R&C works with PHAs throughout the country, and we’ve seen first hand how the gray areas – when do you procure a related entity? what constitutes a prohibited conflict of interest? what are the use restrictions on funds earned by an affiliate? – can slow or reduce innovation, or at least make it more expensive.

 

So, we as a firm appreciate the many, many hours the Department has put into developing this notice. Seeking to articulate the underlying premises and requirements of how PHAs may implement public housing programs through affiliated entities is complex, particularly given the regulatory structure which assumes PHAs are owner operators of public housing and little more. Hopefully, the Notice when issued will provide PHAs with sufficient guidance to comply with HUD requirements where using their affiliated entities in innovative and productive ways.

 

That said, I do have a couple of comments. These are largely from R&C as a firm, not our specific clients, but it is informed by the dilemmas and struggles they go through.

Determining if an entity is an instrumentality or an affiliate (or neither) is the crux of the notice – any remaining obligations are dependent on that determination. Unfortunately, the current “definitions” are essentially unworkable.

 

They are descriptive but not helpful to PHAs in attempting to classify a related entity. We believe that HUD intends to differentiate the entities with a concept of control such that:

 

 

We hope that the issued Notice will provide sufficient guidance, namely:

 

 

 

 

 

 

 

 

“Affiliate” shall mean a separate legal entity, other than an Instrumentality, the formation of which involved the use of public housing funds, and in which the PHA has a material ownership interest or through board members or executive staff materially participates in its governance or management on a regular, continual and substantial basis. 

 

 

HUD has indicated that this Notice will only be applied prospectively, so that actions taken prior to the Notice, without the benefit of guidance such as this Notice, would not be penalized for their entrepreneurial activities. We request that a clearer statement of prospective application of new guidance be added.

 

We recognize that clear violations of previously-established rules clear must be remedied, but there is a big difference between pledging public housing property in violation of the Act and the ACC, and treating an entity as an Instrumentality when a subsequently issued notice draws a fine line qualifying as an Instrumentality and how that entity is organized and operated.

 

Now that the final shape and scope of the Notice is becoming clearer, we suggest that the Notice – at least the allocation principles – could also apply to non-development activities. PHAs will have to face that any way, when related entities are:

 

 

 

At a practical level, we see the allocation guidance as useful affiliates engaging in both public housing development and some other activities (non-public housing development, public housing management).

 

These multi-functional entities are technically under the purview of both Part 943 and this Notice, and should be advised as to how the two sets of guidance will interact. 

 

We appreciate the thought HUD has given to the interaction of the new operating fund rule with this draft Notice, and note that the allocation and fee sections in the current draft Notice seem to largely reflect the impact of the new Operating Fund rule, including Section III’s definition of “reasonable fees,” and the Notice’s acknowledgement that fees paid to PHAs and derived from services are no longer direct grant funds or program income, and that central office costs do not need to be allocated. We request that the Notice further clarify the following:

 

 

We also believe the Notice would benefit from clarifying “Public Housing Assets.” This term is defined by referring to public housing property, yet this term is itself undefined. Tying the term to the definition of “project” in the ACC will solidify the concept. 

We suggest adding the following language to refine “Public Housing Assets”: “(1) public housing developed, acquired, or assisted by HUD under the Act, other than Section 8 of the Act, and all improvements thereon; (2) all real and personal property (tangible and intangible) which is acquired or held by a PHA in connection with a project covered by an ACC, and (3) all operating receipts derived therefrom.”

 

The monitoring section implies that the field office has an obligation to review the activities of affiliates. This is true, but only to the same degree that it monitors any third party which has been procured by a PHA. We suggest taking a close look at the monitoring section to remove any suggestion that there is a heightened review standard for affiliates or that the review, if any, focus on potential conflicts of interest (i.e. personal financial benefit) at the time of contracting.