Section 108 Loan Guarantee Program

ADMINISTERED AS PART OF THE COMMUNITY DEVELOPMENT BLOCK GRANT (CDBG) PROGRAM

SECTION 108 - WHAT IS IT?

Financing tool that allows States and local governments to expand size of their CDBG programs (as much as 5 times their CDBG allocations)

If activities meet CDBG requirements and loan meets Sec. 108 underwriting criteria, State or locality issues notes for HUD’s guarantee

Notes are repaid with CDBG funds, program income, and/or other revenues

ADVANTAGES OF SEC 108

Leverages grants Not a general obligation Receive funds now Spread costs over multi-year period Long-term, fixed-rate financing at favorable rates

STATE BORROWERS

States can apply directly for Section 108 loans Eligible uses:

Loans and grants to UGLGs for eligible activities Payment of interest, issuance costs, debt service

reserves

State application must specify each activity to be carried out or categories of activities to be carried out

Loan fund concept

ELIGIBLE ACTIVITIES

Real property acquisitionRehab of publicly owned real property

RelocationClearance/demolitionSite preparation

ELIGIBLE ACTIVITIES (continued)

Housing rehabilitationEconomic developmentPublic facilities/improvementsIssuance costsCapitalized interestReserves

TYPICAL USES

Economic Development Industrial expansion Retail Office

Public facilities/improvements Housing rehab

NATIONAL OBJECTIVES

LOW/MOD BENEFIT

SLUM/BLIGHT

URGENT NEED

Area Benefit Limited Clientele Housing Jobs

Area

Urban Renewal

Spot

PUBLIC BENEFIT STANDARDS

Each ED activity must either create jobs or provide needed services for low and moderate income persons.

Amount expended on activity cannot exceed: $50,000/job, or $1,000/low-mod person

Aggregate standards: $35,000/job, or $350/low-mod person

THE SECTION 108 GUARANTEE PROGRAM

HUD

Guarantee

Pledge of CDBG Funds (and additional security)

Guarantee

[Entitlement/State]Permanent

Lender

Interim Lender

Locality/State

Section 108 Flow of Funds: Level INo Third Party Borrower

Borrower*Project $

Project $

HUDHUD Section

108 Guarantee

* “Borrower” in this case denotes all eligible

recipients

Repayment $

Wall Street (Private 108

Note Purchasers/“Investors”)

Main Street Project

The Eligible 108 Activity

(Borrower or Third Party Borrower)

Assignment of

Additional Loan

Security

Pledge of CDBG

Section 108 Flow of Funds: Level II Borrower Relends Funds to 3rd Party

Borrower

Borrower *

Assignment of

Additional Loan

Security

Pledge of CDBG

HUDSection 108 Guarantee

* “Borrower” in this case denotes all eligible recipients** Repayment goes to Trustee/Fiscal Agent designated by HUD.

Bank of New York Mellon is current Trustee/Fiscal Agent

Wall Street (Private 108

Note Purchasers/“Investors”)

Main Street Project

The Eligible 108 Activity (Borrower

or Third Party Borrower)

Security

Repayment $

Project $

Project $

Repayment $ **

SOURCES OF REPAYMENT OF SECTION 108 LOANS

CDBG funds Program income Tax Increment Financing revenues “Additional security” (negotiated on a case

by case basis)

TYPES OF FINANCING

Interim – variable rate Permanent – fixed rate

INTERIM LOANS

Interim loan available until public offering Fiscal Agent arranges interim loan

Interest rate: 90 day LIBOR + 20 basis points HUD guarantees obligation

Interim Lender currently a Money Market Fund (Federated Investors)

PUBLIC OFFERING PROCESS

Public offering usually once a year, conducted by Sec. 108 underwriting team

Provides long-term, fixed-rate financing “Public offering” Interest rates Fees Loans serviced by trustee (currently Bank of

New York Mellon)

NEW FEE RULE

HUD published proposed rule on Feb 5, 2015 HUD will publish final rule and notice after

consideration of comments received Fee requirement will be effective ONLY for

applications approved after the final rule Any recipient with an approved application prior to

publication of the final rule will NOT be subject to the fee requirement

Technical assistance will be provided to help borrowers adjust to the fee requirement

Section 108 Loan Authority

FY 2015 CDBG Allocation – $20,000,000

times 5

$100,000,000

Less: Outstanding 108 – ($30,000,000)

Amount available $ 70,000,000

Use of Section 108 Funds Subject to CDBG “Cross cutting” Requirements - Examples are: Davis-Bacon Environmental review

COMPARISON OF RATES (Mar 2015)

Prime Rate (variable) –3.25% Section 108: fixed (due 8/1/2034)** – 2.70% Section 108: variable – 0.50%

**If public offering were held in March

Section 108 Summary

Important Section 108 Borrower Development Tool Wide range of eligible uses Addresses CDBG national objectives Non-competitive and rolling process Leverages scarce resources

$5 for every $1 of CDBG 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