Using Section 108 Loan Guarantee Financing to Promote Economic Development March 2011
Participating in the Webinar • Call will last approximately 90 minutes. •All callers are “muted” due to the high number of participants. • The slides will be posted on the CDBG Program pages shortly. • Webinar will be recorded for future use and made available for viewing/downloading.
Participating in the Webinar • Please call into the webinar using the audio information, and log into the viewing portion using the Live Meeting link. • If you have questions on the material that is covered today, you are welcome to submit them throughout the presentation using the “Q&A” function on the Live Meeting toolbar. • A resource advisor will forward some questions to presenters to answer at the end of the webinar. • HUD will be developing additional guidance on Section 108 loan guarantee financing.
Using Section 108 Loan Guarantee Financing to Promote Economic Development March 2011
SECTION 108 LOAN GUARANTEE PROGRAM • ADMINISTERED AS PART OF CDBG PROGRAM • 24 CFR § 570.700-570.711
SECTION 108 LOAN GUARANTEE PROGRAM OVERVIEW
WHAT IS SECTION 108? • Financing tool that allows communities and States to expand size of their CDBG programs (as much as 5 times their CDBG allocations) • If activities meet CDBG requirements and loan meets Section 108 underwriting criteria, State or locality issues note for HUD’s guarantee • Notes are repaid with CDBG funds, program income, and/or other revenues
SECTION 108 SUMMARY • Over 1,800 commitments, totaling $8.5 billion • $2.4 billion in loans outstanding • Approximately 60% of Section 108 commitments are allocated to economic development • 100,000 jobs created or retained
WHY SECTION 108 IS NECESSARY • Communities have “Main Street” development projects which need long-term, affordable financing • CDBG funds aren’t available because they are obligated to other uses • Private sector investors (“Wall Street”) are willing to provide financing for projects, but are unwilling to bear project risk • Section 108 is a vital resource for matching the needs of Main Street with the financing from Wall Street
ADVANTAGES OF SECTION 108 • LEVERAGE: $1 of CDBG creates $5 of Section 108 borrowing capacity • RECEIVE FUNDS NOW not pay-as-you-go • SPREAD COSTS over multi-year period • LONG-TERM, FIXED-RATE FINANCING at AAA rates • NOT A GENERAL OBLIGATION for debt purposes
SECTION 108 FLOW OF FUNDS (KEY PLAYERS) HUD Main Street Project Wall Street (Private The Eligible 108 Borrower* Activity (Borrower or Lenders/Investors) Third Party Borrower) * “Borrower” in this case denotes all eligible community recipients
SECTION 108 FLOW OF FUNDS (CONT.) HUD Main Street Borrower applies to HUD for Section 108 Guarantee and Project Offers Pledge of CDBG Wall Street (Private The Eligible 108 Activity (Borrower or Lenders/Investors) Third Party Borrower) Borrower* * “Borrower” in this case denotes all eligible community recipients
SECTION108 FLOW OF FUNDS (CONT.) HUD HUD Section 108 Guarantee Pledge of CDBG Main Street Project Wall Street (Private The Eligible 108 Borrower* Lenders/Investors) Activity (Borrower or Third Party Borrower) * “Borrower” in this case denotes all eligible community recipients
SECTION 108 FLOW OF FUNDS (CONT.) HUD HUD Section 108 Guarantee Pledge of CDBG Main Street Project Project $ Project $ Wall Street (Private Borrower* The Eligible 108 Lenders/Investors) Activity (Borrower or Third Party Borrower) * “Borrower” in this case denotes all eligible community recipients
SECTION 108 FLOW OF FUNDS (CONT.) HUD HUD Section 108 Guarantee Assignment Pledge of of Additional CDBG Loan Security Main Street Security Project $ Wall Street (Private Project Project $ Lenders/Investors) Borrower* The Eligible 108 Activity (Borrower or Third Party Borrower) * “Borrower” in this case denotes all eligible community recipients
SECTION 108 FLOW OF FUNDS (CONT.) HUD HUD Section 108 Guarantee Assignment Pledge of of Additional CDBG Loan Security Security Main Street Project $ Project $ Project Wall Street (Private Borrower* The Eligible 108 Lenders/Investors) Repayment $ Activity (Borrower Repayment $ or Third Party Borrower) * “Borrower” in this case denotes all eligible community recipients
PROJECT EXAMPLE: OXFORD PLAZA AND DAVID BROWER CENTER (Berkeley, CA) Oxford Plaza • 41 spaces of ground-level parking • 8,100 square feet of retail • 97 units of affordable housing David Brower Center • 33,000 square feet of rental office space for non-profit organizations • 7,400 square foot auditorium and conference center • 3,000 square foot restaurant
PROJECT EXAMPLE: ADRIAEN’S LANDING— HARTFORD, CT 36-acre area-based development • Housing • Retail • Entertainment • Hotel • Convention Center • Recreation
SECTION 108 LOAN GUARANTEE PROGRAM BASICS
WHO CAN APPLY? • Entitlement Communities (Cities and Urban Counties) that receive CDBG funds directly • Non-Entitlement communities eligible to receive CDBG funds under the HUD-Administered Small Cities CDBG program • Non-Entitlement public entities assisted by states that administer block grants • States (for use in non-entitlement areas) • Insular areas (American Samoa, Guam, Northern Mariana Islands, and the Virgin Islands)
HOW CAN SECTION 108 LOAN FUNDS BE USED? • Real property acquisition • Rehabilitation of publicly owned real property o Relocation o Clearance/demolition o Site preparation • Housing rehabilitation • Economic development • Public facilities/improvements • Issuance costs • Interest costs • Debt service reserves
TYPICAL ECONOMIC DEVELOPMENT USES OF SECTION 108 FINANCING • Commercial Development o e.g., retail, offices, restaurants • Industrial Development o e.g., manufacturing, warehouses, bio-medical facilities • Working Capital
NATIONAL OBJECTIVES • Any national objective is possible, depending on purpose of Section 108-assisted development Job creation/retention Area Benefit LOW/MOD BENEFIT Limited Clientele Area Spot SLUM/BLIGHT URGENT NEED
PUBLIC BENEFIT STANDARDS • Mandatory for: • Special economic development projects -- §570.203 • Community economic development projects (by CBDO) -- §570.204, and • Public improvement or facility projects classified under Low/Mod Job Creation/Retention where more than $10,000/job in CDBG assistance
OTHER REQUIREMENTS Section 108 activities must comply with all CDBG rules • 70% LMI Targeting • Other Federal Requirements o Environmental review o Davis Bacon o Uniform Relocation Act o Office of Management and Budget circulars (as applicable — A-122, A-87, A-21) o Fair housing/equal opportunity o Lead Based Paint
SECTION 108 LOAN GUARANTEE PROGRAM FINANCING
SECTION 108 FINANCING SPECIFICS • Amount up to five times annual CDBG award o Entitlement o State • Maximum Term 20 years • Taxable
SECTION 108 LOAN-GUARANTEE FINANCING HUD Guarantee Investor (Interim Lender) Guarantee Pledge of CDBG Loan Proceeds Funds Investor (Permanent Lender) Loan Proceeds Locality/State
TYPES OF FINANCING • Interim – variable interest rate • Permanent – fixed interest rate
INTERIM LOANS • Interim loan available until public offering • Fiscal Agent arranges sale of HUD-guaranteed note and services loan o Interest rate: Variable 90 day London Inter Bank Offered Rate (LIBOR) + 20 basis points, paid quarterly o HUD guarantees repayment of borrower’s loan to investors • Interim Lender currently a Money Market Fund (Federated Investors)
PERMANENT LOANS • Permanent – fixed interest rate o Public offering provides long-term, fixed-interest rate financing o “Public offering” conducted annually by Section 108 underwriting team o Interest rates — fixed; benchmarked on U.S. Treasury yields o Fees — includes underwriting, legal and printing costs o Loans serviced by trustee
COMPARISON OF INTEREST RATES (March 2011) • Prime Rate (variable) – 3.25% • Section 108: fixed (due 8/1/2031)** – 3.85% • Section 108: variable – 0.51% (LIBOR OF 0.31% plus 20 basis points) **If public offering were held in March
SECTION 108 UNDERWRITING • Debt coverage ratio, as applicable • Credit Reform Act o HUD estimates “subsidy rate” for Section 108 o HUD establishes loss reserve o CDBG grants and additional loan security
FORMS OF ADDITIONAL SECURITY Examples include: • Assets created from use of Section 108 guaranteed loan (project-based security) • Real Property • Portfolio income • Equipment • Parking revenue • Special tax revenue
PROJECT BASED SECURITY Examples include: • Lien on real property (in name of HUD Secretary) based on appraised value • Tax increment revenues • Assignment of interest on third-party (e.g., business) loans • “Additional Security” (negotiated on a case -by- case basis)
SOURCES OF REPAYMENT OF SECTION 108 LOANS Examples include: • Payments from third-party borrowers • Tax Increment Financing (TIF) revenues • Program Income • CDBG program grant funds
KEY STEPS
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