termined in accordance with criteria established by HUD.

(p) Invitation for preliminary proposals-substantial rehabilitation ("Invitation for Preliminary Proposals"). A notice published by HUD inviting the submission of Preliminary Proposals in accordance with this Part. (See Sec. 1277.203.)

(q) Lease. A written agreement between an Owner and an Eligible Family for the leasing of a Decent, Safe, and Sanitary dwelling unit in accordance with the applicable Contract, which agreement is in compliance with the provisions of this Part.

(r) Local Housing Assistance Plan. A housing assistance plan submitted by a unit of general local government and approved by HUD under section 104 of the HCD Act or, in the case of a unit of general local government not participating under Title I of the HCD Act, a housing plan which contains the elements set forth in section 104(a) (4) of the HCD Act and which is approved by the Secretary as meeting the requirements of section 213 of that Act.

(s) Lower-income family. A family whose income does not exceed 80 percent of the median income for the area as determined by HUD with adjustments for smaller or larger families, except that HUD may establish income limits higher or lower than 80 percent on the basis of its findings that such variations are necessary because of the prevailing levels of construction costs, unusually high or low incomes, or other factors.

(t) New communities. New community developments approved under Title IV of the Housing and Urban Development Act of 1968 and Title VII of the Housing and Urban Development Act of 1970.

(u) Owner. Any private person or entity, including a cooperative, or a PHA, having the legal right to lease or sublease substantially rehabilitated dwelling units.

(v) PHA-Owner Proposal and PHAOwner Project. A proposal for a project under this Part (and the resulting project) to be owned by a PHA throughout the term of the Agreement and Contract where such Agreement and Contract are to be entered into between the PHA and HUD.

(w) Preliminary proposal. A proposal to provide substantially rehabilitated housing submitted in response to a HUD Invitation for Preliminary Proposals. (See Secs. 1277.203-1277.208.)

(x) Private-Owner/PHA Proposal and Private-Owner/PHA Project. A proposal for a project under this Part (and the resulting project) to be owned by a private Owner throughout the term of the Agreement and Contract where such Agreement and Contract are to be entered into between the private Owner and the PHA pursuant to an ACC between the PHA and HUD.

(y) Private-Owner Proposal and Private-Owner Project. A proposal for a project under this Part (and the resulting project) to be owned by a private Owner throughout the term of the Agreement and Contract where such Agreement and Contract are to be entered into between the private Owner and HUD.

(z) Public Housing Agency (“PHA”). Any State, county, municipality, or other governmental entity or public body (or agency or instrumentality thereof) which is authorized to engage in or assist in the development or operation of housing for low-income Families.

(aa) Secretary. The Secretary of Housing and Urban Development.

(2) Substantial rehabilitation also includes renovation, alteration or remodeling for the conversion or adaptation of structurally sound property to the design and condition required for use under this Part (e.g., conversion of a hotel to housing for the elderly).

(cc) Very low-income family. A family whose income does not exceed 50 percent of the median income for the area, as determined by HUD, with adjustments for smaller or larger families.

§ 1277.103 Basic policies.

(a) Limitation on Use of Substantially Rehabilitated Housing. (1) No proposal for housing to be rehabilitated may be approved by HUD unless HUD requirements implementing the provisions of

sections 213 (a), (b), and (c) of the HCD Act regarding review by the unit of general local government have been satisfied.

(2) Substantial Rehabilitated projects shall be permitted only where: (i) HUD determines that there is not and there is not likely soon to be an adequate supply of existing housing which, with the aid of housing assistance payments provided under the Section 8 Housing Assistance Payments Program-Existing Housing, can meet the needs of Eligible Families, or (ii) the proposed project is specifically approved by HUD in accordance with priorities established from time to time by the Secretary including priorities for New Communities which involve substantial rehabilitation.

(b) Preference for Certain Types of Projects. (1) 20 percent projects. Assistance payments may be made with respect to up to 100 percent of the dwelling units in any structure or project. However, within the category of projects that are not designed for use primarily by the elderly and the handicapped and which involve the rehabilitation of more than 50 units, a preference will be provided for projects in which housing assistance will be limited to 20 percent or less of the units. (See Sec. 1277.208(e) (1).)

(2) Three or more bedroom projects. Where the need for dwelling units of three or more bedroom size ("large dwelling units") is shown, each HUD field office shall be responsible, to the extent feasible, for inviting and selecting proposals which in the aggregate will achieve the goal of providing a number of large dwelling units equal to at least 20 percent of all the assisted units approved under the section 8 Housing Assistance Payments Program, without undue concentration of such large dwelling units in any one location.

(c) Maximum Total Annual Housing Assistance Payments (Private-Owner or PHA-Owner Projects). (1) The maximum total annual housing assistance payments that may be committed under the Contract shall be the total of the Gross Rents for all the Contract units in the project.

(2) A project account will be established and maintained, in an amount as determined by the Secretary consistent with his responsibilities under section 8(c) (6) of the Act, out of amounts by which the maximum Contract commitment per year exceeds amounts paid under the Contract for any year. This ac

count will be established and maintained by HUD as a specifically identified and segregated account, and payment shall be made therefrom only for the following purposes:

(i) Increases in housing assistance payments; and

(ii) Other costs specifically authorized or approved by the Secretary.

Any balance in this account after payment of the last housing assistance payment shall be applied by HUD as a receipt under section 10(b) of the Act.

(d) Annual contributions (privateowner/PHA projects). (1) The maximum total annual contributions that may be contracted for in the ACC for a project shall be: (i) the total of the Gross Rents for all the Contract Units in the project plus (ii) a fee for the regular costs of PHA administration. HUD-approved preliminary costs for administration (including administrative costs in connection with PHA activities related to relocation of occupants) shall be payable out of this total.

(2) A project account will be established and maintained, in an amount as determined by the Secretary consistent with his responsibilities under section 8(c) (6) of the Act, out of amounts by which the maximum ACC commitment per year exceeds amounts paid under the ACC for any year. This account shall be established and maintained by HUD as a specifically identified and segregated account, and payment shall be made therefrom only for the following purposes:

(i) Increases in housing assistance payments;

(ii) Increases in the amount of the fee for regular PHA costs of administration; and

(iii) Other costs specifically authorized or approved by the Secretary.

Any balance in this account after payment of the last annual contribution for the project shall be applied by HUD in accordance with law.

(e) Housing assistance payments to owners.-(1) General. Housing assistance payments shall be paid to Owners for units under lease by Eligible Families, in accordance with the Contract and as provided in this paragraph (e). The housing assistance payment will pay the Owner the difference between the Contract Rent and the portion of said rent payable by the Family as determined in accordance with the HUD-established schedules and criteria.

(2) Vacancies during rent-up. If a Contract unit is not leased as of the effective date of the Contract, the Owner shall be entitled to housing assistance payments in the amount of 80 percent of the Contract Rent for the unit for a vacancy period not exceeding 60 days from the effective date of the Contract, provided that the Owner (i) commenced marketing and otherwise complied with Sec. 1277.215, (ii) has taken and continues to take all feasible actions to fill the vacancy, including, but not limited to, contacting applicants on his waiting list, requesting the PHA and other appropriate sources to refer eligible applicants, and advertising the availability of the unit, and (iii) has not rejected any eligible applicant, except for good cause acceptable to HUD or the PHA, as the case may be.

(3) Vacancies After Rent-up. (i) If an Eligible Family vacates its unit (other than as a result of action by the Owner which is in violation of the Lease or the Contract or any applicable law), the Owner shall receive housing assistance payments in the amount of 80 percent of the Contract Rent for a vacancy period not exceeding 60 days; provided, however, that if the Owner collects any of the Family's share of the rent for this period in an amount which, when added to the 80 percent payments, results in more than the Contract Rent, such excess shall be payable to HUD or as HUD may direct. (See also Sec. 1277.103 (a).) The Owner shall not be entitled to any payment under this paragraph (e) (3) (i) unless he: (A) immediately upon learning of the vacancy, has notified HUD or the PHA, as the case may be, of the vacancy or prospective vacancy and the reasons for the vacancy, and (B) has taken and continues to take the actions specified in paragraphs (e) (2) (ii) and (e) (2) (iii) of this section.

(ii) If the Owner evicts an Eligible Family, he shall not be entitled to any payment under paragraph (e) (3) (i) of this section unless the request for such payment is supported by a certification that (A) he gave such Family a written notice of the proposed eviction, stating the grounds and advising the Family that it had 10 days within which to present its objections to the Owner in writing or in person and (B) the proposed eviction was not in violation of the Lease or the Contract or any applicable law.

(4) The Owner shall not be entitled to housing assistance payments with respect

to vacant units under this paragraph (e) to the extent he is entitled to payments from other sources (for example, payments for losses of rental income incurred for holding units vacant for relocatees pursuant to Title I of the HCD Act or payments under § 1277.103 (r).)

(f) Initial maximum rents to Owners. (1) The sum of the initial Contract Rents and any Allowances for Utilities and Other Services shall not exceed the Fair Market Rents for newly constructed rental housing, except that such Fair Market Rents may be exceeded (i) by up to 10 percent if the field office director determines that special circumstances warrant such higher rents and the higher rents meet the test of reasonableness in paragraph (f) (2) of this section, or (ii) by up to 20 percent, where the Assistant Secretary for Housing Production and Mortgage Credit determines that special circumstances warrant such higher rents, or that such higher rents are necessary to the implementation of a local Housing Assistance Plan, or that such higher rents meet the test of reasonableness in paragraph (f) (2) of this section.

(2) The Contract Rents as proposed must be determined by HUD to be reasonable in relation to the quality, location, amenities, methods and terms of financing, and management and maintenance services of the project, and proposed rents shall be subject to reduction if they are found to be higher than such reasonable rents.

(3) In addition, for projects financed with HUD-insured mortgages, initial Contract Rents for units assisted under this Contract shall not exceed the rents approved by HUD in connection with the mortgage insurance for such projects.

(g) Term of housing assistance payments contract. (1) A Contract may be for an initial term of not more than five years, with an option solely in the Owner to renew for additional terms of not more than five years each, provided that the total Contract term, including renewals, shall not exceed 20 years for any dwelling unit.

(2) In the case of a Contract under which housing assistance payments are made with respect to a project owned by, or financed by a loan or loan guarantee from, a State or local agency, the total Contract term may not exceed 40 years for any dwelling unit.

(3) Notwithstanding the maximum total allowable term per unit stated in

paragraph (g) (1) or (g) (2) of this section, a shorter term shall be determined by HUD where appropriate, taking into account the nature and extent of the required rehabilitation, the amount of the capital expenditures reasonably required under the proposal, the reasonable period and rate of amortization for the financing, and the approved rents to the Owner.

(4) If the project is accepted in stages, the dates for the initial and the renewal terms shall be separately related to the units in each stage; provided, however, that the total Contract term for the units in all the stages, counting from the effective date of the Contract with respect to the first stage, may not exceed the overall maximum term allowable for any one unit, plus two years.

(h) Rent Adjustments.—(1) funding of adjustments. Housing assistance payments will be made in increased amounts commensurate with Contract Rent adjustments under this paragraph, up to the maximum total annual housing assistance payments committed under the Contract. The provisions of the Contract or the ACC, as the case may be, are designed (by providing for maximum total annual commitments in excess of the amounts required at the time of the initial rental of dwelling units and by setting aside such excess amounts in a project reserve) to assure that housing assistance payments will be increased on a timely basis to cover increases in Contract Rents or decreases in Family incomes. In addition, the Contract or the ACC, as the case may be, will provide that HUD will take such additional steps authorized by section 8 (c) (6) of the Act as may be necessary to carry out this assurance, including (as provided in that section) "the reservation of annual contributions authority for the purpose of amending housing assistance contracts or the allocation of a portion of new authorizations for the purpose of amending housing assistance contracts."

(2) Automatic annual adjustments. (i) Automatic Annual Adjustment Factors will be determined by HUD at least annually; interim revisions may be made as market conditions warrant. Such Factors and the basis for their determination will be published in the FEDERAL REGISTER. These published Factors will be reduced appropriately by HUD where utilities are paid directly by Families.

(ii) On each anniversary date of the Contract, the Contract Rents shall be

adjusted by applying the applicable Automatic Annual Adjustment Factor most recently published by HUD. Contract Rents may be adjusted upward or downward, as may be appropriate; however, in no case shall the adjusted rents be less than the Contract Rents on the effective date of the Contract.

(3) Special additional adjustments. Special additional adjustments may be granted, when approved by HUD, to reflect increases in the actual and necessary expenses of owning and maintaining the Contract units which have resulted from substantial general increases in real property taxes, utility rates, or similar costs (i.e., assessments, and utilities not covered by regulated rates), but only if and to the extent that the Owner clearly demonstrates that such general increases have caused increases in the Owner's operating costs which are not adequately compensated for by automatic annual adjustments. The Owner shall submit to HUD financial statements which clearly suport the increase.

(4) Overall limitation. Notwithstanding any other provisions of this Part, adjustments as provided in this paragraph (h) shall not result in material differences between the rents charged for assisted and comparable unassisted units, as determined by HUD.

(i) Types of housing and property standards. (1) Existing structures of various types may be appropriate for this program including apartment hotels, single-family houses, or multi-family structures. Hotels or office buildings may be suitable for conversion under this program to housing designed for elderly or handicapped families and individuals, including congregate housing. Single room occupant housing planned specifically as a relocation resource for eligible single persons may also be developed. Units in highrise elevator buildings may not be used for Families with children unless HUD determines there is no practical alternative. Mobile homes may not be utilized in this program.

(2) No section 8 assistance may be provided for any unit occupied by an Owner; however, cooperatives are considered rental housing for this purpose.

(3) Participation in this program requires compliance with (i) HUD Minimum Design Standards for Rehabilitation for Residential Properties, (ii) in the case of congregate or single room occupant housing, the appropriate HUD

guidelines and standards, (iii) HUD requirements pursuant to section 209 of the HCD Act for projects for the elderly or the handicapped, (iv) HUD requirements pertaining to noise abatement and control, (v) HUD regulations issued pursuant to the Lead Base Paint Poisoning Prevention Act, 42 USC 4801, and (vi) applicable State and local laws, codes, ordinances, and regulations.

(j) Site and neighborhood standards. Proposed sites for substantial rehabilitation projects must be approved by HUD as meeting the following standards:

(1) Adequate utilities (water, sewer, gas and electricity) and streets shall be available to service the site.

(2) The site and neighborhood shall be suitable from the standpoint of facilitating and furthering full compliance with the applicable provisions of Title VI of the Civil Rights Act of 1964, Title VIII of the Civil Rights Act of 1968, Executive Order 11063, and HUD regulations issued pursuant thereto.

(3) The site shall promote greater choice of housing opportunities and avoid undue concentration of assisted persons in areas containing a high proportion of lower-income persons.

(4) The site shall be free from serious adverse environmental conditions, or there shall be evidence that any such conditions will be corrected by the time the rehabilitation is completed.

(5) The site shall comply with any applicable conditions in the Local Housing Assistance Plan, approved by HUD.

(6) The housing shall be accessible to social, recreational, educational, commercial, and health facilities and services, and other municipal facilities and services that are at least equivalent to those typically found in neighborhoods consisting largely of unsubsidized, standard housing of similar market rents.

(7) Travel time and cost via public transportation or private automobile, from the neighborhood to places of employment providing a range of jobs for lower-income workers, shall not be excessive. (While it is important that elderly housing not be totally isolated from employment opportunities, this requirement need not be adhered to rigidly for such projects.)

(8) If the housing to be rehabilitated has occupants, the relocation requirements referred to in Sec. 1277.103 (k), must be met.

(9) Housing may not be rehabilitated ir. an area that has been identified by

HUD as having special flood hazards and in which the sale of flood insurance has been made available under the National Flood Insurance Act of 1968, unless the project is covered by flood insurance as required by the Flood Disaster Protection Act of 1973, and it meets any relevant HUD standards and local requirements.

(k) Relocation. (1) In the evaluation or selection of Preliminary Proposals, consideration shall be given to whether there are occupants who would have to be displaced, whether there is a feasible plan for relocation of such occupants, the degree of hardship which displacement might cause, and the availability of funding for relocation payments. Greater weight shall be given to proposals which do not require displacement, or, where displacement is required, which will involve the least amount of hardship.

(2) In the case of a PHA-Owner Project, no Agreement shall be executed with respect to occupied units which involve substantial rehabilitation requiring that the units be vacated unless the Agreement provides (i) the PHA undertakes liability for and provides the funding of all relocation payments under section 202, 203, and 204 of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, or (ii) other commitments, satisfactory to HUD, have been made for the funding of such payments. (In the case of a Private-Owner Project or a Private-Owner/PHA Project, the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 is inapplicable.)

(1) Equal opportunity requirements. Participation in this program requires compliance with (1) Title VI of the Civil Rights Act of 1964, Title VIII of the Civil Rights Act of 1968, Executive Orders 11063 and 11246, and section 3 of the Housing and Urban Development Act of 1968; and (2) all rules, regulations, and requirements issued pursuant thereto.

(m) National Environmental Policy Act. Participation in this program requires compliance with the National Environmental Policy Act and all rules, regulations, and requirements issued pursuant thereto.

(n) Clean Air Act and Federal Water Pollution Control Act. Participation in this program requires compliance with the Clean Air Act and the Federal Water Pollution Control Act and all rules, reg