GAO-07-768R Leveraging Federal Funds 

United States Government Accountability Office

Washington, DC 20548 

May 25, 2007 

The Honorable Maxine Waters 

Chairwoman 

Subcommittee on Housing and Community Opportunity 

Committee on Financial Services 

House of Representatives 

Subject: Leveraging Federal Funds for Housing, Community, and Economic 

Development 

Dear Madam Chairwoman: 

Each year the federal government funds numerous affordable housing and 

community and economic development initiatives through an array of programs, such 

as the Department of Housing and Urban Development’s (HUD) Section 108 Loan 

Guarantee (Section 108) program.1

 Yet, the need for federal money to fund these 

initiatives has continued to grow, while the federal budget increasingly has been 

strained by other competing funding priorities. To help finance their initiatives and 

achieve program goals, recipients of funding under these federal programs often have 

combined or “leveraged” their funds with other federal, state, local, and private sector 

resources. While leveraging is generally recognized favorably by public and private 

sector officials, its use in federal programs has not been widely analyzed. 

This report responds, in part, to your request that we examine leveraging as it relates 

to federal housing, community, and economic development programs. Specifically, 

this interim report (1) examines the perspectives of stakeholders—government and 

industry officials, academics, and others with knowledge of or experience with 

leveraging—on the use, implications, and measurement of leveraging in housing and 

community and economic development programs and (2) describes the type of data 

HUD collects that could be used to determine the extent of leveraging in the Section 

108 program. Additionally, enclosure II describes how federal funds may have been 

or could be leveraged in the Section 108 program.2

 

 

1

As described in further detail in this report, the Section 108 program allows communities to borrow 

against their current and future Community Development Block Grant allocations to fund larger-scale 

housing and community and economic development projects. 

 

2

Also as will be discussed in this report, the Section 108 data derive from information on proposed 

sources and amounts of funding at the time of application for program funding. Because the data do 

not represent actual funding, we describe the funding conditionally—for example, “may have been 

leveraged.” 
To examine the perspectives of stakeholders on the use, implications, and 

measurement of leveraging in housing and community and economic development 

programs, we reviewed academic, industry, and other literature and interviewed 

stakeholders. To describe the type of data HUD collects that could be used to 

determine the extent of leveraging in the Section 108 program, we interviewed HUD 

officials, reviewed relevant program regulations and guidance, and reviewed our 

prior reports in this area and reports of others. To describe how funds may have 

been leveraged in the Section 108 program, we collected information on the proposed 

sources and amounts of funds used to finance a random sample of 50 proposed 

Section 108 projects. For a detailed description of our scope and methodology, see 

enclosure I. Enclosure III describes how we categorized some of the types of funding 

sources that can be leveraged with Section 108 funds and selected programs under 

those categories. We conducted our work in Washington, D.C. and Chicago from 

November 2006 to May 2007 in accordance with generally accepted government 

auditing standards. 

As agreed with your office, we will provide a final report in the fall of 2007, which will 

address any further information we have gathered relating to the objectives listed 

above. For example, we plan to assess how generally accepted measurements of 

leveraging can be used in combination with other indicators to measure the 

performance of housing and community and economic development programs. In 

addition, we plan to review how or the extent to which leveraging occurs in the 

following additional programs: the Department of the Treasury’s Community 

Development Financial Institutions (CDFI), Low-Income Housing Tax Credit, and 

New Markets Tax Credits programs; and HUD’s Community Development Block 

Grant (CDBG), HOME Investment Partnerships (HOME), and HOPE VI programs. 

 

Results in Brief 

Leveraging can be a useful tool for financing affordable housing and community and 

economic development and generally is regarded favorably by public and private 

sector officials; however, its use may have unintended consequences, and commonly 

used measures of leveraging have certain limitations. Leveraging can occur at an 

institutional level (to fund multiple initiatives) and at a project level (to fund a 

discrete activity or development). Leveraging also may occur because programs 

require that program dollars be matched with other funds or because program dollars 

are limited and participating communities or other recipients need to seek additional 

funds for their initiatives. Although stakeholders we interviewed and the literature 

we reviewed generally regarded leveraging as useful, they also noted that it may have 

implications such as inefficiencies resulting from differing application and reporting 

deadlines in public programs and the potential substitution of federal for private 

funding, which could direct scarce federal funds from the neediest communities. 

Finally, stakeholders and the literature agreed that the most common way to describe 

the extent of leveraging for programs or projects is through a ratio, which expresses 

the proportion of dollars that other sources contributed against dollars that the 

program contributed. However, most of our interviewees said that what a ratio can 

reveal about the success or efficiency of funding a program or project depends partly 

on the circumstances of the development, such as its location and the availability of 

potential investors. 

2 GAO-07-768R Leveraging Federal Funds 
HUD collects data on the other sources and amounts of funds communities plan to 

leverage with Section 108 loan funds to finance various housing and community and 

economic development projects. HUD maintains these data in Section 108 

memorandums, which the agency prepares as a record of actions taken with respect 

to a Section 108 loan guarantee application. However, because these data represent 

projected sources and amounts of funding, they cannot be used to determine the 

actual amount of leveraging in the Section 108 program. Nonetheless, available data 

on projected funding can provide insight into the extent to which communities 

planned to leverage Section 108 loan funds with other federal, state or local, and 

private sources. See enclosure II for information about the Section 108 projects we 

reviewed. 

 

Background 

Traditionally, a range of governmental and financial entities and academics have 

defined or conceptualized leveraging as using one source of funds to attract 

additional sources of funds.3

 Thus, for example, a low-income housing development 

in which the federal government’s initial investment attracted, or was the impetus for, 

additional private or other investment could be seen as a project that involved 

leveraging. However, some have said that leveraging also can be thought of broadly 

to mean the combining of multiple sources of funds.4

 Under this broader 

conceptualization, the investment of federal funds does not necessarily have to be the 

impetus for the investment of other funds.5

 Thus, for example, a low-income housing 

development for which the federal government provided “gap” financing also could 

be seen as a project that involved leveraging.6

 For purposes of this report, we refer to 

leveraging in this broader sense—the combination of multiple sources of funds, 

including other federal, state, local, and private funds, to finance development 

projects, among other things. 

 3

The traditional conceptualization of leveraging includes financial leveraging—the degree to which a

business or an investor utilizes borrowed funds. For example, a company that uses borrowed funds to 

invest in a real estate development project is considered to be using leverage to carry out its 

investment strategy. 

4

For example, see R. Quercia, W. Rohe, and D. Levy, “A New Look at Creative Finance,” Housing 

Policy Debate, 11, issue 4 (2000): 943-972.

5

We have referred to leveraging in both the traditional and the broader sense in several reports. See 

GAO, Empowerment Zone and Enterprise Community Program: Improvements Occurred in 

Communities, but the Effect on the Program Is Unclear, GAO-06-727 (Washington, D.C.: Sept. 22,

2006); Public Housing: HOPE VI Leveraging Has Increased, but HUD Has Not Met Annual Reporting 

Requirements, GAO-03-91 (Washington, D.C.: Nov. 15, 2002); and Urban Action Grants: An Analysis 

of Eligibility and Selection Criteria, and Program Results, GAO/RCED-89-143 (Washington, D.C.: 

July 7, 1989). 

6

Gap financing is a source of funds that is used to complete a project's funding needs when all other

available sources of funds have been exhausted. 

3 GAO-07-768R Leveraging Federal Funds 
Congress established the Section 108 program in 1974 as a part of the CDBG 

program.7

 As amended in 1977, the law permitted entitlement communities—

generally cities designated as central cities of metropolitan statistical areas, other 

cities with populations of at least 50,000, and qualified urban counties—to borrow up 

to three times their current year’s CDBG allocation to obtain additional resources for 

financing larger-scale housing and community and economic development projects 

that otherwise could not be accomplished with a single year’s CDBG allocation.8

 In 

1990, the Cranston-Gonzales National Affordable Housing Act extended participation 

in the program to nonentitlement communities—smaller communities, including 

many rural communities whose CDBG programs are administered by the state—and 

raised the amount communities could borrow to five times their current year’s CDBG 

allocation (or in the case of nonentitlement communities, five times the state’s 

allocation).9

 

Eligible communities must apply to HUD to obtain approval for a Section 108 loan 

guarantee. Both HUD field offices and headquarters play a role in managing the loan 

program. Generally, field offices assist communities and states in preparing their 

applications, make recommendations to headquarters to approve or deny loans, and 

monitor funded activities. Headquarters provides final approval for all loan 

guarantees, negotiates loan terms with applicants, and arranges for the sale of loans. 

The maximum amount HUD can commit to guarantee to a community is fives times 

the community’s annual CDBG allocation, and HUD guarantees repayment of 100 

percent of the community’s Section 108 indebtedness. 

Under the Section 108 program, a community’s current and future CDBG allocations 

serve as the principal collateral for the loan (that is, a community or state’s CDBG 

funds are used to make payments due on the guaranteed loan if other funds, such as 

project-related income, are insufficient for that purpose). To date, HUD has not been 

required to make a payment to the holder of a note guaranteed under Section 108 as a 

result of a default. 

The Section 108 program does not require communities to leverage program funds as 

a condition of receiving a loan guarantee. However, Congress created two sources of 

funds for use specifically in conjunction with Section 108 loan proceeds—Economic 

Development Initiative (EDI) and Brownfields Economic Development Initiative 

 7

42 U.S.C. § 5308. 

8

Communities can use Section 108 loan funds to carry out these activities themselves or can reloan the

funds to a third-party borrower.

9

P.L. 101-625, § 910. 

4 GAO-07-768R Leveraging Federal Funds 
(BEDI) grants.10 HUD awards grant funds under both programs to states and 

communities undertaking initiatives funded in whole or in part with Section 108 loan 

funds.11 As discussed later in this report, communities often leverage (combine) 

Section 108 loan funds with other federal, state or local, and private sources of funds. 

From 2001 through 2006, federal commitments to proposed Section 108 projects—

that is, reservations of funds to guarantee loans—averaged approximately $290 

million annually. Commitments declined sharply between 2005 and 2006, from 

approximately $337 million to $220 million. During the same period, advances—

Section 108 loan funds provided to a community—averaged $325 million annually.12

 

From 2001 through 2006, HUD approved 358 applications for loan guarantees. The 

number of applications HUD approved ranged from 36 (2006) to 73 (2002) and 

averaged approximately 60 per year. Most of the communities HUD approved for 

loan guarantees during this period proposed using their Section 108 loan funds for 

economic development and physical infrastructure projects (see fig. 1). 

Figure 1: Proposed Section 108 Projects by Type, Fiscal Years 2001 through 2006 

 10The EDI program was established in 1994 to encourage communities to make greater use of Section 

108 loan guarantees by providing additional financing for projects and paying for some costs of 

borrowing under Section 108. BEDI was established in 1998 to support state and local efforts to start 

or continue redevelopment on brownfields sites—abandoned, idled, or underused real property where 

actual or potential environmental contamination complicates redevelopment—and enhance the 

viability of projects financed with Section 108 loan guarantees. By statute, HUD must make BEDI 

grant awards contingent on applicants getting a Section 108 loan guarantee (42 U.S.C. § 5308(q)). 

Communities have 5 years from the date grants are committed to use them. 

11HUD stopped making competitive grants under EDI in 2001. However, HUD still may make specialpurpose or targeted EDI grants to qualifying communities pursuant to Congressional directives. HUD 

still makes competitive BEDI grants. 

12This average excludes advances made in 2005. Advances made in this year were artificially low 

(approximately $168 million) because no public offering was held that year. HUD obtains funding for 

Section 108 loans though public offerings of pooled loans on the private sector capital market. The 

average for advances can exceed the average for commitments because communities have up to 5 

years from the date of commitment to use their loan funds. 

5 GAO-07-768R Leveraging Federal Funds 
Leveraging Can Occur in Different Ways and for Different Reasons, but Its 

Relationship to Success or Efficiency in Funding Is Not Well Understood 

Based on our conversations with stakeholders and a review of the literature, we 

found that leveraging occurs in different ways and for different reasons, depending 

on the program. Further, the stakeholders with whom we spoke discussed several 

unintended implications of leveraging that were echoed in some of the literature. 

Finally, while the most common way to express the extent of leveraging is through a 

leverage ratio, stakeholders agreed that what a ratio can reveal about the success or 

efficiency of an institution in funding a program or project has certain limitations. 

 

According to Stakeholders and Literature, Leveraging Can Occur at Different Levels 

and for Different Reasons

Leveraging can occur at the institutional or at the project level (see fig. 2). At the 

institutional level, an institution or organization pools funds from multiple sources, 

which later are used to finance individual projects. For example, under the CDFI 

program, the federal government makes investments in certified institutions, which 

the institutions use to leverage (in this case match) additional sources of funds.13 The 

certified institutions then determine how they will use these pooled resources to 

finance a range of housing and community and economic development activities. In 

comparison, at the project level, a community or other development authority 

leverages funds as necessary for discrete projects. For example, under the Section 

108 program, communities may use Section 108 loan funds to finance a variety of 

projects, and each individual project may contain a different mix of funding sources, 

depending on its size and type. As previously described, at either level, leveraging 

may occur in the traditional sense—federal program funds are used to attract other 

sources of funds—or in the broader sense—sources of funds are combined for 

development, but no one source of funds is specifically intended to attract the other 

sources of funds. 

 13Congress created the CDFI Fund under the Riegle Community Development and Regulatory

Improvement Act of 1994 (P.L. 103-325) to promote economic revitalization and community 

development through investment in certified institutions. The CDFI Fund makes financial assistance 

awards in the form of equity investments, loans, deposits, or grants to certified institutions. Before 

receiving any financial assistance through the CDFI program, a CDFI must be certified by the CDFI 

Fund—which does so after determining that a program has a primary mission of promoting 

development, its predominant business activity is lending or investing in development, and it serves

(an) economically distressed investment area(s) or targeted population(s). Institutions must match

these investments dollar for dollar with funds of the same type from nonfederal sources. For purposes 

of this report, we considered matched funds to be leveraged funds. 

6 GAO-07-768R Leveraging Federal Funds 
Figure 2: Leveraging at the Institutional and Project Levels 

Leveraging also may occur as a result of statutory or regulatory requirements, 

program design, or for other reasons. For example, the HOME program statute 

generally requires states and communities to match 25 percent of their HOME 

allocations on an annual basis.14 According to HUD officials, Congress thought it was 

important for states and communities to make permanent contributions to the 

development of affordable housing in their areas, so it included a matching 

(leveraging) requirement in the HOME statute. Under the New Markets Tax Credit 

program, leveraging is not legally required, but applicants that propose projects that 

leverage additional funds are rewarded with additional points in the competitive 

application process for issuance of tax credits.15 Finally, some programs, such as the 

Section 108 program, do not require or provide incentives for recipients of program 

funds to leverage, but leveraging often occurs anyway in these programs—for 

example, to stretch limited federal dollars or promote partnerships among public and 

private investors. 

Finally, many with whom we spoke said that while leveraging is often a useful tool 

for improving communities, it may be harder to do in highly distressed urban areas or 

in rural areas than it is in more developed urban areas. They explained that the risk 

of investment in highly distressed urban areas is often too high to attract significant 

private investment.16 For example, in our 2002 report on the HOPE VI program—a 

 1442 U.S.C. § 12750. Under HOME, HUD provides formula grants to states and localities to fund 

activities that build, buy, or rehabilitate affordable housing for rent or home ownership or provide

direct rental assistance to low-income households. 

15See “Notice of Allocation Availability Inviting Applicants for the 2007 Allocation Round of the New 

Markets Tax Credit Program,” 71 Federal Register 70835, 70841 (Dec. 6, 2006). 

16Investment risk is the potential for fluctuation in the value of an investment, which could result in 

loss of principal. 

7 GAO-07-768R Leveraging Federal Funds 
program designed to improve severely distressed public housing, which is often 

located in distressed urban communities—we found that 79 percent of the funds 

contributed to HOPE VI projects were from federal sources while 12 percent were 

from private sources.17 Our 1989 report on the Urban Development Action Grants 

(UDAG) program similarly found that more-distressed cities expected to need more 

UDAG funding to complete projects and had lower amounts of leveraging than lessdistressed cities that received UDAG funds.18 Similarly, some stakeholders said that 

the number of investors in rural areas may be limited. An Office of Thrift Supervision 

report on rural development noted that it is not uncommon for only one or two 

financial institutions to serve a rural community, and some communities lack access 

to such institutions.19

 

Although Generally Regarded Favorably, Leveraging Also Has Implications Such as 

Potentially Substituting Federal for Private Funding

Many with whom we spoke and much of the literature we reviewed indicated that 

leveraging can help facilitate housing and community and economic development.20 

For example, as discussed previously, leveraging is often used as a way to stretch 

scarce federal funds and promote partnerships between the public and private 

sectors to improve conditions in communities. However, leveraging at the project 

level can be challenging and inefficient, partly because federal, state, and local 

funding sources often have different application and other requirements and 

deadlines. For example, the Low-Income Housing Tax Credit program requires 

developers to complete housing projects within 2 years of receiving a tax credit 

 17GAO-03-91. HOPE VI provides demolition and revitalization grants to public housing authorities. 

Demolition grants fund the demolition of distressed public housing, the relocation of affected 

residents, and provision of supportive services for permanently relocated residents. Revitalization 

grants fund the capital costs of major rehabilitation, new construction, and other physical 

improvements; demolition of severely distressed housing; and community and supportive service 

programs for residents, including relocated residents. To increase the number of affordable housing 

units developed at HOPE VI sites, HUD encouraged housing authorities to use their grants to leverage

funding from other sources.

18GAO/RCED-89-143. Under the terminated UDAG program, HUD granted funds to distressed cities to 

combine with private funds for investment in industrial, commercial, and neighborhood projects. HUD 

defined “distressed” cities as those that ranked among the needier half of all U.S. cities under 

measures such as the communities’ percentage of pre-1940 housing, poverty, and unemployment. 

19Office of Thrift Supervision, “Best Practices in Rural Communities” (Washington, D.C.: 1998). 

20For example, see L. Riggin, P. Grasso, and M. Westcott, “A Framework for Evaluating Housing and 

Community Development Partnership Projects,” Public Administration Review, 52, no. 1 (1992): 40-

46; M. Nenno, “State and Local Governments: New Initiatives in Low-Income Housing Preservation,”

Housing Policy Debate, 2, issue 2 (1991): 467-497; and R. Quercia, W. Rohe, and D. Levy, “A New Look 

at Creative Finance,” Housing Policy Debate, 11, issue 4 (2000): 943-972. 

8 GAO-07-768R Leveraging Federal Funds 
allocation from a state. 21 However, according to some stakeholders with whom we 

spoke, this 2-year deadline can make it difficult to leverage the tax credits with 

certain other federal financing sources, such as HOPE VI grants because such largescale developments can take more than 2 years to complete. 

The inclusion of federal funds in housing and community and economic development 

project finance also helps to spread the investment risk between potential private 

sector investors and the federal government, thereby encouraging private sector 

participation in development. However, some of the literature we reviewed noted the 

potential in public-private partnerships for the uneven distribution of investment 

risks among investors, with the federal government often bearing greater risks and 

costs relative to the partnership benefits.22

According to some stakeholders, at the institutional level, communities and investors 

generally are not encumbered by differing application and other requirements, and 

investors generally are isolated from the investment risks associated with particular 

projects, and thus may be more willing to invest in housing and community and 

economic development initiatives. However, when federal funding is provided at the 

institutional level, the market could play a greater role in influencing what 

development is completed because the federal government plays a more limited role 

in determining how funds are used at this level than it does at the project level. 

Moreover, when funding is provided at the institutional level, it may be difficult to 

trace federal funding down to specific projects because of its more limited role. 

Finally, some of the literature we reviewed suggested that a proportion of projects 

that involve leveraging also likely involve some level of substitution—that is, the 

replacement of private dollars that otherwise would have been invested in a project 

(if lower-cost public funding were not available) with public dollars.23 One suggested 

means of limiting the level of substitution and appropriately sizing public subsidies is 

the inclusion of a “but for” test—a test designed to determine whether a project 

would have been completed but for, or in the absence of, the investment of public 

 21Under the Low-Income Housing Tax Credit program, states are authorized to issue federal tax credits 

for the acquisition, rehabilitation, or new construction of affordable rental housing. The credits 

generally are sold to investors, including individuals, financial institutions, and corporations to raise 

development funds for a project. These outside investors use the tax credit to offset taxes otherwise

owed on their tax returns. See also M. Stegman, “The Excessive Costs of Creative Finance: Growing

Inefficiencies in the Production of Low-Income Housing,” Housing Policy Debate, 2, issue 2 (1991): 

357-373. 

22For example, see S. Mullin, Econsult Corporation for the U.S. Economic Development 

Administration, “Public-Private Partnerships and State and Local Economic Development: Leveraging

Private Investment,” (Philadelphia, Pennsylvania: 2002). 

23See GAO, Federal Grants: Design Improvements Could Help Federal Resources Go Further, 

GAO/AIMD-97-7 (Washington, D.C.: Dec. 18. 1996) and C. Walker and others, The Urban Institute for 

the U.S. Department of Housing and Urban Development, “Public-Sector Loans to Private-Sector 

Businesses: An Assessment of HUD-Sponsored Local Economic Development Lending Activities,” 

(Washington, D.C.: 2002). For the replacement of state funds with federal funds see GAO/AIMD-97-7

and J. Gerenrot, D. Cashin, and A. Paulson, “Community Development Spending, 1981-2004,” Chicago

Fed Letter, no. 232 (Chicago, Illinois: 2006). 

 

9 GAO-07-768R Leveraging Federal Funds 
funds.24 However, such tests may not be good at predicting, for example, the private 

sector’s willingness to absorb risk and thus the appropriate proportion of private 

investment and public subsidy for a project.25 Some stakeholders said that the 

amount of substitution in federal programs can be minimized through the inclusion of 

matching requirements. However, others said that requirements to leverage might 

preclude certain communities (for example rural and severely distressed urban 

communities) from receiving federal funds because they would be unable to attract 

sufficient additional funding. Further, such requirements may provide incentives for 

more developed communities to apply for federal funds because they can easily 

match them with private sources, substituting private funding with public funding 

and potentially diverting scarce federal resources from the projects where they were 

most needed. 

Leverage Ratios Are Commonly Used to Measure the Extent of Leveraging, but They 

Have Certain Limitations

Based on our conversations with stakeholders and our review of the literature and 

housing and community and economic development program guidance, a common 

way of expressing the extent or amount of leveraging that occurs at either the 

institutional or the project level is with a leverage ratio. A leverage ratio relates the 

dollars other sources provide to the dollars a program provides to an institution or a 

project. For example, the leverage ratio for a particular project may be 1:1, meaning 

that the other federal, state, local, and private sources collectively contributed a 

dollar for every program dollar contributed to the project. In general, an institution 

or project with a high leverage ratio is one in which the investment of all other funds 

is large relative to the investment of program funds (for example, 10:1 or 25:1). 

Similarly, an institution or project with a low leverage ratio is one in which the 

investment of all other funds is reasonably small relative to the investment of 

program funds (for example, 2:1 or 0.5:1). 

 

However, stakeholders identified some limitations in the usefulness of leverage ratios 

for conveying detailed information on a program or project. According to 

stakeholders, at the institutional level, leverage ratios are a useful expression of the 

success or efficiency of the institution in attracting or combining resources for future 

development initiatives—at this level, a higher ratio generally would indicate more 

success or efficiency than a lower ratio. But, at the project level, factors such as the 

local economy and the availability of investors could have a positive or negative 

impact on a project’s ability to leverage additional funds, and thus its leverage ratio. 

In addition, ratios used alone cannot convey information on the level of substitution 

in a project. 

 24The UDAG program included such a test. The UDAG statute specified that grants could be made

under the program only when HUD determined that there was a strong probability that (1) the

nonfederal investment in the project would not be made without the UDAG grant and (2) the grant 

would not substitute for nonfederal funds that were otherwise available to the project. 42 U.S.C. 5318 

(j). Cities and private investors were required to certify that projects that received UDAG funds were

in compliance with the statutory requirements. 

 

25For example, see C. Walker and others, “Public-Sector Loans to Private-Sector Businesses: An 

Assessment of HUD-Sponsored Local Economic Development Lending Activities.”

10 GAO-07-768R Leveraging Federal Funds 
 

As part of our ongoing work in this area, we plan to interview additional stakeholders 

to obtain a broader understanding of the perspectives that exist on the use, 

implications, and measurement of leveraging for housing and community and 

economic development programs. We also plan to further review how leverage 

ratios, in combination with other indicators, can be used to measure the performance 

of housing and community and economic development programs. 

HUD Data Could Be Used to Estimate the Extent of Leveraging in the

Section 108 Program 

Although HUD does not calculate a leverage ratio for the Section 108 program, the 

agency collects and maintains some information that may be used to estimate the 

extent to which projects supported by Section 108 loan guarantees plan to leverage 

other federal, state or local, and private funds.26 Specifically, HUD collects 

information on sources and amounts of funds that communities plan to use in 

conjunction with Section 108 loan funds and documents this information in a Section 

108 memorandum. In most cases, these memorandums list the type—for example, 

EDI and BEDI grants, tax-exempt bond and tax credit proceeds, and developer 

equity—and amount of proposed funding sources for projects that will be supported 

by Section 108 loan guarantees. See enclosure III for more information on how we 

categorized some of the types of funding sources that can be leveraged with Section 

108 funds and selected programs included under those categories. 

However, agency officials acknowledged a limitation to the data that affects the 

extent to which it can be used to accurately measure leveraging in the Section 108 

program. In particular, HUD only has data on what sources and amounts of funds a 

community proposes to use (at the time of its application to HUD for a Section 108 

guarantee) to complete a project. According to HUD, proposed sources and amounts 

may differ from the actual sources and amounts used to complete a project, and do 

not represent firm commitments. Some HUD data provided limited support for this 

statement: in fiscal year 2006, HUD reported $1.8 million in unplanned uses of CDBG 

funds to make payments on Section 108 loans, indicating that the sources—in 

particular CDBG funds—communities used in conjunction with Section 108 loan 

funds can change over time.27

 

Nonetheless, information from these memorandums provides some insight into the 

extent to which communities planned to leverage Section 108 loan funds with other 

 26Because Section 108 does not have a leveraging requirement, HUD is not required to and does not

collect data that could be used to calculate an actual (as opposed to an estimated) leverage ratio, as 

discussed in this report. According to HUD, the agency is considering changing its Integrated

Disbursement and Information System (IDIS) to include information on sources and amounts of funds

for Section 108 projects. HUD said that such changes would be subject to the results of the Office of 

Management and Budget’s ongoing Program Assessment Rating Tool (PART) evaluation of Section 108 

and that any changes would not take effect prior to 2009. 

27Communities make unplanned uses of CDBG funds when an intended source of funds, such as 

project-related income, is not used to make a payment on the loan. Communities are expected, but not 

required to report unplanned uses to HUD. As a result unplanned uses may exceed $1.8 million. 

11 GAO-07-768R Leveraging Federal Funds 
sources of funds to finance development projects. For example, the total number of 

proposed sources of funds for each of the 50 projects we reviewed ranged from 1 

(Section 108 loan funds only) through 15.28 The number of other sources used to 

finance a project could be related to, among other things, its size and type. For 

example, projects that used Section 108 loan proceeds as the only source of funding 

generally were for small physical infrastructure improvements in a community, such 

as the construction of a youth sports center or the repair of sidewalks and gutters. 

On the other hand, those projects that used multiple sources of funds often were 

larger-scale, such as the renovation of a brownfields site into a mixed-use commercial 

and residential complex. Enclosure II provides more detailed information on 

proposed sources and amounts of funds for the 50 projects we reviewed. 

In 2002, the Urban Institute found that each Section 108 dollar leveraged an 

additional $1.54 in private funding and $0.68 in other public funding, for a total of 

$2.22 in other funds leveraged.29 In other words, the program had a 2.22:1 leverage 

ratio. Because of the small sample of Section 108 memorandums we reviewed, for 

purposes of this report we were not able to calculate a similar ratio.30 

As part of our ongoing work for you in this area, we plan to assess what data are 

available to measure the extent of leveraging in several other federal programs 

including the Department of the Treasury’s CDFI, Low-Income Housing Tax Credit, 

and New Markets Tax Credits programs; and HUD’s CDBG, HOME, and HOPE VI 

programs and provide information on how these programs leverage federal funds for 

housing and community and economic development. 

Agency Comments 

We provided HUD with a draft of this report for review and comment. The agency 

provided technical comments, which we incorporated in the report as appropriate. 

- - - - 

 28One loan guarantee in our sample (Monessen, Pennsylvania) supported 38 different projects 

proposed by multiple nonentitlement communities that formed a consortium. For each individual 

project described, the community did not list more than 15 sources of funds, although the aggregated 

number of sources for all 38 projects was 95. 

29The Urban Institute collected leveraging data by reviewing loan files for a sample of 201 Section 108

loans made to third parties from 1994 through 1999 in 51 communities determined to be the greatest 

utilizers of such third-party loans (in terms of dollar-volume). However, the researchers 

acknowledged a limitation—missing leveraging data—and noted that leveraging results for Section 108

loans were from data collected on 149 economic development projects. Although the 51 communities

accounted for 96 percent of Section 108 third-party lending during that period, Section 108 loans are

often used by communities themselves in order to undertake various local projects. For purposes of 

calculating the leveraging ratio, the study defined "public" funds to include Section 108, EDI/BEDI,

other federal loans, state and local, and other CDBG funds, and "private" dollars to include private 

lending, equity, stock, personal borrowing, and other funding. 

30Due to the small sample size (50 proposed projects), our results cannot be projected with enough 

precision to provide accurate generalizations to all projects with Section 108 loan guarantees. 

12 GAO-07-768R Leveraging Federal Funds 
As agreed with your office, unless you publicly announce the contents of this report 

earlier, we plan no further distribution until 30 days from the report date. At that 

time, we will send copies of this report to the Ranking Minority Member, 

Subcommittee on Housing and Community Opportunity and the Secretary of Housing 

and Urban Development. We will also make copies available to others upon request. 

In addition, the report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

If you or your staff have any questions concerning this report, please contact me at 

(202) 512-8678 or at shearw@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page of this 

report. Key contributors to this report are listed in enclosure IV. 

Sincerely yours, 

William B. Shear 

Director, Financial Markets and Community Investment 

Enclosures – 4 

13 GAO-07-768R Leveraging Federal Funds 
Enclosure I 

Objectives, Scope, and Methodology 

The objectives of this interim report were to (1) examine the perspectives of 

stakeholders on the use, implications, and measurement of leveraging in housing and 

community and economic development programs and (2) describe the type of data 

the Department of Housing and Urban Development (HUD) collects that could be 

used to determine the extent of leveraging in the Section 108 Loan Guarantee 

(Section 108) program. Enclosure II contains the results of our review of the 

potential extent of leveraging in 50 selected Section 108 projects. See enclosure III 

for a description of how we categorized some of the types of funding sources that 

could be leveraged (combined) with Section 108 funds and selected programs 

included under those categories. 

To examine the perspectives of stakeholders on the use, implications, and 

measurement of leveraging in housing and community and economic development 

programs, we reviewed academic, government, and industry literature related to 

leveraging in the housing and community and economic development fields. To

identify this literature, we conducted a literature search on research databases and 

agency Web sites using each of the terms “leveraging,” “leverage,” “private 

investment,” and “public-private partnership” in combination with each of the terms 

“housing,” “community development,” and “economic development.” For example, 

we searched using the phrase “leveraging and housing.” We also interviewed 

representatives of several federal agencies, including the Department of Agriculture, 

the Department of Commerce, the Department of the Treasury, HUD, and the Office 

of Management and Budget, as well as representatives of industry groups and other 

organizations involved in housing and community and economic development 

initiatives, including the Coalition of Community Development Financial Institutions, 

the Council of State Community and Economic Development Agencies, Enterprise 

Community Partners, the International Economic Development Council, Harvard 

University’s Center for Housing Studies, the John D. and Catherine T. MacArthur 

Foundation, Living Cities: The National Community Development Initiative, the Local 

Initiatives Support Corporation, the National Association of Affordable Housing 

Lenders, the National Association of Development Organizations, the National 

Community Development Association, the National Council of State Housing 

Agencies, NeighborWorks America, and the New Markets Tax Credit Coalition. 

To describe the type of data HUD collects that could be used to determine the extent 

of leveraging in the Section 108 program, we interviewed HUD officials to identify 

what data the agency collects for the Section 108 program. HUD officials explained 

that the agency maintains information on the sources and amounts of funds 

communities proposed using to finance development projects in Section 108 

memorandums. HUD officials provided us with several examples of these 

memorandums, which we reviewed prior to submitting a request for further 

documentation, as described below. We also reviewed relevant program regulations 

and guidance, budget documents, GAO reports, HUD Inspector General reports, and 

other literature to determine what other information was available on the extent of 

leveraging in the program. 

14 GAO-07-768R Leveraging Federal Funds 
To describe how federal funds may have been leveraged in the Section 108 program, 

we randomly selected a sample of 50 loan guarantees using a summary spreadsheet 

containing high-level project information on the 358 loan guarantees committed from 

fiscal years 2001 through 2006, and requested copies of the Section 108 

memorandums for each of the 50 projects.31 We chose this period for review because 

HUD officials said that those were the only years for which the agency maintained 

electronic copies of Section 108 memorandums. In addition to interviewing a HUD 

official knowledgeable in the procedures used to collect and maintain the data 

contained in the Section 108 memorandums, we reviewed the sample of 50 

memorandums for their accuracy and completeness and summarized project 

information in them, including sources and amounts of funds. We found that the data 

contained in these memorandums were sufficiently reliable for describing how 

communities planned to leverage Section 108 loan funds with other sources of funds. 

To simplify the presentation of funding source information for each project (please 

refer to enclosure II), we classified sources into three broad categories: 

 

• other federal funding sources, 

• state or local funding sources, or 

• private funding sources. 

Enclosure III describes how we defined these categories and some of the funding 

sources we included under each of the three categories. However, due to the small 

sample size, our results cannot be projected with enough precision to provide 

accurate generalizations to all projects with Section 108 loan guarantees. 

 

We conducted our work in Washington, D.C., and Chicago from November 2006 to 

May 2007 in accordance with generally accepted government auditing standards. 

 31To determine the accuracy and completeness of the information provided in the summary

spreadsheet, we performed basic checks on the data and interviewed a HUD official who is 

responsible for maintaining the spreadsheet. Based on these checks and HUD’s responses to our 

questions about the completeness and accuracy of the data in the spreadsheet, we determined that the 

data were sufficiently reliable for the purposes of selecting the sample of Section 108 memorandums

for our further review, as well as reporting the total number of applications for Section 108 loan

guarantees HUD approved from 2001 through 2006 and the amounts of Section 108 loan funds 

committed and advanced from 2001 through 2006. 

15 GAO-07-768R Leveraging Federal Funds 
Enclosure II 

Descriptions of Proposed Sources and Amounts of 

Funds Used to Finance 50 Section 108 Projects 

To determine how funds may have been leveraged in the Section 108 program, we 

examined a random sample of 50 proposed Section 108 projects to determine the 

types and amounts of funding sources communities planned to use to finance these 

projects. In varying amounts of detail, the figures below illustrate how communities 

planned to leverage Section 108 loan funds with other sources of funds for 

development. Due to the small sample size, our results cannot be projected with 

enough precision to provide accurate generalizations to all projects with Section 108 

loan guarantees. 

Figure 3 provides information, by fiscal year, on the projected sources for each of the 

50 Section 108 projects we reviewed. Sources are categorized by Section 108 loan 

funds, other federal funding sources, state or local funding sources, and private 

funding sources. 

16 GAO-07-768R Leveraging Federal Funds 
Figure 3: Summary of Projected Sources for the Sample of 50 Section 108 Projects, Fiscal 

Years 2001 through 2006 

Note: ED (economic development), HSG (housing), PI (physical infrastructure) 

Figures 4 through 7 provide information on the proposed funding sources for the 50 

projects in our sample by project type—economic development, physical 

infrastructure, housing, and multiple-type projects. 

17 GAO-07-768R Leveraging Federal Funds 
Figure 4: Proposed Funding Sources for Section 108 Economic Development Projects, Fiscal 

Years 2001 through 2006 

Figure 5: Proposed Funding Sources for Section 108 Physical Infrastructure Projects, Fiscal 

Years 2001 through 2006 

Figure 6: Proposed Funding Sources for Section 108 Housing Projects, Fiscal Years 2001 

through 2006 

18 GAO-07-768R Leveraging Federal Funds 
Figure 7: Proposed Funding Sources for Section 108 Multi-Type Projects, Fiscal Years 2001 

through 2006 

Figures 8 through 13 provide more detailed information on several of the Section 108 

projects we reviewed. 

Figure 8: Proposed Funding Sources—Denver, Colorado

19 GAO-07-768R Leveraging Federal Funds 
Figure 9: Proposed Funding Sources—Flint, Michigan 

Figure 10: Proposed Funding Sources—Tempe, Arizona 

20 GAO-07-768R Leveraging Federal Funds 
Figure 11: Proposed Funding Sources—Rialto, California 

Figure 12: Proposed Funding Sources—Maunabo, Puerto Rico 

21 GAO-07-768R Leveraging Federal Funds 
Figure 13: Proposed Funding Sources—North Tonawanda, New York 

22 GAO-07-768R Leveraging Federal Funds 
Enclosure III 

Descriptions of Programs or Entities We Included Under Categories for 

Federal, State or Local, and Private Funding Sources 

As described in our report and in enclosure II, communities often leverage Section 

108 funds with other sources of funds to finance development projects. We classified 

each of the sources of funds listed in our sample of 50 HUD Section 108 

memorandums into three general categories: “other federal funding sources,” “state 

or local funding sources,” and “private funding sources.” Generally, we considered 

federal funding to be that which is appropriated or otherwise authorized by the U.S. 

Congress. We considered state or local funding to be that which is appropriated or 

otherwise authorized by state or local governmental entities. Finally we considered 

private funding to be that which is contributed by a private source, such as a bank or 

a foundation. This enclosure describes more fully some of the funding sources we 

placed into these categories. 

Other Federal Funding Sources 

Brownfields Economic Development Initiative (BEDI) Grant Program 

Established in 1998 and administered by the U.S. Department of Housing and Urban 

Development (HUD), the BEDI grant program supports state and local efforts to 

commence redevelopment or continue phased redevelopment efforts on brownfields 

sites.32 The BEDI grant program serves a purpose similar to that of the Economic 

Development Initiative grant program when it was first established—to enhance the 

viability of a project financed with a Section 108 loan guarantee. Currently, HUD 

makes BEDI grant awards contingent upon applicants also obtaining a Section 108 

loan guarantee. 

Community Development Block Grant (CDBG) Program 

Through CDBG, HUD provides annual formula grants to states and local jurisdictions 

called “entitlement communities.” States distribute the funds to localities that do not 

qualify as entitlement communities. CDBG funds can be used to implement a wide 

variety of community and economic development activities directed toward 

neighborhood revitalization, economic development, and improvement of community 

facilities and services. We consider CDBG to be a federal source because the grants 

are originally funded at the federal level through Congressional appropriations. 

Economic Development Administration (EDA) Public Works and Economic 

Development Grant Program 

The Department of Commerce’s EDA Public Works and Economic Development 

Grant Program provides funds to help distressed communities attract new industry 

and business growth, diversify local economies, and create jobs. These grants 

 32HUD defines brownfields as abandoned, idled, or under-used real property where actual or potential 

environmental contamination complicates expansion or redevelopment. 

23 GAO-07-768R Leveraging Federal Funds 
support various types of projects such as water and sewer system improvements; 

access roads to industrial parks or sites; business incubator facilities; and other 

infrastructure improvements needed for business retention and expansion. Generally, 

the grants are targeted to communities demonstrating the greatest need for such 

improvements. Grant recipients are required to match up to 50 percent of the amount 

of the award with local matching funds. The amount of matching funds required is 

based on the level of economic distress in the recipient community. Recognized 

Indian tribes may be eligible for up to 100 percent assistance, and may not have to 

provide matching funds. 

Economic Development Initiative (EDI) Grants Program 

HUD’s EDI program was established in 1994 to encourage communities to make 

greater use of the Section 108 loan guarantee program, by providing an additional 

source of financing for projects and reducing or paying for some of the costs of 

borrowing under the loan program. HUD stopped making competitive grants under 

the EDI program in 2001; however, HUD may still make special purpose or targeted 

EDI grants to qualifying communities pursuant to Congressional directives. 

Historic Rehabilitation Tax Credit Program 

Historic Rehabilitation Tax Credits are available for work on certified historic 

structures that will need substantial rehabilitation. Eligible applicants receive a tax 

credit equal to 20 percent of the amount of qualified rehabilitation expenditures. 

HOME Investment Partnerships (HOME) Program 

Through HOME, HUD provides annual formula grants to states and localities to fund 

a wide range of activities designed to build, buy, or rehabilitate affordable housing or 

provide direct rental assistance to low-income people. Specifically, states and 

localities use HOME funds for grants, direct loans, loan guarantees or other forms of 

credit enhancement, rental assistance, and security deposits. We consider HOME 

funds to be a federal source because the grants are originally funded at the federal 

level through Congressional appropriations.

Low-Income Housing Tax Credit Program 

Under the Low-Income Housing Tax Credit program, states are authorized to issue 

federal tax credits for the acquisition, rehabilitation, or new construction of 

affordable rental housing. The credits generally are sold to investors, including 

individuals, financial institutions, and corporations to raise development funds for a 

project. These outside investors use the tax credit to offset taxes otherwise owed on 

their tax returns. To qualify for credits, a project must have a specific proportion of 

its units set aside for lower-income households, and the rents on these units must be 

24 GAO-07-768R Leveraging Federal Funds 
limited to 30 percent of qualifying income.33 Investors may claim these credits on

their tax returns annually for 10 years. Each state receives an annual allocation of 

$1.75 per capita, adjusted each year by a cost of living adjustment factor. States must 

reserve a minimum of 10 percent of the credit for nonprofit developers. Although 

some consider these tax credits to be either a state or private source of funds, we 

consider them to be a federal source because they represent foregone federal income 

and, therefore, are a direct cost to the federal government. 

New Markets Tax Credit Program 

The New Markets Tax Credit program was established by Congress in 2000 to help 

revitalize impoverished, low-income communities. Tax credits are allocated to 

Community Development Entities, who sell the tax credits to investors—including 

individuals, financial institutions, and corporations—who in turn use the proceeds to 

make investments in low-income communities and eligible businesses. The tax credit 

allows the investors to reduce their tax liability by 39 percent of the amount of the 

investment over a 7-year period. The New Markets Tax Credit is nonrefundable, 

meaning that taxpayers do not receive payments for tax credits that exceed their total 

tax liability. Although some consider these tax credits to a private source of funds, 

we consider them to be a federal source because they represent foregone federal 

income and, therefore, are a direct cost to the federal government. 

State or Local Funding Sources 

Housing Trust Funds 

Housing trust funds are funds established by cities, counties, and states that 

permanently dedicate a source of public revenue to support the production and 

preservation of affordable housing. There are at least 257 housing trust funds in the 

United States. 

Tax Increment Financing (TIF) 

TIFs allow a municipality to provide financial incentives to stimulate private 

investment in a designated area (a TIF district) where blight has made it difficult to 

attract new development. The TIF program can be used to support new development 

or the rehabilitation of existing buildings in industrial, commercial, or residential 

projects. Funding for TIF eligible activities is derived from the increase in 

incremental tax revenues generated by new construction or rehabilitation projects 

within the boundaries of the TIF district. States determine what activities are eligible 

with TIF funds, and these activities may include land acquisition, site preparation, 

building rehabilitation, public improvements, and interest subsidy.

 33Projects must meet one of two low-income occupancy requirements: (1) 20 percent of the units must 

be reserved for households with initial, qualifying incomes at or below 50 percent of area median 

income or (2) 40 percent of units must go to households with initial, qualifying incomes at or below 60

percent of area median income. 

 

25 GAO-07-768R Leveraging Federal Funds 
State Tax Credit Programs 

States may also administer tax credit programs to support activities such as historic 

preservation and economic development. For example, Michigan sponsors a historic 

preservation tax credit program where a state income tax credit of up to 25 percent is 

available for preservation of certain historic properties; however, if combined with a 

federal historic preservation tax credit of 20 percent, a project only will be eligible for 

an additional 5 percent state tax credit. The State of Michigan also administers the 

Brownfield Single Business Tax Credit program, which provides an incentive in the 

form of a tax credit for eligible redevelopment investments on a brownfield property. 

The credit is applied against the Single Business Tax liability of the developer. 

Private Funding Sources 

Nonprofit organizations, developers, private banks and lending institutions, 

businesses, and individuals provide an array of financial support—such as developer 

fees, private loans, grants, land donations, and individual financial contributions—to 

Section 108 and other federal housing and community and economic development 

projects. 

26 GAO-07-768R Leveraging Federal Funds 
Enclosure IV 

GAO Contact and Staff Acknowledgements 

GAO Contact: William B. Shear, (202) 512-8678 or shearw@gao.gov

Staff Acknowledgements: In addition to the contact named above, Charles Wilson, Jr., 

Assistant Director; Marianne Anderson; Alison Martin; John McGrail; Marc Molino; 

LaSonya Roberts; Barbara Roesmann; Cory Roman; and Jim Vitarello made key 

contributions to this report. 

(250324) 

27 GAO-07-768R Leveraging Federal Funds 
This is a work of the U.S. government and is not subject to copyright protection in the

United States. It may be reproduced and distributed in its entirety without further

permission from GAO. However, because this work may contain copyrighted images or

other material, permission from the copyright holder may be necessary if you wish to

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER