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COVID-19 Economic Response and Recovery

Maximize Federal Funding Sources by Using HUD’s Section 108 Loan

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Action:

Municipalities should pursue HUD funding and specifically section 108 loan guarantees of the Community Development Block Grant program, to help offset project costs.

Why:

  • Section 108 enables exceptionally low interest-rate-subordinate funding for eligible projects.
  • The funds are fairly flexible in terms of use.
  • The program has been run since 1974 and is, therefore, reliable.
  • To date, there has not been a single default under the program.

Background:

HUD Section 108 increases the capacity of block grants by enabling a community to borrow up to five times its annual CDBG allocation.

The community pledges its current and future CDBG allocations as security for the loan. This does NOT mean that the city will forfeit its CDBG allocations. Normally, the borrower (in the case study below, the city) pays back the loan via revenue created through project proceeds. It is only if the proceeds are not forthcoming that HUD would use pledged CDBG funds to continue to make payments on the loan.

CDBG

The Community Development Block Grant (CDBG) Entitlement Program provides annual grants on a formula basis to entitled cities and counties to develop viable urban communities by providing decent housing and a suitable living environment and by expanding economic opportunities, principally for low- and moderate-income persons.

Section 108 funding can be used to:

  • Acquire real estate. For example, Addington Ridge, NC used $694,000 of Section 108 guaranteed loan funds to acquire and improve a site in the Deep River neighborhood, which it then sold to a developer for affordable housing.
  • Construct, reconstruct, or install public facilities (such as streets, sidewalks, and other site improvements).
  • Make related relocation, clearance, and site improvements.
  • Rehabilitate a publicly-owned property. For example, Anaheim, CA used $7 million of Section 108 guaranteed loan funds to restore a historic orange packing facility. The building was rehabilitated into a food market, which has catalyzed economic development in the downtown neighborhood.
  • Lend money to a for-profit business, in order to support economic development goals. For example, Reading, PA used $1.5m of Section 108 guaranteed loan funds, in conjunction with a $1.4m economic development grant, to help a subsidiary of Summa Industries to purchase machinery and equipment for its newly constructed, 138,000 ft2 facility. The new facility created approximately 200 jobs, which largely went to low- and moderate-income residents.

Case Study

Salem, OR – Salem Convention Center

The city wanted to build a new convention center to support economic growth in the downtown area. The cost was going to be $31.8m and the city faced a funding shortfall.

The city recognized that a combination of TIF and private funding were not going to be sufficient to fund the development. So it applied for $7.9m of section 108 guaranteed loan funds. These were awarded on the basis of existing financial commitments, an assessment of the project’s feasibility, and (critically) the commitment to create 37 full-time jobs, including 20 jobs for low-and moderate-income residents.

A project was structured as follows:

  • VIP’s Motor Inns (a private company) purchased the downtown lot, and then approached the city’s Urban Renewal Agency about the possibility of a coordinated public-private development of a conference center and hotel.
  • The private entity financed the hotel, while the public agency financed the conference center and parking garage. The city funneled its contribution through the agency.
  • The site was reconfigured through a lot line adjustment so that the agency owned the conference center land (which was important for future conference center revenue and was needed to pay back the section 108 loan).

The center has since made more than $51 million net revenue, and helped to drive the revitalization of downtown.
(For more information on the CDBG Entitlement Program, click here)

How to Adapt this Approach

  1. Check on the current availability of section 108 financing to which your city is entitled. (Note that non-entitlement communities can still apply for section 108 loans with the support of their State).
  2. Identify potential projects that meet both your goals and HUD’s requirements.
  3. Assess project(s) for financial feasibility.
  4. Complete a citizen participation process and local review:
    • Solicit input from local stakeholders
    • Advertise the availability of the draft application
    • Make the application available electronically, as well as via hard copy (e.g., in public libraries)
  5. Submit the application to HUD and await approval (usually in around 45 days).
  6. Manage your funds, and report related activities, through HUD’s Integrated Disbursement and Information System (IDIS).

The HUD Exchange website provides simple (really) and detailed steps to ensure your successful application.

Do:

  • Utilize grant specialists and grant management software. Often cities will have a central grants department with liaisons for divisions/ departments, thus reducing the need for a grant specialist within each department. If you cannot access a grant specialist/software, consider partnering with a local foundation.
  • Read all the rules for section 108. They are flexible! But all activities must meet one of these three objectives:
    • Principally benefit low- and moderate-income residents; or
    • Assist in the elimination or prevention of slum and blight conditions; or
    • Meet other community development needs that have an urgency and are of very recent origin.
    • Weigh the timing, required effort, and level of funding. If you do not already originate loans, the process is going to take considerably longer. The typical time from application to approval is 45 days.6
    • Connect with another municipality that has a successful program and learn from their experience/mistakes.

Don’t:

  • Don’t apply for a section 108 loan if the project cannot generate sufficient revenue to repay the loan, as the municipality will still on the hook for repayment.
  • Don’t inflate your job creation numbers. Section 108 is tied to job creation, so if a project does not hit forecast job numbers, you may be required to payback.
  • Don’t take shortcuts with citizen engagement. Educating local residents will help to keep the project moving forward. (Section 108 sounds a lot like section 8, which can ruffle feathers).

Learn more about the Toolkit

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