Section 108 Loan Guarantee Program
The Section 108 Loan Guarantee Program is authorized under Section 108 of the Housing and Community Development Act of 1974 as part of the Community Development Block Grant Program. The Section 108 Loan Guarantee Program offers local governments a source of financing for economic development, large-scale public facility projects, and public infrastructure. The United States Department of Housing and Urban Development sells bonds on the private market and uses the proceeds to fund Section 108 loans through the state to local governments. The local government may loan the funds, which must be repaid, to third parties to undertake eligible Community Development Block Grant activities (typically economic development) or use the funds for other eligible Community Development Block Grant activities. Community Development Block Grant future allocations are used only as secondary security for the United States Department of Housing and Urban Development loan to the local government (the loan guarantee).
In 1997, the Florida Legislature passed changes to the Small Cities Community Development Block Grant Program to allow up to $160,000,000 in loans to be guaranteed by the State's Community Development Block Grant allocation for loans made to small cities and counties on behalf of their needs for economic and community development.
Eligible Activities for Section 108 Loans
- Principally benefit low and moderate income people; or
- Assist in the elimination or prevention of slum and blight conditions; or
- Meet other community development needs that have a particular urgency and are of very recent origin.
Examples of Eligible Section 108 Projects
- Real property acquisition as part of an otherwise eligible activity;
- Rehabilitation of publicly or privately owned real property;
- Housing rehabilitation or development eligible under the Community Development Block Grant program and related relocation;
- Demolition, clearance, and site improvements for eligible Community Development Block Grant activities;
- Section 108 loan closing costs and issuance costs of related public offerings;
- Public infrastructure; and
- Eligible economic development activities.
- Projects approved by the United States Department of Housing and Urban Development in the last several years include economic development and micro loans, shopping centers, industrial expansion, business relocation, warehouse facilities, public infrastructure, office buildings, retail stores, affordable housing site development, business incubators, riverfront commercial and recreational development, hotels and motels, and capitalizing a local revolving loan fund.
Individual cap per local government is $7,000,000 in loan guarantees. Allows the local government to:
- Participate in larger projects
- Avoid referendums for infrastructure financing
- Compete with larger local governments for business relocations
- Provide businesses the ability to access funds at approximately corporate AAA bond rates
Typical Section 108 Loan Guarantee Process (for a loan to a third party)
- The business or other third party approaches the local government with a proposal;
- The local government sets up a "screening meeting" at the Department of Community Affairs for the Department's review and comments on the eligibility and likely fundability by the United States Department of Housing and Urban Development of the proposal;
- The local government packages the loan, has the loan underwriting analysis completed, pledges local government collateral based on the results of the underwriting process, signs the certifications, and sends the completed application to the Department. Department staff reviews the package for accuracy and eligibility, then forwards the loan proposal to the United States Department of Housing and Urban Development when it is complete. As part of this process, the state pledges future Community Development Block Grant allocations as secondary collateral to secure the loan;
- The United States Department of Housing and Urban Development approves the loan package or negotiates with the state, local government, and borrowers to overcome loan package deficiencies;
- The sale of the bonds is closed (or interim financing is provided) by the United States Department of Housing and Urban Development's fiscal agent concurrently with the closing of the Section 108 loan to the local government, who then immediately closes its loan with the borrower. The funds are released by the United States Department of Housing and Urban Development's fiscal agent to the local government's custodial agent (a local bank), who then releases the funds to the borrower based on the terms of the loan agreement;
- The borrower makes monthly payments to the local government's custodial agent, who semi-annually remits to the United States Department of Housing and Urban Development's fiscal agent, who annually pays the bond holders; and
- The local government and the Department periodically monitor the ongoing project and deposits with the custodial agent to ensure that the borrower meets all the Community Development Block Grant requirements relating to labor standards, environmental assessments, acquisition and relocation, financial management, and meeting a national objective.
- The process is simpler when the local government is borrowing the proceeds for activities such as public infrastructure or other public facilities. The local government must pledge a local revenue stream that is adequate to fund the repayment of the Section 108 loan.
Loan Rate, Terms, and Collateral
Interest on the loan from the United States Department of Housing and Urban Development to the local government typically runs ½% above treasury obligations of comparable maturity. Each annual principal amount will have a separate interest rate based on the obligation that must be retired by the United States Department of Housing and Urban Development that year.
If the local government is loaning the funds to a business for economic development activities or some other third party, the local government may add an additional spread to the loan rate to cover servicing costs over the life of the loan as well as require the borrower to pay the loan closing costs and other local government administrative costs. These costs can be included in the loan.
The United States Department of Housing and Urban Development requires security from the borrower and/or the local government to adequately collateralize the loan. If the third party borrower's loan to value ratio is less than .80, or its debt service ratio is less than 1.15, the United States Department of Housing and Urban Development will always require additional collateral, either from the business, individuals, or from the local government. Depending on the activity or project, the United States Department of Housing and Urban Development may require additional collateral from "deals" that meet these ratio thresholds. If a local government fully supports a project questioned by the United States Department of Housing and Urban Development, it may always pledge real estate, specific revenue streams (tax increment, sales tax, etc.), or the full faith and credit of the local government as collateral. Terms for third party loans are typically matched to the useful life of the collateral, with up to 20 years on real estate.
Loan Underwriting Requirements
For a loan to a third party to be eligible, the local government must undertake an underwriting analysis that meets the requirements of 24 Congressional Federal Record Section 570.482(e). This financial analysis must document:
- That all project costs are reasonable;
- That all sources of project funding are committed;
- That to the extent practicable, Community Development Block Grant funds are not substituted for non-federal financial support;
- That the project is financially feasible;
- That to the extent practicable, the return on the owner's equity investment will not be unreasonably high; and
- That to the extent practicable, Community Development Block Grant funds will be disbursed after, or on a pro-rata basis with, the finances provided to the project