Using Section 108 Loan Guarantee Financing to Promote Economic Development March 2011

1. Using Section 108 Loan Guarantee Financing to Promote Economic Development March 2011

2. Participating in the Webinar • Call will last approximately 90 minutes. • All callers are “muted” due to the high number of participants. • The slides will be posted on the CDBG Program pages shortly. • Webinar will be recorded for future use and made available for viewing/downloading.

3. Participating in the Webinar • Please call into the webinar using the audio information, and log into the viewing portion using the Live Meeting link. • If you have questions on the material that is covered today, you are welcome to submit them throughout the presentation using the “Q&A” function on the Live Meeting toolbar. • A resource advisor will forward some questions to presenters to answer at the end of the webinar. • HUD will be developing additional guidance on Section 108 loan guarantee financing.

4. Using Section 108 Loan Guarantee Financing to Promote Economic Development March 2011

5. SECTION 108 LOANGUARANTEE PROGRAM • ADMINISTERED AS PART OF CDBG PROGRAM • 24 CFR § 570.700-570.711

6. Section 108 loan guArantee program overview

7. WHAT IS SECTION 108? • Financing tool that allows communities and States to expand size of their CDBG programs (as much as 5 times their CDBG allocations) • If activities meet CDBG requirements and loan meets Section 108 underwriting criteria, State or locality issues note for HUD’s guarantee • Notes are repaid with CDBG funds, program income, and/or other revenues

8. SECTION 108 SUMMARY • Over 1,800 commitments, totaling $8.5 billion • $2.4 billion in loans outstanding • Approximately 60% of Section 108 commitments are allocated to economic development • 100,000 jobs created or retained

9. WHY SECTION 108 IS NECESSARY • Communities have “Main Street” development projects which need long-term, affordable financing • CDBG funds aren’t available because they are obligated to other uses • Private sector investors (“Wall Street”) are willing to provide financing for projects, but are unwilling to bear project risk • Section 108 is a vital resource for matching the needs of Main Street with the financing from Wall Street

10. ADVANTAGES OF SECTION 108 • LEVERAGE: $1 of CDBG creates $5 of Section 108 borrowing capacity • RECEIVE FUNDS NOW not pay-as-you-go • SPREAD COSTS over multi-year period • LONG-TERM, FIXED-RATE FINANCING at AAA rates • NOT A GENERAL OBLIGATION for debt purposes

11. SECTION 108 FLOW OF FUNDS(KEY PLAYERS) HUD Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) Wall Street(Private Lenders/Investors) Borrower* * “Borrower” in this case denotes all eligible community recipients

12. SECTION 108 FLOW OF FUNDS (CONT.) HUD Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) Borrower applies to HUD for Section 108 Guarantee and Offers Pledge of CDBG Wall Street(Private Lenders/Investors) Borrower* * “Borrower” in this case denotes all eligible community recipients

13. SECTION108 FLOW OF FUNDS (CONT.) HUD HUD Section 108 Guarantee Pledge of CDBG Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) Wall Street(Private Lenders/Investors) Borrower* * “Borrower” in this case denotes all eligible community recipients

14. SECTION 108 FLOW OF FUNDS (CONT.) HUD HUD Section 108 Guarantee Pledge of CDBG Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) Wall Street(Private Lenders/Investors) Project $ Project $ Borrower* * “Borrower” in this case denotes all eligible community recipients

15. SECTION 108 FLOW OF FUNDS (CONT.) HUD HUD Section 108 Guarantee Assignment of Additional Loan Security Pledge of CDBG Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) Security Wall Street(Private Lenders/Investors) Project $ Project $ Borrower* * “Borrower” in this case denotes all eligible community recipients

16. SECTION 108 FLOW OF FUNDS (CONT.) HUD HUD Section 108 Guarantee Assignment of Additional Loan Security Pledge of CDBG Security Main Street Project The Eligible 108 Activity (Borrower or Third Party Borrower) Wall Street(Private Lenders/Investors) Project $ Project $ Borrower* Repayment $ Repayment $ * “Borrower” in this case denotes all eligible community recipients

17. PROJECT EXAMPLE: OXFORD PLAZA AND DAVID BROWER CENTER (Berkeley, CA) • Oxford Plaza • 41 spaces of ground-level parking • 8,100 square feet of retail • 97 units of affordable housing • David Brower Center • 33,000 square feet of rental office space for non-profit organizations • 7,400 square foot auditorium and conference center • 3,000 square foot restaurant

18. PROJECT EXAMPLE: ADRIAEN’S LANDING—HARTFORD, CT • 36-acre area-based development • Housing • Retail • Entertainment • Hotel • Convention Center • Recreation

19. Section 108 LOAN GUARANTEE program basics

20. Who Can Apply? • Entitlement Communities (Cities and Urban Counties) that receive CDBG funds directly • Non-Entitlement communities eligible to receive CDBG funds under the HUD-Administered Small Cities CDBG program • Non-Entitlement public entities assisted by states that administer block grants • States (for use in non-entitlement areas) • Insular areas (American Samoa, Guam, Northern Mariana Islands, and the Virgin Islands)

21. HOW CAN SECTION 108 LOAN FUNDS BE USED? • Real property acquisition • Rehabilitation of publicly owned real property • Relocation • Clearance/demolition • Site preparation • Housing rehabilitation • Economic development • Public facilities/improvements • Issuance costs • Interest costs • Debt service reserves

22. TYPICAL ECONOMIC DEVELOPMENT USES OF SECTION 108 FINANCING • Commercial Development • e.g., retail, offices, restaurants • Industrial Development • e.g., manufacturing, warehouses, bio-medical facilities • Working Capital

23. NATIONAL OBJECTIVES • Any national objective is possible, depending on purpose of Section 108-assisted development • Job creation/retention • Area Benefit • Limited Clientele LOW/MOD BENEFIT • Area • Spot SLUM/BLIGHT URGENT NEED

24. PUBLIC BENEFIT STANDARDS • Mandatory for: • Special economic development projects -- §570.203 • Community economic development projects (by CBDO) -- §570.204, and • Public improvement or facility projects classified under Low/Mod Job Creation/Retention where more than $10,000/job in CDBG assistance

25. OTHER REQUIREMENTS Section 108 activities must comply with all CDBG rules • 70% LMI Targeting • Other Federal Requirements • Environmental review • Davis Bacon • Uniform Relocation Act • Office of Management and Budget circulars (as applicable—A-122, A-87, A-21) • Fair housing/equal opportunity • Lead Based Paint

26. Section 108 LOAN GUARANTEE PROGRAM financing

27. SECTION 108 FINANCING SPECIFICS • Amount  up to five times annual CDBG award • Entitlement • State • Maximum Term  20 years • Taxable

28. SECTION 108LOAN-GUARANTEE FINANCING HUD Guarantee Investor(Interim Lender) Guarantee Pledge of CDBG Funds LoanProceeds Investor (PermanentLender) LoanProceeds Locality/State

29. TYPES OF FINANCING • Interim – variable interest rate • Permanent – fixed interest rate

30. INTERIM LOANS • Interim loan available until public offering • Fiscal Agent arranges sale of HUD-guaranteed note and services loan • Interest rate: Variable 90 day London Inter Bank Offered Rate (LIBOR) + 20 basis points, paid quarterly • HUD guarantees repayment of borrower’s loan to investors • Interim Lender currently a Money Market Fund (Federated Investors)

31. PERMANENT LOANS • Permanent – fixed interest rate • Public offering provides long-term, fixed-interest rate financing • “Public offering” conducted annually by Section 108 underwriting team • Interest rates—fixed; benchmarked on U.S. Treasury yields • Fees—includes underwriting, legal and printing costs • Loans serviced by trustee

32. COMPARISON OF INTEREST RATES(March 2011) • Prime Rate (variable) –3.25% • Section 108: fixed (due 8/1/2031)** – 3.85% • Section 108: variable – 0.51% (LIBOR OF 0.31% plus 20 basis points) **If public offering were held in March

33. SECTION 108 UNDERWRITING • Debt coverage ratio, as applicable • Credit Reform Act • HUD estimates “subsidy rate” for Section 108 • HUD establishes loss reserve • CDBG grants and additional loan security

34. FORMS OF ADDITIONAL SECURITY Examples include: • Assets created from use of Section 108 guaranteed loan (project-based security) • Real Property • Portfolio income • Equipment • Parking revenue • Special tax revenue

35. PROJECT BASED SECURITY Examples include: • Lien on real property (in name of HUD Secretary) based on appraised value • Tax increment revenues • Assignment of interest on third-party (e.g., business) loans • “Additional Security” (negotiated on a case-by-case basis)

36. SOURCES OF REPAYMENT OFSECTION 108 LOANS Examples include: • Payments from third-party borrowers • Tax Increment Financing (TIF) revenues • Program Income • CDBG program grant funds

37. Key steps

38. KEY SECTION 108 STEPS Screen potential project Underwrite project Apply to HUD for loan guarantee Receive approval from HUD and close loan Disburse and service loan

39. STEP 1: SCREEN THE PROJECT • Grantees screen projects prior to HUD application to determine: • Eligibility of use • Activity Eligibility • National Objectives Compliance • Public Benefits Standards (as applicable) • Other federal requirements • How the Section 108 loan willbe repaid

40. STEP 2: GUIDELINES FOR UNDERWRITING ECON DEV PROJECTS See guidelines at 24 CFR 570.209(a): • Project costs are reasonable • Sources of funding are committed • CDBG/Section 108 not to be substituted for non-federal funds • Project financially feasible • Return on owner’s equity not unreasonably high • Pro-rata disbursement

41. STEP 3: APPLY TO HUD • Presubmission requirements • Submission requirements • HUD Review

42. BEFORE SUBMITTING • Presubmission and citizen participation requirements • Proposed application includes: • Community development objectives to be met by use of loan guarantee financing • Description of activities and national objectives to be met, and costs • Citizen Participation • Publish community-wide proposed Section 108 loan guarantee application for citizen review and comments • After consideration of citizen comments, make final copy of proposed Section 108 loan guarantee application available to citizens • Consolidated Plan • Follow community’s Consolidated Plan for substantialamendments and citizen participation requirements

43. APPLICATION SUBMISSION 2. Submission Requirements • Projectandactivitydescription,including costs • Eligibility category, including public benefit standards (as applicable) • National objective • Repayment schedule • Certifications

44. HUD REVIEW 3. Review • HUD Field Office • HUD Headquarters

45. STEP 4: RECEIVE APPROVAL AND CLOSE • HUD approves & issues commitment • Close Section 108 loan • HUD prepares loan documents • Delivery of documents to investor (thru Fiscal Agent or Trustee)

46. STEP 5: DISBURSE AND SERVICE THE LOAN • Trustee/Fiscal agent wires funds to account • Custodial Accounts • Guaranteed Loan Funds Account • Borrower disburses funds for activity costs • Borrower disburses to 3rd party for carrying out approved activities • Loan Repayment Account

47. SECTION 108 SUMMARY • Important Development Tool • Wide range of eligible uses • Addresses CDBG national objectives • Non-competitive and rolling process • Leverages scarce resources • $5 for every $1 of CDBG • if underwritten properly, will not be a drain to CDBG program • Important source of funding for larger projects • Flexible repayment schedule • Long-term, reasonably priced financing

48. CONCLUSION ANDLIST OF RESOURCES • E-mail box for questions CDBGEDquestions@hud.gov • CDBG Statute and the Code of Federal Regulations http://www.hud.gov/offices/cpd/lawsregs/index.cfm • Federal Register Notices on Job Relocation and Eminent Domain http://www.hud.gov/offices/cpd/economicdevelopment/toolkit/Job_Pirating_Final_Rule.pdf http://edocket.access.gpo.gov/2006/pdf/06-6258.pdf • Economic Development Toolkit http://www.hud.gov/offices/cpd/economicdevelopment/toolkit/index.cfm • Join Us for the Next Webinar: “Open Forum/Question and Answer Discussion on CDBG and Section 108 Economic Development (for states and entitlements)” – Wednesday, March 30, 2011

49. Your Feedback is Important to Us! • Join Us for the next webinar on Wednesday, March 30, 2011: “Open Forum/Question and Answer Discussion on CDBG and Section 108 Economic Development (for states and entitlements)” Please take a minute to answer a quick 15-Question survey on this HUD Presentation. • Link: http://www.surveymonkey.com/s/CDBG2