antees under the Act. These include profit-seeking, nonprofit, or limited dividend corporations. The form of organization of the developer and changes in that form must be approved by the Secretary. Changes in ownership which might result in changes in control of the developer's operation must also be approved.

(2) The developer must have financial, technical, and administrative ability and background appropriate to the size and complexity of the project, the amount of the obligations to be guaranteed, and the period of time for project completion. The developer must have either in his own organization or available to him land development and related skills of a high order over the whole period of development. He must also have the capacity for anticipating and dealing effectively with the social concerns and problems that must be considered in planning the community or that may arise during the period of development,

(3) The developer may engage in nontitle IV activities, either in the project itself or in related development, subject to such conditions as the Secretary may impose. The project agreement shall impose such control and limitations as the Secretary shall determine are required to (i) govern the nontitle IV activities of the developer, in the project itself or otherwise, or (ii) provide separation of accounts and activities to serve the purposes of the Act and protect the security interests of the United States.

(b) Equal opportunity. (1) The new community project must be specifically designed and implemented so as to assure compliance with all requirements imposed by, or pursuant to, any applicable statute or executive order treating with discrimination on the basis of race, creed, color, sex, or national origin. These include title VIII (Fair Housing) of the Civil Rights Act of 1968 (42 U.S.C. 36013619); title VII of the Civil Rights Act of 1964 (42 U.S.C. 2000e); the Civil Rights Act of 1866, as amended (42 U.S.C. 1981 and 1982); Executive Order 11063 (27 F.R. 11527); and Executive Order 11246, as amended by Executive Order 11375 (30 F.R. 12319, as amended by 32 F.R. 14303); which apply variously so as to prohibit discrimination in the use, sale, lease, or other disposition of land, housing, or facilities in the new community and in employment in the new community or in the development of the new community project. Pursuant to the authority in each executive department to

issue regulations and take other appropriate action under Executive Order 11063 with respect to its programs, discrimination on the basis of race, color, creed, or national origin in the use, sale, lease, or other disposition of any land developed for residential or related uses with assistance under the Act is hereby specifically made a violation of that order enforceable under the terms of section 302 of the Order after due notice and hearing.

(2) In furtherance of subparagraph (1) of this paragraph and as a condition of granting or continuation of assistance, the developer must formulate and implement an affirmative action program covering all or part of the new community project; include appropriate equal opportunity provisions in pertinent contracts, subcontracts, covenants, or other documents; and take such further steps as the Secretary may direct to carry out the developer's program, including, but not limited to, provision of equal opportunity in employment and encouragement of minority business enterprise.

(c) Labor standards. In any new community project, construction contracts, subcontracts, or building and loan agreements for land development assisted under the Act shall contain such labor standards clauses as the Secretary may direct in furtherance of the Act and of the regulations of the Secretary of Labor codified in 29 CFR Part 5. The provisions of such regulations with respect to ineligible contractors shall also be observed. No proceeds of new community obligations may be disbursed to a developer with respect to any such construction contract unless there has been filed, in a manner satisfactory to the Secretary, a certificate signed by the contractor or subcontractor stating that laborers and mechanics employed under the contract have been paid not less than the wages determined by the Secretary of Labor to be prevailing wages for corresponding classes of laborers and mechanics employed on construction of a similar character.

(d) Small builders. In any new community project, there must be provision satisfactory to the Secretary to encourage maintenance and growth of a diversified local homebuilding industry and broad participation by builders, particularly small builders.

(e) Government approvals. The developer must secure all State and local

approvals required by law or determined by the Secretary to be necessary for the project. To the extent significant project activities will require, or depend upon, future approvals that are necessarily unobtainable at the time the offer of commitment is made or the project agreement entered into, the Secretary will require that the project plan or plans provide reasonable assurance that such approvals will and can be secured, in a timely fashion, as needed.

(f) Staging. Major new community projects will ordinarily be planned, carried out, and financed in progressive stages, so as to provide an opportunity to test the market and minimize financial risk, with each stage resulting in a balanced and self-sufficient whole. Exceptions to this requirement, and the degree of and terms for staging, will be determined according to the scope of the project, the nature of market demand, the extent of assurance that all contemplated financing will be obtained and all public actions or approvals taken or obtained, the degree to which economies of scale can in fact be obtained, the possible adverse effects of contemplated major improvements upon the Government's security, the projected scheduling of housing in relation to critical housing needs, particularly needs for low and moderate income housing, and such other matters as the Secretary deems relevant. Regardless of the stage covered in the initial application, the developer must submit a general plan for the entire project which will be covered by subsequent stages.

Subpart C-Financial and Economic Criteria and Standards

§ 710.8 Economic feasibility.

A new community must be economically feasible in terms of economic base or potential for growth. Among the criteria by which feasibility will be determined are the following:

(a) Current and projected economic and demographic growth patterns and demand for and supply of industrial, commercial, and residential properties for the region in which the project is located;

(b) The market area of the project and the growth and demand trends projected within this market area;

(c) The advantages of the project, relative to other developments, including its location, the managerial and mar

keting skills associated with it, and its capacity to sustain a job base which, in turn, will generate demand for housing and commercial facilities.

In the case of projects in rural and other areas, including those beyond the urbanizing portion of a metropolitan area, where, for economic or other reasons, advantage cannot be taken of existing growth trends, it is particularly important that there will be a large enough employment base to generate demand to sustain the projected growth rate of the new community. Feasibility will depend upon the basic conditions for industrial development; the probable effectiveness of private and governmental efforts to attract stable industries and to overcome some of the major obstacles to economic development; and the degree to which commitments from industries can be secured.

A new community must be developed pursuant to a financial plan or program which must include provisions that will:

(a) Cover all anticipated project costs, including, but not limited to, costs which will be met with funds to be borrowed under the obligations guaranteed;

(b) Demonstrate the manner by which, and the sources from which, these costs will be met, including anticipated revenues from the project, financial resources of the developer, and borrowing;

(c) Provide assurances that the developer will have an adequate incentive, in terms of equity invested and expected return, for proceeding with the approved project in an expeditious and efficient manner; and

(d) Set forth a procedure for periodic updating of the financial plan to take into consideration changes in costs, revenues, market conditions, and other relevant changes affecting the plan.

§ 710.10 Maximum Federal guarantee.

The maximum loan which may be guaranteed under the Act is the lesser of (a) 80 percent of the Secretary's estimate of the value of the property upon completion of land development or (b) the sum of 75 percent of the Secretary's estimate of the value of the land before development and 90 percent of his estimate of the actual cost of land development. In no event shall the principal amount of the outstanding obligations guaranteed under the Act with respect to

a single project exceed $50 million. Land which is yet to be acquired and costs which are yet to be incurred at the time a commitment is made may be included as a basis for determining maximum commitment, but, in the absence of escrow or trust provisions under § 710.22(b) (1), only land acquired and costs incurred at or prior to issuance of a guarantee may be included as a basis for determining the maximum outstanding principal amount of obligations which may be guaranteed. § 710.11 Land valuation.

Among the principles which the Secretary will apply with respect to any valuation and which should be applied in any valuation made by or on behalf of a developer are the following:

(a) Before development. (1) Estimates of the "as is" value of the land prior to its development as part of a new community project must be based, to the greatest extent possible, on recent actual arm's length sales transactions of the land involved or of nearby comparable land. In all cases where land valuations exceed actual prices paid by the developer or paid in the latest arm's length transactions, the reasons for the valuation will be fully explained and documented. Unusually high prices paid for remaining parcels needed to round out a site will be considered as unrepresentative of the values of the site as a whole. Different parcels may be valued according to their highest and best use only where supported by market demand. In any case, valuation shall not be limited to a small sample acreage or a few selected choice parcels.

(2) Valuation should not take into account any increased values resulting from the guarantees expected to be issued under the Act and the development made possible by these guarantees, as distinct from normal growth that would have been expected in any event. It is recognized, however, that market value may be increased by improvements already on the land, including those installed by the developer, and changes which have occurred in local zoning or comprehensive planning as a result of actions by the developer. Such increases in value may be taken into account to the same extent as they would be in valuing comparable land.

(b) After development. Estimates of the value of the property upon completion of land development should reflect

the income potential of the new community project from the sale or rental of developed land if the project is carried out as planned. Consideration should be given to the potential effect on values of existing and planned public facilities and other existing and planned development in the area. Absorption rates should be related to the proposed land uses and development schedule for the project. Weight should also be given to any factors affecting the potential value of the particular land in question, such as zoning which may be approved, access, topography, and anticipated governmental approvals.

§ 710.12 Cost estimation.

Only the actual costs of land development, as those terms are defined in § 710.2 (e) and (f), will be considered for purposes of calculating the maximum amount of obligations which may be guaranteed under the Act. The general principles that will apply in estimating actual costs of land development for this determination are as follows:

(a) Costs of land development may be included as estimated actual costs to the extent that they are expected to be incurred after the date as of which land valuation is determined by the Secretary. Planning and other organizational costs relating directly to the development of the new community proposal may be included even if incurred prior to that date.

(b) Construction costs estimates, to the fullest extent feasible, should be supported by detailed engineer's cost figures broken down by unit quantities and prices, and must be identified in terms of specific improvements.

(c) Fees and charges payable pursuant to Subpart E of this part before or during development may be included as estimated actual costs.

§ 710.13 Terms and conditions of borrowing.

(a) Kind of obligations. The obligations guaranteed under the Act may include any bond, debenture, note, or other obligation issued by a developer for public or private sale. To facilitate public financing, the guaranteed obligations of any number of developers may be issued to a trustee who will sell to the public, through underwriters or otherwise, certificates of participation or other securities evidencing rights in the guaranteed obligations held in trust, provided that

the terms and conditions of each such transactions shall be approved by the Secretary.

(b) Investors and lenders. Investors in guaranteed obligations, except for public offerings, must be approved by the Secretary or must meet such standards and criteria as may be from time to time prescribed by him. In the case of a public offering, obligations must be underwritten under terms and conditions approved by the Secretary.

(c) Rates of interest and maturities. Rates of interest and any other charges relating to guaranteed obligations and the repayment maturity and redemption privilege provisions of such obligations must be approved by the Secretary.

(d) Trustees and fiduciaries. Any trustee or other person or corporation acting in a fiduciary capacity with respect to a guaranteed obligation must be a banking or other financial institution subject to governmental inspection and supervision. Approval of such a trustee or other person may be conditioned on its written agreement with the Secretary to take such steps and act under such conditions as the Secretary may prescribe for the protection of the security interests of the United States.

§ 710.14 Equity and working capital.

(a) Prior to the execution of the project agreement a developer must make arrangements satisfactory to the Secretary to assure that there will be adequate funds and working capital to meet cash requirements for costs and contingencies, not covered by the proceeds of guaranteed obligations, incurred or to be incurred in connection with the land development program.

(b) The Secretary may require developers to have equity in addition to funds described in paragraph (a) of this section, according to the amount of and arrangements for debt financing, and such other considerations as he determines may bear upon the risks to the United States as guarantor.

§ 710.15 Security for the guarantee.

(a) All obligations must contain, or be issued subject to, such provisions relating to the security interests of the United States as may be required by the Secretary. These shall include general provisions under which the United States shall acquire rights of subrogation on payment of a guarantee in addition to

such special provisions relating to the security of the United States in the specific property, including real property being acquired and developed, or other property as may be appropriate.

(b) Unless otherwise required or approved by the Secretary, the security of the United States will include a first lien on the real property of the developer (or such portion thereof as the Secretary may determine) owner or acquired in connection with the project. The developer's title to such property and the validity of such lien must be evidenced by a title insurance policy issued by a title insurer licensed to do business in the State in which the real property is located and acceptable to the Secretary, or other satisfactory evidence of title. The form and amount of any title insurance policy shall comply with the standards prescribed by the Secretary. At, or prior to, the issuance of obligations guaranteed under the Act, the first lien referred to above shall be given to and held by the Secretary, or by a trustee approved by him. The instruments creating such lien and setting forth the terms and conditions under which it is given and held must be satisfactory to the Secretary.

(c) Such instruments shall include provisions for the release of real property from the lien, as such property is sold or otherwise disposed of for project purposes, in accordance with such schedules and procedures as the Secretary may require in the project agreement to assure that on the sale or other disposition of such property (1) adequate release payments will be applied to the redemption of the guaranteed obligations or paid into an appropriate fund, or (ii) other appropriate action will be taken or assurances received as may be required to protect the security interests of the United States.

§ 710.16 Terms and conditions of payment under the guarantee.

(a) Nature and scope. The full faith and credit of the United States is pledged to the payment of any guarantee made pursuant to the Act, and the validity of such guarantee shall be incontestable in the hands of a qualified holder of a guaranteed obligation, except for fraud or material misrepresentation on the part of such holder. The guarantee may extend to both principal and interest, including interest, as may be provided for

in the guarantee, accruing between the date of default under a guaranteed obligation and the payment in full of the guarantee.

(b) Claims and payment upon default. Upon default by a developer in payment of interest or principal under an obligation guaranteed under the Act, the first recourse of the holder thereof shall be a claim under the guarantee for payment of the defaulted interest or principal; and, upon payment thereof in accordance with the terms of such guarantee, the holder shall have no further recourse. All payments thereunder shall be made in cash from the revolving fund established pursuant to the Act.

Subpart D-Procedures

§ 710.18 Preapplication proposal.

The preapplication procedure is designed to provide an initial screening to determine whether or not a project appears to be within the broad framework of the Act before all of the detailed plans are completed by the developer. It will also provide the Secretary an opportunity to work with the developer from the earliest stages of project planning.

(a) Inquiry. After familiarizing themselves with the Act and the regulations in this part, applicants are encouraged to meet with the Assistant Secretary for Community Planning and Management and his designated representatives to discuss their proposals, so that subsequent steps may be taken with a clear understanding of the goals and requirements of the program.

(b) Proposal. The first formal step in processing submission of a preapplication proposal to the Assistant Secretary for Community Planning and Management, U.S. Department of Housing and Urban Development, Washington, D.C. 20410. The proposal should deal in summary form with the criteria for project evaluation set forth in Subparts B and C of this part. The proposal need not include the detailed supporting data required for an application. Specific instructions regarding the items which must be included in a proposal may be obtained from the Assistant Secretary for Community Planning and Management. No charge is required upon submission of a preapplication proposal.

(c) Review and action. The Assistant Secretary for Community Planning and Management, upon completion of his re

view of each proposal, will inform the applicant in writing of his findings and (1) invite submission of an application; (2) invite submission of an application, indicating the need for specific changes in the project; (3) recommend the resolution of certain critical problems before proceeding with an application; or (4) discourage an application, indicating the aspects of the proposal which do not appear to meet the requirements of the Act. An invitation to submit an application does not constitute or imply an assurance of eventual approval by the Department. If the applicant is not invited to submit an application, but nevertheless believes that the project may qualify under the Act, he may resubmit the proposal for further review with such changes as, in his opinion, will overcome the initial objections of the Assistant Secretary for Community Planning and Management. § 710.19

Application.

(a) Submission. An application may be submitted to the Assistant Secretary for Community Planning and Management following receipt of an invitation pursuant to § 710.18, and upon payment of the application charge specified in § 710.24. The application must contain information adequate to enable the Secretary to make the determination that the criteria covered in Subparts B and C of this part have each been met. Specific instructions regarding the items which must be included in an application may be obtained from the Assistant Secretary for Community Planning and Management. Such items may, in addition to other matters, include information as to a range of feasible interest rates and alternative repayment schedules and maturities, subject to further determinations in accordance with paragraph (b) of this section.

(b) Offer of commitment. If the determinations referred to in paragraph (a) of this section are made by the Secretary and an application is approved by him hereunder, the Secretary may address a letter to the applicant stating in effect that, based upon the information contained in the applicant's proposal and application and any other information which may have been submitted by the applicant, the Secretary is prepared to enter into an agreement providing for the guarantee under the Act of a specified maximum principal amount of obligations to be issued by a specified devel