Opinion ID: 468117
Heading Depth: 2
Heading Rank: 2

Heading: Leveraging Requirements.

Text: 11 UDAG grants may be made only where the Secretary determines that there is a strong probability that (1) the non-Federal investment in the project would not be made without the grant, and (2) the grant would not substitute for non-Federal funds which are otherwise available to the project. 42 U.S.C. Sec. 5318(j) (1982). Thus, among other criteria to be considered in determining which communities will receive UDAGs, the Secretary should consider the extent to which the grant will stimulate economic recovery by leveraging private investment, 42 U.S.C. Sec. 5318(d)(1)(C) (1982). In furtherance of these policies, 24 C.F.R. Sec. 570.459(b)(2) (1982) requires that [e]ach project considered for selection for [UDAG] funding must have a leveraging ration of at least 2.5 to 1.0. 24 C.F.R. Sec. 570.451(l ) defines leveraging ratio as the total amount of firm private commitment generated by the project divided by the amount of action grant funds awarded to the project. Under 24 C.F.R. Sec. 570.451(i) (1982), firm private commitment means that agreement by which the private participating party in the action grant program agrees to perform an activity specified in the application and demonstrates the financial capacity to deliver the resources necessary to carry out the activity, and commits the resources to the project. 12 Appellants argue that the Section 108 loan funds are public funds that cannot be considered firm private commitment, and that the use of those funds in connection with the financing of the hotel project leaves the project short of the requirement that every dollar of public funds generate at least 2.5 dollars of private investment, in violation of HUD's own rules and regulations. Cf. Service v. Dulles, 354 U.S. 363, 388, 77 S.Ct. 1152, 1165, 1 L.Ed.2d 1403 (1957) (agency must comply with own regulations). 13 Appellants' argument, however, fails to take into account the fact that the developer made a private commitment of funds by personally guaranteeing repayment of the construction loan. It is true that, as originally conceived, the construction loan was conditioned upon execution of an assignment of the proceeds of the Section 108 funds by the City to the bank. Nevertheless, HUD treated the construction financing commitment obtained by the developer as private commitment and also treated the discounted value of the City's loan of its $3.3 million UDAG award to the developer as private funds since both had to be repaid by the developer to the respective creditors with interest. HUD's regulations, which contain a hypothetical example of how to calculate the leveraging ratio, indicate that the construction loan and the UDAG were properly considered private commitment for purposes of determining the leveraging ratio. See 24 C.F.R. Sec. 570.451(l )(2) (1982). In the hypothetical example, set out in the margin, 3 the discounted value of the UDAG grant is counted as firm private commitment, because the UDAG moneys must be repaid with interest to the city. 4 Appellants argue, however, that the example was intended to illustrate how the leveraging ratio was computed rather than to show what type of investment could be considered private. They contend that the allegedly 'private first mortgage' is nothing more than a mere shell in existence only during construction, guaranteed by an assignment of the Section 108 proceeds and immediately replaced upon completion of the hotel by the public Section 108 funds. If this use of Section 108 funds is to be considered private commitment, the argument runs, a luxury hotel project could be financed with only a UDAG and a Section 108 loan, without any funds from private sources. Appellants claim that the fact that the loan is to be repaid with private dollars is irrelevant, since deeming that to be private commitment would permit private development to be funded entirely with low interest loans from public sources, to be repaid with earnings from the project funded. 14 But we agree with the appellees that the regulations contemplate that funds to be repaid by a private developer are private commitment; whether those funds are loans from a private or public institution is immaterial. The definition of firm private commitment does not depend on whether funds that may reach the private developer originated from a public source. The leveraging ratio hypothetical indicates that it is the developer's obligation to repay that makes funds firm private commitment. The construction loan in this case thus was firm private commitment even though there was an agreement that if the project were carried through to completion the City would use its Section 108 loan to purchase it. 15 We do not comment on the wisdom of this method of obtaining the front end private sector financial participation envisioned by Congress when it created the UDAG program. See H.R.Rep. No. 236, 95th Cong., 1st Sess. 9, reprinted in 1977 U.S. Code Cong. & Ad. News 2884, 2892. All we hold here is that, when calculating the leveraging ratio, HUD's own regulations view as firm private commitment any funds, regardless of source, that private investors are ultimately liable to repay. The private party need only demonstrate the capacity to deliver the necessary funding to the specific project regardless of source and commit itself to do so. 16 Appellants claim that, even if the Section 108 loan is deemed firm private commitment, it should also be considered public when calculating the leveraging ratio; calculating the ratio as appellants suggest yields a ratio far short of the required 2.5 to 1. However, we are precluded from calculating the leveraging ratio as appellants suggest by 24 C.F.R. Sec. 570.451(l ) (1982), which defines the leveraging ratio as the total amount of firm private commitment generated by the project divided by the amount of action grant funds awarded to the project. (Emphasis added.) In this case HUD found the firm private commitment totalled $10,536,248 with a leveraging ratio of 3.19 to 1, well above the regulatory requirement. We see no clear basis under the regulations for disturbing that assessment. 17