[Federal Register Volume 59, Number 103 (Tuesday, May 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13196]
[[Page Unknown]]
[Federal Register: May 31, 1994]
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Part III
Department of Housing and Urban Development
_______________________________________________________________________
Office of the Assistant Secretary for Community Planning and
Development
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24 CFR Part 570
Community Development Block Grant Program; Economic Development
Guidelines; Proposed Rule
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-P-01]
RIN 2506-AB53
Community Development Block Grant Program; Economic Development
Guidelines
AGENCY: Office of the Assistant Secretary for Community Planning and
Development, HUD.
ACTION: Proposed rule and guidelines.
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SUMMARY: This rule proposes guidelines to assist Community Development
Block Grant (CDBG) recipients in evaluating and selecting economic
development activities for assistance with CDBG funds. The proposed
guidelines deal with project costs and financial requirements and with
the public benefit provided by such activities. This rule also proposes
certain other changes to facilitate the use of CDBG funds for economic
development objectives.
DATES: Comments due date: June 30, 1994.
ADDRESSES: Interested persons are invited to submit comments regarding
the proposed rule to the Rules Docket Clerk, Office of General Counsel,
room 10276, Department of Housing and Urban Development, 451 Seventh
Street, SW., Washington, DC 20410. Comments should refer to the above
docket number and title. Copies of all written comments received will
be available for public inspection and copying between 7:30 a.m. and
5:30 p.m. weekdays in the Office of the Rules Docket Clerk, at the
address listed above.
FOR FURTHER INFORMATION CONTACT: James R. Broughman, Director,
Entitlement Communities Division, Office of Block Grant Assistance,
room 7282, 451 Seventh Street, SW., Washington, DC 20410. Telephone:
(202) 708-1577; 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 propose 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.
Applicability of This Proposed Rule to the State CDBG Program
Separate regulatory language for the Entitlement and State CDBG
programs is contained in this proposed rule. This preamble discusses
the proposed changes for the two programs together; differences between
the proposals for the two programs are noted. In general, the
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 proposed 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 Proposed 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. The proposed
changes to the Entitlement regulations would also apply to the HUD-
Administered Small Cities and Insular Areas programs. The Department
welcomes comment on whether these proposed changes can be practicably
applied as written to the HUD-Administered and Insular Areas programs,
or whether separate approaches are needed for those two programs.
Further clarification would 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. Public comment is
particularly welcomed on the proposed rule's approach in applying the
aggregate public benefit tests to the HUD-Administered Small Cities and
Insular Areas Programs.
Applicability of This Proposed Rule to the Indian CDBG Program
It has been determined by the Office of Native American Programs
that this proposed 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.
Comments and suggestions are solicited on the possible modification of
this proposed rule or the development of a method of implementing these
requirements for the ICDBG program.
Assistance for Microenterprises
Section 807(a)(4) of the Housing and Community Development Act of
1992 added a new section 105(a)(23) to the Housing and Community
Development Act of 1974, as amended, regarding the provision of CDBG
assistance to facilitate economic development through assistance to
microenterprises and persons developing microenterprises. A
``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.'' This new eligibility provision became
effective upon the enactment of the 1992 Act (October 28, 1992). In
policy guidance issued in January 1993, the Department indicated that
it intended to publish rules for public comment in order to show how
assistance provided under the new provision should be distinguished
from that provided to and for microenterprises under other existing
authority in the CDBG program.
The proposed rule implements the new microenterprise eligibility
category by adding a new paragraph Sec. 570.201(o) to the CDBG
Entitlement regulations. The Department has determined that it is
appropriate to add the new provision to Sec. 570.201, basic eligible
activities, rather than Sec. 570.203, special economic development
activities, to highlight the unique aspects of the new microenterprise
eligibility category. The provision of direct assistance to
microenterprises has long been, and continues to be, eligible as a
special economic development activity under Sec. 570.203(b). Such
activities are carried out under the authority of section 105(a)(17) of
the Housing and Community Development Act of 1974, as amended;
therefore, they are statutorily subject to an ``appropriateness''
determination and the economic development ``guidelines'' (included in
this proposed rule as a new Sec. 570.209 of the Entitlement regulations
and additions to Sec. 570.482 of the State regulations). As noted
above, however, 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 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. The new microenterprise eligibility category at
section 105(a)(23) also authorizes the provision of ``general support *
* * to owners of microenterprises and persons developing
microenterprises,'' over and above the technical assistance and
business support services authorized by the provision for such persons.
The ``general support'' aspect of the eligibility provision is
discussed in further detail later in this preamble. Given the above
unique characteristics of the new statutory provision, the Department
has determined that it is most fitting to list the eligibility category
as a separate activity under Sec. 570.201 instead of adding it as
another special economic development activity under Sec. 570.203 of the
Entitlement regulations.
While the new eligibility category does provide significant
flexibility, there is an important restriction that must be noted. The
beneficiaries of CDBG assistance under this new provision are limited
to ``owners of microenterprises and persons developing
microenterprises'' by the statute. As noted above, a
``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.'' This definition has recently been
incorporated into the CDBG Entitlement regulations at Sec. 570.3.
Pursuant to this statutory restriction, CDBG assistance to any business
that has more than five employees cannot qualify under this provision
and must continue to comply with the requirements of Sec. 570.203(b) of
the Entitlement regulations. It should also be noted that given that
activities assisted under this new provision are to exclusively benefit
microenterprises and persons developing microenterprises, a CDBG-
assisted economic development loan or grant program that is open to any
for-profit business under the provisions of Sec. 570.203(b) (Section
105(a)(17) of the Housing and Community Development Act of 1974, as
amended) cannot exempt an individual activity from compliance with the
economic development ``guidelines'' simply because that individual
business happens to be a microenterprise. The ``guidelines'' as
currently proposed to be implemented by a new Sec. 570.209 of the
Entitlement regulations (and Sec. 570.482 of the State regulations)
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.
The new section 105(a)(23) 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 assistance to
microenterprises and persons developing microenterprises. The
Department has determined that given the general language contained in
the statute, the grantee itself could be considered an entity eligible
to carry out microenterprise assistance activities under section
105(a)(23). If the grantee provides CDBG funds to other intermediary
organizations to carry out microenterprise assistance activities under
the new eligibility category, the Department considers such entities to
be subrecipients. (See further discussion on such subrecipients later
in this preamble.)
As noted earlier, the new microenterprise eligibility category at
section 105(a)(23) authorizes the provision of ``general support (such
as peer support programs and counseling) to owners of microenterprises
and persons developing microenterprises.'' Such ``general support'' is
over and above the technical assistance and business support services
authorized by the provision for such persons. This provision represents
a potentially significant broadening of CDBG eligibility. The language
of the statute indicates that the two specific types of services cited
are meant only to serve as examples of what may be considered eligible
under this provision and not an exclusive listing. The Department
believes that this paragraph may be interpreted very broadly to include
a multitude of non-business services for microenterprise owners and
persons in varying stages of developing microenterprises. Thus, for
illustrative purposes in the proposed rule at Sec. 570.201(o)(3), the
Department has added two additional examples of potentially eligible
services--child care and transportation. The proposed rule also makes
it clear that other similar services that can be shown to help a person
become a microenterprise owner can be considered eligible under this
paragraph. Examples of other such services that might qualify under
this provision, depending on the design of the microenterprise
assistance activity, include personal financial counseling, substance
abuse counseling, job training, and other education programs. Such an
interpretation of this provision may provide significant new
flexibility for grant recipients because services qualifying under this
paragraph are not considered to be subject to the 15 percent cap on
general public service activities qualifying under Sec. 570.201(e) of
the CDBG Entitlement regulations (as authorized by section 105(a)(8) of
the statute). Comment on the Department's interpretation of this
provision is welcome.
A new Sec. 570.482(c) of the State regulations is proposed. This
proposed paragraph would specify that recipients of state CDBG grants,
as well as subrecipients, may provide microenterprise development
assistance; the proposed Sec. 570.482(c) also specifies that provision
of support services to owners or developers of microenterprises is not
subject to the statutory restrictions on public services.
Modification to the Definition of Subrecipient Related to
Microenterprise Assistance Activities
As noted earlier in this preamble, the new Section 105(a)(23)
eligibility provision (proposed herein to be implemented by a new
Sec. 570.201(o) in the Entitlement regulations) 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 term ``subrecipient'' is currently defined at
Sec. 570.500(c) of the CDBG Entitlement regulations as a ``public or
private nonprofit agency, authority or organization, or an entity
described in Sec. 570.204(c), receiving CDBG funds from the recipient
to undertake activities eligible for such assistance under Subpart C.''
As noted above, however, the new statutory eligibility category
specifically includes for-profit entities as organizations that may be
provided CDBG assistance to carry out microenterprise assistance
activities. Thus, in this proposed rule, the Department is revising
Sec. 570.500(c) to add a reference to ``an entity described in
Sec. 570.201(o)'' to include such for-profit entities in the definition
of a subrecipient.
There are no regulatory requirements governing how a grant
recipient selects a subrecipient under the CDBG program. Thus, a
grantee may designate any entity, including a for-profit entity, to act
as a subrecipient to carry out a microenterprise assistance activity
under the new eligibility category. However, the Entitlement recipient
and the subrecipient must then enter into a written agreement that
meets all the requirements of Sec. 570.503 of the CDBG Entitlement
regulations. These requirements include compliance with the applicable
uniform administrative requirements as described at Sec. 570.502 and
the program income requirements as set forth in Sec. 570.504(c).
Ensuring that Economic Development Projects Minimize Displacement
The proposed rule implements section 907(a) of the National
Affordable Housing Act of 1990 by amending Sec. 570.203(b) of the CDBG
Entitlement regulations to delete the words ``necessary or'' from the
previously required ``necessary or appropriate determination'' and to
add the requirement that economic development projects assisted under
this provision must minimize, to the extent practicable, displacement
of existing businesses and jobs in neighborhoods. The language being
added to the regulation on displacement is identical to that contained
in the statute. The Department welcomes comment on whether any further
explanatory language should be added and how broadly this provision
should be interpreted.
Additional Changes to Sec. 570.203, Special Economic Development
Activities
Section 570.203 of the Entitlement regulations is further revised
in this proposed rule, as is Sec. 570.204, to reflect that these
activities are subject to the guidelines for selecting activities as
required by section 806(a) of the Housing and Community Development Act
of 1992 (``1992 Act''). The guidelines themselves are set forth in this
proposed rule in a proposed new Sec. 570.209 in the Entitlement
regulations and additions to Sec. 570.482 in the State regulations.
These proposed changes are discussed in further detail later in this
preamble.
Additionally, a new paragraph (c) is 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 is 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. Under current
regulations, all job training and placement activities are considered
to be public service activities qualifying under Sec. 570.201(e) of the
Entitlement regulations and, thus, subject to the 15 percent cap on
such activities. The Department recognizes that there are significant
differences between general skill-building training programs and those
that are directly linked with assisting individuals, especially low-
and moderate-income persons, to obtain specific job openings generated
by a CDBG-assisted special economic development activity. HUD believes
it would be beneficial to permit the latter type of program to be
considered part of the ``delivery cost'' of the associated special
economic development activity. Such placement and training costs would
then be considered to be eligible under Sec. 570.203 (Sections 105(a)
(14) and (17) of the Housing and Community Development Act of 1974, as
amended) and, thus, not subject to the limitations imposed on general
public service activities. The remaining types of activities delineated
in the proposed Sec. 570.203(c) are already considered to be activity
delivery costs eligible under Sec. 570.203 under current regulations.
The proposed new paragraph only provides a more specific statement of
this point.
National Objective Standards for Low- and Moderate-Income Area Benefit
Activities
This proposed rule includes a revision 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. The proposed revision relates specifically to
special economic development activities that may be carried out under
Sec. 570.203 (Sections 105(a) (14) and (17) of the Housing and
Community Development Act of 1974, as amended) by a community
development financial institution.
Supporting the development and growth of community development
financial institutions is a major initiative of this Administration.
Such existing institutions have demonstrated their ability to identify
and respond to community needs for equity investments, loans, and
development services. They can play a critical role in the
comprehensive revitalization of distressed neighborhoods by addressing
the financing needs of the area that are otherwise unmet. The proposed
change to Sec. 570.208(a)(1)(i) and Sec. 570.483(b)(1)(i) would allow
that if a community development financial institution's charter limits
its overall investment area to a primarily residential area where at
least 51 percent of the residents are low- and moderate-income persons,
any economic development activity carried out under Sec. 570.203
(Sections 105(a) (14) and (17) of the Housing and Community Development
Act of 1974, as amended) by that institution would be presumed to
benefit that investment area generally. Thus, any such activity would
qualify as an area benefit activity. This would reduce record keeping
burdens for such activities while still ensuring that low- and
moderate-income persons are receiving benefits from the activities.
National Objective Compliance by Microenterprise Assistance
Activities
Just as there are unique aspects distinguishing the new
microenterprise eligibility category at section 105(a)(23) of the
statute from CDBG special economic development activities, there is
also a key distinction between the two types of activities relating to
national objective compliance. Special economic development activities
carried out under Sec. 570.203 (a) and (b) of the Entitlement
regulations (Sections 105(a) (14) and (17) of the statute,
respectively) are subject to the restrictions imposed by section
105(c)(1) of the Act. That section limits the manner in which CDBG
special economic development activities may be considered to meet the
national objective of benefiting low- and moderate-income persons.
Pursuant to section 105(c)(1), special economic development activities
carried out under Sec. 570.203 (a) and (b) (Sections 105(a) (14) and
(17) of the Housing and Community Development Act of 1974, as amended)
can only be considered to benefit low- and moderate-income persons
either as an area benefit activity (Sec. 570.208(a)(1) of the
Entitlement regulations and Sec. 570.483(b)(1) of the State
regulations) or as a job creation or retention activity
(Sec. 570.208(a)(4) of the Entitlement regulations and
Sec. 570.483(b)(4) of the State regulations). As noted above, however,
the new microenterprise eligibility category was added to the Act as a
new section 105(a)(23), and this new paragraph is not statutorily
subject to the restrictions imposed by section 105(c)(1). 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.
In this proposed rule, a new Sec. 570.208(a)(2)(iii) has been added
to the Entitlement regulations, and a new Sec. 570.483(b)(2)(iv) has
been added to the State regulations, to specifically provide the
limited clientele national objective option for the new microenterprise
assistance activities. The Department believes that the limited
clientele option provides the greatest flexibility for recipients and
their subrecipients actually carrying out microenterprise assistance
activities under the new eligibility category to qualify these
activities as benefiting low- and moderate-income persons. This
national objective provision would allow such activities to serve a
broad range of microenterprise owners and persons developing
microenterprises without concern as to whether and how many jobs are
actually being ``created'' or ``retained'' as those terms are used in
the CDBG Entitlement regulations at Sec. 570.208(a)(4)
[Sec. 570.483(b)(4) of the State regulations]. This may be particularly
significant when CDBG funds are used under the new eligibility category
for the ``stabilization'' of existing microenterprises or to assist
persons who subsequently decide against ``developing
microenterprises.'' Also, under this proposed national objective
provision, only the income status of the assisted microenterprise
owners and persons developing microenterprises would need to be
assessed; the recipient or subrecipient carrying out the activity would
not have to ascertain the income status of any employees who may be
hired or retained as a result of the CDBG assistance.
The proposed rule would also permit the aggregating of
beneficiaries by program year. Under the limited clientele provision,
the recipient and any subrecipient carrying out the activity would need
to demonstrate that at least 51 percent of the beneficiaries of the
activity during the program year are low- and moderate-income persons.
(States would need to demonstrate 51 percent low- and moderate-income
benefit for each annual grant. Recipients of grants from HUD under the
Insular Areas and HUD-Administered Small Cities programs would need to
demonstrate 51 percent low- and moderate-income benefit for each
separate grant.) Many activities carried out under the new eligibility
category will likely be designed to assist an individual as he/she is
attempting to develop a microenterprise and then to continue to assist
the individual once that person has actually become an owner of a
microenterprise. It is possible that a low- or moderate-income person
initially assisted under such an activity may no longer be considered
to be of low or moderate income in a later program year after the
microenterprise actually becomes operational. The Department believes
that some continuity of service for such persons may still be
desirable. Thus, the proposed rule states that for purposes of meeting
this national objective requirement, any person determined to be of low
or moderate income may be presumed to continue to qualify as such for
up to a three-year period before that person would have to requalify.
Comment on the proposed manner for permitting a microenterprise
assistance activity to demonstrate that it is meeting the national
objective of benefiting low- and moderate-income persons is welcome. As
discussed above, the Department believes that the proposed limited
clientele provision will provide the greatest flexibility to recipients
and their subrecipients actually carrying out such activities.
Demonstrating compliance as job creation or retention activities would
still be an option for activities carried out under the new eligibility
category, but the Department is not proposing to make any special
provisions in Sec. 570.208(a)(4) of the Entitlement regulations and
Sec. 570.483(b)(4) of the State regulations for such activities. While
job creation and retention activities 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, the Department believes
that microenterprise assistance activities carried out under the new
eligibility category could still more easily meet national objective
requirements under the proposed limited clientele provision.
National Objective Standards for Benefiting Low- and Moderate-Income
Persons Through the Creation or Retention of Jobs--Presumptions Added
by 1992 Act
The proposed rule implements Section 806(e) of the 1992 Act by
amending Sec. 570.208(a)(4) [Sec. 570.483(b)(4) in the State
regulations] regarding the national objective standard for benefiting
low- and moderate-income persons through the creation or retention of
jobs. Section 806(e) of the 1992 Act amended section 105(c) of the
Housing and Community Development Act of 1974 by adding a new paragraph
(4) which permits certain presumptions to be made regarding the low- or
moderate-income status for employees benefiting under that national
objective criterion. The presumption permitted by the new section
105(c)(4)(B) was effective upon enactment of the 1992 Act and is now
being codified into the regulations. That section permits a person to
be presumed to be of low or moderate income under this national
objective standard if he/she resides within a census tract where not
less than 70 percent of the residents are low- and moderate-income
persons.
The presumption permitted by the new section 105(c)(4)(A) has not
yet become effective because it refers to census tracts that meet
Federal enterprise zone criteria and HUD determined that further
rulemaking was necessary to identify the specific criteria that must be
met. Section 834 of the 1992 Act makes references to and updates
certain portions of the enterprise zone designation authorized by
section 701 of the Housing and Community Development Act of 1987.
However, at the time the 1992 Act was enacted (October 28, 1992), a new
enterprise zone bill was also being considered in Congress. The Omnibus
Budget Reconciliation Act of 1993 (``1993 Act'') was subsequently
enacted on August 10, 1993. Title XIII, chapter I, subchapter C, part I
of that Act outlines a new program providing for the Federal
designation of Empowerment Zones and Enterprise Communities. This
program has now replaced the more limited enterprise zone designation
authority that was provided in the 1987 Act. Section 1392 of the 1993
Act prescribes the eligibility criteria for Empowerment Zones and
Enterprise Communities. While there are various size, population, and
distress criteria applicable to the overall area proposed for
designation, the only eligibility criterion that is applied to
individual census tracts is a poverty level standard. Pursuant to the
1993 Act, each census tract to be included in an Empowerment Zone or an
Enterprise Community must have a poverty rate of at least 20 percent.
(Note: HUD interprets all of the above-noted statutory
references to ``census tracts'' as also including ``block numbering
areas'' (``BNAs'') in areas where census tracts are not defined. As
used hereafter in this preamble, ``census tracts'' includes BNAs.)
The low- and moderate-income presumption authorized by the new
section 105(c)(4)(A), as added by section 806(e) of the 1992 Act,
states that under the national objective standard of benefiting low-
and moderate-income persons through the creation or retention of jobs,
a person may be presumed to be of low or moderate income if either the
person resides in a census tract that meets Federal enterprise zone
eligibility criteria or the assisted activity is located in such a
census tract. The statute does not require actual Federal designation,
but only that the census tract meet the eligibility criteria. As noted
above, the only eligibility criterion applicable to individual census
tracts under the new Empowerment Zone/Enterprise Community program is
the poverty level standard. Thus, HUD proposes to further amend
Sec. 570.208(a)(4) and Sec. 570.483(b)(4) in this rule to provide that
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
of low or moderate income if either (1) he/she resides in a census
tract where at least 20 percent of the residents are in poverty or (2)
the assisted business is located in a census tract where at least 20
percent of the residents are in poverty and the job under consideration
is to be located within that census tract. Such a change in the
regulations should significantly ease grantees' record keeping burdens
for many economic development activities, as was the apparent
Congressional intent behind the change in the statute. A conforming
change to Sec. 570.506(b) of the Entitlement regulations (the addition
of a new paragraph (7) with the subsequent paragraphs renumbered)
regarding records that need to be maintained is also included in this
proposed rule. Comment on HUD's interpretation of the subject statutory
provision is welcome.
The Department particularly seeks comment as to whether further
standards should be established for census tracts that comprise or
include any part of a community's central business district. In
delineating the size requirements for an area to be nominated as an
Empowerment Zone or an Enterprise Community, section 1392(a)(3)(D) of
the 1993 Act states that the area must exclude any portion of a central
business district unless the poverty rate for each census tract in such
district is not less than 35 percent in the case of an Empowerment Zone
or 30 percent in the case of an Enterprise Community. HUD is interested
in obtaining comment regarding whether the presumption of low- and
moderate-income status included in the proposed revision to
Sec. 570.208(a)(4) and Sec. 570.483(b)(4) should be revised to require
a higher than 20 percent poverty percentage for census tracts that are
part of a community's central business district and if so, whether such
a standard should be set at 30 or 35 percent.
It is noted that the new low- and moderate-income presumption based
on a census tract meeting the eligibility criteria for the Empowerment
Zone/Enterprise Community program would become effective only when a
final rule is published for effect in this regard. It should also be
noted that both of the above presumptions of a person's low- or
moderate-income status are only applicable to activities qualifying
under the low- and moderate-income national objective provisions of
Sec. 570.208(a)(4) and Sec. 570.483(b)(4), job creation or retention
activities. They cannot be extended to activities that qualify as
benefiting low- and moderate-income persons under any of the other
criteria delineated in Sec. 570.208(a) (1) through (3) or
Sec. 570.483(b) (1) through (3). This is because the new section
105(c)(4) of the Act, as added by section 806(e) of the 1992 Act,
specifically states that it is only ``for the purposes of subsection
(c)(1)(C).'' Section 105(c)(1)(C) of the Act is that provision which
states that one of the ways in which economic development activities
can be considered to principally benefit low- and moderate-income
persons is to ``involve employment of persons, a majority of whom are
persons of low and moderate income.''
Other Revisions Regarding Income Documentation
As noted above, a new paragraph (7) is proposed to be added to
Sec. 570.506(b) of the Entitlement regulations to specifically address
what records should be maintained to document compliance with the above
presumptions of a person's low- or moderate-income status as added by
the 1992 Act. HUD is also including in this proposed rule additional
revisions to the introductory paragraph of Sec. 570.506(b) regarding
information HUD will generally accept as documentation of income by
family size. The proposed revisions are principally designed to clarify
what is already the intent of the current rule. The proposed rule cites
specific examples of programs having income qualification criteria at
least as restrictive as CDBG and would also permit grantees to use
evidence that a person is homeless as a substitute for specific
information on income by family size.
Section 570.490(a) of the State regulations states that HUD and the
states shall jointly agree on the content of records to be maintained
by states. HUD is presently in the midst of negotiations with states on
recordkeeping, and will continue the consultation process when final
regulations are published.
Job Creation or Retention by Public Infrastructure Improvements
In this proposed rule, the Department is also including another
amendment to Sec. 570.208(a)(4) of the CDBG Entitlement regulations and
Sec. 570.483(b)(4) of the State CDBG program regulations that is not
directly related to any specific statutory change. This change relates
to grantee concerns that have been raised regarding the requirements
for demonstrating national objective compliance for CDBG-assisted
public infrastructure improvements, such as parking garages, streets,
and water and sewer improvements, that are designed to support an
economic development project and are claimed under the national
objective of benefiting low- and moderate-income persons through the
creation or retention of jobs. Inasmuch as such public infrastructure
improvements qualify independently for eligibility as public
facilities, they are not statutorily subject to the additional
eligibility determinations required for ``special economic
development'' activities. However, such infrastructure improvements may
often have unique difficulties in demonstrating compliance with the
national objective requirements for the creation or retention of jobs.
Grantee concerns in this regard have been most notable in the State
CDBG program, but Entitlement grantees, particularly urban counties,
may also face the same issues.
In the November 9, 1992, State CDBG Program Regulations, HUD
included a new criterion by which public improvements undertaken for
economic development purposes could demonstrate compliance with the
low- and moderate-income benefit national objective. Prior to 1992,
both the Entitlement and State CDBG programs had no specific criteria
for public improvement projects meeting the national objective through
job creation or retention. All recipients were required to track job
creation or retention indefinitely for any and all businesses
benefiting from the CDBG assistance for the public improvements. Such
is still the case for Entitlement grant recipients.
The present State program rule at Sec. 570.483(b)(4)(iv)(C)
requires that a unit of general local government develop an assessment
which identifies any businesses located or expected to locate in the
area to be served by the public improvement. Under that provision, the
jobs to be considered for purposes of meeting the national objective
are all jobs created or retained as a result of the public improvement,
both by businesses identified in the assessment and by any other
businesses which locate in the area within three years after the
completion of the public improvement. If the cost of the public
improvement is less than $3,000 per job, however, the jobs to be
considered may be limited to those created or retained by the
businesses identified in the assessment.
This criterion has been subject to considerable question and
concern from states. Three particular areas of concern have been
frequently cited:
(1) The $3,000 per job threshold is too low;
(2) Counting jobs from all businesses that locate in the area
within a three-year period is unreasonable, as most projects are
undertaken to serve one (or a small number of) specific, identified
business(es);
(3) Counting jobs from businesses which were not identified in the
initial assessment is problematic, because local governments cannot
predict or control the business expansion activities of all businesses
in the service area of a public improvement. A project could fail to
meet the low- and moderate-income benefit national objective if
unanticipated, higher-income jobs created by such previously
unidentified businesses reduce the aggregate percentage of low- and
moderate-income jobs below 51%.
The Department has considered the issues raised by states and their
experiences in implementing this criterion over the past year. As HUD
desires to make the CDBG program a more flexible resource for assisting
economic development projects, the Department proposes to revise the
current State program criterion and also add a comparable provision to
the Entitlement program regulations.
In this proposed rule, the $3,000 per job threshold is raised to
$10,000. The Department recognizes that a public works project with an
economic development purpose is usually undertaken with the primary
goal of assisting one (or a small number of) identified business(es).
Benefit might accrue from the CDBG-assisted public improvement to
other, currently unidentifiable businesses in the service area,
particularly if that area is relatively undeveloped; however, the
project is not being undertaken for their benefit. Where the $10,000
per job threshold can be met by the identified business(es) for whom
the public improvement is being undertaken, job creation or retention
by only that (those) specific business(es) must be tracked.
Where the $10,000 per job threshold cannot be met by considering
only those specific businesses, recipients will still be required to
track all job creation or retention resulting from the CDBG-assisted
public improvement. However, the time period for determining the
universe of businesses for which job creation must be tracked is
changed in this proposed rule. The time period would be changed from 3
years after completion of the improvement to a period starting with the
award of the grant by the state and ending one year after the
completion of the public improvement. In the case if an Entitlement
recipient, the period would start with the identification of the
project in the grantee's final statement. For recipients of grants from
HUD under the Insular Areas or HUD-Administered Small Cities programs,
the period would start with HUD's award of the grant to the recipient.
The proposed rule clarifies that the requirement applies to the time
period during which businesses move into a service area or expand as a
result of the assistance, not to the time period for which jobs must be
tracked for any given business.
The present State CDBG regulation requires that ``the assistance
must be reasonable in relation to the number of jobs''; the Department
chose not to define ``reasonableness'' in the existing regulations. The
portion of this proposed rule establishing the required guidelines for
evaluating the public benefit of special economic development
activities, which is fully discussed later in this preamble, provide a
gauge for defining the reasonableness of the CDBG cost per job.
Therefore, while a public facilities activity would not normally be
subject to the public benefit guidelines, HUD proposes to make such an
activity subject to the new public benefit guidelines proposed herein
at Sec. 570.209(b) and Sec. 570.482(e) in any case where the activity
is undertaken to support an economic development project and it does
not meet the $10,000 per job threshold that is proposed to be
established in the job creation or retention national objective
regulations. The Department will presume that public improvement
activities that meet the proposed $10,000 per job threshold provide
reasonable benefits relative to the amount of the assistance.
Given the above proposed changes, Sec. 570.208(a)(4) is also being
reformatted for clarity in this proposed rule. The only substantive
changes in this section of the regulations are those regarding the
presumptions added by the 1992 Act and job creation/retention by public
infrastructure projects as discussed above. These changes can be found
at the proposed new paragraphs Sec. 570.208(a)(4)(iv) and (v)(C),
respectively.
Request for Comment on Certain Other Job Creation/Retention Issues Not
Contained in the Proposed Rule
In addition to the revisions included in this proposed rule, HUD is
also deliberating certain other issues in an attempt to 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.
While the presumptions added by the 1992 Act regarding a person's
low- or moderate-income status for job creation or retention activities
should significantly ease grantees' record keeping burdens for many
economic development activities, HUD is also considering whether any
further presumptions could be made in this regard. Specifically, HUD is
deliberating whether any reasonable, objective presumption of a
person's low- or moderate-income status could be made on the basis of
the type of job being assisted. Given the statutory requirements of
Section 105(c)(1)(C) of the Act, it is recognized that the type of job
being created or retained cannot be the sole determining factor in
assessing whether an assisted activity actually benefits low- and
moderate-income persons. However, there may be cases where grantee
experience clearly demonstrates that in certain types of businesses or
industries, the large majority of persons employed are low- and
moderate-income persons. HUD is attempting to determine whether there
may be any feasible method for providing a grantee with some relief of
record keeping burdens in such cases. On the other hand, HUD does not
want to provide any encouragement for grantees to assist only those
businesses that produce what may be considered ``dead-end jobs.''
Comment on this issue is welcome.
CDBG job retention requirements are also often the subject of
debate. There is criticism by certain grantees and other entities that
the requirement to document that jobs claimed as being retained would
actually be lost without the CDBG assistance may result in assistance
that is ``too little and too late.'' Such groups argue that a grantee
should be able to provide CDBG assistance to businesses much earlier in
the process in order to help the business remain competitive. However,
it may often be the case that such efforts would actually result in the
``down-sizing'' of a business' workforce. Given that a job retention
national objective claim is based on providing employment
opportunities, principally for low- and moderate-income persons, any
such net reduction in a business' workforce is problematic. Relaxation
of the current requirement to document that jobs would otherwise be
lost may also provide opportunities for abuse of the CDBG program by
permitting assistance to any business that threatens to move or to
close without any objective evidence that supports such a statement.
Comment on these issues, particularly specific proposals as to how they
could be dealt with, is welcome.
There is a second aspect of CDBG job retention requirements that is
often criticized. That is the fact 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. There can be cases where the employees do not
meet the low- and moderate-income limits at that point, but would
likely do so if the jobs are actually lost. The presumptions of a
person's low- and moderate-income status added by the 1992 Act should
help resolve this concern in many such situations. HUD is also
considering whether it may be appropriate to propose some further
regulatory change in this regard, particularly for cases where the
majority of persons holding the endangered jobs have limited education
and no specialized skills and the labor market area does not provide
opportunities for other employment at comparable rates of pay. Comment
on this issue, particularly specific proposals as to how it could be
dealt with, is welcome.
National Objective Standards for Addressing Slums or Blight on an Area
Basis
The proposed rule includes a revision to Sec. 570.208(b)(1)(ii) of
the Entitlement regulations and Sec. 570.483(c)(1)(ii) of the State
regulations to provide for a limited broadening of the requirements an
area must meet in order to be designated as a blighted area under the
CDBG program. Under current regulations, in addition to meeting a
definition of a blighted or deteriorating area under State or local
law, there must also either be a substantial number of deteriorated or
deteriorating buildings throughout the area or the public improvements
must be in a general state of deterioration. The proposed rule would
add a third option as a qualifier for areas that are exclusively
commercial or industrial in nature. Such an area could qualify as a
blighted area under the CDBG program if it met an applicable definition
under State or local law and exhibited pervasive economic
disinvestment. According to the change included in the proposed rule,
such economic disinvestment would be evidenced by a substantial number
of vacancies in previously occupied commercial or industrial buildings
in the area. This change would permit grantees to use CDBG funds to
assist an area experiencing substantial economic disinvestment before a
substantial number of buildings in the area actually reached the point
of being deteriorating or deteriorated. Comment on this proposed change
is welcome. The Department is particularly interested in receiving
comment regarding whether there are any alternative objective and
easily quantifiable measures of economic disinvestment in a commercial
or industrial area.
Request for Comment on an Additional Slum/Blight Issue Not Included in
the Proposed Rule
Several communities have described to the Department situations in
which the presence of environmentally contaminated sites negatively
affects the surrounding community. The Department has, in the past,
determined that cleanup of contaminated sites (as a clearance activity)
can meet the national objective of eliminating slums or blight on a
spot basis. Current regulations do not provide clear means for
recipients to demonstrate that an area is blighted because of
environmental contamination in and of itself.
The presence of contamination could cause abandonment of buildings
or long-term vacancies on or near contaminated sites, which may enable
a commercial or industrial area to qualify as blighted under the
revision to Sec. 570.208(b)(1)(ii) of the Entitlement regulations or
Sec. 570.483(c)(1)(ii) of the State regulations included in the
proposed rule. However, there may also be situations in which the link
between environmental contamination and economic disinvestment may not
be clear-cut.
At question is whether the presence of one or more contaminated
sites, in and of itself, should be considered as evidence of blighting
conditions in an area otherwise meeting a State or local definition of
blight or deterioration. Comments are invited on this issue. In
particular, the Department seeks comments addressing the following
questions:
--How severe must environmental contamination be to have a blighting
influence on an area? Should site(s) be required to appear on a Federal
``Superfund'' (or similar State) cleanup priority list in order to be
considered blighting? If not, how would the serious effect of the
contamination on the area be demonstrated?
--How pervasive must the contamination be in order to affect an entire
area? Must there be multiple contaminated sites throughout the area, or
can one or two contaminated sites be so significant as to cause a
larger overall area to be considered blighted?
--How broad a definition of ``contamination'' is appropriate? The
Department envisions that soil or groundwater pollution would generally
be viewed as ``contamination.'' Presence of hazardous building
materials (such as asbestos or lead-based paint) could also be viewed
as ``contamination''; however, such conditions could already permit an
area to qualify under the existing regulations by causing
``deteriorated or deteriorating buildings.'' Should more widespread air
or water pollution, which may affect not just one area but an entire
city or region, also be viewed as a blighting condition?
Guidelines for Evaluating and Selecting Economic Development Activities
for CDBG Assistance
The proposed rule implements 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. This proposed section of the
regulations is intended to provide guidelines for the purpose of
enabling the recipient to evaluate certain activities proposed to be
assisted with CDBG funds for economic development purposes.
Specifically, these guidelines are to be applied to activities that are
eligible under Sec. 570.203(a) or (b) and similar activities that may
be undertaken by a subrecipient eligible under Sec. 570.204 [Sections
105(a) (14), (17), and (15), respectively of the Housing and Community
Development Act of 1974, as amended]. Section 570.209(a) and
Sec. 570.482(d) discuss the guidelines and objectives for evaluating
project costs and financial requirements, and Sec. 570.209(b) and
Sec. 570.482(e) delineate the guidelines for evaluating public benefit.
In defining the applicability of these guidelines, HUD carefully
reviewed the language contained in section 806(a) of the 1992 Act. The
title of the new subsection added by this provision is cited as
``Guidelines for Evaluating and Selecting Economic Development
Projects.'' The text of the provision then states the following:
The Secretary shall establish, by regulation, guidelines to
assist grant recipients under this title to evaluate and select
activities described in section 105(a)(14), (15), and (17) for
assistance with grant amounts.
The correlation to sections 105(a) (14) and (17) of the Housing and
Community Development Act of 1974, as amended, is clear inasmuch as
those sections authorize the use of CDBG funds for special economic
development activities that are codified in the current Entitlement
regulations under Sec. 570.203 (a) and (b), respectively. Section
105(a)(15) of the Act, however, authorizes the provision of CDBG
assistance to certain eligible subrecipients to carry out a wide
variety of activities as part of a neighborhood revitalization,
community economic development, or energy conservation project. This
provision is codified in the CDBG Entitlement regulations at
Sec. 570.204 (revisions to which are included in this proposed rule).
HUD does not believe that Congress intended to extend the applicability
of the subject guidelines to all CDBG-assisted activities undertaken by
subrecipients eligible under Sec. 570.204, but rather limit the
coverage of the guidelines to economic development activities
undertaken by such entities. The Department has heretofore not formally
defined a ``community economic development project'' (see definition
proposed at Sec. 570.204(a)(2) herein), but the term can be broadly
considered to encompass any project that increases economic
opportunities for community residents. Establishing reasonable
evaluation measures relevant to the entire spectrum of activities
potentially eligible under this criterion would be quite complicated,
and the implementation of such standards could be unduly burdensome for
grantees. Such an outcome does not appear to be consistent with
Congressional intent in enacting the subject statutory provision. Thus,
in this proposed rule, HUD has, for the Entitlement, HUD-Administered
Small Cities, and Insular Areas Programs, limited the extent to which
the guidelines are to be applied to activities that are carried out
under Sec. 570.204 of the CDBG regulations. Activities implemented by
subrecipients eligible under Sec. 570.204 would be subject to the
guidelines only to the extent that if the eligible subrecipient were
not involved, the activities would otherwise be considered eligible
under Sec. 570.203. The State regulations note that the guidelines are
applicable to activities eligible under section 105(a)(17) of the
Housing and Community Development Act of 1974 (as amended), 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. Comment on this
interpretation is welcomed.
As noted above, the new section 105(e)(1) of the Housing and
Community Development Act of 1974, as added by section 806(a) of the
1992 Act, requires HUD to ``establish'' the referenced guidelines ``by
regulation.'' However, that section of the Act further specifically
states that the Secretary may not base a determination of ineligibility
of the use of CDBG funds for economic development activities solely on
the basis that the recipient fails to achieve one or more of the
objectives of that portion of the guidelines pertaining to project
costs and financial requirements. Given this limited ability to enforce
the financial guidelines, HUD considered a variety of approaches in
drafting the Sec. 570.209(a) and Sec. 570.482(d) portion of the
proposed rule. The first issue considered was whether the above
referenced statutory provision was intended to make conducting any form
of financial underwriting for CDBG-assisted economic development
activities totally optional on the part of grant recipients. If some
form of underwriting was to be required, the issue would then be
whether the regulations should specify the exact system of underwriting
that must be followed or whether the regulations should simply set
forth a ``safe harbor'' approach and allow grantees to follow some
other process as long as it aims at the same objectives. Also, given
the limited enforceability noted above, there is a question as to what
level of detail should be included in the regulations themselves.
The proposed rule states that the use of the financial guidelines
discussed under Sec. 570.209(a) and Sec. 570.482(d) is not mandatory.
To further demonstrate this point, the specific elements of the
financial guidelines are not included within the text of the proposed
rule itself. Instead, they are proposed to be published in a concurrent
but separate Federal Register Notice, which is subject to the same
standards for public review and comment as those that govern the
rulemaking process. It should be noted, however, that the proposed rule
further states that grantees electing not to use these guidelines would
be expected to conduct basic financial underwriting with respect to any
CDBG financial assistance provided to a for-profit business. States
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. Thus, compliance
with the exact financial guidelines delineated in the proposed Federal
Register Notice, which is also published herein, is optional on the
part of grant recipients. Nonetheless, HUD believes that sound
management practices dictate that some form of financial underwriting
be performed for any economic development activity proposed for
financial assistance under the CDBG program. Therefore, in cases where
such an activity receiving CDBG financial assistance fails to meet
other applicable program requirements, such as the public benefit
standards described in Sec. 570.209(b) and Sec. 570.482(e) of this
proposed rule or the national objective requirements, HUD will consider
the extent to which the recipient conducted prudent underwriting in
HUD's determination of the appropriate sanctions to be imposed on the
recipient for such noncompliance. Comment on this approach is welcomed.
Comment is also welcomed on the specific elements included in the
proposed financial guidelines. HUD believes that the information
included in the proposed Federal Register Notice provides reasonable
guidance for financial underwriting aimed at the objectives set forth
in the 1992 Act. The Department is interested in obtaining comment as
to whether the guidance provided is seen by local practitioners as
being sufficient or, on the other hand, overly prescriptive. Commenters
are encouraged to submit any recommended alternatives in this regard.
While the 1992 Act specifically limits HUD's enforcement of the
guidelines for project costs and financial requirements in assessing
the eligibility of the use of CDBG funds for economic development
activities, no such limitation is imposed by the Act on the guidelines
required to be established for evaluating the public benefit provided
by CDBG-assisted economic development activities. The new section
105(e)(3) of the Housing and Community Development Act of 1974, as
added by Section 806(a) of the 1992 Act, states that the guidelines
shall provide that the public benefit generated by such an activity is
appropriate relative to the amount of CDBG assistance provided for the
activity. The proposed rule implements this statutory provision at
Sec. 570.209(b) and Sec. 570.482(e) and states that unlike the
financial guidelines discussed in Sec. 570.209(a) and Sec. 570.482(d),
adherence to the guidelines for public benefit is mandatory.
Assessing the extent of public benefit expected to be derived from
an economic development project receiving financial assistance under
the CDBG program has long been required to be documented as part of the
``appropriate'' determination required as a condition of eligibility
for some of the activities covered by the guidelines. However, HUD has
heretofore provided little specific guidance as to what such an
assessment should entail. As discussed above, the changes made by the
1992 Act significantly increase the importance of the public benefit
review in determining the eligibility of certain CDBG-assisted economic
development activities. Thus, it is important that the guidelines
establish reasonable and clear standards for determining whether the
level of public benefit provided by an economic development activity is
appropriate given the amount of CDBG assistance provided to that
activity.
Establishing reasonable public benefit guidelines is a formidable
task. There are a myriad of different factors that are commonly
ascribed to the overall public benefit generated by an economic
development activity. The relative importance of the various factors
can vary significantly between communities, making it difficult to
establish a single set of standards on a national level. Setting such
standards is made even more difficult by the fact that many elements of
the public benefit provided by an economic development project are
highly qualitative and thus difficult to measure objectively.
In developing this proposed rule, HUD considered whether to attempt
to include in the regulatory guidelines a wide array of different
elements of public benefit that could be rated for each economic
development activity proposed for CDBG assistance. However, as noted
above, such an approach would require ratings on each activity for many
highly qualitative elements that can be difficult to measure
objectively. HUD thus decided against using this approach. One of the
common grantee complaints regarding the use of CDBG funds for economic
development activities has been that HUD staff have unreasonably
``second guessed'' the community's underwriting decisions in funding
specific businesses. Congress responded to such complaints in the 1992
Act by clearly stating that no ``but for'' test is to be applied to
CDBG-assisted economic development activities and as discussed earlier
in this preamble, by specifically prohibiting the Secretary from making
determinations of ineligibility solely on the basis that such an
activity fails to achieve the objectives of the financial guidelines.
Given the increased importance of the public benefit evaluation in
determining the eligibility of CDBG-assisted economic development
activities pursuant to the 1992 Act, HUD does not believe that it would
be beneficial to establish public benefit guidelines that could easily
become susceptible to similar ``second guessing'' debates.
In order to provide grantees with clear standards for assessing
what level of CDBG assistance, if any, may be appropriate for proposed
economic development activities, HUD believes it is best to delineate
standards using elements of public benefit that are easily measured and
commonly considered by grant recipients. One of the most widely used
and easily calculated measures in various public economic development
financing programs is a ``cost per job'' standard. HUD has determined
that such a standard is also appropriate to serve as a principal factor
for evaluating the level of public benefit provided by many CDBG-
assisted economic development activities, regardless of which national
objective may be claimed for the activity. It is also recognized,
however, that not all such activities are designed to create or retain
jobs. Some economic development activities assisted with CDBG funds are
designed to serve a certain geographic area, with no direct change in
employment levels. An example of such an activity is the provision of a
CDBG working capital loan to a neighborhood grocery store that may be
experiencing financial difficulties and thus plans to move to a
different location. HUD believes that a ``cost per low- and moderate-
income person served'' calculation is appropriate to serve as a
principal factor for measuring the level of public benefit provided by
such activities. However, HUD recognizes that using the above two
factors as principal measures may unduly limit the scope of the types
of public benefit that are to be generally considered in evaluating a
proposed economic development project for CDBG assistance. Thus, the
proposed rule also includes standards that focus on benefits that
address what HUD believes are important national interests.
The proposed rule at Sec. 570.209(b)(1) and Sec. 570.482(e)(2)
delineates certain basic tests to be applied to each economic
development activity receiving CDBG assistance. The ``CDBG cost per
job'' and the ``CDBG cost per low- and moderate-income person served''
standards included in these tests are designed to establish absolute
upper limits for what HUD would consider to be reasonable on an
individual project basis. This portion of the proposed rule also
delineates certain types of activities that HUD believes, in the
context of the CDBG program, provide insufficient public benefit. Thus,
HUD is proposing to deem these activities to be ineligible for
assistance as part of activities governed by the public benefit
standards. Comment on this proposed list of activities is welcome.
Commenters are encouraged to submit justification for any recommended
additions or deletions.
Beyond the above threshold tests for individual activities, the
proposed rule establishes criteria for measuring the public benefit of
a grantee's CDBG economic development activities on an aggregate
portfolio basis. Under the State CDBG program, these standards would be
applied to the aggregate amount of all such activities carried out by
all units of local government receiving funds from a state's annual
grant. A state would aggregate each annual grant separately, for the
entire time period that an annual grant remains open. Under the HUD-
Administered Small Cities and Insular Areas CDBG Programs, these
standards would be applied to the aggregate amount of all such
activities carried out by the grantee from a single year's grant. A
grantee would aggregate each grant separately, for the entire time
period that a grant remains open. Under the Entitlement program, these
standards would be applied to the aggregate of all such activities for
which the grantee obligated CDBG funds within a single program year
without regard to the source year of the funds. Such aggregate tests
are similar to those already used by other public economic development
financing programs, such as the Small Business Administration's (SBA's)
Section 504 program. They provide the grantee with more flexibility in
selecting individual economic development activities for CDBG funding.
The proposed rule at Sec. 570.209(b)(2) and Sec. 570.482(e)(3)
describes two different criteria that may be used to measure public
benefit in the aggregate. Only one of these criteria would have to be
met to demonstrate compliance with the standards for activities in the
aggregate. Each grantee would have the option of choosing which
criterion it would meet. The first option in the proposed rule applies
a $35,000 ``CDBG cost per job'' standard and a $350 ``CDBG cost per
low- and moderate-income person served'' standard to a grantee's
aggregate portfolio. Under the second option, a grantee would be
considered to meet the public benefit standards if at least 75 percent
of the aggregate amount of CDBG funds used by the grantee for economic
development activities is used for activities that are principally
designed to address at least one of a variety of specified goals that
HUD believes represent important national interests.
Public comment on the proposed rule's approach for evaluating the
level of public benefit provided by a grantee's CDBG-assisted economic
development activities, including the specific numerical standards
established, is particularly welcome. In considering whether and how to
comment on this section, there are certain factors that should be kept
in mind. While it has been noted earlier in this preamble that the
aggregate ``cost per job'' standard is similar to that already used by
SBA's Section 504 program, the proposed CDBG standard is different in
one significant fashion. While SBA's cost per job calculation is based
only on the amount of the debentures guaranteed by SBA, the amount of
CDBG funds to be used in the cost per job calculation under the
proposed CDBG standard is the total amount of CDBG funds used by the
grantee for economic development activities in the specified period.
This amount would include all CDBG-funded activity delivery costs for
economic development activities and all CDBG funds used for technical
assistance to for-profit businesses. Secondly, in devising the proposed
CDBG standards, consideration was given to the possibility of
differentiating between loans and grants. When CDBG funds are provided
to an economic development activity in the form of a loan, it is
generally with the expectation that the funds will be repaid over some
term. Any repayment of such funds reduces the activity's ultimate
``cost'' to the CDBG program. However, the face amount of the loan
still represents at least an ``opportunity cost'' to the grantee's CDBG
program. Given that the majority of CDBG assistance to for-profit
businesses is awarded in the form of loans, HUD has thus determined
that adding any calculations to the public benefit standards to
differentiate between loans and grants would unnecessarily complicate
the process and would be unduly burdensome for grantees.
Section 570.209(c) and Sec. 570.482(f) of the proposed rule address
amendments to economic development activities after the ``appropriate''
review determinations have been completed. As an economic development
activity is implemented, there are often changes in the financing
structure and other various aspects of the project. The intent of this
provision is to indicate that when such changes occur, the grantee
should reevaluate the various terms and conditions of the CDBG
assistance it has agreed to provide for the project. HUD considers each
such reevaluation to be equivalent to a new ``appropriate''
determination in that it is subject to the same guidelines,
particularly those relating to public benefit.
Section 570.209(d) and Sec. 570.482(e)(5) of the proposed rule
address the grantee's responsibility to maintain records that
demonstrate the actual public benefit results, based on the standards
contained in Sec. 570.209(b) and Sec. 570.482(e), achieved upon
completion of the CDBG-assisted economic development activities. These
records must also indicate how the actual results for each project
compare to the level of benefit that was projected to be achieved by
the project at the time the CDBG assistance was obligated. If actual
results vary substantially from the grantee's initial projections, the
grantee is expected to take all actions reasonably within its control
to improve the accuracy of its projections in future cases. This
paragraph is intended to address possible grantee concerns that it may
be put in the position of having to guarantee job creation/retention
results under the proposed public benefit standards. HUD generally
judges compliance with program requirements on the basis of actual
results rather than initial projections. Thus, with the proposed public
benefit standards, HUD intends to track the aggregate of economic
development activities funded by a grantee each year to assess whether
the cost per job standards are actually met. Assessing compliance only
on initial job projections would invite abuse through deliberate
overstatements. As experience with the national objective standard for
benefiting low- and moderate-income persons through the creation or
retention of jobs has shown, the number of jobs actually created by a
CDBG-assisted activity is often less than that which was originally
projected by the grantee. The reasons for the decrease in the number of
jobs created may vary from unexpected developments in the economy
completely beyond the control of the grantee to the deliberate
overstatement of job projections at the time the CDBG assistance was
obligated. It is unreasonable to expect that the number of actual jobs
created by CDBG-assisted economic development activities will always
meet or exceed original projections. However, if actual results vary
significantly from initial projections, the grantee is expected to
review its systems for making such projections and/or reviewing those
supplied by developers and take all actions reasonably within its
control to improve the accuracy of the projections. The actions the
grantee takes in this regard will be considered by HUD in determining
the appropriate sanctions to be imposed on the recipient for any
noncompliance with the public benefit standards.
History of Special Activities by Certain Subrecipients (Section
105(a)(15) of the Act)
This portion of the rule proposes changes to Sec. 570.204 of the
Entitlement regulations, which implements section 105(a)(15) of the
Act, authorizing the provision of ``assistance to neighborhood-based
nonprofit organizations, local development corporations, or entities
organized under 301(d) of the Small Business Investment Act of 1958 to
carry out a neighborhood revitalization or community economic
development or energy conservation project * * *.'' Activities assisted
in accordance with the requirements of Sec. 570.204 are eligible in
their own right, and may thus consist of activities that are ineligible
to be carried out by the recipient, or by subrecipients which do not
qualify under this section. Over the past several years, the Department
has been aware of a considerable amount of confusion among grantees
concerning various aspects of this provision. The main questions raised
repeatedly have been: What kinds of organizations can qualify as
special subrecipients; what limitations are there on the involvement of
the grantee in establishing or operating the organization; and, what
are the essential characteristics of the types of projects to which
this provision is limited? It has become increasingly apparent that
clarification of the provision would be useful. As noted above, one of
the project types that this provision makes eligible is that of
community economic development. Because HUD has embarked upon a course
aimed at making the CDBG program more readily used for economic
development, it has been decided to propose changes to this provision
at this time.
In order to minimize the confusion and misunderstanding concerning
Sec. 570.204, this rule would provide specific criteria for the
entities permitted to carry out such activities and assure that they
are not controlled by the recipient (or other entities not qualified
under this section) to indirectly carry out activities for which they
are ineligible. The rule also establishes the requirement for
meaningful involvement of the eligible subrecipient receiving
assistance ``to carry out a * * * project,'' in order to preclude the
use of the subrecipient as a mere conduit to launder CDBG funds for
otherwise ineligible activities. In addition, the rule provides
definitions for the three types of projects made eligible by section
105(a)(15), particularly in regard to a neighborhood revitalization
project (under which most of the activities are currently carried out
for otherwise ineligible housing activities). The purpose of this is to
give meaning to the statutory ``project'' language and to make clear
that any single CDBG-assisted activity, such as an otherwise ineligible
public service or residential construction, will not of itself
necessarily qualify simply because it is carried out by a subrecipient
qualified under this section. The changes in this rule would apply to
metropolitan city and urban county entitlement recipients.
The only legislative history on the meaning of ``local development
corporation'' in section 105(a)(15) is the reference in the House
Report, 95th Congress 1st Session (1977), to ``local development
corporations organized under either Federal or State laws such as those
under title VII of the Community Services Act of 1974.'' Both title VII
and its successor legislation, the Community Economic Development Act
of 1981, defined community development corporation as:
a nonprofit organization responsible to residents of the area it
serves and which is receiving assistance under part A and any
organization more than 50 percent of which is owned by such an
organization, or designated by such an organization for the purpose
of this subchapter [Subchapter I]. [emphasis added.]
The purpose of Subchapter I--Community Economic Development was:
To encourage the development of special programs by which the
residents of urban and rural low-income areas may, through self-help
and mobilization of the community at large, with appropriate Federal
assistance, improve the quality of their economic and social
participation in community life in such a way as to contribute to
the elimination of poverty and the establishment of permanent
economic and social benefits.
The purpose of part A was:
To establish special programs of assistance to nonprofit private
locally initiated community development corporations which (1) are
directed to the solution of the critical problems existing in
particular communities or neighborhoods (defined without regard to
political or other subdivisions or boundaries) within those urban or
rural areas having concentrations or substantial numbers of low-
income persons; (2) are of sufficient size, scope, and duration to
have an appreciable impact in such communities, neighborhoods and
rural areas in arresting tendencies toward dependency, chronic
unemployment, and community deterioration; (3) hold forth the
prospect of continuing to have such impact after the termination of
financial assistance under this part; and (4) provide financial and
other assistance to start, expand, or locate enterprises in or near
the area to be served so as to provide employment and ownership
opportunities for residents of such areas * * *
Despite the emphasis on economic development in title VII and the
Community Economic Development Act of 1981, the range of activities
permitted for CDCs under these Acts included not only community
business and commercial development programs, but also community
physical development programs, including parks and housing activities
that contribute to an improved environment, and a variety of public
service programs that complement the community development program.
Special Subrecipient Local Development Corporations
As can be seen, the term local development corporation (LDC) does
not have a precise and uniform meaning, but rather encompasses a
diverse range of organizations generally sharing certain basic
characteristics. The existing regulation at Sec. 570.204 therefore
recognizes LDCs qualified under sections 502 and 503 of the Small
Business Investment Act, the CDCs under title VII and the Community
Economic Development Act of 1981, and ``other entities incorporated
under State or local law whose membership is representative of the area
of operation of the entity (including nonresident owners of businesses
in the area) and which are similar in purpose, function, and scope to
the above listed organizations.'' Most LDCs have in common the
characteristics of operating in a defined geographic area; being
established and controlled by residents and businesses located in the
defined area; carrying out community development activities, including
economic development and housing assistance; being established for the
purpose of meeting critical needs in the area, particularly of lower-
income persons, by improving the physical, economic, and social
environment of the area; and being not-for-profit associations or
corporations created under State or local law. While some LDCs may vary
somewhat (e.g., the SBA LDCs provide assistance only for economic
development, do not have a focus on lower-income areas or persons, and
may be for-profit if earnings are only incidental to their operations),
the proposed rule sets forth these more commonly shared characteristics
(including a focus on lower-income residents of the area in view of the
primary purpose of benefiting such persons under the CDBG program) as
the criteria that must be met for all LDCs qualified in Sec. 570.204.
Note that the statutory reference to entities organized under section
301(d) of the Small Business Investment Act of 1958 is reflected in the
proposed rule revisions although these for-profit entities make loans
to businesses (or to other entities that make loans to businesses), and
these activities were made eligible under other provisions of the CDBG
program added in 1981 (Sec. 570.203(b) of the Entitlement regulations).
Reference to the SBA 502 and 503 organizations would be continued in
this rule, however, to avoid unnecessarily disqualifying currently
qualified organizations.
The Department anticipates that a few entities that recipients
believe qualify under the current rule would not qualify under this
rule, and plans to allow in the final rule for a one-year grace period
during which any such organizations may reorganize or find other
funding. Because this rule is based on the history of legislation,
regulation, and policy currently in place, it should not affect the
eligibility of many currently qualified organizations.
Two New Special Subrecipient Policies
Two points on which this proposed rule varies from the current rule
for CDBG entitlements deserve mention. First, this rule would reflect
the policy in the State CDBG program that when the funded project
activities carried out by the subrecipient under this subpart include,
as activities integral to the project, otherwise ineligible income
payments or other public service activities that are eligible under
section 105(a)(8) of the statute, such activities are not subject to
the limitations in that section. This change will be particularly
important for special subrecipients who wish to provide services, such
as day care and job training, as part of a Sec. 570.204 project. Such
services would not be subject to the public service cap. Removal of
this limit would provide more flexibility for community-based efforts
by entitlement communities.
The ``maintenance of effort'' requirements that apply to public
service activities protect an important part of the goals of the CDBG
program, and would be included in this proposed rule to cover both
otherwise eligible and otherwise ineligible public services. The
Department requests comment on inclusion of this clause.
The second point of variation from the current rule is that the
distinction between ``public'' and ``private'' nonprofits, now used to
exclude public nonprofits that might potentially be controlled by the
grantee from eligibility under this section, will no longer be made in
determining the eligibility of entities under this section. A public
nonprofit entity that meets the requirements to be an LDC may now
qualify. The Department believes that these requirements are sufficient
to ensure the independence of the LDC.
Special Subrecipients in Nonentitlement Areas
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'' may now qualify as special
subrecipients 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 this change. Consistent with
the above discussions of proposed changes to Sec. 570.204 of the
Entitlement regulations, the Department interprets section 807(f) of
the 1992 Act as clearly excluding units of general local government.
However, a public nonprofit organization that meets Internal Revenue
Service requirements for nonprofit status may qualify.
Description of Regulatory Changes
Projects defined. The changes in the rule begin at Sec. 570.204(a)
by clarifying that activities funded under this section may be
considered either alone or in concert with other activities being
carried out or for which funding has been committed (which other
activities need not be funded with CDBG funds or carried out by the
subrecipient) for purposes of determining whether an eligible
Sec. 570.204 neighborhood revitalization, community economic
development, or energy conservation project is being undertaken. The
rule continues with definitions of the eligible projects under
Sec. 570.204: Neighborhood revitalization, community economic
development, and energy conservation projects. The definition of
``carry out'' is included to clarify how the LDC is to control the
project.
Public services. The new policy on application of the funding
limitation on public service activities and of the maintenance of
effort clause is discussed above. The Department's interpretation of
the existing rule is that when ineligible public services, such as
income payments, are carried out under Sec. 570.204, the activity is
considered to be a public service and the funds used for this purpose
are subject to the 15 percent limitation at Sec. 570.201(e). Judging
from the questions received by HUD on this matter, recipients do not
believe that the existing rule is sufficiently clear on this matter.
Thus, this proposed rule clarifies the policy.
Ineligible activities. Paragraph (b) has been replaced with a new
paragraph delineating the types of otherwise ineligible activities that
are also not authorized under this section.
Eligible subrecipients. Paragraph (c) has been rewritten to define
eligible subrecipients. This proposed rule removes any further
reference in the rule to neighborhood-based nonprofits (NBNs) since
most, if not all, NBNs qualified under the current rule could meet the
qualifying criteria for an LDC in the proposed rule. The sole purpose
of this change is to simplify the regulation. The Department believes
that NBNs can be very effective agents for neighborhood revitalization
and community economic development, and has drafted this rule to
continue the qualification of such organizations. The proposed rule
refers to all qualifying entities as LDCs, regardless of the geographic
area they serve.
Community control. In general, the Department's history in
implementing section 105(a)(15) reflects a belief that community
control, and not mere community participation is crucial to the
existence of an LDC. Therefore, at Sec. 570.204(c)(2), this rule would
require that 51 percent of the governing body of a qualified LDC be
low- and moderate-income persons residents of or business owners in the
LDC's area of operation. This reflects current policy for most NBN
organizations under Sec. 570.204(c)(1), LDC/CDC organizations under
Sec. 570.204(c)(3)(i), and those organized like CDCs pursuant to the
``similar to'' language at Sec. 570.204(c)(3)(iii). The 51 percent
requirement possibly may disqualify some organizations that currently
qualify as NBNs because their clients are residents of the
neighborhood, even though no residents serve on the governing body of
the organization. The Department believes that the definition of NBN in
the existing rule at Sec. 570.204(c)(1) has allowed grantees to create
``shell'' organizations that serve as conduits for grantees to carry
out otherwise ineligible activities without benefit of any significant
contribution to decision making from persons with a stake in the
neighborhood.
The reasons for the changes the rule proposes at Sec. 570.204(c) to
the definition of LDC have been discussed above. Comment is
specifically requested on whether these changes will disqualify any
truly community-based and controlled organizations, and if so,
specifically how the rule will have this effect.
Special Subrecipients and ``CHDOs''
The new HOME Investment Partnerships program authorized under Title
II of the National Affordable Housing Act of 1990 has a provision
defining community housing development organizations, or ``CHDOs'',
which are similar in many ways to LDCs. In developing this proposed
rule, some care was taken when drafting the language describing common
characteristics of LDCs to define the same characteristics of LDCs as
the HOME regulations define for CHDOs. By establishing definitions
around the same criteria (e.g. percentage of low- and moderate-income
persons on the governing body, percentage of grantee or other entity
representation on the governing body, primary purpose of the
organization, geographic area served) the Department hopes to minimize
confusion among organizations that may qualify both as an LDC for CDBG
and as a CHDO under the HOME Program, and may want to receive funds
under both. After further consideration of these criteria and the
activities undertaken by Sec. 570.204 subrecipients and by CHDOs, the
Department has decided to propose that any qualified CHDO that (1) is
designated by the participating jurisdiction in accordance with the
HOME program rules and (2) has a geographic area of operation that is
no greater than one neighborhood, and (3) has or is expected to receive
HOME funds for developing housing would qualify as an LDC. Note that
two characteristics of CHDOs can vary from the common characteristics
of LDCs in general: (1) CHDOs can serve a geographic area as large as a
metropolitan area (LDCs may serve no more than one county); and (2) the
minimum percentage of low- and moderate-income persons on the governing
body of a CHDO is the same as the percentage of grantee or other entity
appointments (i.e. 33 percent) (the minimum percentage of low- and
moderate-income persons/representatives on the board of an LDC is 51
percent).
While it would be possible under this proposal for one organization
to be designated both as an LDC for CDBG and as a CHDO for HOME, the
CDBG and HOME program requirements for activities undertaken by the two
types of organizations are NOT identical. For example, an LDC using
CDBG funds under Sec. 570.204 must carry out a neighborhood
revitalization, community economic development, or energy conservation
project, and meet a national objective. A CHDO funded under the HOME
program must develop, own or sponsor housing that meets income
targeting and affordability requirements. To the extent feasible within
the above constraints, the Department has developed this proposed rule
to avoid an unnecessary burden on any organization that may qualify
both as an LDC and as a CHDO. The Department requests comments on this
aspect of the proposed rule.
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 the 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. The Department anticipates that regulations implementing the
1992 amendments to Section 3 will be published this fiscal year.
Other Matters
Justification for 30-day Public Comment Period
The Department has determined that it is contrary to the public
interest to have the usual 60-day comment period and, therefore,
believes it appropriate to shorten the comment period to 30 days in
order to expedite the process for developing a final rule that may be
published for effect. Current requirements governing the use of CDBG
funds for economic development activities are unclear, and thus they
tend to be inconsistently applied. This uncertainty has caused many
communities to be apprehensive about undertaking economic development
activities with CDBG funds. As a result, potentially valuable
opportunities for economic empowerment may be lost. While some of the
statutory changes made by the 1992 Act became effective upon enactment,
certain provisions will not become effective until a final rule is
published.
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
proposed in this proposed rule would not have Federalism implications
when implemented and, thus, are not subject to review under the Order.
Nothing in the proposed rule implies any preemption of State or local
law, nor does any provision of the proposed 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 proposed rule would 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 proposed rule hereby
certifies that this proposed rule would 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 proposed rule was listed as item 1638 in the Department's
Semiannual Agenda of Regulations published on April 25, 1994 (59 FR
20424, 20458) 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 C, I, and J, are proposed to
be amended as follows:
PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS
Subpart C--Eligible Activities
1. The authority citation for 24 CFR part 570 would continue to
read as follows:
Authority: 42 U.S.C. 3535(d) and 5300-5320.
2. In Sec. 570.200, paragraph (e) would be 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), 570.203(b), 570.204,
570.206(f), and 570.209.
* * * * *
3. In Sec. 570.201, paragraph (o) would be 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, 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 under this paragraph (o) shall not be subject
to the restrictions on public services contained in Sec. 570.201(e).
4. Section 570.203 would be 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
assisted 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; monitoring and management of
assisted activities; and the screening, referral, and placement of
applicants for employment opportunities generated by CDBG-assisted
economic development activities, including the costs of providing
necessary training for persons filling those positions.
5. Section 570.204 would be revised to read as follows:
Sec. 570.204 Special activities by Local Development Corporations
(LDCs).
(a) Eligible activities. The recipient may provide CDBG funds as
grants or loans to any LDC subrecipient 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 means an activity or
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 means an activity or
activities that increase economic opportunity for persons of low- and
moderate-income or that stimulate or retain businesses or permanent
jobs;
(3) Energy conservation project means an activity or activities
that address local energy conservation;
(4) To carry out a project means that the LDC 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; and
(5) When the funded project activities carried out by the
subrecipient under this subpart include income payments described as
ineligible in Sec. 570.207(b)(4) or other public service activities
generally eligible under Sec. 570.201(e), such activities shall not be
subject to the limitations in Sec. 570.201(e); however, such an
activity must be either a new service or a quantifiable increase in the
level of an existing service above that which has been provided by or
on behalf of the unit of general local government (through funds raised
by the unit, or received by the unit from the State in which it is
located) in the twelve calendar months before the submission of the
statement. (An exception to this requirement may be made if HUD
determines that any decrease in the level of service was the result of
events not within the control of the unit of general local
government.);
(b) Ineligible activities. Notwithstanding that subrecipients 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) Providing assistance to activities that would otherwise be
eligible under Sec. 570.203 that do not meet the requirements of
Sec. 570.209; or
(3) 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 subrecipients. (1) An LDC 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 and economic development activities) within an identified
geographic area of operation not to exceed 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 of private establishments located in 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 except as required for compliance
with Sec. 570.503(b)(8); and
(viii) Is free to contract for goods and services from vendors of
its own choosing.
(2) An LDC will also qualify as an eligible subrecipient 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 and 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).
6. Section 570.208 would be amended by revising the paragraph
heading of paragraph (a) and by revising paragraph (a)(1)(i); by adding
a new paragraph (a)(2)(iii); and by revising paragraphs (a)(4) and
(b)(1)(ii), 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.
Activities carried out under Sec. 570.203 by a community development
financial institution shall be presumed by HUD to meet this criterion
if the institution's charter limits its investment area to a primarily
residential area consisting of at least 51 percent low- and moderate-
income persons.
* * * * *
(2) * * *
(iii) A microenterprise assistance activity carried out in
accordance with the provisions of Sec. 570.201(o) if at least 51
percent of all persons, including both owners of microenterprises and
persons developing microenterprises, who are assisted under the
activity during each program year 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.
* * * * *
(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)
having either:
(1) At least 20 percent of its residents who are in poverty; or
(2) 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) having at least 20 percent of its residents who
are in poverty and the job under consideration is to be located within
that census tract.
(v) 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) In any case where the activity undertaken for the purpose of
creating or retaining jobs is a public facility or improvement, the
requirement shall be met as follows:
(1) Prior to the obligation of CDBG assistance for the activity,
the recipient shall develop an assessment which identifies the
businesses located in or expected to locate in the service area of the
public facility or improvement. For each identified business, the
recipient shall project the number of jobs anticipated to be created or
retained by the business as a result of the public facility or
improvement and enter into written agreements with each such business,
as applicable, concerning such jobs and identifying the number of such
jobs that are to be provided or made available to low- and moderate-
income persons;
(2) The recipient shall compare the number of jobs expected to be
created or retained as a result of the public facility or improvement
with the CDBG cost of the public facility or improvement to be
undertaken:
(i) If the number of jobs actually created or retained by the
combination of the businesses with whom such agreements have been
executed is not less than one full-time equivalent job per $10,000 of
CDBG funds used for the activity, then only the jobs created or
retained by those specific businesses need be considered for purposes
of meeting the national objective requirement;
(ii) If the number of jobs actually created or retained by the
combination of those businesses is less than one full-time equivalent
job per $10,000 of CDBG funds used for the activity, then all jobs
created or retained as a result of the public facility or improvement
shall be considered for purposes of meeting the national objective
requirement. This includes jobs created or retained as a result of the
assistance by businesses already located in the public facility or
improvement's service area, whether identified in the assessment or
not. This also includes jobs created or retained as a result of the
assistance by businesses which locate in the public facility or
improvement's service area during the period starting with the date the
recipient identifies the activity in its final statement and ending one
year after the physical completion of the public facility or
improvement.
(iii) If the public facility or improvement is subject to paragraph
(a)(4)(v)(C)(2)(ii) of this section, then the activity must also comply
with the guidelines concerning public benefit at Sec. 570.209(b).
Note: * * *
(b) Activities which aid in the prevention or elimination of slums
or blight.
* * * * *
(1) * * *
(ii) Throughout the area there exists at least one of the following
conditions:
(A) A substantial number of deteriorated or deteriorating
buildings;
(B) The public improvements are in a general state of
deterioration; or
(C) For exclusively commercial or industrial areas only, pervasive
economic disinvestment as evidenced by a substantial number of
previously occupied buildings experiencing either long term vacancies
or an unusually high rate of turnover in occupancy.
* * * * *
7. A new Sec. 570.209 would be added 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 for
activities that are eligible for CDBG assistance under Sec. 570.203 and
activities carried out under the authority of Sec. 570.204 that would
otherwise be eligible under Sec. 570.203. 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. (1) HUD has developed guidelines that are
designed to provide the recipient with a framework for financially
underwriting and selecting CDBG assisted economic development projects
that are financially viable and that will make the most effective use
of the CDBG funds. These guidelines are published separately as a
Federal Register Notice. The use of the financial 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.
(2) Where appropriate, HUD's guidelines for financial underwriting
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 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.
(3) The guidelines for financial underwriting are for the purpose
of achieving the following objectives:
(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.
(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 in this paragraph (b) identify the types of public benefit
that must be used 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.
(1) Tests for individual activities. (i) With respect to each
individual activity for which CDBG funds are expended under one of the
authorities governed by these guidelines, one of the following two
tests must be met:
(A) The number of permanent jobs created or retained by an assisted
business(es) as a direct result of the CDBG assisted activity shall not
be less than one full-time equivalent job per $100,000 of CDBG funds
used for the activity; or,
(B) The number of low- and moderate-income persons residing in the
area served by an assisted activity which directly results in providing
essential goods or services shall not be less than one person per
$1,000 used for the activity.
(ii) The following activities provide insufficient public benefit
in the context of the CDBG program and are thus deemed to be ineligible
as part of activities governed by these guidelines:
(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 benefit to such
clientele clearly outweighs employment or other benefits to low- and
moderate-income persons;
(D) Acquisition of land for which no specific proposed use has yet
been identified; and
(E) Additional assistance to a for-profit business while that
business is the subject of unresolved findings of noncompliance
relating to previous CDBG assistance provided by the recipient.
(2) Tests for activities in the aggregate. With respect to the
aggregate amount of CDBG funds from a single grant year that are
expended on activities under the authorities governed by these
guidelines, one of the following two criteria, selected at the option
of the grantee, must be met:
(i) In order to qualify under the first criterion, the following
two tests must be met, as applicable:
(A) For activities that are expected to result directly in the
creation or retention of jobs, the number of permanent jobs created or
retained by the assisted businesses shall not be less than one job
(computed on a full-time equivalent basis) per $35,000 of CDBG funds
used for the activities; and,
(B) For activities that are expected to provide essential goods or
services to an area as a direct result of the CDBG assistance, the
number of low- and moderate-income persons residing in the areas served
by the assisted businesses shall not be less than one person per $350
of CDBG funds used for the activities.
Note: With respect to activities that are expected both to
create or retain jobs and to provide essential goods or services to
an area, the grantee may elect to consider such activities under
either the jobs test or the persons-served test, but not both.
(ii) In order to qualify under the second criterion, at least 75
percent of the CDBG funds used by the recipient for activities governed
by these guidelines must be used for activities that are principally
designed to address at least one of the following:
(A) The provision of jobs for participants in any of the following
programs: Jobs Training Partnership Act (JTPA), Jobs Opportunities for
Basic Skills (JOBS), or Aid to Families with Dependent Children (AFDC);
(B) The provision of jobs for participants in Unemployment
Insurance programs;
(C) The provision of jobs for residents of Public and Indian
Housing units;
(D) The provision of jobs for homeless persons;
(E) The provision of jobs that provide clear opportunities for
promotion, such as through the provision of training;
(F) The provision of jobs for persons residing within a census
tract (or block numbering area) that has at least 20 percent of its
residents who are in poverty;
(G) The establishment, stabilization, or expansion of
microenterprises;
(H) The stabilization or revitalization of a neighborhood that is
predominantly low and moderate income;
(I) The provision of assistance to a community development
financial institution whose service area is predominantly low and
moderate income;
(J) The provision of assistance to a neighborhood-based nonprofit
organization serving a neighborhood that is predominantly low and
moderate income;
(K) The provision of employment opportunities that are an integral
component of a community's strategy to promote spatial deconcentration
of low- and moderate-income and minority families;
(L) The provision of 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; or
(M) With prior HUD approval, other innovative approaches that
provide substantial benefit to low-income persons.
(3) Applying the aggregate tests. With respect to the aggregate
tests under paragraph (b)(2) of this section, a metropolitan city or an
urban county shall apply the criteria to all applicable activities for
which CDBG funds are obligated within each single CDBG program year
without regard to the source year of the funds.
(c) Amendments to economic development projects after review
determinations. Once the recipient has completed its economic
development analysis under these guidelines and has agreed to provide
CDBG assistance to the for-profit business, any material change in the
project that affects the underlying assumptions upon which the
recipient relied to conduct its review should be reevaluated under
these and the recipient's guidelines. A ``material change'' is defined
for these purposes as a change in the size, scope, location or public
benefit of the project or a change in the terms or the amount of the
private funds (both lender's funds and equity capital) to be invested
in the project or a change in the terms or the amount of the CDBG
assistance to be made available to the project. If the recipient
determines that a material change has occurred and a reevaluation of
the project indicates that the financial elements and public benefit to
be derived have also changed, then the recipient should make
appropriate adjustments in the amount, the type of CDBG assistance and/
or the terms and conditions under which that assistance has been
offered to reflect the impact of the material change. For example, if a
material change in the project elements resulted in a reduction of the
total project costs, it would be appropriate for the recipient to
reduce the amount of total CDBG assistance.
(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 that was projected to be achieved at the time the CDBG
assistance was obligated. If actual results vary substantially from the
grantee's initial projections, 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's Program: State Administration of CDBG
Nonentitlement Funds
8. Section 570.482 would be amended by adding paragraphs (c), (d),
(e), and (f) to read as follows:
Sec. 570.482 Eligible activities.
* * * * *
(c) Provision of assistance for microenterprise development--(1)
Eligible providers. Microenterprise development activities eligible
under section 105(a)(23) of the Housing and Community Development Act
of 1974, as amended, 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).
(2) Provision of support services. Support services provided under
Section 105(a)(23) of the Housing and Community Development Act of
1974, as amended, 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.
(d) Guidelines and objectives for evaluating project costs and
financial requirements.--(1) Applicability. 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 for activities that are eligible for
CDBG assistance under Sec. 105(a)(17) of the Act, economic development
activities eligible under Sec. 105(a)(14) of the Act, and activities
that are part of a community economic development project eligible
under Sec. 105(a)(15) of the Act. The use of the financial 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. (i) The guidelines are designed to provide the
recipient with a framework for financially underwriting and selecting
CDBG assisted economic development projects that are financially viable
and that will make the most effective use of the CDBG funds. Where
appropriate, HUD's guidelines for financial underwriting 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 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.
(ii) These guidelines are published separately as a Federal
Register Notice. The guidelines for financial underwriting are for the
purpose of achieving the following objectives:
(A) That project costs are reasonable;
(B) That all sources of project financing are committed;
(C) That to the extent practicable, CDBG funds are not substituted
for non-Federal financial support;
(D) That the project is financially feasible;
(E) That to the extent practicable, the return on the owner's
equity investment will not be unreasonably high; and
(F) That to the extent practicable, CDBG funds are disbursed on a
pro rata basis with other finances provided to the project.
(e) 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
guidelines. The standards set forth in this paragraph (e) identify the
types of public benefit that must be used for this purpose and the
minimum level of each that must be obtained for the amount of CDBG
funds used. These guidelines are applicable for activities that are
eligible for CDBG assistance under Sec. 105(a)(17) of the Act, economic
development activities eligible under Sec. 105(a)(14) of the Act, and
activities that are part of a community economic development project
eligible under Sec. 105(a)(15) of the Act. Certain projects eligible
under Section 105(a)(2) of the Act and undertaken for economic
development purposes are subject to these guidelines, as specified in
Sec. 570.482(d)(4)(iv)(C)(3)(iii). 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) Tests for individual activities. (i) With respect to each
individual activity for which CDBG funds are expended under one of the
authorities governed by these guidelines, one of the following two
tests must be met:
(A) The number of permanent jobs created or retained by an assisted
business(es) as a direct result of the CDBG assisted activity shall not
be less than one full-time equivalent job per $100,000 of CDBG funds
used for the activity; or,
(B) The number of low- and moderate-income persons residing in the
area served by an assisted activity which directly results in providing
essential goods or services shall not be less than one person per
$1,000 used for the activity.
(ii) The following activities provide insufficient public benefit
in the context of the CDBG program and are thus deemed to be ineligible
as part of activities governed by these guidelines:
(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 benefit to such
clientele clearly outweighs employment or other benefits to low- and
moderate-income persons;
(D) Acquisition of land for which no specific proposed use has yet
been identified; and
(E) Additional assistance to a for-profit business while that
business is the subject of unresolved findings of noncompliance
relating to previous CDBG assistance provided by the recipient.
(3) Tests for activities in the aggregate. With respect to the
aggregate amount of CDBG funds from a single grant year that are
expended on activities under the authorities governed by these
guidelines, one of the following two criteria, selected at the option
of the grantee, must be met:
(i) In order to qualify under the first criterion, the following
two tests must be met, as applicable:
(A) For activities that are expected to result directly in the
creation or retention of jobs, the number of permanent jobs created or
retained by the assisted businesses shall not be less than one job
(computed on a full-time equivalent basis) per $35,000 of CDBG funds
used for the activities; and,
(B) For activities that are expected to provide essential goods or
services to an area as a direct result of the CDBG assistance, the
number of low- and moderate-income persons residing in the areas served
by the assisted businesses shall not be less than one person per $350
of CDBG funds used for the activities.
(ii) In order to qualify under the second criterion, at least 75
percent of the CDBG funds used by the grantee for activities governed
by these guidelines must be used for activities that are principally
designed to address at least one of the following:
(A) The provision of jobs for participants in any of the following
programs: Jobs Training Partnership Act (JTPA), Jobs Opportunities for
Basic Skills (JOBS), or Aid to Families with Dependent Children (AFDC);
(B) The provision of jobs for participants in Unemployment
Insurance programs;
(C) The provision of jobs for residents of Public and Indian
Housing units;
(D) The provision of jobs for homeless persons;
(E) The provision of jobs that provide clear opportunities for
promotion, such as through the provision of training;
(F) The provision of jobs for persons residing within a census
tract (or block numbering area) that has at least 20 percent of its
residents who are in poverty;
(G) The establishment, stabilization, or expansion of
microenterprises;
(H) The stabilization or revitalization of a neighborhood that is
predominantly low and moderate income;
(I) The provision of assistance to a community development
financial institution whose service area is predominantly low and
moderate income;
(J) The provision of assistance to a neighborhood-based nonprofit
organization serving a neighborhood that is predominantly low and
moderate income;
(K) The provision of employment opportunities that are an integral
component of a community's strategy to promote spatial deconcentration
of low- and moderate-income and minority families;
(L) The provision of 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; or
(M) With prior HUD approval, other innovative approaches that
provide substantial benefit to low-income persons.
(4) Applying the aggregate tests. The following shall apply with
respect to the aggregate tests under paragraph (e)(3) of this section:
(i) With respect to activities that are expected both to create or
retain jobs and to provide essential goods or services to an area, the
grantee may elect to consider such activities under either the jobs
test or the persons-served test, but not both.
(ii) A state shall apply the criteria 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.
(5) 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 that was projected to be achieved at the time the CDBG
assistance was obligated. If actual results vary substantially from the
grantee's initial projections, 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 grantee has
failed the public benefit standards, HUD may require the grantee to
meet more stringent standards in future years as appropriate.
(f) Amendments to economic development projects after review
determinations. Once the recipient has completed its economic
development analysis under these guidelines and has agreed to provide
CDBG assistance to the for-profit business, any material change in the
project that affects the underlying assumptions upon which the
recipient relied to conduct its review should be reevaluated under
these and the recipient's guidelines. A ``material change'' is defined
for these purposes as a change in the size, scope, location or public
benefit of the project or a change in the terms or the amount of the
private funds (both lender's funds and equity capital) to be invested
in the project or a change in the terms or the amount of the CDBG
assistance to be made available to the project. If the recipient
determines that a material change has occurred and a reevaluation of
the project indicates that the financial elements and public benefit to
be derived have also changed, then the recipient should make
appropriate adjustments in the amount, the type of CDBG assistance and/
or the terms and conditions under which that assistance has been
offered to reflect the impact of the material change. For example, if a
material change in the project elements resulted in a reduction of the
total project costs, it would be appropriate for the recipient to
reduce the amount of total CDBG assistance.
9. Section 570.483 would be amended by:
a. Revising the section heading;
b. Revising the paragraph heading of paragraph (b) and by adding a
sentence to the end of paragraph (b)(1)(i);
c. Adding a new paragraph (b)(2)(iv);
d. Redesignating paragraph (b)(4)(iv) as (b)(4)(v), and by adding a
new paragraph (b)(4)(iv);
e. Revising newly redesignated paragraph (b)(4)(v)(C); and
f. Revising paragraph (c)(1)(ii), to read as follows:
Sec. 570.483 Criteria for national objectives.
* * * * *
(b) Activities benefiting low- and moderate-income persons.
* * * * *
(1) * * * (i) * * * Activities carried out under Sections
105(a)(14) or 105(a)(17) of the Act by a community development
financial institution shall be presumed by HUD to meet this criterion
if the institution's charter limits its investment area to a primarily
residential area consisting of at least 51 percent low- and moderate-
income persons.
* * * * *
(2) * * *
(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) if at least 51 percent of all persons, including both
owners of microenterprises and persons developing microenterprises, who
are assisted under the activity from each annual grant 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.
* * * * *
(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)
having either:
(1) At least 20 percent of its residents who are in poverty; or
(2) 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) having at least 20 percent of its residents who
are in poverty and the job under consideration is to be located within
that census tract.
(v) * * *
(C) Where CDBG funds are used for public improvements (e.g., water,
sewer and roads) and the national objective is to be met by job
creation or retention as a result of the public improvement, the
requirement shall be met as follows:
(1) Before CDBG assistance is obligated for such an activity, the
unit of general local government shall develop an assessment which
identifies the businesses located in or expected to locate in the
service area of the public improvements. For each identified business,
the unit of general local government shall project the number of jobs
anticipated to be created or retained by each identified business as a
result of the public improvement;
(2) For any business which agrees to retain or create jobs as a
result of the CDBG-assisted public improvements, the unit of local
government shall have a written agreement with the business spelling
out the business' obligation to create or retain jobs. The agreement
should specify the total number of jobs to be created or retained, the
number of jobs involving the employment of low- and moderate-income
persons, and the time period during which the job creation or retention
will occur. For purposes of meeting the national objective requirement,
the unit of general local government shall count all jobs covered by
such agreements until the local government determines that the business
has fulfilled its job creation or retention obligation;
(3) The unit of local government shall compare the number of jobs
created or retained as a result of the pubic improvement with the CDBG
cost of the public improvements to be undertaken:
(i) If the number of jobs actually created or retained by any
combination of businesses served by the public improvements is such
that the cost (in CDBG funds) per job is less than $10,000, then the
jobs created or retained by those specific businesses shall be
considered for purposes of meeting the national objective requirement;
(ii) If the number of jobs actually created or retained by any
combination of businesses served by the public improvements is such
that the cost (in CDBG funds) per job is $10,000 or more, then all jobs
created or retained as a result of the public improvements shall be
considered for purposes of meeting the national objective requirement.
This includes jobs created or retained as a result of the assistance by
businesses already located in the public improvements service area,
whether identified in the assessment or not. This also includes jobs
created or retained as a result of the assistance by businesses which
locate in the public improvements service area during the period
starting with the date the state awards the CDBG funds to the local
government and ending one year after the physical completion of the
public improvements.
(iii) If the number of jobs actually created or retained by any
combination of businesses served by the public improvements is such
that the cost (in CDBG funds) per job is $10,000 or more, then the
activity shall also be subject to the Guidelines for Evaluating Public
Benefit at Sec. 570.482(e).
* * * * *
(c) * * *
(1) * * *
(ii) Throughout the area there exists at least one of the following
conditions:
(A) A substantial number of deteriorated or deteriorating
buildings;
(B) The public improvements are in a general state of
deterioration; or
(C) For exclusively commercial or industrial areas only, pervasive
economic disinvestment as evidenced by a substantial number of
previously occupied buildings experiencing either long term vacancies
or an unusually high rate of turnover in occupancy.
Subpart J--Grant Administration
10. In Sec. 570.500, paragraph (c) would be revised to read as
follows:
Sec. 570.500 Definitions.
* * * * *
(c) Subrecipient means a public or private nonprofit agency,
authority or organization, or an entity described in Sec. 570.201(o) or
Sec. 570.204(c), receiving CDBG funds from the recipient to undertake
activities eligible for such assistance under subpart C of this part.
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.
11. Section 570.506 would be amended by revising paragraph (b)
introductory text; by redesignating paragraphs (b)(7) through (b)(11)
as (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, and the data source used for determining the percentage.
* * * * *
(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.
* * * * *
Dated: May 20, 1994.
Andrew Cuomo,
Assistant Secretary for Community Planning and Development.
Attachment--The Following Is Proposed To Be the Substance of What Will
Be Published as a Separate Federal Register Notice Concurrent With the
Final Rule
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
that are financially viable and that will make the most effective use
of the CDBG funds. The use of these financial underwriting guidelines
as 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. 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.
Where appropriate, HUD's guidelines for financial underwriting
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 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 guidelines for financial underwriting are for the purpose of
achieving the following objectives:
(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.
(1) Project costs are reasonable. 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 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.
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. 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.
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:
(i) 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
(ii) 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.
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 would generally 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. 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:
(i) 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
(ii) 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.
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, the 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.
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.
[FR Doc. 94-13196 Filed 5-26-94; 9:48 am]
BILLING CODE 4210-29-P
