Using Section 108 Loan Guarantee Financing to Promote Economic Development March 2011

Transcription

1 Using Section 108 Loan Guarantee Financing to Promote Economic Development March 2011

2 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.

3 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.

4 Using Section 108 Loan Guarantee Financing to Promote Economic Development March 2011

5 SECTION 108 LOAN GUARANTEE PROGRAM ADMINISTERED AS PART OF CDBG PROGRAM 24 CFR

6 SECTION 108 LOAN GUARANTEE PROGRAM OVERVIEW

7 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

8 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

9 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

10 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

11 SECTION 108 FLOW OF FUNDS (KEY PLAYERS) HUD Wall Street (Private Lenders/Investors) Borrower* Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) * Borrower in this case denotes all eligible community recipients

12 SECTION 108 FLOW OF FUNDS (CONT.) HUD Wall Street (Private Lenders/Investors) Borrower applies to HUD for Section 108 Guarantee and Offers Pledge of CDBG Borrower* Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) * Borrower in this case denotes all eligible community recipients

13 SECTION108 FLOW OF FUNDS (CONT.) HUD Section 108 Guarantee Wall Street (Private Lenders/Investors) Pledge of CDBG HUD Borrower* Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) * Borrower in this case denotes all eligible community recipients

14 SECTION 108 FLOW OF FUNDS (CONT.) HUD Section 108 Guarantee Wall Street (Private Lenders/Investors) Pledge of CDBG HUD Project $ Project $ Borrower* Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) * Borrower in this case denotes all eligible community recipients

15 SECTION 108 FLOW OF FUNDS (CONT.) HUD Section 108 Guarantee Pledge of CDBG HUD Assignment of Additional Loan Security Wall Street (Private Lenders/Investors) Project $ Borrower* Security Project $ Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) * Borrower in this case denotes all eligible community recipients

16 SECTION 108 FLOW OF FUNDS (CONT.) HUD Section 108 Guarantee Pledge of CDBG HUD Assignment of Additional Loan Security Wall Street (Private Lenders/Investors) Project $ Repayment $ Borrower* Security Project $ Repayment $ Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) * Borrower in this case denotes all eligible community recipients

17 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

18 PROJECT EXAMPLE: ADRIAEN S LANDING HARTFORD, CT 36-acre area-based development Housing Retail Entertainment Hotel Convention Center Recreation

19 SECTION 108 LOAN GUARANTEE PROGRAM BASICS

20 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)

21 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

22 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

23 NATIONAL OBJECTIVES Any national objective is possible, depending on purpose of Section 108-assisted development LOW/MOD BENEFIT Job creation/retention Area Benefit Limited Clientele SLUM/BLIGHT Area Spot URGENT NEED

24 PUBLIC BENEFIT STANDARDS Mandatory for: Special economic development projects Community economic development projects (by CBDO) , and Public improvement or facility projects classified under Low/Mod Job Creation/Retention where more than $10,000/job in CDBG assistance

25 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

26 SECTION 108 LOAN GUARANTEE PROGRAM FINANCING

27 SECTION 108 FINANCING SPECIFICS Amount up to five times annual CDBG award o Entitlement o State Maximum Term 20 years Taxable

28 SECTION 108 LOAN-GUARANTEE FINANCING HUD Guarantee Investor (Interim Lender) Guarantee Pledge of CDBG Funds Loan Proceeds Investor (Permanent Lender) Loan Proceeds Locality/State

29 TYPES OF FINANCING Interim variable interest rate Permanent fixed interest rate

30 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)

31 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

32 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

33 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

34 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

35 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-bycase basis)

36 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

37 KEY STEPS

38 KEY SECTION 108 STEPS Screen potential project Underwrite project Apply to HUD for loan guarantee Receive approval from HUD and close loan Disburse and service loan

39 STEP 1: SCREEN THE PROJECT Grantees screen projects prior to HUD application to determine: 1. Eligibility of use o o o o Activity Eligibility National Objectives Compliance Public Benefits Standards (as applicable) Other federal requirements 2. How the Section 108 loan will be repaid

40 STEP 2: GUIDELINES FOR UNDERWRITING ECON DEV PROJECTS See guidelines at 24 CFR (a): Project costs are reasonable Sources of funding are committed CDBG/Section 108 not to be substituted for non-federal funds Project financially feasible Return on owner s equity not unreasonably high Pro-rata disbursement

41 STEP 3: APPLY TO HUD 1. Presubmission requirements 2. Submission requirements 3. HUD Review

42 BEFORE SUBMITTING 1. Presubmission and citizen participation requirements Proposed application includes: o o Community development objectives to be met by use of loan guarantee financing Description of activities and national objectives to be met, and costs Citizen Participation o o Publish community-wide proposed Section 108 loan guarantee application for citizen review and comments After consideration of citizen comments, make final copy of proposed Section 108 loan guarantee application available to citizens Consolidated Plan o Follow community s Consolidated Plan for substantial amendments and citizen participation requirements

43 APPLICATION SUBMISSION 2. Submission Requirements Project and activity description, including costs Eligibility category, including public benefit standards (as applicable) National objective Repayment schedule Certifications

44 HUD REVIEW 3. Review HUD Field Office HUD Headquarters

45 STEP 4: RECEIVE APPROVAL AND CLOSE HUD approves & issues commitment Close Section 108 loan o HUD prepares loan documents o Delivery of documents to investor (thru Fiscal Agent or Trustee)

46 STEP 5: DISBURSE AND SERVICE THE LOAN Trustee/Fiscal agent wires funds to account o Custodial Accounts Guaranteed Loan Funds Account Borrower disburses funds for activity costs Borrower disburses to 3 rd party for carrying out approved activities Loan Repayment Account

47 SECTION 108 SUMMARY Important Development Tool Wide range of eligible uses Addresses CDBG national objectives Non-competitive and rolling process Leverages scarce resources o $5 for every $1 of CDBG o if underwritten properly, will not be a drain to CDBG program Important source of funding for larger projects Flexible repayment schedule Long-term, reasonably priced financing

48 box for questions CONCLUSION AND LIST OF RESOURCES CDBG Statute and the Code of Federal Regulations Federal Register Notices on Job Relocation and Eminent Domain l_rule.pdf Economic Development Toolkit Join Us for the Next Webinar: Open Forum/Question and Answer Discussion on CDBG and Section 108 Economic Development (for states and entitlements) Wednesday, March 30, 2011

49 Your Feedback is Important to Us! Join Us for the next webinar on Wednesday, March 30, 2011: Open Forum/Question and Answer Discussion on CDBG and Section 108 Economic Development (for states and entitlements) Please take a minute to answer a quick 15-Question survey on this HUD Presentation. Link: