# Presentation: 370364

## CDBG WEBCAST

***CDBG WEBCAST***
***HUD, OFFICE OF BLOCK GRANT ASSISTANCE***

## MODULE 7: Section 108 

## WELCOME

- Training Presented by HUD, Office of Community Planning and Development, Office of Block Grant Assistance (OBGA)
- Richard Kennedy, Director, OBGA
- Paul Webster, Director of Financial Management Division
- Hugh Allen, Deputy Director of Financial Management Division

## CDBG TRAINING SERIES

- Eight modules in series:
- Module 1: Welcome, CDBG Statutory/Regulatory Context, National Objectives
- Module 2: State CDBG Program
- Module 3: Administration/Planning, Financial Management, Including Program Income
- Module 4: Housing and Other Real Property Activities
- Module 5: Public Facilities, Interim Assistance, Public Services and Other Activities
- Module 6: Economic Development, Including Public Benefit** **
**Module 7: Section 108**
- Module 8: IDIS, Performance Measurement, Reporting
- Training presented by OBGA staff
- Available on HUD’s website at: http://www.hud.gov/offices/cpd/communitydevelopment/programs/index.cfm

## MODULE 7 TOPICS AND TRAINERS

- Topics:
- Eligible activities
- Transaction types
- Section 108 underwriting
- HUD review of applications
- Trainers:
- Dick Kennedy
- Paul Webster
- Hugh Allen

## WHAT IS SECTION 108?

**WHAT IS SECTION 108?**

- Method of expanding CDBG funds by using *future* CDBG grant as *collateral* to borrow funds
- Section 108 process basics:
- (1) Community applies to HUD
- (2) Based on community’s pledge, HUD
- issues notes
- (3) $$$ from sale of notes used for
- Section 108 eligible project
- (4) Notes are repaid

## SECTION 108 HISTORY

- 1974 law provided opportunity to continue urban renewal
- 1979 Demonstration Program
- 1986 Consolidated Omnibus Budget Reconciliation Act
- 1987 eligibility changes
- 1990 National Affordable Housing Act
- 1992 Credit Reform Act

## ADVANTAGES OF SECTION 108

**ADVANTAGES OF SECTION 108**

- Leverages grants
- Not a general obligation
- Receive funds now (no pay as you go)
- Spread costs over multi-year period
- Long-term, fixed-rate financing at favorable rates

## PROJECT EXAMPLE: BRYAN/COLLEGE STATION COMMUNITY HEALTH CENTER

## PROJECT EXAMPLE: FORT WORTHMINYARD FOOD STORES

## PROJECT EXAMPLE: PHILADELPHIAHOMEOWNERSHIP ZONE

## ELIGIBLE ACTIVITIES

**ELIGIBLE ACTIVITIES**

- Real property acquisition
- Rehabilitation of publicly owned real property
- Relocation
- Clearance/demolition
- Site preparation
- Housing rehabilitation
- Economic development
- Public facilities/improvements
- Issuance costs
- Capitalized interest
- Reserves

## APPLICABLE RULES

- Section 108 must comply with all key CDBG rules
- National objective
- 70% LMI targeting
- Other federal requirements
- Environmental review
- Davis Bacon
- URA
- OMB circulars
- Fair housing/equal opportunity
- Lead Based Paint
- HUD Reform Act

## NATIONAL OBJECTIVES

**NATIONAL OBJECTIVES**

**LOW/MOD BENEFIT**

**SLUM/BLIGHT**

**URGENT NEED**

-  Area Benefit

-  Limited Clientele

-  Housing

-  Jobs

-  Area

-  Urban Renewal

-  Spot

- Any national objective is possible, depending on Section 108 project

## SECTION 108 FINANCING 

**SECTION 108 FINANCING **

**HUD**

**Guarantee**

**Guarantee**

**Investors**

**Interim Lender**

**Locality**

**Loan** **Proceeds**

**[State]**

**Loan** **Proceeds**

**Pledge of CDBG**
**Funds**

## LEVELS OF TRANSACTION

**LEVELS OF TRANSACTION**

- # 1 Communities borrow from investors via notes
- # 2 Communities undertake activities or re-lend

## LEVEL #1 TRANSACTION

**LEVEL #1 TRANSACTION**

**HUD**

**INVESTORS**

**LOCALITY**

**$$**

**CDBG PLEDGE**
**[STATE]**

**GUARANTEE**

## LEVEL #2 TRANSACTION

**LEVEL #2 TRANSACTION**

**HUD**

**INVESTORS**

**LOCALITY**

**$**

**CDBG PLEDGE**
**[STATE]**

**$**

**THIRD**
**PARTY**

**GUARANTEE**

## SECTION 108 FINANCING SPECIFICS

**SECTION 108 FINANCING SPECIFICS**

- Amount
- Up to five times annual entitlement
- Term
- Rates
- Permanent financing
- Interim financing
- Fees

## TYPES  OF FINANCING

**TYPES  OF FINANCING**

- Interim – variable rate
- Permanent – fixed rate

## INTERIM LOANS

**INTERIM LOANS**

- Public offering usually once a year
- Interim loan available until public offering
- Fiscal Agent arranges interim loan
- Interest rate: 90 day LIBOR + 20 basis points
- HUD guarantees obligation

## PERMANENT LOANS

**PERMANENT LOANS**

- Public offering provides long-term, fixed-rate financing
- “Public offering” conducted annually by Sec. 108 underwriting team
- Interest rates
- Fees
- Loans serviced by trustee

## SECTION 108 UNDERWRITING

**SECTION 108 UNDERWRITING**

- Credit Reform Act
- HUD estimates “subsidy rate” for Section 108
- HUD establishes loss reserve
- Additional security

## SOURCES OF REPAYMENT OF SECTION 108 LOANS

**SOURCES OF REPAYMENT OF SECTION 108 LOANS**

- CDBG funds
- Program income
- “Additional security” (negotiated on a case by case basis)

## FORMS OF ADDITIONAL SECURITY

**FORMS OF ADDITIONAL SECURITY**

- Examples include:
- Assets created from use of Sec. 108 funds
- Real Property
- Portfolio income
- Other
- Parking revenue
- Non tax revenue

## PROJECT BASED SECURITY

**PROJECT BASED SECURITY**

- Examples include:
- Mortgage on real property (in name of Secretary of HUD)
- Tax increments
- Assignment of third party (e.g., business) loans

## KEY SECTION 108 STEPS

**KEY SECTION 108 STEPS**

**Screen potential applicant or project**

**Apply to HUD**

**Receive approval from HUD and close loan**

**Disburse and service the loan**

## STEP 1: SCREEN THE PROJECT

**STEP 1: SCREEN THE PROJECT**

- Grantees screen projects prior to HUD application
- Look at:
- Eligibility
- How will the Section 108 loan be repaid

## STEP 2: APPLY TO HUD

**STEP 2: APPLY TO HUD**

- Presubmission requirements
- Submission requirements
- Field and HUD Headquarters office review

## PRESUBMISSION REQUIREMENTS

**PRESUBMISSION REQUIREMENTS**

- Citizen participation
- Conduct needs hearing
- Publish proposed statement and projected uses
- Amend CD plan or incorporate Section 108 in final plan
- Conduct second public hearing

## APPLICATION SUBMISSION

**APPLICATION SUBMISSION**

- Application to HUD should include:
- Project description
- Eligibility category
- National objective
- Repayment schedule
- Certifications

## HUD REVIEW

**HUD REVIEW**

- Review by HUD Field Office
- Review by HUD Headquarters

## STEP 3: RECEIVE APPROVAL AND CLOSE

**STEP 3: RECEIVE APPROVAL AND CLOSE**

- HUD approves & notifies
- Close Section 108 loan
- Procedures differ for level #1 and level #2 transactions

## STEP 4: DISBURSE AND SERVICE THE LOAN

**STEP 4: DISBURSE AND SERVICE THE LOAN**

- Trustee/Fiscal agent services level #1
- Community must establish system for level #2
- Custodial Accounts
- Loan Guarantee Account
- Loan Repayment Account

## LOAN PORTFOLIO SYSTEM

- Collections
- Monitoring & accounting
- Collateral preservation
- Anticipate & deal with problems
- Foreclosure