[Federal Register Volume 60, Number 3 (Thursday, January 5, 1995)]
[Rules and Regulations]
[Pages 1922-1954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32151]
[[Page 1921]]
_______________________________________________________________________
Part VII
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 570
_______________________________________________________________________
Community Development Block Grant Program Economic Development
Guidelines; Final Rule
Federal Register / Vol. 60, No. 3 / Thursday, January 5, 1995 / Rules
and Regulations
[[Page 1922]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Community Planning and
Development
24 CFR Part 570
[Docket No. R-94-1729; FR-3474-F-02]
RIN 2506-AB53
Community Development Block Grant Program Economic Development
Guidelines
AGENCY: Office of the Assistant Secretary for Community Planning and
Development, HUD.
ACTION: Final rule and guidelines.
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SUMMARY: This rule establishes guidelines to assist Community
Development Block Grant (CDBG) recipients in evaluating and selecting
economic development activities for assistance with CDBG funds. The
guidelines deal with project costs and financial requirements and with
the public benefit provided by such activities. This rule also makes
certain other changes to facilitate the use of CDBG funds for economic
development objectives.
EFFECTIVE DATE: February 6, 1995.
FOR FURTHER INFORMATION CONTACT: James R. Broughman, Director, Office
of Block Grant Assistance, Room 7286, 451 Seventh Street, SW,
Washington, DC 20410. Telephone: (202) 708-3587; TDD: (202) 708-2565.
(These are not toll-free numbers.)
SUPPLEMENTARY INFORMATION: One of the Department of Housing and Urban
Development's (HUD's) expressed goals is to provide an economic lift
for distressed cities. Toward this end, HUD has embarked on a course
designed to make the Community Development Block Grant (CDBG) program a
potentially major contributor to the provision of jobs, especially for
low-income persons residing in our poorest areas. To accomplish this
goal, the Department recognizes that it will need to change both the
perception and the reality concerning the usefulness of CDBG for
economic development objectives.
Section 806 of the Housing and Community Development Act of 1992
(the 1992 Act) requires the Secretary to establish, by regulation,
guidelines to assist CDBG recipients to evaluate and select economic
development activities for assistance with CDBG funds. The 1992 Act
also made further changes in the CDBG program affecting the use of
funds for economic development activities, particularly those carried
out under the national objective of benefiting low- and moderate-income
persons through the creation or retention of jobs. These changes
necessitate revisions to the CDBG regulations. HUD has also determined
that it is appropriate to take this opportunity to make certain other
changes to the regulations to facilitate the use of CDBG funds for
economic development objectives. These changes are designed to reduce
the administrative burden on grantees while, at the same time, focusing
efforts on assisting the residents of low- and moderate-income
neighborhoods.
A proposed rule regarding these issues was published on May 31,
1994, at 59 FR 28175. The rule gave the public 30 days in which to
submit comments. Fifty-one comments were received, and many of the
comments were extensive. The following types and numbers of commenters
were represented: 14 local government agencies, 7 state agencies, 12
national associations, 7 development organizations, 1 regional planning
agency, 3 private citizens, and 7 HUD Field staff.
Applicability of This Rule to the State CDBG Program
Separate regulatory language for the Entitlement and State CDBG
programs is contained in this rule. This preamble generally discusses
the changes for the two programs together, with differences between the
requirements for the two programs noted. Overall, such differences have
been kept to a minimum.
The State CDBG program regulations do not contain an explanatory
list of eligible activities, and relatively few terms are defined in
regulation. The changes to Secs. 570.201, 570.203, 570.204, 570.500 and
570.506 (and the accompanying preamble discussions thereof) are thus
not applicable to the State CDBG program, as there are no comparable
sections in the State regulations. In interpreting the list of eligible
activities found in Section 105 of the Housing and Community
Development Act of 1974, as amended, states may use the Entitlement
regulations as interpretive guidance.
Applicability of This Rule to the HUD-Administered Small Cities and
Insular Areas CDBG Programs
Portions of the Entitlement CDBG Program regulations are
incorporated by reference into the regulations for the HUD-Administered
Small Cities program and the Insular Areas CDBG program. Thus, the
changes to the Entitlement regulations also apply to the HUD-
Administered Small Cities and Insular Areas programs. Further
clarification will be provided (such as through annual Notices of
Funding Availability or other instructions) for those programs,
particularly regarding applications proposing a limited number of
activities subject to the public benefit guidelines.
Applicability of This Rule to the Indian CDBG Program
It has been determined by the Office of Native American Programs
that this regulation will not be applicable to the Indian Community
Development Block Grant (ICDBG) program. The nature of the ICDBG
program is so separate and distinct from the Entitlement or the State
and Small Cities program that it is in the best interest of the ICDBG
to address these issues separately. A specific rule will be proposed at
a later date to address the needs of the Indian Tribes and Alaskan
Native Villages served by the ICDBG program to comply with the
requirements of the Housing and Community Development Act of 1992.
Summary of Public Comments and HUD Responses
Assistance for Microenterprises
Issue. Three commenters requested that the maximum number of
employees permitted in order for a business to be considered a
microenterprise be increased. (2 local government agencies and 1 state
agency)
Response. The term ``microenterprise'' is defined by Section
807(c)(2) of the 1992 Act as a ``commercial enterprise that has five or
fewer employees, one or more of whom owns the enterprise.'' With this
statutory limitation, the maximum number of employees cannot be
increased.
Issue. Four commenters requested further clarification of the
definition of a microenterprise. Issues raised included: whether the
limitation on the number of employees applies to actual persons or
full-time-equivalent positions; the scope of the term ``commercial'';
and the length of time a CDBG-assisted microenterprise must remain
within the five-employee maximum. (2 national associations, 1 state
agency, and 1 private citizen)
Response. The Department interprets the statutory language
regarding the size limitations for a microenterprise as referring to
number of actual persons employed by the business, including the
owner(s).
As noted above, the statutory definition of a microenterprise
describes [[Page 1923]] such a business as a ``commercial enterprise. .
. .'' The Department does not believe that it was Congress' intent to
construe the term ``commercial'' so narrowly in this instance that it
would encompass only retail businesses. Rather, the HUD interprets this
term broadly to mean any ``entity engaged in commerce,'' subject to the
size limitations further imposed by the statutory definition of a
microenterprise. Definitions of the terms ``microenterprise'' and
``small business'' are being incorporated into the CDBG regulations at
Sec. 570.3 in this final rule.
In regard to the length of time a CDBG-assisted microenterprise
must remain within these size limitations, the same general rule that
applies to other CDBG activities would also apply to microenterprise
assistance. That is, the size limitation applies only at the time the
CDBG assistance is provided. There may often be the expectation that,
in the future, the business will grow beyond five employees; that
expectation should not block assistance to a currently qualified
microenterprise. A grantee need not track the size of the business
throughout the term of any CDBG loan received, as the commenters feared
might be the case. However, it should be noted that when CDBG
assistance is provided on an ongoing basis, as may often be the case
for ``general support'' activities, such assistance ceases to qualify
under the microenterprise eligibility category at the point when the
business grows beyond the five-employee size limitation. Further
assistance to the business after that time must qualify under other
existing eligibility categories.
Issue. Two commenters requested that HUD further define the term
``persons developing microenterprises.'' (1 state agency and 1 private
citizen)
Response. HUD agrees that it is useful to include such a definition
in the regulations. Thus, a new paragraph Sec. 570.201(o)(3) has been
added to this final rule to provide such a definition. Generally, the
term ``persons developing microenterprises'' is defined as persons who
have expressed interest and who are, or after an initial screening
process are expected to be, actively working toward developing
businesses, each of which is expected to be a microenterprise at the
time it is formed. It should be noted that HUD does not expect that all
such persons will actually start a microenterprise; some ``fallout'' is
expected. However, patterns of excessive ``fallout'' rates in a
grantee's microenterprise activities may cause HUD to question whether
such activities truly serve ``persons developing microenterprises.''
Issue. Two commenters requested that HUD revise the regulations to
permit ``general support'' services to also be provided, outside of the
public service cap, to businesses larger than microenterprises. (1
state agency and 1 national association)
Response. The Department cannot accommodate the requested change.
Flexibility to provide such services outside the public service
category is only statutorily provided for microenterprise assistance
carried out under Section 105(a)(23) of the Housing and Community
Development Act of 1974, as amended, and, to a less direct extent,
qualified activities carried out under Section 105(a)(15) of the Act
(Sec. 570.204 of the Entitlement regulations). As noted above, the
statute also imposes the five-employee size limitation on
microenterprises.
Issue. Seven commenters requested that HUD clarify various aspects
of the ``general support'' portion of the microenterprise eligibility
provision. Issues raised included: whether there were any circumstances
in which such support activities would be considered public service
activities; whether ``general support'' could be provided to employees
of microenterprises who are not part-owners; whether ``general
support'' included costs related to the delivery of microenterprise
assistance; and whether the entities providing assistance under this
category would be those most attuned to the special needs of
microenterprises. (1 local government agency, 3 national associations,
2 development organizations, and 1 private citizen)
Response. As noted above, the statute limits the instances in which
``general support'' services may be provided to businesses outside the
public service eligibility category. In any circumstances which fall
outside the specified instances, the provision of such support services
would need to qualify as public service activities.
Under the microenterprise eligibility provision, the statute limits
the direct provision of ``general support'' to ``owners of
microenterprises and persons developing microenterprises.'' Thus,
``general support'' cannot be provided directly to employees of
microenterprises who are not part-owners. However, there may often be
other ways of structuring the activity to achieve essentially the same
end result. For example, financial assistance may be provided to the
microenterprise owner under Sec. 570.201(o)(1)(i) to permit the owner
to provide certain benefits to his/her employees if that can be shown
to assist in the ``development, stabilization, or expansion'' of the
microenterprise. Alternatively, the extent of financial assistance
provided to the microenterprise owner for the capital needs of the
business could be sized taking into account the owner's cost of
providing such benefits for his/her employees.
The term ``general support'' as it is used in the statute and
Sec. 570.201(o)(1)(iii) is not intended to specifically include the
activity administrator's cost of delivering microenterprise assistance
to owners of microenterprises and persons developing them. As with any
CDBG activity, it is recognized that there are various necessary costs
associated with carrying out a microenterprise assistance activity. As
the commenters note, these may include the costs of outreach and
screening, curriculum development, coordination with other agencies,
formation and management of peer lending groups, and certain staff
training and development. As with any other CDBG activity, such costs
directly related to carrying out the microenterprise assistance
activity are considered eligible as part of that activity, without
being categorized as ``general support.'' Such ``activity delivery''
costs are not considered to be general administrative costs that would
be subject to the 20 percent cap.
In regard to the nature of the entities carrying out activities
under this eligibility category and their familiarity with the needs of
microenterprises, HUD has interpreted the statutory provision as
broadly as possible in developing this rule. This should permit
grantees significant flexibility in determining how, and by whom,
microenterprise assistance activities should be carried out, based on
local needs and priorities. The specific selection of service providers
is a matter of local discretion.
Issue. Four commenters recommended that some form of
``appropriate'' test be required for microenterprise assistance carried
out under the new eligibility category or that the rule include some
language stating that such assistance must be reasonable and necessary.
(2 local government agencies, 1 state agency, and 1 HUD Field staff
person)
Response. As noted in the preamble to the proposed rule, this new
microenterprise eligibility category was added to the Act as a new
Section 105(a)(23). This new paragraph of the statute does not contain
any requirement that assistance for such activities be determined to be
``appropriate.'' In addition, this new paragraph is not included among
those eligibility categories listed as covered by [[Page 1924]] the
economic development ``guidelines'' to be established pursuant to the
new Section 105(e) of the statute, as added by Section 806(a) of the
1992 Act. HUD does not believe that adding any regulatory requirements
to this eligibility category that are not required by statute is
warranted. As with any other CDBG activity, however, grantees are free
to develop more restrictive local policies as they feel are appropriate
to meeting their local needs and objectives. Also, pursuant to
Secs. 570.200(a)(5) and 570.502 of the CDBG regulations, all costs
incurred for CDBG assisted activities must be in conformance with the
applicable uniform administrative requirements. This includes the
requirement that the costs be necessary and reasonable for the proper
and efficient administration of the program. Thus, HUD does not believe
it is necessary to include any special language in this regard in
Sec. 570.201(o).
Issue. A concern was raised over the fact that no revision to the
Section 108 Loan Guarantee regulations at Sec. 570.703 was proposed to
reflect the addition of microenterprise assistance as a separate
eligibility category. (1 HUD Field staff person)
Response. Activities eligible for assistance under the Section 108
Loan Guarantee program are specifically delineated at Section 108(a) of
the Act. While the 1992 Act added the separate microenterprise
eligibility category as a new Section 105(a)(23) of the statute, no
reference to this new paragraph was added to Section 108(a) of the
statute. Thus, this eligibility category is not directly eligible for
assistance using Section 108 Loan Guarantees. However, the provision of
direct assistance to microenterprises has long been, and continues to
be, eligible as a special economic development activity under Section
105(a)(17) of the Act (Sec. 570.203(b) of the Entitlement regulations).
Section 105(a)(17) is included at Section 108(a) among the list of
activities eligible for Loan Guarantee assistance under that section.
Therefore, grantees may use Section 108 Loan Guarantees to directly
assist microenterprises, subject to the statutorily required
``appropriateness'' determination and coverage under the economic
development ``guidelines'' (established in this final rule as a new
Sec. 570.209 of the Entitlement regulations and additions to
Sec. 570.482 of the State regulations). These ``guidelines'' take into
account the special needs and limitations arising from the size of such
businesses assisted under Sec. 570.203(b) as required by the new
Section 105(g)(1) of the statute (as added by Section 807(c)(1) of the
1992 Act).
Issue. One commenter asked whether (or how) certain assistance to
in-home day care providers might be eligible under the proposed
Sec. 570.201(o) or Sec. 570.203. The commenter noted that day care is
often provided by people within their own homes. Improvements to the
house may be necessary or beneficial to the provision of day care
services. The existing regulations do not provide guidance as to
whether improvements to a residence in this case should be classified
as rehabilitation or as assistance to a business.
Response. The Department agrees that this issue is not clear in the
existing regulations; the addition of the microenterprise assistance
eligibility section further muddies the issue, as many home day care
providers might also qualify as a microenterprise. Situations in which
businesses are operated from a residence are not limited to day care
provision. To address this comment, the Department has revised
Sec. 570.202 (eligible rehabilitation activities) of the Entitlement
regulations. With this revision, certain situations in which physical
improvements to a residence are undertaken to benefit a business
operated therein may be classified as housing rehabilitation.
Ensuring That Economic Development Projects Minimize Displacement
Issue. Section 907(a) of the National Affordable Housing Act of
1990 amended Section 105(a)(17) of the statute to require, in part,
that economic development projects assisted under this provision must
minimize, to the extent practicable, displacement of existing
businesses and jobs in neighborhoods. The proposed rule implemented
this provision by amending Sec. 570.203 of the Entitlement regulations
with language on displacement that was identical to that contained in
the statute. Six commenters addressed this issue, and several of them
recommended that further guidance be provided. However, few specific
recommendations were received. (3 national associations, 1 local
government agency, 1 private citizen, and 1 HUD Field staff person)
Response. HUD has determined that it is most appropriate to leave
the final rule provision as proposed on this issue. Within the
parameters of the statutory language, grantees will have flexibility to
demonstrate compliance with this requirement as appropriate for their
circumstances. One possible way in which a grantee could demonstrate
compliance with this requirement is by conducting an analysis for each
covered economic development project to determine that any displacement
of existing businesses and jobs that is likely to occur as a result of
the economic development project, both in the neighborhood in which the
project is located and in other surrounding neighborhoods, is
justifiable given an examination of possible alternatives.
Additional Changes to Sec. 570.203, Special Economic Development
Activities
Issue. A total of eight commenters addressed the new paragraph (c)
that was proposed to be added to Sec. 570.203 of the Entitlement
regulations to specifically address items that may be considered
activity delivery costs in conjunction with special economic
development activities assisted under this section. The Department's
principal purpose in proposing the addition of this paragraph was to
permit certain job training and placement activities in direct
conjunction with otherwise assisted CDBG special economic development
activities to be considered part of the ``delivery cost'' of those
special economic development activities. All eight commenters supported
this general concept, but five of them requested modification or
clarification of the provision. The recommended modifications included:
extending this provision to include construction jobs created as part
of CDBG projects; extending it to include all ``CDBG-eligible''
economic development projects rather than just actual ``CDBG-assisted''
projects; limiting the job training and placement activities permitted
under this provision to actual low- and moderate-income persons; and
reclassifying the outreach and monitoring portions of this provision as
general administrative costs subject to the 20 percent cap.
Clarification was also requested as to whether there were any
circumstances where the job training activities discussed would still
be considered a public service. (3 local government agencies, 3
national associations, and 2 development organizations)
Response. HUD has determined that it is not appropriate to extend
the coverage of this provision to include job training for construction
jobs created as part of all CDBG projects in general. This new economic
development services provision specifically applies only to activities
qualifying as special economic development activities under the CDBG
program. Costs for training and apprenticeship programs directly
related to the construction for these activities can generally be
considered to be covered under this provision. Costs of such programs
for other types of [[Page 1925]] CDBG projects can often be considered
as activity delivery costs of the respective projects to which they
pertain.
In regard to the comment that the proposed provision should be
extended to include all ``CDBG-eligible'' economic development projects
rather than just otherwise ``CDBG-assisted'' projects, the Department
has determined that this recommendation has merit. Under the CDBG
program, grant funds may be used to assist an activity ``in whole or in
part,'' as noted at Sec. 570.200(a) of the Entitlement regulations.
There are many cases in which ``activity delivery'' costs are the only
portion of an activity's overall costs that are paid for with CDBG
funds. Thus, Sec. 570.203(c) has been revised in this final rule to
reflect the recommended change. In order to qualify under this
provision, job training and placement activities must still constitute
activity delivery costs for an economic development project that would
otherwise be eligible for further assistance under Sec. 570.203. HUD
considers this to permit such training activities only where the
grantee has an agreement with a specific business(es) to actually
employ the person(s) trained. This provision does not authorize
programs that will merely create a ``pool'' of trained persons from
which a business(es) may possibly hire. (Such activities must continue
to qualify as public service activities under Sec. 570.201(e) of the
Entitlement regulations unless they meet the requirements of the new
Sec. 570.201(o) or Sec. 570.204.) It should also be noted that the use
of CDBG funds for activity delivery costs qualifying under
Sec. 570.203(c) constitutes CDBG assistance to the related economic
development project, regardless of the funding sources for any other
portion of the project. Thus, that project becomes subject to all
applicable CDBG requirements, including national objective and public
benefit requirements.
In regard to the comment that the job training and placement
activities permitted under this provision should be limited to actual
low- and moderate-income persons, the Department has decided not to
adopt this recommendation. Such a proposal confuses the distinction
between eligibility and national objective requirements. As activity
delivery costs, job training and placement activities carried out under
Sec. 570.203(c) are considered part of the economic development project
to which they relate. Thus, they are generally considered to qualify
under the same national objective as that economic development project.
Such CDBG special economic development activities can qualify under a
variety of national objective provisions; they are not limited to
creating or retaining jobs for low- and moderate-income persons.
This comment has raised an issue, however, that HUD found to merit
further consideration. Under existing regulations, with very few
exceptions, the majority of persons benefiting from a CDBG-assisted
activity must be low- and moderate-income persons. HUD is aware of
various proposals under which certain entities have indicated a
willingness to train low- and moderate-income persons for jobs and/or
provide such persons with other employment opportunities, but these
entities cannot agree that 51 percent of all assisted persons will be
low or moderate income. HUD believes that such proposals can often
provide valuable opportunities for employment of low- and moderate-
income persons and that a way should be found to permit CDBG funds to
assist such efforts. Thus, HUD is amending the low- and moderate-income
limited clientele national objective requirements in this final rule
[with a new Sec. 570.208(a)(2)(iv) in the Entitlement regulations and a
new Sec. 570.483(b)(2)(v) in the State regulations] to authorize the
use of CDBG funds for such activities that provide training and/or
other employment support services in limited circumstances. This
provision is discussed more fully in detail in the national objective
portion of this preamble.
There also appears to be some general confusion regarding what can
be considered as activity delivery costs and what must be classified as
general administration subject to the 20 percent cap. Apart from the
job training and placement activities discussed above, most of the
remaining types of activities delineated in the proposed
Sec. 570.203(c) are already considered to be activity delivery costs
eligible under the currently-existing Sec. 570.203. The proposed new
paragraph only provides a more specific statement of this point. One
commenter specifically took issue with the outreach and monitoring
portions of this provision, arguing that such activities should be
considered part of general administration. HUD agrees that
``monitoring'' should be considered a general administration activity,
and thus, that term has been deleted from the new Sec. 570.203(c) in
this final rule. However, reasonable outreach efforts by grantees to
obtain applicants for available assistance and the direct management of
resulting activities are routinely considered part of the delivery cost
of such activities. The commenter compares the above type of outreach
and marketing efforts to activities designed to help inform low-income
residents about CDBG. If that reference is to activities that are
designed to make residents generally aware of the CDBG program and how
they may participate in determining what types of activities the
community funds, such a comparison is imprecise. Rather, the type of
outreach and marketing efforts included under the new Sec. 570.203(c)
would be comparable to activities designed to make residents aware of
how they could apply for assistance under specific activities, such as
a housing rehabilitation program.
Special Activities by Community-Based Development Organizations
(CBDOs)--Sec. 570.204 (Section 105(a)(15) of the Act)
Issue. Six commenters addressed the eligible activities and project
definition sections of the proposed rule changes at Sec. 570.204 (a)
and (b). Most of these commenters requested clarification of the
proposed definitions and discussion of eligible activities. (2 national
associations, 1 local government agency, 1 private individual, and 2
HUD Field staff persons)
Response. HUD has not accepted the recommendation from one national
association to add language to the beginning of Sec. 570.204(a) to
specifically state that the recipient may provide CDBG funds to a
subrecipient under this section ``if permitted by state or local law.''
Compliance with applicable state or local laws is a requirement for
recipients in carrying out all CDBG activities; thus, there is no need
to make a special statement here.
In response to the various requests for clarification of the
definitions for the projects made eligible by Section 105(a)(15) of the
Act, HUD has made minor changes to those definitions included in
Sec. 570.204(a) (1), (2), and (3) in this final rule. For the
definition of a ``community economic development project,'' this
includes a cross-reference to the Consolidated Plan rule at 24 CFR
91.1(a)(1)(iii), which describes the types of activities HUD generally
considers to aid in ``expanding economic opportunities,'' which is part
of the primary objective of the CDBG program as delineated at Section
101(c)(1) of the Act. The definition also notes the general conditions
under which the construction or rehabilitation of housing may be
included as part of a ``community economic development
project.'' [[Page 1926]]
One commenter, a private citizen, raised a question as to whether a
``project'' qualifying under Sec. 570.204 included only activities for
which there is funding committed and which are occurring now or whether
it could include proposed future activities for which no funding has
yet been secured. HUD has determined that specific limits on the scope
of a project cannot easily be prescribed in this regard. Thus, it has
not been addressed in the text of this final rule. HUD expects
recipients to use a plausible interpretation of the term ``project''
and only include activities that are to be carried out within a
reasonable period of time. Such an interpretation should at least
exclude activities which have not yet received necessary conceptual
approvals from the local government.
HUD has also revised the reference to permitted services under
Sec. 570.204. Two commenters, a private citizen and a HUD Field staff
person, requested clarification of this provision. Also, under a
similar expansion of service activities as part of the new
microenterprise eligibility category at Sec. 570.201(o), one of those
same commenters raised a concern about potential abuse of the expanded
flexibility if the requirements were not clearly defined. HUD has
reconsidered the proposed provision and has determined that it is
appropriate to limit the type of services that may be excluded from the
public service cap by qualifying under this section to those (1) that
are specifically designed to increase economic opportunities by
supporting the development of permanent jobs, or (2) services of any
type carried out under this section pursuant to a strategy approved by
HUD under the provisions of Sec. 91.215(e). To reflect this change, the
proposed paragraph Sec. 570.204(a)(5) has been deleted, the proposed
paragraph Sec. 570.204(b)(2) has been renumbered to (b)(3), and a new
paragraph Sec. 570.204(b)(2) has been added to this final rule. In the
State program regulations, proposed Sec. 570.482(c)(2) has been
deleted, and a new paragraph Sec. 570.482(d) has been added to discuss
the eligibility of employment-related services and microenterprise
support services.
Issue. One commenter recommended that the Department consider the
eligible project carried out by the qualified organization under
Sec. 570.204 to be a single eligible activity instead of ``only a loose
grouping of other eligible activities.'' The commenter recommends that
this approach be reflected throughout the regulations, including
national objective requirements, the economic development guidelines,
and record keeping requirements. (1 HUD Field staff person)
Response. In regard to eligibility requirements under Sec. 570.204,
it already is the overall project that is assessed to determine if it
qualifies as one of the three types of projects authorized by this
section. Problems arise when trying to apply this approach for
assessing compliance with national objective requirements, economic
development guidelines, and other applicable requirements, however,
because of statutory requirements that must be applied to specific
types of activities that may be part of the qualified project. For
example, Section 105(c)(3) of the Act limits the manner in which any
housing activities may be considered to benefit low- and moderate-
income persons. Also, Section 105(e) of the Act, as added by Section
806(a) of the 1992 Act, subjects economic development activities to
compliance with the public benefit requirements. Beyond such statutory
restrictions, the Department also believes that requiring detailed
information on what the organization is actually doing with the CDBG
funds helps ensure accountability to both the local citizens and HUD.
However, HUD has determined that the commenter's recommendation does
have a certain degree of merit. Thus, HUD has made certain changes to
the CDBG regulations in this final rule to ease grantees' burden in
tracking national objective compliance for certain activities that may
qualify for eligibility under this category. These changes are
discussed further in the respective national objective portions of this
preamble.
Issue. In regard to the types of entities that qualify under
Sec. 570.204, one commenter noted that such entities are commonly
referred to by practitioners as ``community-based development
organizations (CBDOs)'' or ``community development corporations
(CDCs).'' (1 national association)
Response. HUD has determined that is appropriate, in adopting a
single generic name for the entities that may qualify under
Sec. 570.204, to use a name that is commonly understood by
practitioners. It was also apparent from various comments that the
proposed rule's use of the term ``local development corporations
(LDCs)'' in this regard caused some confusion with some commenters
thinking HUD was ``picking'' one of the entities in the current rule
over the others. Use of the ``CDC'' term noted by the above commenter
could create confusion with existing entities funded under other
Federal programs. Therefore, to reduce confusion, the term ``community-
based development organization (CBDO)'' is now used in this final rule
as the generic term to describe all entities that may qualify under
Sec. 570.204.
Issue. Five commenters addressed the proposed revision to the
definition of the term ``subrecipient'' at Sec. 570.500(c). The
proposed revision was intended only to expand that current provision to
include for-profit entities that are now specifically authorized by
statute to carry out microenterprise assistance activities under the
new eligibility provision implemented in this final rule by a new
Sec. 570.201(o) in the Entitlement regulations [Section 105(a)(23) of
the Act]. Most of the commenters recommended that HUD not consider any
entities carrying out activities under the new microenterprise category
as ``subrecipients'' but rather as ``end beneficiaries.'' These
commenters also requested a similar change in classification for
entities receiving CDBG assistance under Sec. 570.204 of the
Entitlement regulations [Section 105(a)(15) of the Act]. Other
commenters asked only for a clarification of the proposed revision to
Sec. 570.500(c). (1 local government agency, 1 development
organization, and 3 HUD Field staff persons)
Response. The comments regarding entities carrying out activities
under the new microenterprise category will be discussed later in this
preamble in further discussion of the revision to Sec. 570.500(c) in
this final rule. This specific section will only respond to these
comments as they relate to entities receiving CDBG assistance under
Sec. 570.204 of the Entitlement regulations (Section 105(a)(15) of the
Act). The Department has re-examined the status of these entities
within the context of the statutory language at Section 105(a)(15).
This section of the statute authorizes the provision of CDBG assistance
to certain qualified entities to carry out specific types of projects.
Upon review, HUD has determined that the comments questioning the
status of these entities as subrecipients have merit. The Department
has determined that, similar to for-profit businesses carrying out
economic development projects, the entities carrying out qualified
activities under Sec. 570.204 (Section 105(a)(15) of the Act) can be
considered not to be an intermediary organization in the grant
assistance chain acting for the grantee, but rather as being
specifically eligible to receive CDBG assistance itself. While these
entities are not true ``end beneficiaries'' as the commenters argue
(that term applies to the persons served by the activities), they are
not strictly intermediaries either. Thus, the Department has determined
that such [[Page 1927]] eligible entities carrying out qualified
activities under this section will no longer be considered as
subrecipients under the CDBG program. In this final rule,
Sec. 570.500(c) has been amended, in part, to reflect this change.
Issue. Two commenters addressed the general jurisdictional
limitations for organizations qualifying under this section as proposed
at Sec. 570.204(c)(1)(i). One of these, a national association,
recommended that these regulations mirror the Community Housing
Development Organization (CHDO) requirements which permit an entity to
operate in a rural ``multi-county area (but not a whole state).'' The
other commenter, a local government agency, recommended that the
proposed regulatory language be amended to read:
``. . . primarily within an identified geographic area of operation
within the jurisdiction of the recipient. . . .'' The commenter argues
that this would permit an organization with a successful track record
to share its experience by consulting or entering into a joint venture
to support a project in other areas. (1 national association and 1
local government agency)
Response. HUD has determined not to accept the ``multi-county''
recommendation because maintaining local community control of a
organization qualifying under Sec. 570.204 is crucial. Also, it should
be noted that truly rural organizations would not be subject to these
regulatory restrictions anyway. This is because Section 807(f) of the
1992 Act expanded the list of organizations eligible to carry out
activities in nonentitlement areas under Section 105(a)(15) of the
Housing and Community Development Act of 1974, as amended. ``Nonprofit
organizations serving the development needs of the communities of
nonentitlement areas'' now qualify under Section 105(a)(15) of the Act.
Since the State CDBG program regulations contain no listing of eligible
activities, no regulatory language is needed to implement that change.
In regard to the second comment above regarding jurisdictional
limitations, the Department agrees with the commenter's reasoning and
has revised Sec. 570.204(c)(1)(i) to reflect the recommended language
in this final rule. In this regard, however, HUD does note that it
interprets the term ``primarily'' as it is used in this section to mean
that most of the organization's projects are located, funds are used,
and staff time is expended on a project or projects within the
identified geographic area of operation and that outside projects are
largely incidental to the organization's activities and purposes.
Issue. One commenter recommended that HUD provide a definition for
the term ``particular attention'' as it is used in the new
Sec. 570.204(c)(1)(ii) regarding addressing the needs of low- and
moderate-income persons. (1 national association)
Response. The ``particular attention'' language as used in the
above-noted section comes from those statutes that have been referenced
for several years in the CDBG regulations at Sec. 570.204(c)(3)
defining local development corporations. The Department is not aware of
any significant problems with conflicting interpretations of this
language, which is the commenter's stated concern. Thus, the rule has
not been modified to include a formal definition of this term. In
general, HUD would expect the charter, bylaws, etc., of the CBDO to
reflect a commitment to meeting the needs of low- and moderate-income
persons.
Issue. In reference to the new Sec. 570.204(c)(1)(iii), another
commenter expressed ``serious reservations'' about allowing for-profit
organizations to qualify under this section of the regulations. (1
development organization)
Response. The statute at Section 105(a)(15) and the CDBG
regulations at Sec. 570.204 have long permitted for-profit
organizations under this section with the inclusion of Small Business
Investment Companies. The rule now includes only a clearer statement of
what already is permitted. The rule does provide a stipulation that any
monetary profits to a CBDO's shareholders or members must be only
incidental to its operations.
Issue. Four commenters addressed the board structure requirements
under Sec. 570.204(c)(1)(iv). Concerns raised included an objection to
excluding organizations composed solely of institutional members from
qualifying under this section and comments both for and against the
inclusion of business owners in defining permitted board structures.
One of the commenters also recommended that HUD permit the low- and
moderate-income presumptions added by the 1992 Act to be used under
this section in determining whether a sufficient percentage of board
members are low- and moderate-income persons. (1 local government
agency, 2 development organizations, and 1 national association)
Response. HUD has determined that all of the comments regarding the
inclusion of institutions and business owners on the boards of
qualifying CBDOs have some merit. Thus, the Department has refined the
requirements at Sec. 570.204(c)(1)(iv) in this final rule to permit
consideration of both institutional board members and business owners,
but only to the extent that the entities that they represent are both
located in and serve the CBDO's geographic area of operation. In regard
to the comment about permitting the presumption of low- and moderate-
income residents status under this section, it is noted that the
presumptions at Section 105(c)(4) of the HCD Act, as added by Section
806(e) of the 1992 Act, apply only to activities qualifying under the
national objective of job creation or retention for low- and moderate-
income persons. Permitting them to be used in determining compliance
with the board structure requirements of this section would include too
broad of a spectrum of organizations to qualify under this provision.
Thus, the Department has rejected this comment.
Issue. Three commenters addressed the proposed Sec. 570.204(c)(2)
that provided further ways in which an organization might qualify as an
eligible CBDO under this section. These commenters requested
clarification of when this paragraph would apply, and two of the
commenters specifically requested that HUD expand the jurisdictional
restrictions imposed on CHDOs, as designated by the HOME program,
qualifying under this paragraph. (1 national association, 1 development
organization, and 1 HUD Field staff person)
Response. HUD's intent in the proposed Sec. 570.204(c)(2) was to
give organizations that did not meet the general qualification
requirements of (c)(1) certain additional ways of qualifying as a CBDO
under this section of the CDBG regulations. It was not intended that
qualifying organizations would have to meet both (c) (1) and (2); an
entity can qualify under either standard. HUD has revised the
introductory language to Sec. 570.204(c)(2) in this final rule to
clarify that intent. An understanding of this approach is critical in
assessing the requirements that a CHDO under the HOME program must meet
in order to qualify under Sec. 570.204 of the CDBG Entitlement
regulations. A CHDO qualifying under the HOME program may or may not
meet the general qualification requirements for a CBDO under the CDBG
Entitlement program, as delineated at Sec. 570.204(c)(1) of this final
rule. If a CHDO meets those requirements, it may have an area of
operation as large as the jurisdiction of the recipient, just as any
other qualified CBDO. The more restrictive jurisdictional limits at
Sec. 570.204(c)(2)(iii) are only applicable to [[Page 1928]] CHDOs that
cannot meet the general CDBG Entitlement qualification requirements for
CBDOs. An example of such an entity would be a CHDO that meets only the
minimum HOME percentage requirement for low- and moderate-income
persons on its board (33 percent) and cannot show that it has
sufficient types of representatives on that board to meet the 51
percent standard delineated in Sec. 570.204(c)(1)(iv).
In assessing the comments on this issue, HUD has determined that it
is appropriate to provide organizations with an additional alternative
for qualifying as a CBDO under this section of the CDBG regulations.
Thus, in this final rule, HUD has added a new Sec. 570.204(c)(3) under
which an organization that does not qualify under either
Sec. 570.204(c) (1) or (2) may also be determined to qualify as an
eligible entity under this section if the grantee demonstrates to the
satisfaction of HUD, through the provision of information regarding the
organization's charter and by-laws, that the organization is
sufficiently similar in purpose, function, and scope to those entities
qualifying under the above-referenced paragraphs. The Department
intends to have this determination made at the HUD Field Office level.
Also in this regard, it should be noted that HUD expects that many
Community Development Financial Institutions meeting the criteria in
Title I, Subtitle A of the Riegle Community Development and Regulatory
Improvement Act of 1994 (P. L. 103-325, enacted September 23, 1994)
will qualify as CBDOs under Sec. 570.204 of the CDBG Entitlement
regulations. The above-referenced subtitle comprises the Community
Development Banking and Financial Institutions Act. The purpose of this
subtitle is to create a Community Development Financial Institutions
Fund to promote economic revitalization and community development
through investment in, and assistance to, CDFIs, including enhancing
the liquidity of such institutions. The CDFI Fund is to be a wholly-
owned Government corporation that will not be affiliated with any other
agency of the Federal Government. In this final rule, HUD is adding to
the Entitlement regulations a definition of the term CDFI that
references the above-noted new legislation. A CDFI is generally defined
at Section 103 of that Act as an entity that (i) has a primary mission
of promoting community development; (ii) serves an investment area or a
targeted population; (iii) provides development services in conjunction
with equity investments or loans, directly or through a subsidiary or
affiliate; (iv) maintains accountability to residents of its investment
area or targeted population; and (v) is not a government agency or
instrumentality. An ``investment area'' is defined as an area that
either (i) meets objective criteria of economic distress developed by
the Fund and has significant unmet needs for loans or equity
investments; or (ii) is located in a designated Empowerment Zone or
Enterprise Community. These CDFI criteria are similar to those now set
forth in Sec. 570.204(c).
It should again be noted that the requirements of Sec. 570.204 only
apply to the qualification of CBDOs serving Entitlement jurisdictions
under the CDBG program. As discussed earlier in this preamble, Section
807(f) of the 1992 Act expanded the list of organizations eligible to
carry out activities in nonentitlement areas under Section 105(a)(15)
of the HCD Act. Any nonprofit organization serving the development
needs of nonentitlement areas now qualifies under Section 105(a)(15) of
the Act for the State CDBG program.
Issue. One commenter also recommended that HUD allow a limited
partnership in which the managing general partner is an eligible CBDO
to qualify under Sec. 570.204. The commenter argues that the use of
low-income tax credits (LITCs) necessitates a limited partnership
structure and that adding the limited partnership itself as a
qualifying entity would remove the necessity of having two levels of
contracts--one between the grantee and the CBDO and one between that
CBDO and the limited partnership. (1 local government agency)
Response. Limited partnerships are single purpose entities which
exist to syndicate and develop one project. It would be difficult to
construe the definitions of the statutorily eligible entities to
include limited partnerships. Thus, HUD has decided against expressly
adding a provision to the regulations to include the type of limited
partnership described by the commenter. However, in cases in which the
activities of an LIHTC limited partnership are controlled by a
Sec. 570.204 qualified entity, usually by that entity either serving as
the general partner of the limited partnership or establishing such an
entity as a subsidiary, the Department has accepted that CDBG
assistance may be provided by the Sec. 570.204 qualified entity to the
limited partnership for the purpose of carrying out all or part of the
eligible project. The Department will continue to explore ways of
removing unnecessary administrative burdens for such projects.
Issue. Specifically in regard to qualified entities in
nonentitlement areas, one commenter (a state agency) took issue with
the discussion of such entities contained in the preamble to the
proposed rule. The state agency disagreed with HUD's statutory
interpretation that the term ``nonprofit organizations serving the
development needs of communities in non-entitlement areas'' excludes
units of general local government. This interpretation, according to
the state, would restrict the use of CDBG funds by certain State-
sanctioned local entities.
Response. The Department has chosen not to accept this comment. The
preamble to the proposed rule noted that a public nonprofit
organization which meets Internal Revenue Service requirements for
nonprofit status may qualify under Section 105(a)(15) of the Act. The
Department does not define a number of terms (``neighborhood
revitalization project'', ``community economic development project'',
``energy conservation project'', ``carrying out an activity'') which
are significant to the discussion of CBDOs above, in order to give
States maximum flexibility to implement Section 105(a)(15) within the
context of their particular situations.
National Objective Standards for Low- and Moderate-Income Area Benefit
Activities
Issue. A total of seven commenters addressed the proposed revisions
to Sec. 570.208(a)(1)(i) of the Entitlement regulations and
Sec. 570.483(b)(1)(i) of the State regulations dealing with activities
qualifying under the national objective of benefiting low- and
moderate-income persons as area benefit activities. This revision
relates specifically to a proposed presumption of compliance for
special economic development activities that may be carried out under
Sec. 570.203 [Sections 105(a) (14) and (17) of the HCD Act] by a
community development financial institution (CDFI) meeting certain
criteria. Concerns raised by the commenters included statements both
for and against the proposed presumption; requests for clarification of
the types of entities that would qualify as CDFIs; and requests for
revisions to the ``primarily residential'' and other aspects of the
regulation. (1 local government agency, 1 state agency, 1 development
organization, 1 national association, 1 private citizen, and 2 HUD
Field staff persons)
Response. Supporting the development and growth of CDFIs can be a
critical component in the comprehensive revitalization of
[[Page 1929]] distressed neighborhoods because they often address the
financing needs of these areas that are otherwise unmet. Existing CDFIs
have demonstrated their ability to identify and respond to community
needs for equity investments, loans, and development services. Thus,
HUD has decided to include a modified version of the proposed
presumption in this final rule.
First, it is important to define the types of entities that may
qualify as CDFIs, as some of the commenters noted. As noted earlier in
this preamble, HUD is herein adding to the CDBG regulations a
definition of the term CDFI that references the Title I, Subtitle A of
the Riegle Community Development and Regulatory Improvement Act of 1994
(P. L. 103-325, enacted September 23, 1994). Secondly, HUD has
determined that it is more appropriate to create separate paragraphs in
Sec. 570.208 of the Entitlement regulations and Sec. 570.483 of the
State regulations to reflect the options that may be used for
activities carried out by certain CDFIs, rather than to simply include
the proposed presumption in Sec. 570.208(a)(1)(i) and
Sec. 570.483(b)(1). Thus, in this final rule, HUD has added new
paragraphs under the ``additional criteria'' section of the national
objective requirements at Sec. 570.208(d)(6) of the Entitlement
regulations and Sec. 570.483(e)(4) of the State regulations to list the
options that may be used for CDBG activities carried out by any CDFI
whose charter limits its investment area to a primarily residential
area consisting of at least 51 percent low- and moderate-income
persons. The new paragraphs Sec. 507.208(d)(6)(i) and
Sec. 570.483(e)(4)(i) cross reference with additional new paragraphs
Sec. 570.208(a)(1)(v) and Sec. 570.483(b)(1)(iv) of the Entitlement and
State regulations, respectively. Pursuant to these paragraphs, job
creation or retention activities carried out by CDFIs meeting the above
criteria may be presumed to meet the low- and moderate-income area
benefit criteria. It should be noted that with the area benefit
presumption applied in this manner, the ``exception criteria'' for
Entitlement communities cannot be used in this regard. Thus, in order
to take advantage of the area benefit presumption, the CDFI's
investment area must be at least 51 percent low- and moderate-income
regardless of the community's usual area benefit threshold requirement.
HUD has determined that it is also appropriate to offer a similar
benefit for job creation or retention activities carried out under
certain other circumstances. Thus, in this final rule, HUD has also
added Sec. 570.208(d)(5) in the Entitlement regulations, which is
cross-referenced in Sec. 570.208(a)(1)(v). Under this provision, job
creation or retention activities undertaken in an area pursuant to a
HUD-approved economic revitalization strategy developed in accordance
with the authority of Sec. 91.215(e) of the Consolidated Plan final
rule may be presumed to meet the low- and moderate-income area benefit
criteria. It should be noted that in order to reduce the potential for
abuse of this provision, HUD is limiting this form of area benefit
presumption to areas that are primarily residential and contain a
percentage of low- and moderate-income residents that is no less than
the percentage computed by HUD pursuant to Sec. 570.208(a)(1)(ii) but
in no event less than 51 percent. This means that the required low- and
moderate-income percentage for the area may be significantly higher
than that which the community generally uses for its area benefit
activities. For those communities that generally use the ``exception
criteria,'' the required low- and moderate-income percentage for this
area benefit presumption is 51 percent. For a community that generally
is required to meet 51 percent for regular area benefit activities, the
required low- and moderate-income percentage for this area benefit
presumption is that percentage level of low- and moderate-income
persons in the last census block group in the community's highest
quartile of block groups ranked in order of proportion of low- and
moderate-income persons, as computed by HUD pursuant to
Sec. 570.208(a)(1)(ii).
The Department will develop guidelines for determining when
grantees should be authorized to take advantage of the benefits of this
economic revitalization strategy area approach. These guidelines will
be distributed to both grantees and HUD Field Office staff.
In developing this approach for the Entitlement program, the
Department became aware of significant issues concerning how the
economic revitalization strategy provision might be applied to the
State program. Therefore, the Department is not implementing comparable
regulation language for the State program at this time. In order to
gain public comment, the economic revitalization strategy area concept
for states will be the subject of a future proposed rule. In the
meantime, the Department welcomes any comments or suggestions on how
the economic revitalization strategy area approach might be applied to
the State CDBG program.
Two commenters expressed concern about the requirement in
Sec. 570.208(a)(1)(i) that limits the use of the low- and moderate-
income area benefit provision in general to only those activities that
serve areas that are ``primarily residential.'' It should be noted this
requirement is a long-standing provision of the CDBG regulations and
has served the program well. Thus, HUD has decided not to make any
changes to that requirement in this final rule. One of the commenters,
a HUD Field staff person, recommended that a specific exception to the
``primarily residential'' requirement be made for projects qualifying
under Sec. 570.204 of the Entitlement regulations [Section 105(a)(15)
of the HCD Act] because the types of projects made eligible under that
section, including ``neighborhood revitalization'' and ``community
economic development,'' appear to lend themselves to an area-wide
benefit test. Such a change has not been incorporated into this final
rule. The activities most often carried out under Sec. 570.204 [Section
105(a)(15)] involve the provision of housing, and Section 105(c)(3) of
the HCD Act specifically precludes the use of a low- and moderate-
income area benefit national objective claim for such activities.
However, in recognition of the merit of the recommendation, HUD has
made certain changes in this final rule to ease grantees' burden in
tracking low- and moderate-income national objective compliance for
housing activities in certain areas. These changes are more fully
discussed later in this preamble.
One commenter, a national association, expressed support for a
supposed ``revision to permit area benefit . . . without requiring that
the area be defined in terms of census tracts or other official
boundaries.'' The commenter appears to misunderstand current
requirements. While the CDBG regulations do require entitlement
grantees to use, to the greatest extent feasible, the most recently
available decennial census data to support the low- and moderate-income
character of the area (and Sec. 570.208(a)(1)(iv) has been modified to
incorporate a reference to the new Sec. 570.208(a)(1)(v) in this
regard), there is no current requirement that the service area be
defined along census tract or other official boundaries. The language
included in this regard in Sec. 570.208(a)(1)(i) (for Entitlements) and
Sec. 570.483(b)(1) (for States) in the proposed rule is unchanged from
current requirements. [[Page 1930]]
National Objective Compliance by Microenterprise Assistance Activities
Issue. A total of 15 commenters addressed the proposed new
Sec. 570.208(a)(2)(iii) to be added to the Entitlement regulations and
the proposed new Sec. 570.483(b)(2)(iv) to be added to the State
regulations to specifically provide the limited clientele national
objective option for activities qualifying under the new
microenterprise assistance eligibility category. Many of these
commenters specifically supported the provision, and a few specifically
opposed it. Various commenters requested revisions to or clarification
of certain aspects of the provision, most of which related to the
manner in which jobs created by such activities would be considered (2
local government agencies, 3 state agencies, 4 national associations, 4
development organizations, 1 private citizen, and 1 HUD Field staff
person).
Response. As discussed in the preamble to the proposed rule,
activities carried out under the new microenterprise eligibility
category are not statutorily subject to the same low- and moderate
income national objective limitations as are generally applicable to
special economic development activities carried out under Sec. 570.203
[and Sections 105(a)(14) & (17) of the HCD Act]. Thus, the low- and
moderate-income limited clientele method of meeting a national
objective becomes an option for activities carried out under the new
microenterprise eligibility category. While many commenters
specifically supported the subject proposed provision, a few commenters
specifically opposed it, particularly the fact that only 51 percent of
the owners of microenterprises and persons developing them would be
required to be low- and moderate-income persons. Thus, there would be
the potential to permit sizable numbers of non-low- and moderate-income
persons to receive financial assistance to develop a for-profit
business. HUD has found these arguments to be compelling. Thus, the
Department has revised the subject limited clientele provision in this
final rule to restrict its use to qualify only those assisted owners of
microenterprises and persons developing microenterprises who are low-
and moderate-income persons. This change should not be a significant
issue for many of the microenterprise activities assisted under the
CDBG program. Many such programs are designed to provide a means to
help disadvantaged persons become more economically self-sufficient and
are thus often targeted to persons who meet income qualification
criteria at least as restrictive as the CDBG definition of low and
moderate income. Also, to allow for some continuity of service to a
low- or moderate-income person initially assisted under a
microenterprise activity who later may no longer meet the income
guidelines after the microenterprise actually becomes operational, the
Department has retained the option that permits, for purposes of
meeting this national objective requirement, any person determined to
be of low or moderate income to be presumed to continue to qualify as
such for up to a three-year period before that person would have to
requalify. The language in this final rule also clarifies that under
this new limited clientele provision, it is only owners of
microenterprises and persons developing microenterprises that are
considered for national objective purposes and not employees of such
businesses who are not part-owners.
While the new limited clientele provision has been restricted to
only low- and moderate-income persons, activities qualifying under the
new microenterprise eligibility category that may serve non-low- and
moderate-income entrepreneurs may still be assisted under the criteria
for creation and/or retention of jobs principally for low- and
moderate-income persons. Under that national objective claim, all
employees of a microenterprise, including the owner(s), are considered,
and a grantee can use the new presumptions added by Section 806(e) of
the 1992 Act for determining a person's status as a low- or moderate-
income person, as implemented in this final rule at Sec. 570.208(a)(4)
of the Entitlement regulations and Sec. 570.483(b)(4) of the State
regulations. These presumptions cannot be used under the new limited
clientele provision because the 1992 Act added them as a new Section
105(c)(4) of the HCD Act which refers only to activities qualifying
under the national objective of job creation or retention for low- and
moderate-income persons.
One commenter asked that HUD specifically name examples of low- and
moderate-income clientele. Certain such examples that apply to all
activities benefiting low- and moderate-income persons are included in
Sec. 570.506(b) of the Entitlement regulations.
Two commenters requested clarification as to whether HUD's
proposing the limited clientele provision for microenterprise
assistance activities means that ``cost per job'' created will not be a
primary consideration in the evaluation of a CDBG-funded
microenterprise program. ``Cost per job'' is not a primary HUD
consideration for any microenterprise assistance activities carried out
under the new separate microenterprise eligibility category. Such a
calculation only comes into play in the public benefit standards
(established elsewhere in this final rule), which are not statutorily
applicable to activities carried out under the new microenterprise
eligibility category. As with any CDBG activity, however, grantees have
the flexibility to add additional local criteria for activity
evaluation. Also, given the general requirement that all costs charged
to the CDBG program must be necessary and reasonable for the proper and
efficient administration of the program, HUD expects grantees to
consider cost in relation to results for all activities and to take
steps to curb unusually high costs.
National Objective Compliance for Employment Support Activities
As delineated earlier in this preamble under the discussion of the
new Sec. 570.203(c) economic development services provision in the
Entitlement regulations, HUD is aware of various proposals under which
certain entities have indicated a willingness to train low- and
moderate-income persons for jobs and/or provide such persons with other
employment opportunities, but these entities cannot agree that 51
percent of all assisted persons will be low- or moderate-income. HUD
believes that such proposals can often provide valuable opportunities
for employment of low- and moderate-income persons and that a way
should be found to permit CDBG funds to assist such efforts. Thus, HUD
is amending the low- and moderate-income limited clientele national
objective requirements in this final rule [with a new
Sec. 570.208(a)(2)(iv) in the Entitlement regulations and a new
Sec. 570.483(b)(2)(v) in the State regulations] to authorize the use of
CDBG funds for such activities that provide training and/or other
employment support services in limited circumstances. In order to
qualify under this provision, CDBG assistance for the project must be
limited to the provision of such training and/or supportive services;
the percentage of the total project cost borne by CDBG may not exceed
the percentage of all persons assisted who are low or moderate income.
HUD has included this provision under the limited clientele category
rather than the job creation or retention national objective category
because while such use of CDBG funds solely for job training and/or
supportive services can often be considered to [[Page 1931]] ``involve
employment'' of low- and moderate-income persons (reference Section
105(c)(1) of the Act), they cannot generally be considered to directly
``create'' or ``retain'' jobs as those terms are used in the CDBG
regulations.
National Objective Standards for Low- and Moderate-Income Housing
Activities
As noted under the low- and moderate-income area benefit discussion
earlier in this preamble, HUD has added in this final rule new
paragraphs Sec. 570.208(d)(5) and (6) in the Entitlement regulations
and Sec. 570.483(e)(4) in the State regulations. These paragraphs lay
out various national objective options for activities undertaken in
certain lower-income areas either by a CDFI or (in Entitlement
communities) pursuant to a HUD-approved economic revitalization
strategy. Paragraph (ii) of each of these new sections refers to
housing activities carried out under these circumstances, and they are
cross referenced in Sec. 570.208(a)(3) in the Entitlement regulations
and Sec. 570.483(b)(3) in the State regulations in this final rule. As
noted earlier, Section 105(c)(3) of the Act limits the manner in which
housing activities may be considered to benefit low- and moderate-
income persons, and it precludes the use of an area benefit claim for
such activities. As an alternative, the new provisions in this final
rule permit all housing activities carried out under the delineated
limited circumstances to be grouped together and considered as a single
structure for purposes of complying with the low- and moderate-income
housing national objective requirements. (For example, a grantee
providing rehabilitation assistance to 10 single-family housing units
in such an area could classify all 10 units as meeting the low- and
moderate-income benefit national objective if at least six of the units
were occupied by low- and moderate-income persons.) For the calculation
of the overall low- and moderate-income benefit level of a grantee's
CDBG program, such housing is still subject to the limitation on
benefit to low- and moderate-income persons relative to activity costs,
pursuant to Sec. 570.200(a)(3)(iv) of the Entitlement regulations and
Sec. 570.484(b)(4) of the State regulations.
National Objective Standards for Benefiting Low- and Moderate-Income
Persons Through the Creation or Retention of Jobs
Presumptions Added by 1992 Act
Issue. A total of 19 commenters addressed the general manner in
which HUD proposed to implement the presumptions for determining an
employee's status as a low- and moderate-income person that were added
to the HCD Act as a new Section 105(c)(4) by Section 806(e) of the 1992
Act for job creation and retention activities. Of the total number of
commenters, 11 clearly indicated their support for the proposed change,
and five stated their opposition. Most of the support comments were
based on the reduced burden and ``less intrusive'' means for
determining the low- and moderate-income status of employees. Most of
the comments opposing the proposed change referenced the fact that the
proposed rule used only the minimum test for Empowerment Zone and
Enterprise Community census tract. Concern was particularly expressed
that there was no reference to the ``pervasive poverty, unemployment,
and general distress'' requirement for Empowerment Zone and Enterprise
Communities. (6 local government agencies, 6 national associations, 1
state agency, 3 development organizations, 2 private citizens, and 1
HUD Field staff person)
Response. After a thorough review of all of the above comments and
the applicable statutory references at Title XIII, Chapter I,
Subchapter C, Part I of the Omnibus Budget Reconciliation Act of 1993
regarding the eligibility criteria for Empowerment Zones and Enterprise
Communities, HUD has determined that the presumptions added by the 1992
Act should be implemented in a more stringent manner than was set forth
in the proposed rule. The Department particularly agrees with those
commenters who noted that the ``pervasive poverty, unemployment, and
general distress'' eligibility requirement for Empowerment Zone and
Enterprise Communities should be reflected in the implementation of the
subject low- and moderate-income presumptions for job creation and
retention activities under the CDBG program. Thus, a new paragraph
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new
paragraph Sec. 570.483(b)(4)(v) of the State regulations have been
added to define the requirements a census tract (or block numbering
area) must meet in order to qualify for the presumptions added by the
1992 Act. Under these provisions, a census tract must, in part,
demonstrate pervasive poverty and general distress by meeting at least
one of three delineated standards. Two of these standards relate to the
poverty levels in the various block groups comprising the census tract.
The third standard provides a grantee with the option of requesting a
determination from HUD that a census tract meets the ``pervasive'' test
based on other objectively determinable signs of general distress. The
Department intends to have the subject determinations made at the HUD
Field Office level.
A conforming change to the new Sec. 570.506(b)(7) of the
Entitlement regulations regarding records that need to be maintained
for the subject presumptions is also included in the final rule.
Issue. A total of 10 commenters responded to HUD's specific request
for comment as to whether tighter presumption standards should be
established for census tracts that comprise or include any part of a
community's central business district (CBD), as discussed in the
Empowerment Zone and Enterprise Community legislation. Six of the
commenters wanted no special standards for CBDs. Four of the commenters
argued that there must be tighter standards for such areas given the
statutory eligibility criteria for Empowerment Zones and Enterprise
Communities (4 local government agencies, 3 national associations, 1
development organization, and 2 private citizens).
Response. After a thorough review of all of the above comments and
the applicable statutory references, HUD has determined that tighter
presumption standards must be established for CBDs. The statutory
arguments are compelling. Thus, in the new paragraph
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new
paragraph Sec. 570.483(b)(4)(v) of the State regulations added by this
final rule, HUD has included language similar to that which appears in
the Empowerment Zone and Enterprise Community regulations regarding
this issue, establishing a 30 percent poverty standard for any census
tract that includes any portion of a CBD (as that term is used in the
most recent Census of Retail Trade).
Issue. Two commenters recommended that HUD revise the proposed rule
language to include census tracts that qualify for Empowerment Zone or
Enterprise Community eligibility under that program's special rules
relating to the determination of poverty rates for census tracts with
small populations, particularly those tracts that are more
[[Page 1932]] than 75 percent zoned for commercial or industrial use (1
local government agency and 1 development organization).
Response. HUD has determined that it is not appropriate to revise
the regulations implementing the CDBG presumptions to include such
tracts in general. While the Empowerment Zone/Enterprise Community
legislation does permit these tracts to be considered as passing the
minimum poverty tests, this is done mainly in the context of qualifying
the tract as part of an overall area to be designated. Because the CDBG
presumptions apply only on an individual census tract basis, the
Department has determined that including such tracts without limitation
would unduly broaden the scope of the subject presumptions. However, it
is recognized that many federally designated Empowerment Zones and
Enterprise Communities could include such census tracts. Thus, the new
paragraph Sec. 570.208(a)(4)(v) of the Entitlement regulations and a
new paragraph Sec. 570.483(b)(4)(v) of the State regulations added in
this final rule to implement the CDBG presumptions permit any census
tract that is part of a federally designated Empowerment Zone or
Enterprise Community to qualify for the CDBG presumption regardless of
whether it meets the other general criteria delineated in the
regulation.
Issue. Several commenters raised other concerns that relate to the
statutory bases for the subject presumptions of a person's low- and
moderate-income status for CDBG activities carried out under the
national objective of job creation or retention. Issues raised
included: concerns regarding the use of census tract data instead of
block group or ``neighborhood'' data; a recommendation to permit
communities to use data obtained through a survey; questions as to why
one of the presumptions only applied to the residence of the employee
while the other applied to either the employee's residence or the
location of the assisted business; and concerns about the
interpretation of the terms ``assisted business'' and ``job under
consideration'' as used in the proposed rule, as opposed to the term
``assisted activity'' as used in the Act (4 national associations and 1
private citizen).
Response. Section 105(c)(4) of the Act, as added by Section 806(e)
of the 1992 Act, which expressly authorizes the subject low- and
moderate-income presumptions for job creation and retention activities,
specifically refers to ``census tracts.'' Thus, overall tract data must
be used in determining these presumptions. In regard to the presumption
that is determined by the tract meeting what Section 105(c)(4) calls
``Federal enterprise zone eligibility criteria,'' it is noted that the
Empowerment Zone/Enterprise Community legislation requires poverty
rates to be determined using the most recent decennial census data
available. Thus, this requirement is carried over into a new paragraph
Sec. 570.208(a)(4)(v) of the Entitlement regulations and a new
paragraph Sec. 570.483(b)(4)(v) of the State regulations added in this
final rule to implement the related CDBG presumption. The other CDBG
presumption, which is based on the low- and moderate-income character
of the census tract in which an employee resides, does not carry with
it the specific requirement that the most recent decennial census data
available must be used. Thus, while HUD expects grantees to follow the
general CDBG rule of using such census data to the fullest extent
feasible, it would be possible for a grantee to conduct a survey to
support a census tract's qualification for that presumption. However,
given the statutory ``census tract'' language noted above, the area for
which such a survey would be undertaken must coincide with the census
tract boundary. It is further noted that this latter presumption only
applies to a census tract in which an employee resides and not to the
location of the assisted economic development project because of the
statutory language in Section 105(c)(4).
In expressing concern over the possible interpretation of the terms
``assisted business'' and ``job under consideration,'' as used in the
regulations implementing the broader presumption, one commenter gave
two examples. First, the commenter states that assistance to a ``branch
office'' located in a qualified tract should be able to use the
presumption resulting from ``Federal enterprise zone eligibility
criteria'' even if the business' principal office is located elsewhere.
This is entirely consistent with the language included in the new
paragraph Sec. 570.208(a)(4)(iv) of the Entitlement regulations and the
new paragraph Sec. 570.483(b)(4)(iv) of the State regulations. In using
the term ``assisted business'' in those portions of the rule, HUD does
not intend to imply that the business' main office or corporate
headquarters must be located in a qualified tract in order to use the
presumption. The regulatory language is designed to provide sufficient
restrictions to prohibit businesses from establishing only a ``shell''
office to make use of the location presumption while the actual
activity being assisted is in fact being carried out elsewhere.
Assistance to legitimate ``branch offices'' is not restricted under the
regulatory language. As a second example, the commenter states that a
``job training center or small business assistance office'' should be
able to use the presumption even though such a facility ``helps people
who do not yet have businesses nor specific `jobs under
consideration'.'' It is not clear how this second example would be able
to use the presumption given the statutory language at Section
105(c)(4). Based on that provision, the new presumptions can only be
used for activities qualifying under the national objective of job
creation or retention for low- and moderate-income persons. Job
training centers or business assistance offices such as those which
appear to be described in the commenter's second example generally
would not qualify under that national objective and would thus not be
able to use the presumption.
Issue. Two commenters raised questions about how the subject
presumptions would be implemented. The first question relates to
whether the presumptions based on an employee's residence could be used
together with the traditional way of documenting an employee as a low-
or moderate-income person in order to meet the overall 51 percent low-
and moderate-income requirement for jobs created or retained by a
particular assisted business. One of the commenters also asked what
documentation HUD will require to verify that jobs are created when the
presumption on the basis of the location of the business is used. (1
state agency and 1 private citizen)
Response. In regard to the first question, it is entirely
permissible for a grantee, in a single activity, to combine counting
employees presumed to be low- and moderate-income persons on the basis
of their residence with those employees documented as being such
persons under more traditional means. Any concerns that this could
possibly lead to the company and/or the grantee being accused of
``singling out certain individuals'' for requests for income
information (as one of the commenters states), is as unfounded as the
``privacy'' concerns certain persons have raised for several years in
discussions of this section of the CDBG regulations. In regard to the
second question, a grantee qualifying a business based on its location
must still obtain sufficient documentation to demonstrate that jobs are
actually created or retained by the activity. This documentation would
be [[Page 1933]] similar to that which the grantee currently receives
for such activities, with the exception that any employee income
information would be omitted.
Issue. Two commenters recommended that the final rule contain
language which would make it easy for low- and moderate-income people
to challenge an ``unwarranted presumption.'' They recommend that HUD
reiterate the regulatory ``substantial evidence to the contrary''
language in this section of the regulations and add wording that would
encourage residents to submit challenges and direct HUD to quickly
respond to such challenges. (1 national association and 1 development
organization)
Response. HUD cannot accommodate this recommendation. The subject
presumptions of a person's low- and moderate-income status for job
creation or retention activities is specifically authorized by statute.
It does not matter if the presumption appears ``unwarranted'' in a
specific case; if the activity meets the requirements delineated in
Section 105(c)(4) of the Act, it is entitled to use the presumption.
There is a distinct difference between these presumptions and those
that are HUD has otherwise established only on a regulatory basis under
the limited clientele standards.
Job Creation or Retention by Public Infrastructure Improvements
The Department proposed another amendment to Sec. 570.208(a)(4) of
the CDBG Entitlement regulations and Sec. 570.483(b)(4) of the State
regulations concerning the requirements for demonstrating national
objective compliance by CDBG-assisted infrastructure improvements.
Eight entities commented on this proposed change: 4 states, 2 national
associations, one HUD staff person and one citizen. Nearly all
commenters supported HUD's efforts to provide more flexibility in this
area. Several comments suggested specific revisions to HUD's proposal.
Issue. Communities often over-design public facilities to
accommodate future growth; this frequently makes sense for the
community. However, CDBG funds should only be used to pay costs
associated with the capacity needed by presently-identified businesses,
or else the grantee should track future job creation for three years.
Response. The Department has chosen not to accept this suggestion.
As noted in the preamble to the proposed rule, the Department proposed
shortening the three-year tracking period to one year because it has
received numerous comments from states that the existing State CDBG
regulations are unduly burdensome. The Department believes it would be
cumbersome for HUD staff to attempt to identify and prorate
construction costs associated with current vs. future capacity needs;
this could place HUD staff in the role of second-guessing grantees'
engineering reports.
Issue. Two commenters requested that projected, rather than actual,
job creation/retention be compared to the $10,000 CDBG cost-per-job
threshold. Because grantees cannot be completely certain how many jobs
will actually be created, there may be instances where the projected
cost per job is less than $10,000, but the actual cost per job is over
$10,000.
Response. The Department concurs with these comments. The
Department is concerned that grantees might intentionally overstate the
projected number of jobs so as to take advantage of the less stringent
requirements for projects whose per-job cost is less than $10,000.
However, it is impossible for job creation or retention estimates to be
100% accurate. As the proposed regulations are worded, a grantee could
be retroactively held responsible for tracking a wider universe of
businesses for job creation/retention if the actual cost per job was
over $10,000, even though the projected cost per job was under $10,000.
In the final regulations, references to actual vs. projected job
creation/retention have been eliminated. Instead, the regulations refer
to jobs ``to be created or retained.''
In the regulations on public benefit documentation, the Department
indicates that, where a grantee shows a pattern of substantial
variation between projected and actual benefits received, a grantee
will be expected to take actions to improve the accuracy of its
projections. The Department has not included comparable language in
this section. If, for purposes of this section, a grantee's projections
show a pattern of substantial variation from actual job creation/
retention, the Department will expect grantees to take steps to improve
the accuracy of their projections.
Issue. One commenter recommended that, rather than requiring
grantees to conduct an assessment of businesses in the service area of
the public facility or improvement, the rule should require an
``appropriate'' review for public improvement projects undertaken to
create or retain jobs.
Response. The Department does not accept this comment, for two
reasons. This suggestion confuses requirements for meeting a national
objective with requirements for demonstrating the eligibility of an
activity. Equally significant is that the new statutory requirements
regarding evaluating and selecting economic development projects
effectively replace the ``appropriate'' determinations previously
required. The Guidelines for Evaluating Project Costs and Financial
Requirements are not applicable to public improvement projects; a
grantee may choose to develop guidelines for evaluating public
improvement projects if it wishes. The Department has chosen to apply
the public Benefit standards only to those public improvement projects
(undertaken to create or retain jobs) for which the projected cost per
job is $10,000 or more.
Issue. HUD should restrict the use of CDBG funds in situations
where economic development infrastructure activities cross privately-
owned property. This would be construed as a potential windfall to the
private property owner or company.
Response. The Department has chosen not to accept this
recommendation. HUD is unaware of any evidence that this is a
significant problem in the CDBG program. As the commenter acknowledges,
states and localities have legal mechanisms to govern hookup access to
public utilities.
Issue. One commenter noted that the proposed Entitlement and State
regulation language differs regarding businesses with which agreements
must be signed; the commenter prefers the language in the proposed
State CDBG regulation.
Response. The Department has revised the relevant sections [which
are now Sec. 570.483(b)(4)(vi)(F) and Sec. 570.208(a)(4)(vi)(F) to
provide greater consistency between the two paragraphs. In revamping
this section of the regulations, the Department has eliminated
references to agreements with businesses.
Issue. Two states urged the Department to delete portions of the
proposed regulations: the requirement for conducting an assessment of
businesses in the service area of the public facility or improvement;
the requirement that job creation should be tracked for each business
until the business' job creation/retention obligation is fulfilled;
and, where the cost per job is $10,000 or more, applying the time
period for tracking businesses to just the business(es) with signed
agreements for which the improvement is undertaken.
Response. Based on relevant statutory language in the Housing and
Community Development Act, the Department disagrees with the
implication that documentation regarding national objectives should
cease once the originally-projected [[Page 1934]] number of jobs has
been created. Furthermore, these recommendations would eliminate the
distinction in requirements between activities in which the cost per
job is $10,000 or more and those in which the cost per job is under
$10,000. Based on the data from the State CDBG program, the $10,000 per
job created/retained threshold appears to be significantly above the
median costs for public facility/improvement projects of this sort; few
projects should thus be subject to the stricter requirements. The
Department believes that stricter requirements are appropriate for
projects costing $10,000 per job or more, because less public benefit
is being obtained per CDBG dollar expended.
However, the Department has taken seriously the underlying desire
for simplicity, and as a result has worked to streamline this section
of the regulations. Eliminated in the final regulations is the
requirement that the recipient undertake an assessment of all
businesses in the service area of the public facility/improvement to
determine which businesses may create/retain jobs as a result of the
public facility/improvement. Grantees are cautioned, however, that
should the CDBG per-job cost of the project be $10,000 or more, the
recipient must still aggregate jobs created/retained by all businesses
which locate or expand in the service area of the public improvement/
facility. Grantees will thus need some mechanism for identifying such
businesses.
Issue. One state requested that the proposed public improvement-job
creation requirements for the State program be made retroactively
applicable to projects funded by states after December 9, 1992. That
was the effective date of the current State CDBG regulations, in which
the existing requirements concerning public improvement-job creation
activities were first effected.
Response. A recent U.S. Supreme Court decision casts uncertainty on
the constitutionality of retroactive rulemaking. The Department feels
an attempt to provide some retroactive flexibility through the rule-
making process could be legally problematic. States may, as always,
request a waiver of the existing regulations for individual cases.
Other Job Creation/Retention Issues
Issue. One commenter raised a concern regarding the provision at
the new Sec. 570.208(a)(4)(vi)(B) of the Entitlement regulations which
permits the aggregation of jobs for loan funds administered by a
subrecipient where CDBG pays only for the staff and overhead and loans
are made exclusively from non-CDBG funds. The commenter recommended
that HUD change the phrase ``. . . jobs created by all the businesses
receiving loans during each program year'' to ``. . . jobs projected by
all the businesses receiving . . .'' This recommendation is based on
the claim that during the early years of a program's operation, ``few
jobs may actually have been created, even though many loans have been
`committed.''' (1 private citizen)
Response. The commenter appears to misunderstand the subject
provision. The regulation does not measure the number of jobs actually
created in each program year. Instead, it measures all the jobs created
as a result of the CDBG assistance by all the businesses that receive
loans in each program year, regardless of when the jobs are actually
created.
In developing this final rule, HUD has pursued additional job
aggregation options in consideration of the many comments received in
support of less burdensome job tracking. Also, in considering the
comments on the public benefit standards, HUD has determined that it is
appropriate to offer certain flexibility for activities that serve
important national interests. Thus, in this final rule, HUD is
delineating three additional instances under which jobs created or
retained may be aggregated for purposes of determining compliance with
national objective requirements. Aggregation of jobs is now also
permitted for (1) activities providing technical assistance to for-
profit businesses; (2) activities meeting the criteria in the public
benefit standards at Sec. 570.209(b)(2)(v) of the Entitlement
regulations and Sec. 570.482(f)(3)(v) of the State regulations; and (3)
for activities carried out by a CDFI. To reflect this,
Sec. 570.208(a)(4)(vi) of the Entitlement regulations and
Sec. 570.483(b)(4)(vi) of the State regulations have been amended. In
this regard, it should also be noted new paragraphs Sec. 570.208(d)(7)
and Sec. 570.483(e)(5), added to the Entitlement and State regulations
respectively, require that for an activity that may meet the standards
for more than one of these options, the grantee may elect only one
option under which to qualify the activity. No ``double counting'' is
permitted.
Issue. One commenter raised a concern regarding the requirement
regarding the criteria now at Sec. 570.208(a)(4)(iii) and
Sec. 570.483(b)(4) making jobs ``available to'' low- and moderate-
income persons, particularly the ``no special skills'' requirement
unless the business agrees to hire unqualified people and then provide
training. The commenters argues that HUD should not ``presume'' that
low- and moderate-income persons have no education because many such
persons may have a community college or vocational technical education
and still be underemployed or poorly paid because of various factors.
The commenter also notes that in certain cases, the jobs to be created
by an assisted activity will not actually be created for a year or
more, which would provide time for necessary training before the
business completes its hiring process. (1 national association)
Response. The reference requirement is important to ensure that no
special skill or education requirements form a barrier to low- and
moderate-income persons being considered for the jobs under the
``available to'' option under Sec. 570.208(a)(4). If a community knows
that there is a pool of more skilled low- and moderate-income persons
available, it can always choose to demonstrate compliance with the
national objective requirement under the ``held by'' option where skill
level is not considered. The new low- and moderate-income presumptions
should also make it easier for grantees to use the ``held by'' option.
In regard to the issue of the timing of the training versus hiring, the
Department wants to ensure that any training claimed under the new
``economic development services'' provision at Sec. 570.203(c) of the
Entitlement regulations and Sec. 570.482(d) of the State regulations is
limited to persons whom the respective business has actually agreed to
employ and not to include training just to provide a general ``pool''
of persons from which a business may possibly hire. This is important
in distinguishing ``economic development services'' that qualify as
part of the ``delivery costs'' of a related economic development
project from more generic public service activities that qualify under
Sec. 570.201(e) of the Entitlement regulations. It is noted that under
this final rule, activities qualifying under either of these
eligibility categories can also take advantage of the new low- and
moderate-income limited clientele option at Sec. 570.208(a)(2)(iv) of
the Entitlement regulations and Sec. 570.483(b)(2)(v) of the State
regulations in certain circumstances.
Request for Comment on Certain Other Job Creation/Retention Issues Not
Contained in the Proposed Rule
In addition to a discussion of specific regulatory revisions, the
preamble to the May 31, 1994, proposed rule also contained a specific
request for public comment on certain other issues which HUD is
examining in an attempt to [[Page 1935]] determine whether further
changes should be proposed regarding the national objective standards
for benefiting low- and moderate-income persons through the creation or
retention of jobs. These issues included: (1) whether any further low-
and moderate-income presumptions should be made for job creation or
retention activities; (2) whether any modification should be made to
the CDBG job retention requirement to document that jobs claimed as
being retained would actually be lost without the CDBG assistance; and
(3) whether any modification should be made to the requirement in job
retention activities that, except for some allowance for jobs that may
become available through turnover, the low- and moderate-income
standards are applied at the time the assistance is provided, which is
while the employees still have the income from the jobs that they are
subject to lose. (Please refer to the preamble to the proposed rule
published in the Federal Register on May 31, 1994, for a more complete
discussion of these issues.)
A sizable amount of public comment in response to these issues was
received. Many of the comments offered interesting suggestions, and HUD
will be publishing an additional proposed rule in response to some of
the recommendations provided. Such items must go through the proposed
rulemaking process in order to provide the general public with an
opportunity to comment on them before they would be published for
effect. The public comments received on these issues based on the
request contained in the preamble to the May 31, 1994, proposed rule
will be discussed fully in the preamble to the new proposed rule.
National Objective Standards for Addressing Slums or Blight on an Area
Basis
The proposed rule included a revision to Sec. 570.208(b)(1)(ii) of
the Entitlement regulations and Sec. 570.483(c)(1)(ii) of the State
regulations. This proposal would allow designated slum/blighted areas
to qualify under the slum/blight national objective if the area
exhibited pervasive economic disinvestment in the form of high turnover
or vacancy rates in previously occupied commercial or industrial
buildings.
In addition, the Department sought comment on whether instances of
environmental contamination should be considered as evidence of
blighting conditions. No specific regulatory language was proposed in
that area, however.
The Department received valuable input on both topics relating to
the slum/blight national objective. As a result, the Department has
decided to propose additions to the slum/blight criteria to accommodate
environmental contamination, and to revise its initially proposed
criteria regarding pervasive economic disinvestment. The existing
regulations would be significantly restructured to accommodate these
changes.
The Department has decided to publish a new set of proposed
regulations dealing with the slum/blight national objectives. The
comments received by the Department on slum/blight issues will be
discussed in the preamble to those new proposed regulations.
Guidelines for Evaluating and Selecting Economic Development Activities
for CDBG Assistance
The proposed rule contained language implementing section 806(a) of
the 1992 Act at a proposed new Sec. 570.209 in the Entitlement
regulations and additions to Sec. 570.482 in the State regulations. The
proposed regulations described guidelines for evaluating certain
economic development activities assisted with CDBG funds. These
guidelines consist of two parts: guidelines and objectives for
evaluating project costs and financial requirements, the use of which
are not mandatory, and public benefit standards, which are mandatory.
Numerous comments were received on various aspects of this section
of the proposed regulations. The comments can be categorized into
groups of issues, and will be discussed by category of issue.
Underwriting Guidelines--General
The proposed rule described HUD's Guidelines and Objectives for
Evaluating Project Costs and Financial Requirements (the ``underwriting
guidelines''); the proposed guidelines themselves were published as a
separate Federal Register notice on the same day. Sixteen commenters
commented on HUD's proposed Guidelines and Objectives for Evaluating
Project Costs and Financial Requirements: 5 local governments, 4
national associations, 2 States, 3 HUD Field Office staffs, one citizen
and one business development entity. Four commenters expressed overall
support for the approach proposed to be taken by the Department in
implementing the requirements of the 1992 Act.
Issue. Three commenters stated that the underwriting guidelines
themselves should be included in the text of the regulations, rather
than in a separate Federal Register notice. By not being part of the
regulations themselves, commenters felt that the guidelines would be
more easily overlooked or forgotten about in future years.
Response. These issues were carefully considered by the Department
in developing the proposed rule. The rule stated that the use of the
underwriting guidelines proposed at Sec. 570.209(a) and Sec. 570.482(e)
is not mandatory. To further demonstrate this point, the specific
elements of the underwriting guidelines were not included within the
text of the proposed rule itself. Instead, they were proposed to be
published in a concurrent but separate Federal Register notice.
Outweighing the conmmenters' concerns is the fact that, while Congress
directed that the guidelines be published by regulation, the use of the
underwriting guidelines is not mandatory. To publish non-binding
guidance within a set of otherwise binding regulations would be
contradictory and confusing. In disseminating information on the final
regulations, the Department will take steps to include the guidelines
along with the final regulations, to help ensure that the Federal
Register notice does not get overlooked.
Issue. Three widely divergent comments were received regarding the
applicability of the underwriting guidelines to microenterprise and
small business assistance programs. One commenter argued that
``appropriate determinations'' should not be required on a loan-by-loan
basis for microenterprise activities, but could be addressed by overall
program design. Another argued that the underwriting guidelines should
apply to microenterprise assistance activities, so that communities
will have a stronger regulatory framework upon which to develop their
own guidelines for evaluating microenterprise loans. A third commenter
stated that small businesses which do not qualify as microenterprises
should be given some relief from the underwriting criteria and
financial documentation requirements.
Response. The 1992 Act specifies that HUD is to develop guidelines
for evaluating and selecting economic development activities funded
under sections 105(a) (14), (15) and (17) of the Act. Microenterprise
assistance activities were made separately eligible under the new
Sec. 105(a)(23) of the 1992 Act, and thus were not subjected to the
underwriting guidelines by Congress. The Department feels it is
inappropriate to extend coverage of the underwriting guidelines to
programs which provide assistance exclusively to microenterprises and
which are eligible under Sec. 105(a)(23). Grantees may
[[Page 1936]] develop their own underwriting guidelines for the
evaluation of microenterprise assistance programs. However, if a
grantee designs a program to provide assistance to both
microenterprises and other small businesses, the public benefit
standards and underwriting guidelines apply to the entire program, and
grantees will be expected to evaluate each instance of assistance
individually. Regarding the third comment, both the proposed and the
final regulations state that different levels of review and financial
documentation are appropriate for different sizes of projects and
businesses; grantees are encouraged to develop guidelines which take
into consideration the size of the business being assisted.
From the first of these comments, as well as from several comments
addressed elsewhere in this preamble, it is clear that the relationship
between the financial guidelines, the public benefit standards and the
``appropriate determination'' requirements (which the Department has
heretofore relied on) is not understood. In the 1987 ``Stokvis Memo''
and in the 1992 ``Kondratas Memo'', the Department outlined its policy
for implementing the statutory requirement that assistance to private
for-profit entities must be ``appropriate to carry out an economic
development project''. The Department believes that the new
underwriting guidelines and public benefit standards, taken together,
effectively comprise a methodology for determining that such assistance
is appropriate, and supplant the previously-required ``appropriate
determinations''.
It is important to note that the financial and public benefit
standards cover a wider range of activities than did the ``appropriate
determinations'', including all economic development activities funded
under sections 105(a) (14) and (15) of the Act. Grantees are encouraged
to develop guidelines to cover the evaluation and selection of other
types of economic development activities, beyond those statutorily
required. However, HUD will not evaluate or enforce locally-developed
guidelines covering economic development activities other than those
described in the regulations.
Issue. Three commenters expressed apprehension about a statement
contained in the preamble to the proposed regulations. The Department
noted that, in cases where an activity receiving CDBG financial
assistance fails to meet other applicable program requirements, such as
the public benefit standards or the national objective requirements,
HUD will consider the extent to which the recipient conducted prudent
underwriting in determining appropriate sanctions to be imposed on the
recipient for such noncompliance. Commenters questioned the consistency
of this statement with statutory language, felt this represented a
``gotcha'' mentality by HUD, and opened the door to HUD ``second-
guessing'' grantees' underwriting decisions.
Response. Commenters are correct in noting that the Department is
prohibited from basing a determination of project ineligibility on the
failure of a project to meet the objectives of the underwriting
guidelines. The Department will not monitor grantees' projects for
compliance with HUD's underwriting guidelines. The proposed
underwriting guidelines also state, however, that the Department
expects that grantees will engage in some form of underwriting of
projects, regardless of whether or not a grantee adopts HUD's
guidelines. The intent of the preamble statement was not to suggest
that HUD would ``second-guess'' local underwriting guidelines or
decisions about specific projects pursuant to them. When the Department
discovers cases of noncompliance with other program requirements (such
as national objectives or eligibility), it has flexibility to determine
the appropriate action to resolve the noncompliance. In cases of
noncompliance with other program requirements, the Department reserves
the right to examine whether the grantee conducted any underwriting on
the activity in question. If a grantee performed no underwriting
whatsoever (or purely perfunctory underwriting) on a project that
fails, the Department may look to see whether even rudimentary
underwriting would have disclosed to the grantee that the project was
likely to fall into noncompliance. Similarly, the Department will also
consider whether a grantee's underwriting disclosed that a project was
likely to fail, but the grantee chose to fund the project anyway for
reasons unrelated to underwriting decisions.
Issue. One HUD staff person inquired about the relationship between
the public benefit standards and the underwriting guidelines. The
commenter asked what HUD would do in a case where a grantee followed
established underwriting guidelines, yet knowingly chose to fund a
project which exceeded the public benefit standards (particularly the
individual activity standards).
Response. Having complied with a grantee's underwriting standards
would not recuse this project from failure to meet the regulatory
requirements for public benefit. In such a situation, the Department
may still consider the extent to which underwriting was performed in
assessing what corrective action is appropriate to resolve the
noncompliance.
Issue. One correspondent requested clarification or examples of
what is meant by the statement that guidelines also apply to
``activities carried out under the authority of Sec. 570.204 that would
otherwise be eligible under Sec. 570.203.''
Response. The Department's position is, and has been, that all
activities involving assistance to a for-profit business are subject to
the same requirements (including the underwriting guidelines, the
public benefit standards, and the previously- required ``appropriate
determinations''). Provision of CDBG assistance to a for-profit
business through a non-profit subrecipient does not exempt such an
activity from the underwriting guidelines or public benefit standards.
In the final regulations, this principle is clarified and illustrated
with an example.
Issue. Three commenters raised questions about the treatment of
non-financial or indirect assistance to businesses in the underwriting
guidelines. Two commenters felt that by not specifically addressing the
level of underwriting documentation needed for technical assistance
activities, the proposed regulations imply that the same degree of
analysis is required for technical assistance to a business as for
direct financial assistance. Two commenters also urged the department
to accept yearly aggregation of technical assistance activities for
demonstrating compliance with national objectives.
Response. The Department concurs with the comments regarding
technical assistance activities. The underwriting guidelines published
today specifically mention that different levels of underwriting
documentation may be appropriate for technical assistance activities,
given the nature and dollar value of assistance being provided to
businesses. The Department has also added a provision to the national
objectives requirements for low- and moderate-income benefit, to allow
job creation/retention to be aggregated for technical assistance
activities.
Certain indirect forms of assistance to business, such as land
acquisition or certain public improvement projects, are not statutorily
subject to the underwriting guidelines. The Department believes that,
while not mandatory, grantees should evaluate all forms of assistance
to businesses, to ensure that the project represents an appropriate use
of the grantee's funds. Grantees are encouraged to develop
[[Page 1937]] underwriting guidelines which include other economic
development activities beyond those subject to the regulations.
Issue. Several comments were received on the wording of several of
the objectives in the guidelines. These comments generally spring from
the commenters' professional opinions on the desirable design features
or outcomes of individual programs.
Response. Because the underwriting guidelines are not mandatory,
the Department has chosen not to adopt most of these suggestions.
Commenters are encouraged to incorporate their ideas into their local
guidelines.
Public Benefit Standards
HUD heard from 20 different commenters on the public benefit
standards (and how they would be applied) in the proposed regulations:
3 local governments, 2 states, 8 national associations, 2 development
organizations, one citizen and 4 HUD staff. Comments on public benefit
fell into four categories of concern: the overall approach and
terminology used; the individual activity standards; activities
providing insufficient public benefit; and the aggregate standards.
While numerous questions and concerns were raised, individual
commenters also expressed general support for various aspects of the
proposed approach to public benefit: the concept of aggregating public
benefit; the flexibility provided by multiple approaches to measuring
public benefit; and the concept of allowing certain categories of
activities to be excluded from the aggregate dollar standards.
It was also very clear that many commenters did not understand the
relationship among the different public benefit standards. Confusion
was also expressed about the meaning of various terms used in the
proposed regulations, which apparently added to confusion over the
relationships among the standards. To overcome this confusion, the
Department has substantially rewritten and reorganized the final
regulations sections on public benefit.
Overall Approach and Terminology
Issue. Three different commenters asked for clarification of
various terms such as ``tests'', ``criteria'', ``portfolio'' and
``obligated''. One asked what constituted an ``activity'' for purposes
of aggregation: an individual loan? All activity in one particular loan
program run by a grantee? Would a grantee with 10 different programs
subject to the public benefit standards develop 10 aggregate numbers,
or one? Another asked for confirmation that the public benefit
measurement period differs from the time period in which job creation/
retention is measured for national objectives documentation.
Response. In the final regulation, the Department has attempted to
use more precise wording. The term ``obligated'' here has the same
meaning as it does elsewhere in the CDBG program--a formal commitment
of funds to fund a specific activity, such as a signed contract with a
business, or written notification of loan approval. The term ``test''
has been replaced with ``standard''; each numerical measure by which
activities are judged (individually or in aggregate) is a standard. Use
of the term ``portfolio'' has been avoided in discussing the aggregate
standards. Use of the term ``criteria'' is limited to describing the
``important national interests'' activities which may be excluded from
the aggregate standards.
The comment regarding the measurement period for public benefit vs.
national objectives is correct. For most covered activities designed to
create/retain jobs, each provision of assistance to a business is
judged separately for whether it meets a national objective; each
business is discretely tracked for job creation/retention until the
business has fulfilled its jobs commitment. In contrast, public benefit
for any given business is judged at the time assistance is first
obligated to the business; the levels of public benefit determined at
the time funds are obligated are then aggregated for all instances of
assistance provided by a grantee through all covered activities. (The
period of time over which activities are aggregated varies among the
Entitlement, State, Insular and HUD-Administered CDBG programs.) Thus,
for any given business, job creation/retention is primarily measured
prospectively for public benefit and retrospectively for national
objectives purposes. (However, this explanation does not apply
universally; as the regulations note, certain types of activities may
be aggregated differently. In addition, grantees are to keep
comparative documentation on the projected vs. actual public benefit
from projects.)
Issue. A number of commenters voiced various objections to the
overall approach to public benefit: the proposed standards are
arbitrary and simplistic, and invite ``second-guessing'' of projects by
HUD; more study is needed in this area before specific standards are
proposed; the standards focus too much on the cost per job and assume
that more jobs per CDBG dollar is a more important outcome than job
quality; the standards ignore present or future values of assistance
provided; the standards focus too much on individual activities,
ignoring overall program outcomes; the standards focus too much on
aggregate benefits, ignoring individual activities.
Response. As discussed in the preamble to the proposed regulations,
the Department considered all of these issues in developing the
proposed public benefit standards. More sophisticated measurement
systems involve greater complexity, and may increase the documentation
burden on grantees and/or reduce flexibility. The Department strives to
effect a system which is flexible enough to encompass the great variety
of individual programs and individual activities which exist across the
CDBG program, and yet ensures at least some modicum of public benefit
will be obtained from any given activity. The Department has made
revisions to the public benefit standards in response to comments, but
has chosen not to radically change the overall approach.
Issue. Two commenters (including one state) suggested that each
community (or the state) be allowed to establish its own public benefit
standards; HUD could then monitor communities or states for compliance
with their standards.
Response. The Department believes these suggestions are
inconsistent with the statute. The 1992 Act specified that HUD is to
develop, by regulation, guidelines to ensure that public benefit is
appropriate relative to the amount of CDBG assistance provided. The
commenters' approach could increase, not decrease, grantee complaints
about HUD ``second guessing'' local decisions.
Individual Activity Standards
Issue. Five commenters opined that the proposed $100,000-per-job
individual activity standard is much too high to ensure reasonable
public benefit for any given activity; various figures between $12,000
and $50,000 were suggested as replacements. On the other hand, one
commenter expressed concern that the $100,000 standard could preclude
use of CDBG funds for massive real estate redevelopment projects or
capital-intensive industrial projects; other public benefits from such
projects may well justify the expenditure of CDBG funds even when the
cost per job is high.
Response. After weighing these arguments, the Department has
decided to lower the individual activity per-job standard to $50,000.
This should still provide flexibility to undertake vitally important
projects with high capital costs per job created or retained;
[[Page 1938]] grantees may request a waiver of regulations for projects
which would exceed this level. The ``CDBG cost per job'' and the ``CDBG
cost per low- and moderate-income person served'' standards are
designed to establish absolute upper limits for what HUD would consider
to be reasonable on an individual project basis. Grantees are free to
set lower per-job maximums for their own projects, if they wish.
Another example of high-cost projects which the Department has
become aware of is the removal of environmental contaminants as part of
a redevelopment project. The use of CDBG funds for such ``brownfields
remediation'' activities is of growing interest among grantees.
Projects of this nature can present high costs relative to the amount
of public benefit as defined in these regulations. However, grantees
may have additional flexibility in structuring the use of CDBG funds to
treat environmental conditions. For example, publicly-owned land may be
cleaned up before title is transferred to a private owner. In this way,
the environmental remediation activity would not be subject to the
public benefit standards.
Issue. Two commenters opined that the proposed $1,000 per area-
resident standard is similarly too high to ensure reasonable public
benefit; one recommended $50 instead.
Response. The Department has decided to leave the per-area-resident
standard as proposed. A lower figure could hinder economic development
activities in small communities or sparsely-populated rural areas.
Grantees are free to set lower per-area-resident maximums for their own
projects, if they wish.
``Insufficient Public Benefit'' Activities
The proposed regulations contained a list of activities for which
HUD believes insufficient public benefit is derived; these activities
would therefore not be eligible for CDBG assistance. Six comments were
received on this list of activities (one each from a citizen, a local
government, a national association and a HUD staff person, and two from
states). Three commenters suggested additional activities to be added
to the list of activities, two commenters objected to the inclusion of
one activity on the list, and two commenters requested clarification of
language.
Issue. Use of grant funds for projects that will directly compete
with existing businesses should be prohibited.
Response. The Department believes this proposal would severely
restrict grantees' use of CDBG funds for economic development and would
handcuff the Department's efforts to make CDBG a more flexible funding
resource. There is nothing which would prevent individual grantees from
adopting such a policy, if they wish.
Issue. Gaming facilities (whether on or off Indian Reservations)
should also be made ineligible.
Response. The Department has considered this issue in the past and
has decided not to pursue it.
Issue. Job Pirating (the use of CDBG funds to move a business from
one community to another, with no net expansion of activity) is a waste
of taxpayers' money and should be determined to be an ineligible
activity.
Response. The Department has studied the problem of job piracy a
number of times in the past, but has not taken action to prohibit this
activity. Determining whether a business is relocating principally
because of the CDBG assistance, or because of other reasons, is a
particularly intractable problem in attempting to define job piracy.
Recently, Congress has shown interest in legislating on this issue. The
Department has therefore decided to defer action on the issue of job
piracy until it is clear what action might be taken in authorizing
legislation.
Issue. Three commenters opposed including the acquisition of land
for which no specific use has been determined on the list of
``insufficient public benefit'' activities. Commenters argued that this
would eliminate future economic development activities, and that
forcing grantees to prematurely identify the use of land drives up the
development cost. One commenter suggested that HUD require land
acquisition to meet a national objective within two years of the
expenditure of funds.
Response. The Department does not find the arguments for removing
this activity from the list to be convincing. The Department is aware
of a number of situations in which land has been purchased using CDBG
funds with no specific use in mind, and in which the Department later
determined that no national objective was ever met by the acquisition.
In the Department's opinion, ``landbanking'' with CDBG funds does not
provide any public benefit. It should be noted that the proposed
regulation would not prohibit the construction of speculative buildings
for which no tenant has been identified; nor does it mean that a
specific occupant must be identified before land can be purchased.
However, a grantee should at least be able to identify the intended use
of the property (such as for a shopping center or office building).
That does not mean, however, that grantees could satisfy the regulatory
intent simply by identifying just any vaguely described proposed use.
The language has been revised slightly in the final regulations to
refer to ``acquisition of land for which the specific use has not been
identified''.
Issue. One commenter requested specific examples of types of
privately-owned recreational facilities serving a predominantly-higher
income clientele which might be determined ineligible under the
proposed regulations. Concerning another activity on the list, this
commenter also noted that the proposed language would not prevent the
provision of assistance to a ``corporate shell'' or another corporate
entity established by the same owner(s) of a business which is the
subject of unresolved findings.
Response. The Department has chosen not to try to develop such a
list of recreational facilities, as that list might be misinterpreted
as all-encompassing; furthermore, a comparison of the recreational
benefits vs. other benefit to low- and moderate-income persons must of
necessity be done on a case-by-case basis. The Department concurs with
the second comment; the final regulations have been revised to include
other businesses owned by the same owner(s). The final rule also makes
minor clarifying revisions to several of the other ``insufficient
public benefit'' activities.
Aggregate Activity Standards
Issue. Three commenters argued that the aggregate standards are too
complex, and so should be eliminated. Some commenters feared that
grantees may focus only on the individual activity standards and
overlook the aggregate standards; the human tendency will be to fund
high-profile, high-cost-per-benefit projects first and ``make it up
later'' with smaller projects. Another commenter expressed concern that
for low-volume economic development programs, the individual and
aggregate standards would effectively be the same; if a grantee does
one loan early in a year with a per-job cost over $35,000 and then ends
up making no other loans, the grantee automatically fails the aggregate
standard.
Response. To reinforce the significance of the aggregate public
standards, the regulations concerning public benefit have been re-
ordered to discuss the aggregate standards first. It is not the
Department's intent to unduly penalize low-volume economic development
programs for noncompliance by one or two loans. However, in evaluating
projects for possible funding, all grantees are well
[[Page 1939]] advised to consider their historical levels of economic
development activity to ensure that the aggregate standards will be
met. It should be noted that HUD's decision to lower the individual
activity standard for job creation/retention from $100,000 to $50,000
should reduce the possibility that grantees will fail the aggregate
standard because they funded very high cost-per-job projects early in
the year.
Issue. One commenter argued that the $35,000 per-job aggregate
standard is too high to ensure reasonable public benefit; several
alternative standards in the range of $5,000-$10,000 per job were
recommended instead.
Response. The Department has chosen not to accept this
recommendation. This commenter also raised other objections to HUD's
proposed method for assessing public benefit; taken together, their
comments argue for a much more rigorous approach to economic
development funding, which would reduce grantee flexibility.
Issue. One commenter argued in favor of either eliminating the $350
per low- and moderate-income area resident standard, or at least
raising it to $500.
Response. The Department has decided to retain the proposed $350
figure.
Issue. One HUD staff person questioned how public benefit would be
measured in the aggregate under the HUD-Administered Small Cities CDBG
program, given that many grantees have revolving loan funds funded with
program income from previous grants.
Response. The Department agrees that the proposed regulations do
not adequately address this issue. In the final Entitlement
regulations, Sec. 570.209(b)(2) has been revised to address aggregate
public benefit in the HUD-Administered Small Cities and Insular Areas
CDBG programs.
Issue. Four comments were received on the list of ``important
national interest'' activities. Two commenters felt that more than 75%
of a grantee's funds should be used for such ``important national
interest'' activities in order to meet the alternate aggregate
standard. One commenter felt the criteria were so broadly written as to
allow virtually all activities to qualify, and particularly objected to
four of the proposed criteria [(E), (F), (H), (L)] as inappropriate.
Another questioned why microenterprise assistance activities [(G)] were
included on the list, when microenterprise assistance activities funded
under Sec. 105(a)(23) of the Act are not subject to the public benefit
standards. One commenter favored keeping the percentage of funds
requirement at 75%.
Response. In developing final regulations, the Department has
substantially revised the concept that certain activities can be
excluded from the $35,000 per-job or $350 per-area-resident aggregate
standards. The 75% provision has been eliminated as an alternate to the
aggregate dollar standards. Instead, grantees may, at their option,
exclude individual ``important national interest'' activities from the
aggregate standards. The list of ``important national interest''
activities which can be excluded from the aggregate standards has also
been revised. Proposed criterion (G) has been eliminated, and proposed
criteria (A) and (B) have been combined. Two new criteria [(L) and (M)]
have been added to the Entitlement program final rule; these criteria
provide additional flexibility in support of the new ``economic
revitalization strategy area'' approach to demonstrating national
objectives compliance. (This approach is discussed under ``Low and
Moderate Income Area Benefit Activities'' above; as noted there, the
approach is being implemented in the Entitlement program only at this
time.) The remaining criteria are now more narrowly defined to better
target assistance to certain population groups. One significant effect
of these changes to the ``important national interest'' activities is
worth noting. All activities which do not meet one of these ``important
national interest'' criteria must be subject to the aggregate dollar
standards.
Issue. Two commenters expressed concern about the relationship of
the aggregate standards to the Section 108 Loan Guarantee Program.
Concern is expressed that the $35,000 per-job aggregate standard will
hinder grantees' use of the Section 108 Loan Guarantee program; Section
108 projects are often big projects which could overwhelm the aggregate
average. If an expenditure of CDBG funds is required several years down
the line to cover a default, the grantee's aggregate level of public
benefit would suddenly become skewed too late for a grantee to make
adjustments.
Response. It is acknowledged that certain large Section 108
projects might have a high cost per job; however, the Department
believes Section 108 projects should be treated consistently with other
CDBG-funded projects. The Department has revised the requirements
applying to the ``important national interests'' activities listed in
the final rule; grantees may now, at their option, exclude activities
meeting these criteria from the aggregate standards. The Department
believes many Section 108 projects could meet one or more of these
criteria. Grantees may also request a waiver of the regulations for
individual activities which may not meet the public benefit
requirements. Concerning an unexpected skewing of aggregate benefit
resulting from a default, grantees should consider the possibility of a
default when deciding whether to fund proposed projects.
Issue. One commenter suggested that economic development services
activities funded under proposed Sec. 570.203(c) of the Entitlement
regulations be excluded from the public benefit standards, either
categorically or at the grantee's option.
Response. The Department does not believe it possible to exempt
this type of economic development activity from the public benefit
standards, given the statutory language mandating the development of
public benefit standards for activities qualifying under this
authority.
The Department has added language to the discussion of public
benefit which clarifies how to apply the individual and aggregate
standards to activities which provide job training, job placement and
other employment support services. Except for microenterprise
assistance activities eligible under Sec. 105(a)(23) of the Act, many
such activities will be subject to the public benefit standards because
they are undertaken pursuant to Sections 105(a)(14), (15) or (17) of
the Act. For purposes of the individual and aggregate public benefit
standards only, the jobs which such services involve are counted as
jobs created or retained. (See also the preamble discussion of national
objectives for further information on these activities.)
Public Benefit Standards--Documentation of Benefit
Five commenters (two states and three national associations)
offered comments on proposed paragraphs 570.209(d) and 570.482(e)(6).
Comments fell into two groups: those concerned about what constitutes a
substantial difference in actual versus projected benefits; and those
concerned about what sanctions the Department might take where actual
benefits were found to be substantially less than projected benefits.
One of the comments expressed general support for the approach to allow
adjustment to the projection process.
Issue. One commenter felt that if a grantee re-evaluates an amended
project, it should be held accountable to its amended projections, not
to its initial projections. The commenter recommended that the
regulations [[Page 1940]] should refer to ``initial or amended
projections''.
Response. The Department concurs with this point; the final
regulations discuss benefits in terms of benefits ``anticipated when
the CDBG assistance was obligated.'' This is intended to include
situations in which projections are revised because of changes in a
project which a grantee agrees to allow.
Issue. One commenter recommended that grantees' records concerning
the amount of public benefit derived from projects be made available to
the public at no cost. This commenter also recommended that Entitlement
grantees' Grantee Performance Reports should contain information on
differences between projected and actual public benefits from projects.
Response. Existing requirement concerning the availability of
documents to the public (such as the CDBG citizen participation
requirements) already cover the commenter's first concern. The
Department will take under advisement the suggestion concerning
reporting of benefits, at such time in the future that reporting
requirements are revised.
Issue. One commenter expressed the opinion that if a grantee shows
a pattern of substantial differences between projected and actual
benefits, over perhaps a two year period, HUD should impose a two-year
moratorium on the offending activity for that grantee.
Response. The Department does not accept this recommendation, as it
is inconsistent with existing CDBG regulations concerning sanctions for
noncompliance. The Department opposes the concept of developing
different, prescribed sanctions for different categories of
noncompliance.
Issue. One commenter expressed concern over the proposal that the
Department might hold a grantee to more stringent public benefit
standards in the future when the Department found a grantee to have
failed the public benefit standards. The commenter recommended that the
Department not take such action unless a grantee failed the standards
for two consecutive years, so as not to punish a grantee which might do
only one project in a year and have that one project prove
unsuccessful.
Response. While the Department agrees that low-volume economic
development programs should not be unduly penalized for the failure of
one project, the Department considers it inappropriate to identify a
specific time period over which to measure success or failure. The
final regulations have been revised to discuss situations in which ``a
pattern of substantial variation'' occurs.
Issue. Two states expressed concern about proposed language
requiring a state to ``take all actions reasonably within its control''
to improve a unit of local government's public benefit projections,
when actual results vary substantially from initial projections. This
language was seen as imprecise, and calls into question just what
actions are within a state's (versus the local government's) control to
rectify the problem. One state expressed concern that HUD might
sanction a state even after the state took all actions available to it
to correct a problem. The other state, while recognizing HUD's
oversight role, felt it inappropriate for HUD to second-guess a state's
actions, as only the state can impose on itself those actions necessary
to resolve the problem at the local level.
Response. These comments, as well as those discussed previously,
clearly indicate concern by grantees over what sanctions the Department
might take against a grantee, and over what local-level actions are
``enough'' to address a problem. The Department concurs up to a point
with the states' comments. The intended meaning of this paragraph was
that if local governments' results disclose a pattern of inaccurately
projecting pubic benefits, then the state should take actions to insure
that localities improve projection accuracy; if a state were to do
little or nothing to correct the problems, then HUD could impose
stricter standards upon a state. Similarly, if an Entitlement grantee
demonstrates that its projection process is inaccurate, it should take
steps to improve the accuracy of its projections; if local efforts to
resolve the problem were ineffective or nonexistent, then HUD could
impose stricter public benefit standards upon the grantee. HUD does not
intend that problems by one state recipient should be cause for
sanctions against an entire state's program.
HUD does not consider it useful to attempt to define what actions
are ``reasonably within the grantee's control'', as every situation
would involve a judgement call as to what could or should be done. The
concept of deferring entirely to a state's judgement about what actions
could or should be taken (against a state grant recipient) is
impractical, given HUD's statutory mandate to determine grantees'
compliance.
The paragraphs on documentation have been revised to respond to all
the above comments, and to provide greater clarity of meaning. In
addition, Sec. 570.482(f)(6) of the final State regulations clarifies
HUD's expectations upon states concerning local governments'
performance.
Amendments to Projects After Determinations
Four commenters (three local governments and one national
association) commented on the paragraphs concerning amendments to
projects after a funding decision has been reached.
Issue. Three commenters questioned as imprecise HUD's use of the
term ``material change'' in referring to situations in which a grantee
should reevaluate a project (after committing funding to it) because of
changes in the project. One commenter felt the proposed wording implied
that reanalysis would be required for any change, which would in their
opinion be overkill. Another commenter suggested use of the term
``substantial change'', which is used in the existing Entitlement
regulations to describe situations in which the Final Statement must be
amended.
Response. It is not the Department's intent that any change in a
project should necessitate its complete reevaluation. Minor changes,
such as the shifting of small dollar amounts among budget categories,
or a one-month extension to the construction period, probably would not
affect the underlying assumptions upon which a grantee decided to
assist the project. However, if the project changes to the extent that
the revised project would be very different in its scope, public
benefit, total cost or CDBG cost (compared to the project as initially
approved by the grantee), the Department believes that the project
should be reexamined under the public benefit and underwriting
guidelines. A grantee should confirm whether it still wishes to
participate in the project, whether the costs and benefits of the
project are still reasonable, and whether the amount of public benefit
is still reasonable given the amount of assistance being provided.
In the final regulations, these paragraphs have been rewritten to
state that a project should be reevaluated if the project changes to
the extent that ``a significant amendment to the contract (with the
business) is appropriate.'' The use of the term ``substantial'' was
avoided, as some might attempt to apply the same concept of
``substantial'' as used concerning Final Statement amendments--a
borrowing of concepts which the Department feels is not appropriate or
relevant. The Department has chosen not to define what constitutes a
``significant amendment'', nor to define the types of changes which
[[Page 1941]] would call for reevaluation. Grantees are strongly
encouraged, in developing their guidelines, to define what they will
consider to be ``significant changes'', and to identify how they will
reevaluate projects.
Issue. One commenter objected to the example provided at the end of
the paragraph concerning a situation in which total project costs
change. In this example, the Department suggested that if total project
costs decreased, it would be appropriate to reduce the amount of CDBG
assistance to the project. The commenter felt that this implies that
any reduction in total project cost should automatically result in a
comparable reduction in the amount of CDBG assistance, which may not be
practical. The commenter recommended eliminating the example.
Response. The Department concurs with the basic point that it may
not always be appropriate to reduce the amount of CDBG assistance in
such cases. The example has been retained in the final rule, but has
been modified to state that ``it may be appropriate'' to reduce the
amount of CDBG assistance. The final regulation also notes that when a
project is amended to receive additional CDBG assistance, the project
as amended must still comply with the public benefit standards.
Modification to the Definition of Subrecipient Related to
Microenterprise Assistance Activities
Issue. As noted earlier under the CBDO discussion regarding
Sec. 570.204 of the Entitlement regulations (Section 105(a)(15) of the
Act), five commenters addressed the proposed revision to the definition
of the term ``subrecipient'' at Sec. 570.500(c) to expand that
provision to include for-profit entities that are now specifically
authorized by statute to carry out microenterprise assistance
activities under the new eligibility provision implemented in this
final rule by a new Sec. 570.201(o) in the Entitlement regulations
[Section 105(a)(23) of the Act]. Most of the commenters recommended
that HUD not consider any entities carrying out activities under the
new microenterprise category as ``subrecipients'' but rather as ``end
beneficiaries.'' These commenters also requested a similar change in
classification for entities receiving CDBG assistance under
Sec. 570.204 of the Entitlement regulations [Section 105(a)(15) of the
Act]. Other commenters asked only for a clarification of the proposed
revision to Sec. 570.500(c). (1 local government agency, 1 development
organization, and 3 HUD Field staff persons)
Response. The new Section 105(a)(23) of the Act authorizes ``the
provision of assistance to public and private organizations, agencies,
and other entities (including nonprofit and for-profit entities) to
enable such entities to facilitate economic development'' by providing
various forms of assistance to owners of microenterprises and persons
developing microenterprises. The Department interprets this provision
to mean that any such entities beyond the grantee itself are to serve
as intermediaries in the grant assistance chain rather than being
considered beneficiaries in and of themselves. Thus, the Department
considers such organizations to be subrecipients under the CDBG
program. The existing definition of the term ``subrecipient'' at
Sec. 570.500(c) of the CDBG Entitlement regulations is being revised in
this final rule only to include a specific reference to the for-profit
entities now authorized to carry out microenterprise assistance
activities. (Nonprofit entities carrying out such activities are
already covered by the existing definition of a ``subrecipient.'') The
language in the proposed change to Sec. 570.500(c) has been revised,
however, to clarify the Department's intent.
Other Issues Regarding Income Documentation
Issue. One commenter recommended that HUD take this opportunity to
clarify what is meant by a ``verifiable certification'' as the term is
used in Sec. 570.506(b). The commenter asks whether this term implies
that a sample of the certifications should be verified. (1 private
citizen)
Response. HUD does not believe that this issue need be further
specified in the text of the regulation itself. However, as guidance
for grantees, it should be noted that, over time, HUD does expect that
some sample of such certifications would be verified by the grantee or
subrecipient, as applicable. This verification is important to
maintaining program accountability and integrity.
Issue. One commenter raised concerns about the burden of keeping
family size and income data for job creation or retention activities.
As another option, the commenter recommended that HUD only look at the
wages of the individual employee and compare that figure against the
income limits for one-person households. (1 development organization)
Response. HUD cannot accept this recommendation. First, the
proposal is not consistent with the general statutory definition of a
low- and moderate-income person as being a member of a low- and
moderate-income family. Secondly, the proposal's use of the wages of a
created job as the basis for determining a person's income status runs
counter to CDBG program requirements. To be counted toward compliance
with low- and moderate-income national objective compliance, a person
need only be low- and moderate-income at the time the CDBG assistance
is provided, i.e., for a created job, at the time he or she is hired.
The CDBG program does not and should not impose any requirement that
the person would have to stay low- and moderate-income based on the
wages of the created job. Finally, it should be noted that presumptions
added by the 1992 Act for determining whether a person is considered
low- and moderate-income for job creation or retention activities, as
implemented in this final rule, should significantly reduce the burden
described by the commenter.
Issue. One commenter stated that, in regard to the State CDBG
program, it is good that HUD is consulting and negotiating with States
on record keeping issue, but the commenter complained that the number
of States being consulted was too small. The commenter argued that HUD
should negotiate record keeping requirements with each and every State
because since they represent such broad and varied regions. (1 state
agency)
Response. It is not logistically possible for HUD to negotiate with
each and every State before issuing record keeping regulations for the
State CDBG program. HUD is still negotiating with a sample of States
and is hoping to devise certain minimum record keeping standards for
States that will be accepted on a consensus basis.
Other Issues Not Specifically Addressed in the Proposed Rule
A number of comments were received on issues not specifically
addressed in the proposed regulations, but which were seen (by
commenters) as having significant bearing on the use of CDBG funds for
economic development activity.
Issue. Two commenters (both local governments) requested that the
Department address the issue of using CDBG funds for economic
development activities on military bases which are being closed.
Response. The Department does not see the reuse or redevelopment of
closed military bases as an activity per se, but rather a goal which
CDBG funds can be used to address. The Department believes the current
regulations concerning eligibility and national objectives, along with
these revised [[Page 1942]] regulations, give communities considerable
flexibility to carry out a broad range of economic development
activities, including those on former military bases.
Issue. Six commenters (3 national associations, 2 states and one
local government) identified other Federal requirements as major
inhibitors to the use of CDBG for economic development (particularly
for microenterprise assistance), and asked the Department to examine
ways to streamline these other requirements. Specifically identified
were environmental review procedures, program income requirements, and
the Davis-Bacon Wage Rate Act.
Response. HUD acknowledges that these areas are the source of
frequent complaints. However, as some commenters noted, the underlying
bases for many of the regulatory requirements in these areas are
statutory, and thus lie beyond HUD's span of control. HUD is willing to
explore ways in which regulations governing these other federal
requirements might be made more amenable to the use of CDBG funds for
economic development.
In particular, the Department realizes that CDBG regulations
governing the use of CDBG program income must be revised to include
1992 changes to the Act. Issues concerning program income will be dealt
with more comprehensively in separate future rule-making. In the
meantime, and in response to these comments, the Department has
identified three incremental changes which can be made regarding
program income, and has included them in this final rule.
1. The 1992 State CDBG program regulations included a provision
excluding from the definition of program income an amount of up to
$10,000 per year per state grant recipient. This provision was
consistent with 1992 amendments to the Act, which permitted the
Secretary to exclude from program requirements amounts of program
income that are determined to be so small that compliance with
requirements would place an unreasonable administrative burden on units
of local government. During the past two years, a number of states have
commented to HUD that many of their grant recipients regularly receive
over $10,000 per year in program income; thus, at its present level,
this exclusion provision is of little or no benefit to state grant
recipients. Since state grant award amounts are typically smaller than
the average yearly entitlement grant amount, state grant recipients
typically receive less program per year than entitlement grantees. The
problem noted by states is likely to be equally or more problematic for
entitlement grantees.
The Department has determined that $25,000 is a more appropriate
level at which to set the yearly exclusion amount. These final
regulations also extend the exclusion provision to the Entitlement
program for the first time. In a separate rulemaking, the Department is
also adding the exclusion provision to the HUD-Administered Small
Cities program regulations.
2. The existing definition of program income includes revenue
generated by activities carried out with the proceeds from loans
guaranteed under Section 108. Such revenue is now treated as program
income even if the guaranteed loan is repaid with non-CDBG funds. Such
revenue is treated as program income notwithstanding that it is
required to be pledged to the repayment of the Section 108 loan. The
final rule excludes from the definition of program income certain
amounts generated by activities financed by Section 108 loans, to the
extent that non-CDBG funds are used to repay the loan. Activities which
can qualify for this exclusion are those meeting the criteria at
Sec. 570.209(b)(2)(v) or Sec. 570.482(f)(3)(v) (the ``important
national interest'' activities), and those carried out in conjunction
with an Economic Development Initiative grant in an area determined by
the Department to meet the eligibility requirements for Urban
Empowerment Zone designation.
Any revenue generated by activities financed with Section 108 loan
guarantees which is not defined as program income would be
miscellaneous revenue. In addition, any amounts in debt service
accounts that were funded with non-CDBG funds (e.g. Section 108 funds
and monies provided by the assisted business) that remain after full
and final repayment of the guaranteed loan would also be considered
miscellaneous revenue.
3. As discussed earlier under the heading of Community-Based
Development Organizations, the Department has substantially revised the
requirements governing activities funded under Sec. 105(a)(15) of the
Act (and Sec. 570.204 of the Entitlement regulations). As a result of
those changes, the department has determined that amounts generated by
such activities can also be excluded from the requirements governing
the use of program income.
Because Sec. 105(a)(15) of the Act differentiates between the types
of eligible entities in entitlement jurisdictions and nonentitled
areas, this change has been effected by different means for the
Entitlement and State CDBG programs. Section 570.500(c) of the
Entitlement regulations, which defines the term ``subrecipient'', has
been revised; entities described in Sec. 570.204(c) [which implements
Sec. 105(a)(15) of the Act], are no longer defined as subrecipients. As
noted previously, the term ``subrecipient'' is not defined in the State
CDBG program. Section 570.489(e) of the State rule (which comprises
program income requirements) has been revised to exclude from the
definition of program income amounts generated by Sec. 105(a)(15)
activities. States are expected to ensure that any such activities are
indeed carried out by an entity pursuant to Sec. 105(a)(15).
It should be noted that this exclusion does not cover situations in
which a grantee provides CDBG assistance to one of these entities in
the form of a loan. Any repayments of principal or interest from the
entity to the grantee for such a loan would be considered to be CDBG
program income, regardless of the source of the funds used for
repayment.
Issue. Numerous commenters noted that HUD needs to provide
additional training for grantees and HUD Field Office staff to ensure
uniform understanding, interpretation and implementation of the revised
regulations. HUD should also go beyond formal training to provide other
mechanisms (such as national conferences, development of model
programs, resource guidebooks and computer bulletin boards) for sharing
information on economic development activities. Areas in which certain
commenters were particularly interested in seeing greater information-
sharing included: related federal initiatives such as welfare reform
and Empowerment Zones/Enterprise Communities; sharing of model
programs; microenterprise assistance programs; use of ``first source''
agreements for job creation activities; and combining CDBG with other
federal economic development resources.
Response. The Department acknowledges the importance of training on
new regulations, and is planning to provide training to both grantees
and HUD Field Office staff once these regulations are effective. HUD is
also developing a CDBG economic development reference manual which will
include model programs. The Department's Consolidated Technical
Assistance initiative, which is already being implemented, should also
result in additional training opportunities on economic development
issues.
The Department plans to develop guidelines by which those
communities [[Page 1943]] demonstrating the best performance in the
area of economic development may be identified. These guidelines will
be distributed to both grantees and HUD Field Office staff. The
Department will also identify administrative mechanisms through which
additional relief may be provided to communities with the best economic
development performance records.
Relationship to Section 3 Economic Opportunity Requirements
Recipients of CDBG funds must also comply with the requirements of
Section 3 of the Housing and Urban Development Act of 1968 (Section 3),
as amended by Section 915 of the 1992 Act. Section 3 requires that, to
the greatest extent feasible, and consistent with existing Federal,
State and local laws and regulations, employment and other economic
opportunities arising in connection with CDBG assistance to any Section
3 covered project are given to low- and very low-income persons
residing within the metropolitan area (or nonmetropolitan county) in
which the project is located. For the CDBG program, Section 3 covered
projects include housing rehabilitation, housing construction, and
other public construction. The Section 3 requirements apply to
training, employment and contracting opportunities arising in
connection with a covered project, as well as job (or other
opportunities) which may be retained or created as a result of the
project. An interim rule implementing the 1992 amendments to Section 3
was published by the Department in the Federal Register on June 30,
1994, and it became effective August 1, 1994.
Other Matters
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
in this rule do not have Federalism implications when implemented and,
thus, are not subject to review under the Order. Nothing in the rule
implies any preemption of State or local law, nor does any provision of
the rule disturb the existing relationship between the Federal
Government and State and local governments.
Executive Order 12606, the Family
The General Counsel, as the designated Official under Executive
Order 12606, has determined that this rule does not have potential
significant impact on family formation, maintenance, and general well-
being, and, thus, is not subject to review under the Order.
Environmental Finding
A Finding of No Significant Impact with regard to the environment
has been made in accordance with HUD regulations in 24 CFR part 50,
which implement section 102(2)(C) of the National Environmental Policy
Act of 1969, 42 U.S.C. 4321. The Finding of No Significant Impact is
available for public inspection between 7:30 a.m. and 5:30 p.m.
weekdays in the Office of the Rules Docket Clerk, Room 10276, 451
Seventh Street, SW., Washington, DC 20410.
Regulatory Flexibility
Under the Regulatory Flexibility Act (5 U.S.C. 605(b)), the
Secretary by his approval of publication of this rule hereby certifies
that this rule does not have a significant economic impact on a
substantial number of small entities. The rule does not affect the
amount of funds provided in the CDBG program, but rather modifies and
updates program administration and procedural requirements to comport
with recently enacted legislation.
Semiannual Agenda
This rule was listed as item 1848 in the Department's Semiannual
Agenda of Regulations published on November 14, 1994 (59 FR 57632,
57664) under Executive Order 12866 and the Regulatory Flexibility Act.
Catalog of Federal Domestic Assistance
The Community Development Block Grant Program is listed in the
Catalog of Federal Domestic Assistance under the following numbers:
Entitlements--14.218, HUD-administered Small Cities--14.219, Indian--
14.223, Insular Areas--14.225, State's Program--14.228.
List of Subjects in 24 CFR Part 570
Administrative practice and procedure, American Samoa, Community
development block grants, Grant programs--education, Grant programs--
housing and community development, Guam, Indians, Lead poisoning, Loan
programs--housing and community development, Low and moderate income
housing, New communities, Northern Mariana Islands, Pacific Islands
Trust Territory, Pockets of poverty, Puerto Rico, Reporting and
recordkeeping requirements, Small cities, Student aid, Virgin Islands.
Accordingly, 24 CFR part 570, subparts A, C, I, and J, are amended
as follows:
PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS
1. The authority citation for 24 CFR part 570 continues to read as
follows:
Authority: 42 U.S.C. 3535(d) and 5300-5320.
Subpart A--General Provisions
2. In Sec. 570.3, definitions for ``Community Development Financial
Institution'', ``Microenterprise'', and ``Small business'', are added
in alphabetical order to read as follows:
Sec. 570.3 Definitions.
* * * * *
Community Development Financial Institution has the same meaning as
used in the Community Development Banking and Financial Institutions
Act of 1994 (12 U.S.C. 4701 note).
* * * * *
Microenterprise means a business that has five or fewer employees,
one or more of whom owns the enterprise.
* * * * *
Small business means a business that meets the criteria set forth
in section 3(a) of the Small Business Act (15 U.S.C. 631, 636, 637).
* * * * *
Subpart C--Eligible Activities
3. In Sec. 570.200, paragraph (e) is revised to read as follows:
Sec. 570.200 General policies.
* * * * *
(e) Recipient determinations required as a condition of
eligibility. In several instances under this subpart, the eligibility
of an activity depends on a special local determination. Recipients
shall maintain documentation of all such determinations. A written
determination is required for any activity carried out under the
authority of Secs. 570.201(f), 570.202(b)(3), 570.204, 570.206(f), and
570.209.
* * * * *
4. In Sec. 570.201, paragraph (o) is added to read as follows:
Sec. 570.201 Basic eligible activities.
* * * * *
(o)(1) The provision of assistance either through the recipient
directly or through public and private organizations, agencies, and
other subrecipients (including nonprofit and for-profit subrecipients)
to facilitate economic development by:
(i) Providing credit, including, but not limited to, grants, loans,
loan guarantees, and other forms of financial support, for the
establishment, [[Page 1944]] stabilization, and expansion of
microenterprises;
(ii) Providing technical assistance, advice, and business support
services to owners of microenterprises and persons developing
microenterprises; and
(iii) Providing general support, including, but not limited to,
peer support programs, counseling, child care, transportation, and
other similar services, to owners of microenterprises and persons
developing microenterprises.
(2) Services provided this paragraph (o) shall not be subject to
the restrictions on public services contained in paragraph (e) of this
section.
(3) For purposes of this paragraph (o), ``persons developing
microenterprises'' means such persons who have expressed interest and
who are, or after an initial screening process are expected to be,
actively working toward developing businesses, each of which is
expected to be a microenterprise at the time it is formed.
5. In Sec. 570.202, paragraph (a)(1) is revised to read as follows:
Sec. 570.202 Eligible rehabilitation and preservation activities.
(a) * * *
(1) Privately owned buildings and improvements for residential
purposes; improvements to a single-family residential property which is
also used as a place of business, which are required in order to
operate the business, need not be considered to be rehabilitation of a
commercial or industrial building, if the improvements also provide
general benefit to the residential occupants of the building;
* * * * *
6. Section 570.203 is amended by revising the introductory text and
paragraph (b), and by adding a new paragraph (c), to read as follows:
Sec. 570.203 Special economic development activities.
A recipient may use CDBG funds for special economic development
activities in addition to other activities authorized in this subpart
which may be carried out as part of an economic development project.
Guidelines for selecting activities to assist under this paragraph are
provided at Sec. 570.209. The recipient must ensure that the
appropriate level of public benefit will be derived pursuant to those
guidelines before obligating funds under this authority. Special
activities authorized under this section do not include assistance for
the construction of new housing. Special economic development
activities include:
* * * * *
(b) The provision of assistance to a private for-profit business,
including, but not limited to, grants, loans, loan guarantees, interest
supplements, technical assistance, and other forms of support, for any
activity where the assistance is appropriate to carry out an economic
development project, excluding those described as ineligible in
Sec. 570.207(a). In selecting businesses to assist under this
authority, the recipient shall minimize, to the extent practicable,
displacement of existing businesses and jobs in neighborhoods.
(c) Economic development services in connection with activities
eligible under this section, including, but not limited to, outreach
efforts to market available forms of assistance; screening of
applicants; reviewing and underwriting applications for assistance;
preparation of all necessary agreements; management of assisted
activities; and the screening, referral, and placement of applicants
for employment opportunities generated by CDBG-eligible economic
development activities, including the costs of providing necessary
training for persons filling those positions.
7. Section 570.204 is revised to read as follows:
Sec. 570.204 Special activities by Community-Based Development
Organizations (CBDOs).
(a) Eligible activities. The recipient may provide CDBG funds as
grants or loans to any CBDO qualified under this section to carry out a
neighborhood revitalization, community economic development, or energy
conservation project. The funded project activities may include those
listed as eligible under this subpart, and, except as described in
paragraph (b) of this section, activities not otherwise listed as
eligible under this subpart. For purposes of qualifying as a project
under paragraphs (a)(1), (a)(2), and (a)(3) of this section, the funded
activity or activities may be considered either alone or in concert
with other project activities either being carried out or for which
funding has been committed. For purposes of this section:
(1) Neighborhood revitalization project includes activities of
sufficient size and scope to have an impact on the decline of a
geographic location within the jurisdiction of a unit of general local
government (but not the entire jurisdiction) designated in
comprehensive plans, ordinances, or other local documents as a
neighborhood, village, or similar geographical designation; or the
entire jurisdiction of a unit of general local government which is
under 25,000 population;
(2) Community economic development project includes activities that
increase economic opportunity, principally for persons of low- and
moderate-income, or that stimulate or retain businesses or permanent
jobs, including projects that include one or more such activities that
are clearly needed to address a lack of affordable housing accessible
to existing or planned jobs and those activities specified at 24 CFR
91.1(a)(1)(iii);
(3) Energy conservation project includes activities that address
energy conservation, principally for the benefit of the residents of
the recipient's jurisdiction; and
(4) To carry out a project means that the CBDO undertakes the
funded activities directly or through contract with an entity other
than the grantee, or through the provision of financial assistance for
activities in which it retains a direct and controlling involvement and
responsibilities.
(b) Ineligible activities. Notwithstanding that CBDOs may carry out
activities that are not otherwise eligible under this subpart, this
section does not authorize:
(1) Carrying out an activity described as ineligible in
Sec. 570.207(a);
(2) Carrying out public services that do not meet the requirements
of Sec. 570.201(e), except that:
(i) Services carried out under this section that are specifically
designed to increase economic opportunities through job training and
placement and other employment support services, including, but not
limited to, peer support programs, counseling, child care,
transportation, and other similar services; and
(ii) Services of any type carried out under this section pursuant
to a strategy approved by HUD under the provisions of 24 CFR 91.215(e)
shall not be subject to the limitations in Sec. 570.201(e)(1) or (2),
as applicable;
(3) Providing assistance to activities that would otherwise be
eligible under Sec. 570.203 that do not meet the requirements of
Sec. 570.209; or
(4) Carrying out an activity that would otherwise be eligible under
Sec. 570.205 or Sec. 570.206, but that would result in the recipient's
exceeding the spending limitation in Sec. 570.200(g).
(c) Eligible CBDOs. (1) A CBDO qualifying under this section is an
organization which has the following characteristics:
(i) Is an association or corporation organized under State or local
law to engage in community development activities (which may include
housing [[Page 1945]] and economic development activities) primarily
within an identified geographic area of operation within the
jurisdiction of the recipient, or in the case of an urban county, the
jurisdiction of the county; and
(ii) Has as its primary purpose the improvement of the physical,
economic or social environment of its geographic area of operation by
addressing one or more critical problems of the area, with particular
attention to the needs of persons of low and moderate income; and
(iii) May be either non-profit or for-profit, provided any monetary
profits to its shareholders or members must be only incidental to its
operations; and
(iv) Maintains at least 51 percent of its governing body's
membership for low- and moderate-income residents of its geographic
area of operation, owners or senior officers of private establishments
and other institutions located in and serving its geographic area of
operation, or representatives of low- and moderate-income neighborhood
organizations located in its geographic area of operation; and
(v) Is not an agency or instrumentality of the recipient and does
not permit more than one-third of the membership of its governing body
to be appointed by, or to consist of, elected or other public officials
or employees or officials of an ineligible entity (even though such
persons may be otherwise qualified under paragraph (c)(1)(iv) of this
section); and
(vi) Except as otherwise authorized in paragraph (c)(1)(v) of this
section, requires the members of its governing body to be nominated and
approved by the general membership of the organization, or by its
permanent governing body; and
(vii) Is not subject to requirements under which its assets revert
to the recipient upon dissolution; and
(viii) Is free to contract for goods and services from vendors of
its own choosing.
(2) A CBDO that does not meet the criteria in paragraph (c)(1) of
this section may also qualify as an eligible entity under this section
if it meets one of the following requirements:
(i) Is an entity organized pursuant to section 301(d) of the Small
Business Investment Act of 1958 (15 U.S.C. 681(d)), including those
which are profit making; or
(ii) Is an SBA approved Section 501 State Development Company or
Section 502 Local Development Company, or an SBA Certified Section 503
Company under the Small Business Investment Act of 1958, as amended; or
(iii) Is a Community Housing Development Organization (CHDO) under
24 CFR 92.2, designated as a CHDO by the HOME Investment Partnerships
program participating jurisdiction, with a geographic area of operation
of no more than one neighborhood, and has received HOME funds under 24
CFR 92.300 or is expected to receive HOME funds as described in and
documented in accordance with 24 CFR 92.300(e).
(3) A CBDO that does not qualify under paragraphs (c) (1) or (2) of
this section may also be determined to qualify as an eligible entity
under this section if the recipient demonstrates to the satisfaction of
HUD, through the provision of information regarding the organization's
charter and by-laws, that the organization is sufficiently similar in
purpose, function, and scope to those entities qualifying under
paragraphs (c) (1) or (2) of this section.
8. Section 570.207 is amended by revising paragraphs (b)
introductory text and (b)(3)(iii) to read as follows:
Sec. 570.207 Ineligible activities.
* * * * *
(b) The following activites may not be assisted with CDBG funds
unless authorized under provisions of Sec. 570.203 or as otherwise
specifically noted herein or when carried out by a entity under the
provisions of Sec. 570.204.
* * * * *
(3) * * *
(iii) When carried out by an entity pursuant to Sec. 570.204(a);
* * * * *
9. Section 570.208 is amended by:
a. Revising the paragraph heading of paragraph (a), revising
paragraph (a)(1)(i), the first sentence in paragraph (a)(1)(iv), and
adding a new paragraph (a)(1)(v);
b. Revising paragraph (a)(2)(i) introductory text and by adding new
paragraphs (a)(2)(iii) and (a)(2)(iv);
c. Revising the introductory text of paragraph (a)(3);
d. Revising paragraph (a)(4); and
e. Adding new paragraphs (d)(5), (d)(6), and (d)(7), to read as
follows:
Sec. 570.208 Criteria for national objectives.
* * * * *
(a) Activities benefiting low- and moderate-income persons.
* * * * *
(1) Area benefit activities. (i) An activity, the benefits of which
are available to all the residents in a particular area, where at least
51 percent of the residents are low and moderate income persons. Such
an area need not be coterminous with census tracts or other officially
recognized boundaries but must be the entire area served by the
activity. An activity that serves an area that is not primarily
residential in character shall not qualify under this criterion.
* * * * *
(iv) In determining whether there is a sufficiently large
percentage of low and moderate income persons residing in the area
served by an activity to qualify under paragraphs (a)(1)(i), (ii), or
(v) of this section, the most recently available decennial census
information shall be used to the fullest extent feasible, together with
the Section 8 income limits that would have applied at the time the
income information was collected by the Census Bureau. * * *
(v) Activities meeting the requirements of paragraph (d)(5)(i) of
this section may be considered to qualify under this paragraph,
provided that the area covered by the strategy is primarily residential
and contains a percentage of low- and moderate-income residents that is
no less than the percentage computed by HUD pursuant to paragraph
(a)(1)(ii) of this section but in no event less than 51 percent.
Activities meeting the requirements of paragraph (d)(6)(i) of this
section may also be considered to qualify under paragraph (a)(1) of
this section.
(2) Limited clientele activities. (i) An activity which benefits a
limited clientele, at least 51 percent of whom are low- or moderate-
income persons. (The following kinds of activities may not qualify
under paragraph (a)(2) of this section: activities, the benefits of
which are available to all the residents of an area; activities
involving the acquisition, construction or rehabilitation of property
for housing; or activities where the benefit to low- and moderate-
income persons to be considered is the creation or retention of jobs,
except as provided in paragraph (a)(2)(iv) of this section.) To qualify
under paragraph (a)(2) of this section, the activity must meet one of
the following tests:
* * * * *
(iii) A microenterprise assistance activity carried out in
accordance with the provisions of Sec. 570.201(o) with respect to those
owners of microenterprises and persons developing microenterprises
assisted under the activity during each program year who are low- and
moderate-income persons. For purposes of this paragraph, persons
determined to be low and moderate income may be presumed to continue to
qualify as such for up to a three-year period. [[Page 1946]]
(iv) An activity designed to provide job training and placement
and/or other employment support services, including, but not limited
to, peer support programs, counseling, child care, transportation, and
other similar services, in which the percentage of low- and moderate-
income persons assisted is less than 51 percent may qualify under this
paragraph in the following limited circumstance:
(A) In such cases where such training or provision of supportive
services assists business(es), the only use of CDBG assistance for the
project is to provide the job training and/or supportive services; and
(B) The proportion of the total cost of the project borne by CDBG
funds is no greater than the proportion of the total number of persons
assisted who are low or moderate income.
(3) Housing activities. An eligible activity carried out for the
purpose of providing or improving permanent residential structures
which, upon completion, will be occupied by low- and moderate-income
households. This would include, but not necessarily be limited to, the
acquisition or rehabilitation of property, conversion of non-
residential structures, and new housing construction. If the structure
contains two dwelling units, at least one must be so occupied, and if
the structure contains more than two dwelling units, at least 51
percent of the units must be so occupied. Where two or more rental
buildings being assisted are or will be located on the same or
contiguous properties, and the buildings will be under common ownership
and management, the grouped buildings may be considered for this
purpose as a single structure. Where housing activities being assisted
meet the requirements of paragraph Sec. 570.208 (d)(5)(ii) or
(d)(6)(ii) of this section, all such housing may also be considered for
this purpose as a single structure. For rental housing, occupancy by
low and moderate income households must be at affordable rents to
qualify under this criterion. The recipient shall adopt and make public
its standards for determining ``affordable rents'' for this purpose.
The following shall also qualify under this criterion:
* * * * *
(4) Job creation or retention activities. An activity designed to
create or retain permanent jobs where at least 51 percent of the jobs,
computed on a full time equivalent basis, involve the employment of
low- and moderate-income persons. To qualify under this paragraph, the
activity must meet the following criteria:
(i) For an activity that creates jobs, the recipient must document
that at least 51 percent of the jobs will be held by, or will be
available to, low- and moderate-income persons.
(ii) For an activity that retains jobs, the recipient must document
that the jobs would actually be lost without the CDBG assistance and
that either or both of the following conditions apply with respect to
at least 51 percent of the jobs at the time the CDBG assistance is
provided:
(A) The job is known to be held by a low- or moderate-income
person; or
(B) The job can reasonably be expected to turn over within the
following two years and that steps will be taken to ensure that it will
be filled by, or made available to, a low- or moderate-income person
upon turnover.
(iii) Jobs that are not held or filled by a low- or moderate-income
person may be considered to be available to low- and moderate-income
persons for these purposes only if:
(A) Special skills that can only be acquired with substantial
training or work experience or education beyond high school are not a
prerequisite to fill such jobs, or the business agrees to hire
unqualified persons and provide training; and
(B) The recipient and the assisted business take actions to ensure
that low- and moderate-income persons receive first consideration for
filling such jobs.
(iv) For purposes of determining whether a job is held by or made
available to a low- or moderate-income person, the person may be
presumed to be a low- or moderate-income person if:
(A) He/she resides within a census tract (or block numbering area)
that either:
(1) Meets the requirements of paragraph (a)(4)(v) of this section;
or
(2) Has at least 70 percent of its residents who are low- and
moderate-income persons; or
(B) The assisted business is located within a census tract (or
block numbering area) that meets the requirements of paragraph
(a)(4)(v) of this section and the job under consideration is to be
located within that census tract.
(v) A census tract (or block numbering area) qualifies for the
presumptions permitted under paragraphs (a)(4)(iv)(A)(1) and (B) of
this section if it is either part of a Federally-designated Empowerment
Zone or Enterprise Community or meets the following criteria:
(A) It has a poverty rate of at least 20 percent as determined by
the most recently available decennial census information;
(B) It does not include any portion of a central business district,
as this term is used in the most recent Census of Retail Trade, unless
the tract has a poverty rate of at least 30 percent as determined by
the most recently available decennial census information; and
(C) It evidences pervasive poverty and general distress by meeting
at least one of the following standards:
(1) All block groups in the census tract have poverty rates of at
least 20 percent;
(2) The specific activity being undertaken is located in a block
group that has a poverty rate of at least 20 percent; or
(3) Upon the written request of the recipient, HUD determines that
the census tract exhibits other objectively determinable signs of
general distress such as high incidence of crime, narcotics use,
homelessness, abandoned housing, and deteriorated infrastructure or
substantial population decline.
(vi) As a general rule, each assisted business shall be considered
to be a separate activity for purposes of determining whether the
activity qualifies under this paragraph, except:
(A) In certain cases such as where CDBG funds are used to acquire,
develop or improve a real property (e.g., a business incubator or an
industrial park) the requirement may be met by measuring jobs in the
aggregate for all the businesses which locate on the property, provided
such businesses are not otherwise assisted by CDBG funds.
(B) Where CDBG funds are used to pay for the staff and overhead
costs of a subrecipient making loans to businesses exclusively from
non-CDBG funds, this requirement may be met by aggregating the jobs
created by all of the businesses receiving loans during each program
year.
(C) Where CDBG funds are used by a recipient or subrecipient to
provide technical assistance to businesses, this requirement may be met
by aggregating the jobs created or retained by all of the businesses
receiving technical assistance during each program year.
(D) Where CDBG funds are used for activities meeting the criteria
listed at Sec. 570.209(b)(2)(v), this requirement may be met by
aggregating the jobs created or retained by all businesses for which
CDBG assistance is obligated for such activities during the program
year, except as provided at paragraph (d)(7) of this section.
(E) Where CDBG funds are used by a Community Development Financial
Institution to carry out activities for the purpose of creating or
retaining jobs, this requirement may be met by
[[Page 1947]] aggregating the jobs created or retained by all
businesses for which CDBG assistance is obligated for such activities
during the program year, except as provided at paragraph (d)(7) of this
section.
(F) Where CDBG funds are used for public facilities or improvements
which will result in the creation or retention of jobs by more than one
business, this requirement may be met by aggregating the jobs created
or retained by all such businesses as a result of the public facility
or improvement.
(1) Where the public facility or improvement is undertaken
principally for the benefit of one or more particular businesses, but
where other businesses might also benefit from the assisted activity,
the requirement may be met by aggregating only the jobs created or
retained by those businesses for which the facility/improvement is
principally undertaken, provided that the cost (in CDBG funds) for the
facility/improvement is less than $10,000 per permanent full-time
equivalent job to be created or retained by those businesses.
(2) In any case where the cost per job to be created or retained
(as determined under paragraph (a)(4)(v)(C)(1) of this section) is
$10,000 or more, the requirement must be met by aggregating the jobs
created or retained as a result of the public facility or improvement
by all businesses in the service area of the facility/improvement. This
aggregation must include businesses which, as a result of the public
facility/improvement, locate or expand in the service area of the
facility/improvement between the date the recipient identifies the
activity in its final statement and the date one year after the
physical completion of the facility/improvement. In addition, the
assisted activity must comply with the public benefit standards at
Sec. 570.209(b).
* * * * *
(d) * * *
(5) Where the grantee has elected to prepare an area revitalization
strategy pursuant to the authority of Sec. 91.215(e) of this title and
HUD has approved the strategy, the grantee may also elect the following
options:
(i) Activities undertaken pursuant to the strategy for the purpose
of creating or retaining jobs may, at the option of the grantee, be
considered to meet the requirements of this paragraph under the
criteria at paragraph (a)(1)(v) of this section in lieu of the criteria
at paragraph (a)(4) of this section; and
(ii) All housing activities in the area for which, pursuant to the
strategy, CDBG assistance is obligated during the program year may be
considered to be a single structure for purposes of applying the
criteria at paragraph (a)(3) of this section.
(6) Where CDBG-assisted activities are carried out by a Community
Development Financial Institution whose charter limits its investment
area to a primarily residential area consisting of at least 51 percent
low- and moderate-income persons, the grantee may also elect the
following options:
(i) Activities carried out by the Community Development Financial
Institution for the purpose of creating or retaining jobs may, at the
option of the grantee, be considered to meet the requirements of this
paragraph under the criteria at paragraph (a)(1)(v) of this section in
lieu of the criteria at paragraph (a)(4) of this section; and
(ii) All housing activities for which the Community Development
Financial Institution obligates CDBG assistance during the program year
may be considered to be a single structure for purposes of applying the
criteria at paragraph (a)(3) of this section.
(7) Where an activity meeting the criteria at Sec. 570.209(b)(2)(v)
may also meet the requirements of either paragraph (d)(5)(i) or
(d)(6)(i) of this section, the grantee may elect to qualify the
activity under either the area benefit criteria at paragraph (a)(1)(v)
of this section or the job aggregation criteria at paragraph
(a)(4)(vi)(D) of this section, but not both. Where an activity may meet
the job aggregation criteria at both paragraphs (a)(4)(vi) (D) and (E)
of this section, the grantee may elect to qualify the activity under
either criterion, but not both.
10. A new Sec. 570.209 is added to subpart C to read as follows:
Sec. 570.209 Guidelines for evaluating and selecting economic
development projects.
The following guidelines are provided to assist the recipient to
evaluate and select activities to be carried out for economic
development purposes. Specifically, these guidelines are applicable to
activities that are eligible for CDBG assistance under Sec. 570.203.
These guidelines also apply to activities carried out under the
authority of Sec. 570.204 that would otherwise be eligible under
Sec. 570.203, were it not for the involvement of a Community-Based
Development Organization (CBDO). (This would include activities where a
CBDO makes loans to for-profit businesses.) These guidelines are
composed of two components: guidelines for evaluating project costs and
financial requirements; and standards for evaluating public benefit.
The standards for evaluating public benefit are mandatory, but the
guidelines for evaluating projects costs and financial requirements are
not.
(a) Guidelines and Objectives for Evaluating Project Costs and
Financial Requirements. HUD has developed guidelines that are designed
to provide the recipient with a framework for financially underwriting
and selecting CDBG-assisted economic development projects which are
financially viable and will make the most effective use of the CDBG
funds. These guidelines, also referred to as the underwriting
guidelines, are published as appendix A to this part. The use of the
underwriting guidelines published by HUD is not mandatory. However,
grantees electing not to use these guidelines would be expected to
conduct basic financial underwriting prior to the provision of CDBG
financial assistance to a for-profit business. Where appropriate, HUD's
underwriting guidelines recognize that different levels of review are
appropriate to take into account differences in the size and scope of a
proposed project, and in the case of a microenterprise or other small
business to take into account the differences in the capacity and level
of sophistication among businesses of differing sizes. Recipients are
encouraged, when they develop their own programs and underwriting
criteria, to also take these factors into account. The objectives of
the underwriting guidelines are to ensure:
(1) That project costs are reasonable;
(2) That all sources of project financing are committed;
(3) That to the extent practicable, CDBG funds are not substituted
for non-Federal financial support;
(4) That the project is financially feasible;
(5) That to the extent practicable, the return on the owner's
equity investment will not be unreasonably high; and
(6) That to the extent practicable, CDBG funds are disbursed on a
pro rata basis with other finances provided to the project.
(b) Standards for Evaluating Public Benefit. The grantee is
responsible for making sure that at least a minimum level of public
benefit is obtained from the expenditure of CDBG funds under the
categories of eligibility governed by these guidelines. The standards
set forth below identify the types of public benefit that will be
recognized for this purpose and the minimum level of each that must be
obtained for the amount of CDBG funds used. Unlike the guidelines for
project costs and financial requirements covered under paragraph (a) of
this section, the use of the standards for public benefit is mandatory.
Certain public facilities and [[Page 1948]] improvements eligible under
Sec. 570.201(c) of the regulations, which are undertaken for economic
development purposes, are also subject to these standards, as specified
in Sec. 570.208(a)(4)(vi)(D)(2).
(1) Standards for activities in the aggregate. Activities covered
by these guidelines must, in the aggregate, either:
(i) Create or retain at least one full-time equivalent, permanent
job per $35,000 of CDBG funds used; or
(ii) Provide goods or services to residents of an area, such that
the number of low- and moderate-income persons residing in the areas
served by the assisted businesses amounts to at least one low- and
moderate-income person per $350 of CDBG funds used.
(2) Applying the aggregate standards. (i) A metropolitan city or an
urban county shall apply the aggregate standards under paragraph (b)(1)
of this section to all applicable activities for which CDBG funds are
first obligated within each single CDBG program year, without regard to
the source year of the funds used for the activities. A grantee under
the HUD-Administered Small Cities or Insular Areas CDBG programs shall
apply the aggregate standards under paragraph (b)(1) of this section to
all funds obligated for applicable activities from a given grant;
program income obligated for applicable activities will, for these
purposes, be aggregated with the most recent open grant. For any time
period in which a community has no open HUD-Administered or Insular
Areas grants, the aggregate standards shall be applied to all
applicable activities for which program income is obligated during that
period.
(ii) The grantee shall apply the aggregate standards to the number
of jobs to be created/retained, or to the number of persons residing in
the area served (as applicable), as determined at the time funds are
obligated to activities.
(iii) Where an activity is expected both to create or retain jobs
and to provide goods or services to residents of an area, the grantee
may elect to count the activity under either the jobs standard or the
area residents standard, but not both.
(iv) Where CDBG assistance for an activity is limited to job
training and placement and/or other employment support services, the
jobs assisted with CDBG funds shall be considered to be created or
retained jobs for the purposes of applying the aggregate standards.
(v) Any activity subject to these guidelines which meets one or
more of the following criteria may, at the grantee's option, be
excluded from the aggregate standards described in paragraph (b)(1) of
this section:
(A) Provides jobs exclusively for unemployed persons or
participants in one or more of the following programs:
(1) Jobs Training Partnership Act (JTPA);
(2) Jobs Opportunities for Basic Skills (JOBS); or
(3) Aid to Families with Dependent Children (AFDC);
(B) Provides jobs predominantly for residents of Public and Indian
Housing units;
(C) Provides jobs predominantly for homeless persons;
(D) Provides jobs predominantly for low-skilled, low- and moderate-
income persons, where the business agrees to provide clear
opportunities for promotion and economic advancement, such as through
the provision of training;
(E) Provides jobs predominantly for persons residing within a
census tract (or block numbering area) that has at least 20 percent of
its residents who are in poverty;
(F) Provides assistance to business(es) that operate(s) within a
census tract (or block numbering area) that has at least 20 percent of
its residents who are in poverty;
(G) Stabilizes or revitalizes a neighborhood that has at least 70
percent of its residents who are low- and moderate-income;
(H) Provides assistance to a Community Development Financial
Institution that serve an area that is predominantly low- and moderate-
income persons;
(I) Provides assistance to a Community-Based Development
Organization serving a neighborhood that has at least 70 percent of its
residents who are low- and moderate-income;
(J) Provides employment opportunities that are an integral
component of a project designed to promote spatial deconcentration of
low- and moderate-income and minority persons;
(K) With prior HUD approval, provides substantial benefit to low-
income persons through other innovative approaches;
(L) Provides services to the residents of an area pursuant to a
strategy approved by HUD under the provisions of Sec. 91.215(e) of this
title;
(M) Creates or retains jobs through businesses assisted in an area
pursuant to a strategy approved by HUD under the provisions of
Sec. 91.215(e) of this title.
(3) Standards for individual activities. Any activity subject to
these guidelines which falls into one or more of the following
categories will be considered by HUD to provide insufficient public
benefit, and therefore may under no circumstances be assisted with CDBG
funds:
(i) The amount of CDBG assistance exceeds either of the following,
as applicable:
(A) $50,000 per full-time equivalent, permanent job created or
retained; or
(B) $1,000 per low- and moderate-income person to which goods or
services are provided by the activity.
(ii) The activity consists of or includes any of the following:
(A) General promotion of the community as a whole (as opposed to
the promotion of specific areas and programs);
(B) Assistance to professional sports teams;
(C) Assistance to privately-owned recreational facilities that
serve a predominantly higher-income clientele, where the recreational
benefit to users or members clearly outweighs employment or other
benefits to low- and moderate-income persons;
(D) Acquisition of land for which the specific proposed use has not
yet been identified; and
(E) Assistance to a for-profit business while that business or any
other business owned by the same person(s) or entity(ies) is the
subject of unresolved findings of noncompliance relating to previous
CDBG assistance provided by the recipient.
(4) Applying the individual activity standards. (i) Where an
activity is expected both to create or retain jobs and to provide goods
or services to residents of an area, it will be disqualified only if
the amount of CDBG assistance exceeds both of the amounts in paragraph
(b)(3)(i) of this section.
(ii) The individual activity standards in paragraph (b)(3)(i) of
this section shall be applied to the number of jobs to be created or
retained, or to the number of persons residing in the area served (as
applicable), as determined at the time funds are obligated to
activities.
(iii) Where CDBG assistance for an activity is limited to job
training and placement and/or other employment support services, the
jobs assisted with CDBG funds shall be considered to be created or
retained jobs for the purposes of applying the individual activity
standards in paragraph (b)(3)(i) of this section.
(c) Amendments to economic development projects after review
determinations. If, after the grantee enters into a contract to provide
assistance to a project, the scope or financial elements of the project
change [[Page 1949]] to the extent that a significant contract
amendment is appropriate, the project should be reevaluated under these
and the recipient's guidelines. (This would include, for example,
situations where the business requests a change in the amount or terms
of assistance being provided, or an extension to the loan payment
period required in the contract.) If a reevaluation of the project
indicates that the financial elements and public benefit to be derived
have also substantially changed, then the recipient should make
appropriate adjustments in the amount, type, terms or conditions of
CDBG assistance which has been offered, to reflect the impact of the
substantial change. (For example, if a change in the project elements
results in a substantial reduction of the total project costs, it may
be appropriate for the recipient to reduce the amount of total CDBG
assistance.) If the amount of CDBG assistance provided to the project
is increased, the amended project must still comply with the public
benefit standards under paragraph (b) of this section.
(d) Documentation. The grantee must maintain sufficient records to
demonstrate the level of public benefit, based on the above standards,
that is actually achieved upon completion of the CDBG-assisted economic
development activity(ies) and how that compares to the level of such
benefit anticipated when the CDBG assistance was obligated. If the
grantee's actual results show a pattern of substantial variation from
anticipated results, the grantee is expected to take all actions
reasonably within its control to improve the accuracy of its
projections. If the actual results demonstrate that the recipient has
failed the public benefit standards, HUD may require the recipient to
meet more stringent standards in future years as appropriate.
Subpart I--State Community Development Block Grant Program
11. Section 570.482 is amended by adding paragraphs (c), (d), (e),
(f), and (g) to read as follows:
Sec. 570.482 Eligible activities.
* * * * *
(c) Provision of Assistance for Microenterprise Development.
Microenterprise development activities eligible under Section
105(a)(23) of the Housing and Community Development Act of 1974 (the
Act), as amended, (42 U.S.C. 5301 et seq.) may be carried out either
through the recipient directly or through public and private
organizations, agencies, and other subrecipients (including nonprofit
and for-profit subrecipients).
(d) Provision of Public Services. The following activities shall
not be subject to the restrictions on public services under Section
105(a)(8) of the Housing and Community Development Act of 1974, as
amended:
(1) Support services provided under Section 105(a)(23) of the
Housing and Community Development Act of 1974, as amended, and
paragraph (c) of this section; and
(2) Services carried out under the provisions of Section 105(a)(15)
of the Housing and Community Development Act of 1974, as amended, that
are specifically designed to increase economic opportunities through
job training and placement and other employment support services,
including, but not limited to, peer support programs, counseling, child
care, transportation, and other similar services.
(e) Guidelines and Objectives for Evaluating Project Costs and
Financial Requirements--(1) Applicability. The following guidelines,
also referred to as the underwriting guidelines, are provided to assist
the recipient to evaluate and select activities to be carried out for
economic development purposes. Specifically, these guidelines are
applicable to activities that are eligible for CDBG assistance under
section 105(a)(17) of the Act, economic development activities eligible
under section 105(a)(14) of the Act, and activities that are part of a
community economic development project eligible under section
105(a)(15) of the Act. The use of the underwriting guidelines published
by HUD is not mandatory. However, states electing not to use these
guidelines would be expected to ensure that the state or units of
general local government conduct basic financial underwriting prior to
the provision of CDBG financial assistance to a for-profit business.
(2) Objectives. The underwriting guidelines are designed to provide
the recipient with a framework for financially underwriting and
selecting CDBG-assisted economic development projects which are
financially viable and will make the most effective use of the CDBG
funds. Where appropriate, HUD's underwriting guidelines recognize that
different levels of review are appropriate to take into account
differences in the size and scope of a proposed project, and in the
case of a microenterprise or other small business to take into account
the differences in the capacity and level of sophistication among
businesses of differing sizes. Recipients are encouraged, when they
develop their own programs and underwriting criteria, to also take
these factors into account. These underwriting guidelines are published
as appendix A to this part. The objectives of the underwriting
guidelines are to ensure:
(i) That project costs are reasonable;
(ii) That all sources of project financing are committed;
(iii) That to the extent practicable, CDBG funds are not
substituted for non-Federal financial support;
(iv) That the project is financially feasible;
(v) That to the extent practicable, the return on the owner's
equity investment will not be unreasonably high; and
(vi) That to the extent practicable, CDBG funds are disbursed on a
pro rata basis with other finances provided to the project.
(f) Standards for Evaluating Public Benefit. (1) Purpose and
Applicability. The grantee is responsible for making sure that at least
a minimum level of public benefit is obtained from the expenditure of
CDBG funds under the categories of eligibility governed by these
standards. The standards set forth below identify the types of public
benefit that will be recognized for this purpose and the minimum level
of each that must be obtained for the amount of CDBG funds used. These
standards are applicable to activities that are eligible for CDBG
assistance under section 105(a)(17) of the Act, economic development
activities eligible under section 105(a)(14) of the Act, and activities
that are part of a community economic development project eligible
under section 105(a)(15) of the Act. Certain public facilities and
improvements eligible under Section 105(a)(2) of the Act, which are
undertaken for economic development purposes, are also subject to these
standards, as specified in Sec. 570.483(b)(4)(vi)(F)(2). Unlike the
guidelines for project costs and financial requirements covered under
paragraph (a) of this section, the use of the standards for public
benefit is mandatory.
(2) Standards for activities in the aggregate. Activities covered
by these standards must, in the aggregate, either:
(i) Create or retain at least one full-time equivalent, permanent
job per $35,000 of CDBG funds used; or
(ii) Provide goods or services to residents of an area, such that
the number of low- and moderate-income persons residing in the areas
served by the assisted businesses amounts to at least one low- and
moderate-income person per $350 of CDBG funds used.
(3) Applying the aggregate standards. (i) A state shall apply the
aggregate [[Page 1950]] standards under paragraph (e)(2) of this
section to all funds distributed for applicable activities from each
annual grant. This includes the amount of the annual grant, any funds
reallocated by HUD to the state, any program income distributed by the
state and any guaranteed loan funds made under the provisions of
subpart M of this part covered in the method of distribution in the
final statement for a given annual grant year.
(ii) The grantee shall apply the aggregate standards to the number
of jobs to be created/retained, or to the number of persons residing in
the area served (as applicable), as determined at the time funds are
obligated to activities.
(iii) Where an activity is expected both to create or retain jobs
and to provide goods or services to residents of an area, the grantee
may elect to count the activity under either the jobs standard or the
area residents standard, but not both.
(iv) Where CDBG assistance for an activity is limited to job
training and placement and/or other employment support services, the
jobs assisted with CDBG funds shall be considered to be created or
retained jobs for the purposes of applying the aggregate standards.
(v) Any activity subject to these standards which meets one or more
of the following criteria may, at the grantee's option, be excluded
from the aggregate standards described in paragraph (f)(2) of this
section:
(A) Provides jobs exclusively for unemployed persons or
participants in one or more of the following programs:
(1) Jobs Training Partnership Act (JTPA);
(2) Jobs Opportunities for Basic Skills (JOBS); or
(3) Aid to Families with Dependent Children (AFDC);
(B) Provides jobs predominantly for residents of Public and Indian
Housing units;
(C) Provides jobs predominantly for homeless persons;
(D) Provides jobs predominantly for low-skilled, low- and moderate-
income persons, where the business agrees to provide clear
opportunities for promotion and economic advancement, such as through
the provision of training;
(E) Provides jobs predominantly for persons residing within a
census tract (or block numbering area) that has at least 20 percent of
its residents who are in poverty;
(F) Provides assistance to business(es) that operate(s) within a
census tract (or block numbering area) that has at least 20 percent of
its residents who are in poverty;
(G) Stabilizes or revitalizes a neighborhood income that has at
least 70 percent of its residents who are low- and moderate-income;
(H) Provides assistance to a Community Development Financial
Institution (as defined in the Community Development Banking and
Financial Institutions Act of 1994, (12 U.S.C. 4701 note)) serving an
area that has at least 70 percent of its residents who are low- and
moderate-income;
(I) Provides assistance to an organization eligible to carry out
activities under section 105(a)(15) of the Act serving an area that has
at least 70 percent of its residents who are low- and moderate-income;
(J) Provides employment opportunities that are an integral
component of a project designed to promote spatial deconcentration of
low- and moderate-income and minority persons;
(K) With prior HUD approval, provides substantial benefit to low-
income persons through other innovative approaches.
(4) Standards for individual activities. Any activity subject to
these standards which falls into one or more of the following
categories will be considered by HUD to provide insufficient public
benefit, and therefore may under no circumstances be assisted with CDBG
funds:
(i) The amount of CDBG assistance exceeds either of the following,
as applicable:
(A) $50,000 per full-time equivalent, permanent job created or
retained; or
(B) $1,000 per low- and moderate-income person to which goods or
services are provided by the activity.
(ii) The activity consists of or includes any of the following:
(A) General promotion of the community as a whole (as opposed to
the promotion of specific areas and programs);
(B) Assistance to professional sports teams;
(C) Assistance to privately-owned recreational facilities that
serve a predominantly higher-income clientele, where the recreational
benefit to users or members clearly outweighs employment or other
benefits to low- and moderate-income persons;
(D) Acquisition of land for which the specific proposed use has not
yet been identified; and
(E) Assistance to a for-profit business while that business or any
other business owned by the same person(s) or entity(ies) is the
subject of unresolved findings of noncompliance relating to previous
CDBG assistance provided by the recipient.
(5) Applying the individual activity standards. (i) Where an
activity is expected both to create or retain jobs and to provide goods
or services to residents of an area, it will be disqualified only if
the amount of CDBG assistance exceeds both of the amounts in paragraph
(f)(4)(i) of this section.
(ii) The individual activity tests in paragraph (f)(4)(i) of this
section shall be applied to the number of jobs to be created or
retained, or to the number of persons residing in the area served (as
applicable), as determined at the time funds are obligated to
activities.
(iii) Where CDBG assistance for an activity is limited to job
training and placement and/or other employment support services, the
jobs assisted with CDBG funds shall be considered to be created or
retained jobs for the purposes of applying the individual activity
standards in paragraph (f)(4)(i) of this section.
(6) Documentation. The state and its grant recipients must maintain
sufficient records to demonstrate the level of public benefit, based on
the above standards, that is actually achieved upon completion of the
CDBG-assisted economic development activity(ies) and how that compares
to the level of such benefit anticipated when the CDBG assistance was
obligated. If a state grant recipient's actual results show a pattern
of substantial variation from anticipated results, the state and its
recipient are expected to take those actions reasonably within their
respective control to improve the accuracy of the projections. If the
actual results demonstrate that the state has failed the public benefit
standards, HUD may require the state to meet more stringent standards
in future years as appropriate.
(g) Amendments to economic development projects after review
determinations. If, after the grantee enters into a contract to provide
assistance to a project, the scope or financial elements of the project
change to the extent that a significant contract amendment is
appropriate, the project should be reevaluated under these and the
recipient's guidelines. (This would include, for example, situations
where the business requests a change in the amount or terms of
assistance being provided, or an extension to the loan payment period
required in the contract.) If a reevaluation of the project indicates
that the financial elements and public benefit to be derived have also
substantially changed, then the recipient should make appropriate
adjustments in the amount, type, terms [[Page 1951]] or conditions of
CDBG assistance which has been offered, to reflect the impact of the
substantial change. (For example, if a change in the project elements
results in a substantial reduction of the total project costs, it may
be appropriate for the recipient to reduce the amount of total CDBG
assistance.) If the amount of CDBG assistance provided to the project
is increased, the amended project must still comply with the public
benefit standards under paragraph (f) of this section.
12. Section 570.483 is amended by:
a. Revising the section heading;
b. Adding a new paragraph (b)(1)(iv):
c. Revising paragraph (b)(2)(i)(C), and adding new paragraphs
(b)(2)(iv) and (b)(2)(v);
d. Revising paragraph (b)(3) introductory text;
e. Redesignating paragraph (b)(4)(iv) as (b)(4)(vi), and by adding
new paragraphs (b)(4)(iv) and (v);
f. Revising newly designated paragraph (b)(4)(vi)(B);
g. Redesignating newly designated paragraph (b)(4)(vi)(c) as
paragraph (b)(4)(vi)(F) and revising it;
h. Adding new paragraphs (b)(4)(vi)(C), (D) and (E); and
i. Adding new paragraphs (e)(4) and (5), to read as follows:
Sec. 570.483 Criteria for national objectives.
* * * * *
(b) * * *
(1) * * *
(iv) Activities meeting the requirements of paragraph (e)(4)(i) of
this section may also be considered to qualify under this paragraph
(b).
(2) * * *
(i) * * *
(C) Activities where the benefit to low- and moderate-income
persons to be considered is the creation or retention of jobs, except
as provided in paragraph (b)(2)(v) of this section.
* * * * *
(iv) A microenterprise assistance activity (carried out in
accordance with the provisions of Section 105(a)(23) of the Act or
Sec. 570.482(c) and limited to microenterprises) with respect to those
owners of microenterprises and persons developing microenterprises
assisted under the activity who are low- and moderate-income persons.
For purposes of this paragraph, persons determined to be low and
moderate income may be presumed to continue to qualify as such for up
to a three-year period.
(v) An activity designed to provide job training and placement and/
or other employment support services, including, but not limited to,
peer support programs, counseling, child care, transportation, and
other similar services, in which the percentage of low- and moderate-
income persons assisted is less than 51 percent may qualify under this
paragraph in the following limited circumstances:
(A) In such cases where such training or provision of supportive
services is an integrally-related component of a larger project, the
only use of CDBG assistance for the project is to provide the job
training and/or supportive services; and
(B) The proportion of the total cost of the project borne by CDBG
funds is no greater than the proportion of the total number of persons
assisted who are low or moderate income.
(3) Housing activities. An eligible activity carried out for the
purpose of providing or improving permanent residential structures
which, upon completion, will be occupied by low- and moderate-income
households. This would include, but not necessarily be limited to, the
acquisition or rehabilitation of property, conversion of non-
residential structures, and new housing construction. If the structure
contains two dwelling units, at least one must be so occupied, and if
the structure contains more than two dwelling units, at least 51
percent of the units must be so occupied. Where two or more rental
buildings being assisted are or will be located on the same or
contiguous properties, and the buildings will be under common ownership
and management, the grouped buildings may be considered for this
purpose as a single structure. Where housing activities being assisted
meet the requirements of paragraph (e)(4)(ii) of this section, all such
housing may also be considered for this purpose as a single structure.
For rental housing, occupancy by low and moderate income households
must be at affordable rents to qualify under this criterion. The
recipient shall adopt and make public its standards for determining
``affordable rents'' for this purpose. The following shall also qualify
under this criterion:
* * * * *
(4) * * *
(iv) For purposes of determining whether a job is held by or made
available to a low- or moderate-income person, the person may be
presumed to be a low- or moderate-income person if:
(A) He/she resides within a census tract (or block numbering area)
that either:
(1) Meets the requirements of paragraph (b)(4)(v) of this section;
or
(2) Has at least 70 percent of its residents who are low- and
moderate-income persons; or
(B) The assisted business is located within a census tract (or
block numbering area) that meets the requirements of paragraph
(b)(4)(v) of this section and the job under consideration is to be
located within that census tract.
(v) A census tract (or block numbering area) qualifies for the
presumptions permitted under paragraphs (b)(4)(iv) (A)(1) and (B) of
this section if it is either part of a Federally-designated Empowerment
Zone or Enterprise Community or meets the following criteria:
(A) It has a poverty rate of at least 20 percent as determined by
the most recently available decennial census information;
(B) It does not include any portion of a central business district,
as this term is used in the most recent Census of Retail Trade, unless
the tract has a poverty rate of at least 30 percent as determined by
the most recently available decennial census information; and
(C) It evidences pervasive poverty and general distress by meeting
at least one of the following standards:
(1) All block groups in the census tract have poverty rates of at
least 20 percent;
(2) The specific activity being undertaken is located in a block
group that has a poverty rate of at least 20 percent; or
(3) Upon the written request of the recipient, HUD determines that
the census tract exhibits other objectively determinable signs of
general distress such as high incidence of crime, narcotics use,
homelessness, abandoned housing, and deteriorated infrastructure or
substantial population decline.
(vi) * * *
(B) Where CDBG funds are used to pay for the staff and overhead
costs of a subrecipient specified in section 105(a)(15) of the Act
making loans to businesses exclusively from non-CDBG funds, this
requirement may be met by aggregating the jobs created by all of the
businesses receiving loans during any one-year period.
(C) Where CDBG funds are used by a recipient or subrecipient to
provide technical assistance to businesses, this requirement may be met
by aggregating the jobs created or retained by all of the businesses
receiving technical assistance during any one-year period.
(D) Where CDBG funds are used for activities meeting the criteria
listed at Sec. 570.482(f)(3)(v), this requirement may be met by
aggregating the jobs created or retained by all businesses for which
CDBG assistance is obligated for such activities during any one-year
period, except as provided at paragraph (e)(5) of this
section. [[Page 1952]]
(E) Where CDBG funds are used by a Community Development Financial
Institution to carry out activities for the purpose of creating or
retaining jobs, this requirement may be met by aggregating the jobs
created or retained by all businesses for which CDBG assistance is
obligated for such activities during any one-year period, except as
provided at paragraph (e)(5) of this section.
(F) Where CDBG funds are used for public facilities or improvements
which will result in the creation or retention of jobs by more than one
business, this requirement may be met by aggregating the jobs created
or retained by all such businesses as a result of the public facility
or improvement.
(1) Where the public facility or improvement is undertaken
principally for the benefit of one or more particular businesses, but
where other businesses might also benefit from the assisted activity,
the requirement may be met by aggregating only the jobs created or
retained by those businesses for which the facility/improvement is
principally undertaken, provided that the cost (in CDBG funds) for the
facility/improvement is less than $10,000 per permanent full-time
equivalent job to be created or retained by those businesses.
(2) In any case where the cost per job to be created or retained
(as determined under paragraph (b)(4)(iii)(C)(1) of this section) is
$10,000 or more, the requirement must be met by aggregating the jobs
created or retained as a result of the public facility or improvement
by all businesses in the service area of the facility/improvement. This
aggregation must include businesses which, as a result of the public
facility/improvement, locate or expand in the service area of the
public facility/improvement between the date the state awards the CDBG
funds to the recipient and the date one year after the physical
completion of the public facility/improvement. In addition, the
assisted activity must comply with the public benefit standards at
Sec. 570.482(e).
* * * * *
(e) * * *
(4) Where CDBG-assisted activities are carried out by a Community
Development Financial Institution whose charter limits its investment
area to a primarily residential area consisting of at least 51 percent
low- and moderate-income persons, the unit of general local government
may also elect the following options:
(i) Activities carried out by the Community Development Financial
Institution for the purpose of creating or retaining jobs may, at the
option of the unit of general local government, be considered to meet
the requirements of this paragraph under the criteria at paragraph
(b)(1)(iv) of this section in lieu of the criteria at paragraph (b)(4)
of this section; and
(ii) All housing activities for which the Community Development
Financial Institution obligates CDBG assistance during any one-year
period may be considered to be a single structure for purposes of
applying the criteria at paragraph (b)(3) of this section.
(5) Where an activity meeting the criteria at Sec. 570.482(f)(3)(v)
also meets the requirements at paragraph (e)(4)(i) of this section, the
unit of general local government may elect to qualify the activity
under either the area benefit criteria at paragraph (b)(1)(iv) of this
section or the job aggregation criteria at paragraph (b)(4)(vi)(D) of
this section, but not both. Where an activity may meet the job
aggregation criteria at both paragraphs (b)(4)(vi) (D) and (E) of this
section, the unit of general local government may elect to qualify the
activity under either criterion, but not both.
* * * * *
13. Section 570.489 is amended by:
a. Revising paragraph (e)(1) introductory text;
b. Redesignating paragraph (e)(2) as paragraph (e)(3); and
c. Adding a new paragraph (e)(2), to read as follows:
Sec. 570.489 Program administrative requirements.
* * * * *
(e) Program income. (1) For the purposes of this subpart, ``program
income'' is defined as gross income received by a state, a unit of
general local government or a subrecipient of a unit of general local
government that was generated from the use of CDBG funds, except as
provided in paragraph (e)(2) of this section. When income is generated
by an activity that is only partially assisted with CDBG funds, the
income shall be prorated to reflect the percentage of CDBG funds used
(e.g., a single loan supported by CDBG funds and other funds; a single
parcel of land purchased with CDBG funds and other funds). Program
income includes, but is not limited to, the following:
* * * * *
(2) ``Program income'' does not include the following:
(i) The total amount of funds which is less than $25,000 received
in a single year that is retained by a unit of general local government
and its subrecipients;
(ii) Amounts generated by activities eligible under section
105(a)(15) of the Act and carried out by an entity under the authority
of section 105(a)(15) of the Act;
(iii) Amounts generated by activities that are financed by a loan
guaranteed under Section 108 of the Act and meet one or more of the
public benefit criteria specified at Sec. 570.482(f)(3)(v) or are
carried out in conjunction with a grant under Section 108(q) of the Act
in an area determined by HUD to meet the eligibility requirements for
designation as an Urban Empowerment Zone pursuant to 24 CFR part 597,
subpart B. Such exclusion shall not apply if CDBG funds are used to
repay the guaranteed loan. When such a guaranteed loan is partially
repaid with CDBG funds, the amount generated shall be prorated to
reflect the percentage of CDBG funds used. Amounts generated by
activities financed with loans guaranteed under Section 108 of the Act
which are not defined as program income shall be treated as
miscellaneous revenue and shall not be subject to any of the
requirements of this part. However, such treatment shall not affect the
right of the Secretary to require the Section 108 borrower to pledge
such amounts as security for the guaranteed loan. The determination
whether such amounts shall constitute program income shall be governed
by the provisions of the contract required at Sec. 570.705(b)(1).
* * * * *
Subpart J--Grant Administration
14. Section 570.500 is amended by revising paragraph (a)
introductory text; by adding a new paragraph (a)(4); and by revising
paragraph (c); to read as follows:
Sec. 570.500 Definitions.
* * * * *
(a) Program income means gross income received by the recipient or
a subrecipient directly generated from the use of CDBG funds, except as
provided in paragraph (a)(4) of this section.
* * * * *
(4) Program income does not include:
(i) Any income received in a single program year by the recipient
and all its subrecipients if the total amount of such income does not
exceed $25,000; and
(ii) Amounts generated by activities that are financed by a loan
guaranteed under Section 108 of the Act and meet one or more of the
public benefit criteria specified at Sec. 570.209(b)(2)(v) or are
carried out in conjunction with a grant under Section 108(q) in an area
determined by HUD to meet the eligibility requirements for designation
as an Urban Empowerment Zone pursuant to 24 CFR part 597, subpart B.
Such exclusion shall not apply if CDBG [[Page 1953]] funds are used to
repay the guaranteed loan. When such a guaranteed loan is partially
repaid with CDBG funds, the amount generated shall be prorated to
reflect the percentage of CDBG funds used. Amounts generated by
activities financed with loans guaranteed under Section 108 which are
not defined as program income shall be treated as miscellaneous revenue
and shall not be subject to any of the requirements of this Part.
However, such treatment shall not affect the right of the Secretary to
require the Section 108 borrower to pledge such amounts as security for
the guaranteed loan. The determination whether such amounts shall
constitute program income shall be governed by the provisions of the
contract required at Sec. 570.705(b)(1).
* * * * *
(c) Subrecipient means a public or private nonprofit agency,
authority or organization, or a for-profit entity authorized under
Sec. 570.201(o), receiving CDBG funds from the recipient to undertake
activities eligible for such assistance under Subpart C of this part.
The term excludes an entity receiving CDBG funds from the recipient
under the authority of Sec. 570.204. The term includes a public agency
designated by a metropolitan city or urban county to receive a loan
guarantee under Subpart M of this part, but does not include
contractors providing supplies, equipment, construction or services
subject to the procurement requirements in 24 CFR 85.36 or in
Attachment O of OMB Circular A-110, as applicable.
15. Section 570.506 is amended by revising paragraph (b)
introductory text; by removing the semicolon at the end of paragraph
(b)(2)(iii) and adding a period in its place; by redesignating
paragraphs (b)(7) through (b)(11) as paragraphs (b)(8) through (b)(12),
respectively; by adding a new paragraph (b)(7); and by revising
paragraph (c), to read as follows:
Sec. 570.506 Records to be maintained.
* * * * *
(b) Records demonstrating that each activity undertaken meets one
of the criteria set forth in Sec. 570.208. (Where information on income
by family size is required, the recipient may substitute evidence
establishing that the person assisted qualifies under another program
having income qualification criteria at least as restrictive as that
used in the definitions of ``low and moderate income person'' and ``low
and moderate income household'' (as applicable) at Sec. 570.3, such as
Job Training Partnership Act (JTPA) and welfare programs; or the
recipient may substitute evidence that the assisted person is homeless;
or the recipient may substitute a copy of a verifiable certification
from the assisted person that his or her family income does not exceed
the applicable income limit established in accordance with Sec. 570.3;
or the recipient may substitute a notice that the assisted person is a
referral from a state, county or local employment agency or other
entity that agrees to refer individuals it determines to be low and
moderate income persons based on HUD's criteria and agrees to maintain
documentation supporting these determinations.) Such records shall
include the following information:
* * * * *
(7) For purposes of documenting, pursuant to paragraphs
(b)(5)(i)(B), (b)(5)(ii)(C), (b)(6)(iii) or (b)(6)(v) of this section,
that the person for whom a job was either filled by or made available
to a low- or moderate-income person based upon the census tract where
the person resides or in which the business is located, the recipient,
in lieu of maintaining records showing the person's family size and
income, may substitute records showing either the person's address at
the time the determination of income status was made or the address of
the business providing the job, as applicable, the census tract in
which that address was located, the percent of persons residing in that
tract who either are in poverty or who are low- and moderate-income, as
applicable, the data source used for determining the percentage, and a
description of the pervasive poverty and general distress in the census
tract in sufficient detail to demonstrate how the census tract met the
criteria in Sec. 570.208(a)(4)(v), as applicable.
* * * * *
(c) Records which demonstrate that the recipient has made the
determinations required as a condition of eligibility of certain
activities, as prescribed in Secs. 570.201(f), 570.201(i),
570.202(b)(3), 570.203(b), 570.204(a), 570.206(f), and 570.209.
* * * * *
16. Appendix A is added to part 570 to read as follows:
Appendix A to Part 570--Guidelines and Objectives for Evaluating
Project Costs and Financial Requirements
I. Guidelines and Objectives for Evaluating Project Costs and
Financial Requirements. HUD has developed the following guidelines
that are designed to provide the recipient with a framework for
financially underwriting and selecting CDBG-assisted economic
development projects which are financially viable and will make the
most effective use of the CDBG funds. The use of these underwriting
guidelines as published by HUD is not mandatory. However, grantees
electing not to use these underwriting guidelines would be expected
to conduct basic financial underwriting prior to the provision of
CDBG financial assistance to a for-profit business. States electing
not to use these underwriting guidelines would be expected to ensure
that the state or units of general local government conduct basic
financial underwriting prior to the provision of CDBG financial
assistance to a for-profit business.
II. Where appropriate, HUD's underwriting guidelines recognize
that different levels of review are appropriate to take into account
differences in the size and scope of a proposed project, and in the
case of a microenterprise or other small business to take into
account the differences in the capacity and level of sophistication
among businesses of differing sizes.
III. Recipients are encouraged, when they develop their own
programs and underwriting criteria, to also take these factors into
account. For example, a recipient administering a program providing
only technical assistance to small businesses might choose to apply
underwriting guidelines to the technical assistance program as a
whole, rather than to each instance of assistance to a business.
Given the nature and dollar value of such a program, a recipient
might choose to limit its evaluation to factors such as the extent
of need for this type of assistance by the target group of
businesses and the extent to which this type of assistance is
already available.
IV. The objectives of the underwriting guidelines are to ensure:
(1) that project costs are reasonable;
(2) that all sources of project financing are committed;
(3) that to the extent practicable, CDBG funds are not
substituted for non-Federal financial support;
(4) that the project is financially feasible;
(5) that to the extent practicable, the return on the owner's
equity investment will not be unreasonably high; and
(6) that to the extent practicable, CDBG funds are disbursed on
a pro rata basis with other finances provided to the project.
i. Project costs are reasonable. i. Reviewing costs for
reasonableness is important. It will help the recipient avoid
providing either too much or too little CDBG assistance for the
proposed project. Therefore, it is suggested that the grantee obtain
a breakdown of all project costs and that each cost element making
up the project be reviewed for reasonableness. The amount of time
and resources the recipient expends evaluating the reasonableness of
a cost element should be commensurate with its cost. For example, it
would be appropriate for an experienced reviewer looking at a cost
element of less than $10,000 to judge the reasonableness of that
cost based upon his or her knowledge and common sense. For a cost
element in excess of $10,000, it would be more appropriate for the
reviewer to compare the cost element with a third-party, fair-market
price quotation for that cost element. Third-party price quotations
may also be used by a reviewer to help determine the reasonableness
of cost elements below $10,000 when the reviewer evaluates projects
[[Page 1954]] infrequently or if the reviewer is less experienced in
cost estimations. If a recipient does not use third-party price
quotations to verify cost elements, then the recipient would need to
conduct its own cost analysis using appropriate cost estimating
manuals or services.
ii. The recipient should pay particular attention to any cost
element of the project that will be carried out through a non-arms-
length transaction. A non-arms-length transaction occurs when the
entity implementing the CDBG assisted activity procures goods or
services from itself or from another party with whom there is a
financial interest or family relationship. If abused, non-arms-
length transactions misrepresent the true cost of the project.
2. Commitment of all project sources of financing. The recipient
should review all projected sources of financing necessary to carry
out the economic development project. This is to ensure that time
and effort is not wasted on assessing a proposal that is not able to
proceed. To the extent practicable, prior to the commitment of CDBG
funds to the project, the recipient should verify that: sufficient
sources of funds have been identified to finance the project; all
participating parties providing those funds have affirmed their
intention to make the funds available; and the participating parties
have the financial capacity to provide the funds.
3. Avoid substitution of CDBG funds for non-Federal financial
support. i. The recipient should review the economic development
project to ensure that, to the extent practicable, CDBG funds will
not be used to substantially reduce the amount of non-Federal
financial support for the activity. This will help the recipient to
make the most efficient use of its CDBG funds for economic
development. To reach this determination, the recipient's reviewer
would conduct a financial underwriting analysis of the project,
including reviews of appropriate projections of revenues, expenses,
debt service and returns on equity investments in the project. The
extent of this review should be appropriate for the size and
complexity of the project and should use industry standards for
similar projects, taking into account the unique factors of the
project such as risk and location.
ii. Because of the high cost of underwriting and processing
loans, many private financial lenders do not finance commercial
projects that are less than $100,000. A recipient should familiarize
itself with the lending practices of the financial institutions in
its community. If the project's total cost is one that would
normally fall within the range that financial institutions
participate, then the recipient should normally determine the
following:
A. Private debt financing--whether or not the participating
private, for-profit business (or other entity having an equity
interest) has applied for private debt financing from a commercial
lending institution and whether that institution has completed all
of its financial underwriting and loan approval actions resulting in
either a firm commitment of its funds or a decision not to
participate in the project; and
B. Equity participation--whether or not the degree of equity
participation is reasonable given general industry standards for
rates of return on equity for similar projects with similar risks
and given the financial capacity of the entrepreneur(s) to make
additional financial investments.
iii. If the recipient is assisting a microenterprise owned by a
low- or moderate-income person(s), in conducting its review under
this paragraph, the recipient might only need to determine that non-
Federal sources of financing are not available (at terms appropriate
for such financing) in the community to serve the low- or moderate-
income entrepreneur.
4. Financial feasibility of the project. i. The public benefit a
grantee expects to derive from the CDBG assisted project (the
subject of separate regulatory standards) will not materialize if
the project is not financially feasible. To determine if there is a
reasonable chance for the project's success, the recipient should
evaluate the financial viability of the project. A project would be
considered financially viable if all of the assumptions about the
project's market share, sales levels, growth potential, projections
of revenue, project expenses and debt service (including repayment
of the CDBG assistance if appropriate) were determined to be
realistic and met the project's break-even point (which is generally
the point at which all revenues are equal to all expenses).
Generally speaking, an economic development project that does not
reach this break-even point over time is not financially feasible.
The following should be noted in this regard:
A. some projects make provisions for a negative cash flow in the
early years of the project while space is being leased up or sales
volume built up, but the project's projections should take these
factors into account and provide sources of financing for such
negative cash flow; and
B. it is expected that a financially viable project will also
project sufficient revenues to provide a reasonable return on equity
investment. The recipient should carefully examine any project that
is not economically able to provide a reasonable return on equity
investment. Under such circumstances, a business may be overstating
its real equity investment (actual costs of the project may be
overstated as well), or it may be overstating some of the project's
operating expenses in the expectation that the difference will be
taken out as profits, or the business may be overly pessimistic in
its market share and revenue projections and has downplayed its
profits.
ii. In addition to the financial underwriting reviews carried
out earlier, the recipient should evaluate the experience and
capacity of the assisted business owners to manage an assisted
business to achieve the projections. Based upon its analysis of
these factors, the recipient should identify those elements, if any,
that pose the greatest risks contributing to the project's lack of
financial feasibility.
5. Return on equity investment. To the extent practicable, the
CDBG assisted activity should provide not more than a reasonable
return on investment to the owner of the assisted activity. This
will help ensure that the grantee is able to maximize the use of its
CDBG funds for its economic development objectives. However, care
should also be taken to avoid the situation where the owner is
likely to receive too small a return on his/her investment, so that
his/her motivation remains high to pursue the business with vigor.
The amount, type and terms of the CDBG assistance should be adjusted
to allow the owner a reasonable return on his/her investment given
industry rates of return for that investment, local conditions and
the risk of the project.
6. Disbursement of CDBG funds on a pro rata basis. To the extent
practicable, CDBG funds used to finance economic development
activities should be disbursed on a pro rata basis with other
funding sources. Recipients should be guided by the principle of not
placing CDBG funds at significantly greater risk than non-CDBG
funds. This will help avoid the situation where it is learned that a
problem has developed that will block the completion of the project,
even though all or most of the CDBG funds going in to the project
have already been expended. When this happens, a recipient may be
put in a position of having to provide additional financing to
complete the project or watch the potential loss of its funds if the
project is not able to be completed. When the recipient determines
that it is not practicable to disburse CDBG funds on a pro rata
basis, the recipient should consider taking other steps to safeguard
CDBG funds in the event of a default, such as insisting on
securitizing assets of the project.
Dated: December 22, 1994.
Mark C. Gordon,
General Deputy Assistant Secretary for Community Planning and
Development.
[FR Doc. 94-32151 Filed 12-29-94; 4:33 pm]
BILLING CODE 4210-29-P
