705(p) would establish burdensome and 
costly requirements on PHAs and should be changed. One commenter 
suggested that such information should be submitted semi-annually 
rather than quarterly. Another suggested that HUD limit its 
requirements to the PHA's annual reports and copies of reports 
submitted to the financing institution. Other commenters questioned the 
need for these reports altogether, since HUD should be able to get this 
information from other reports submitted as part of the PHA's CFP 
Annual Statement/Performance and Evaluation Report or PHA Annual Plan.
    Response: Section 905.505(h)(1) now clarifies that the use of CFFP 
proceeds shall be included in the CFP Annual Statement/Performance and 
Evaluation Report and CFP Five-Year Action Plan in the same manner as 
other uses of a PHA's Capital Funds. In addition, the use of Capital 
Funds for the payment of debt service needs to be included in the CFP 
Annual Statement/Performance and Evaluation Report and CFP Five-Year 
Action Plan in the same manner as other uses of Capital Funds.
    HUD requires that PHAs report quarterly in regard to CFFP 
transactions, because data on the use of CFFP proceeds are not included 
in automated HUD systems in the same manner as Capital Funds, for which 
current data on obligation and expenditure can be accessed.
    Comment: Proposed Sec.  905.710(b)(3) would require parties to 
dedicate time and resources to negotiating an agreement without the 
confidence that they would ultimately obtain HUD approval. The rule 
should strike a better balance between protecting HUD's limited 
resources and requiring private parties to commit extensive resources 
to a transaction that may not be approved.
    Response: HUD's review of the documents associated with CFFP 
transactions is for conformance with program requirements only. As 
such, any negotiations should already be complete and the documents 
should be in their final form before the Capital Fund Financing 
Proposal is submitted to HUD.
    HUD nevertheless does recognize and appreciate that clarity and 
transparency in policy and programmatic requirements increases the 
efficiency of the overall process, both in structuring the Capital Fund 
Financing Proposal, and in HUD's review after the proposal is 
submitted. Toward this end, HUD has been developed legal guidance for 
bond documents. The legal guidance will provide sample provisions that 
the PHA could adopt at its discretion. Although the legal provisions 
would be optional, such provisions could provide a reference point for 
structuring Capital Fund Financing Proposals, removing some of the 
uncertainty that PHAs may now experience in structuring their 
transactions.
    Comment: While the proposed rule required PHA to submit a complete 
set of financing documents (Sec.  905.705(b)(3)), the proposed rule did 
not specify the documents that are to be submitted. More importantly, 
the proposed rule did not indicate how the documents are to be 
evaluated.
    One commenter recommended that Sec.  905.710(b)(3) be removed and 
made more like the streamlined requirements for mixed-finance projects. 
Another commenter recommended that HUD establish a process to approve 
LIHTC LLC (Limited Liability Company)

[[Page 65206]]

operating agreements and critical third-party financing documents 
before these documents are made final.
    Response: Financing documents vary significantly from one 
transaction to the next, even for similar transactions, such as direct 
loans or private placements. There is no definitive way that HUD can 
identify in a regulation the entire list of financing documents that 
each PHA will enter into as part of a CFFP.
    In regard to eliminating the requirement for financing documents as 
part of a streamlined process similar to the mixed-finance program, HUD 
has had much greater experience with mixed-finance public housing than 
with the CFFP. Although HUD has been implementing the CFFP on a case-
by-case basis since 2000, it was not until 2005 that the program began 
to be more widely used. As such, the CFFP is not deemed to be ripe for 
the same streamlining efforts as are currently being promulgated for 
HUD's mixed-finance program. Nonetheless, HUD appreciates the need to 
continually increase the efficiency of HUD programs, and this final 
rule does introduce some streamlining of procedure as have already been 
discussed in this preamble.
    In regard to HUD establishing a process to approve LIHTC LLC 
Operating Agreements before the documents are finalized, it is 
important to note that LIHTC documents, and HUD's review thereof, are 
subject to the mixed-finance program regulations at 24 CFR part 941. On 
December 27, 2006, HUD published a proposed rule entitled ``Streamlined 
Application Process in Public/Private Partnerships for the Mixed-
Finance Development of Public Housing Units.'' The streamlined process 
would substantially reduce the legal documents that must be submitted 
to HUD for review as part of the mixed-finance process.
    Comment: Proposed Sec.  905.710(b)(3) (final Sec.  905.510(b)(5)), 
which provides that HUD will not review preliminary financing documents 
that are still under negotiation, is problematic. The rule should make 
this requirement an option at HUD's discretion. PHAs may need assurance 
that HUD will approve the security interests prior to concluding 
negotiations.
    Response: The CFFP is an appropriations-based financing program. As 
an appropriations-based form of financing involving the CFFP, the 
security interest provided by PHAs to lenders or bondholders is a 
pledge of future Capital Funds, subject to the availability of 
appropriations. As HUD has approved more than $3 billion in Capital 
Fund Financing Proposals, the security interest provided pursuant to 
this program has been well established, accepted by the marketplace, 
and should be familiar to all program participants.
    In terms of reviewing financing documents that are still under 
negotiation or making the requirement for financing documents optional, 
HUD is not a party to the agreements between PHAs and their lenders or 
bondholders, although these negotiations concern substantial Federal 
funding. HUD's review of the documents associated with CFFP 
transactions is necessary for conformance with program