Opinion ID: 468117
Heading Depth: 2
Heading Rank: 3

Heading: Use of Section 108 Funds for New Construction.

Text: 18 Section 108 loan guarantees may not be used for new construction, 42 U.S.C. Sec. 5308(a) (1982) (Secretary may guarantee obligations issued to finance acquisition or rehabilitation of real property); 24 C.F.R. Sec. 570.701 (1982), but this means only that the funds cannot be lent or provided to a developer prior to or during construction. A community may, however, use the proceeds of its Section 108 loan to acquire a newly constructed project. This procedure is not synonymous with direct funding of new construction since no Section 108 funds will be applied to the project until after construction is completed and no Section 108 funds will be used by the developer to pay any of the ongoing costs of construction. This is true even if the developer pledges its eventual receipt of the proceeds from the sale of the project as collateral to secure private financing for construction and even if it is apparent that the project can only be paid for by the buyer--in this case the City--out of the Section 108 funds. The Section 108 funds still will not change hands until a completed project exists; they are thus used to acquire real property as authorized by the statute and regulations. That the developer is a partner in the operating partnership receiving the lease-back does not, standing alone, render the transaction a sham in which Section 108 funds are in fact to be used for new construction. 19 Appellants do not demonstrate any statutory or regulatory violation by HUD or by the City. Therefore, we affirm the judgment.