HUD Issues Proposed Capital Fund Rule

On February 7, HUD issued a proposed rule for the Public Housing Capital Fund program. The rule essentially conforms HUD regulations affecting public housing capital activities with the program structure authorized by the Quality Housing and Work Responsibility Act of 1998 (QHWRA). Regulations implementing various parts of QHWRA, such as the Capital Fund formula, had been promulgated in the intervening years. However, until now there has not been a comprehensive rewrite of those rules and HUD has relied in some cases on the pre-existing regulations.

The Proposed Rule combines and reorganizes several existing regulations into a revised 24 CFR Part 905. These include 24 Part 941 (Public Housing Development, including Mixed-Finance), Part 968 (Comprehensive Grant Program, CIAP, and the Vacancy Reduction Program), and Part 969 (continued operation as low-income housing). The existing regulatory sections would be repealed.

Substantively, much of the rule is simply a restatement of the existing regulations, conformed to current law, as described above. However, there are some notable exceptions that are particularly important to the industry.

Among the most significant proposals are: 

Deviations from HUD Rules under Mixed-Finance. For the first time, HUD has proposed a regulatory provision that would implement the statutory authority in QHWRA that permits owners of mixed-finance projects to deviate from otherwise applicable public housing requirements, such as rents and income eligibility. Eligible developments are those where 20% or more of the units are nonpublic housing rental units. Mixed-finance transactional documents typically contemplate such "transformation” remedies. However, the regulatory means to implement them has not been proposed until now.

Replacement Housing Factor (RHF) Funds.  The rule proposes a transition from the current 10-year RHF eligibility down to 5 years. HUD seeks specific comment on this change. RHF was an important feature of the negotiated rulemaking for the Capital Fund formula following QHWRA and was intended to ensure that there are some funds available to redevelop distressed public housing aside from HOPE VI.

Other important changes from the existing regulations include:

Total Development Costs (TDCs). PHAs may request a TDC exception for integrated utility management, capital planning, and other activities that maximize energy conservation and efficiency.

Physical needs assessments (PNAs). The rule adds a new requirement for project-based physical needs assessments (PNAs) for all properties in a PHAs’s inventory.

ACC Amendments. Specific timeframes are added for PHAs to submit the annual Capital Fund ACC Amendment.

Construction Standards. With respect to construction standards, all development activity would have to comply with a national building code, accessibility requirements are specifically addressed, and design and construction standards would be applied to modernization as well as development activity.

Energy Conservation Measures. HUD seeks specific comment on what cost-effectiveness test(s) should be used to determine whether particular conservation measures identified

Management Improvements. The cap on using Capital Funds for management improvements would be reduced from 20% to 10% over a 3-year period. The primary reason cited for the change is that PHAs can now use up to 50% of annual Capital Funds for non-capital activities if they maximize their current authority to use 20% for management improvements, 10% for administration, and 20% for Operating Fund activities.

Title Insurance. When acquiring property for development, a PHA would be required to obtain a title insurance policy before taking title.

Mixed-Finance. Subpart F of the rule, which (under Part 941) had previously been reserved solely for mixed-finance development, now combines the regulations applicable to conventional and mixed-finance development. Mixed-finance development is specifically addressed at proposed section 905.604.

Rule are due by April 8, 2011. CLPHA will be reviewing the rule in more detail and submitting comprehensive comments to HUD. If you have any questions or comments regarding the Proposed Rule, please contact Todd Thomas, Senior Research and Policy Analyst,  (202) 638-1300 or Steve Holmquist, CLPHA counsel, (202) 349-2462.