Putting together funding sources for a redevelopment project can often be a daunting task. One potentially valuable funding source which is the Section 108 loan guarantee program.
Section 108 is the loan guarantee provision of the Community Development Block Grant (CDBG) program. See 24 C.F.R. §§ 570.1 et seq. Section 108 provides communities with a source of financing for economic development, housing rehabilitation, public facilities, and large-scale physical development projects. It is a public investment tool offered by the U.S. Department of Housing and Urban Development (HUD) to local governments, which allows the local governments to transform a portion of their CDBG funds into federally guaranteed loans. However, local governments borrowing funds guaranteed by Section 108 must pledge their current and future CDBG allocations to cover the loan amount as security for the loan. Additional security, which is determined on a case-by-case basis, will also be required to assure repayment of guaranteed obligations.
Activities eligible for Section 108 financing include:
- Economic development activities eligible under CDBG;
- Acquisition of real property;
- Rehabilitation of publicly owned property;
- Housing rehabilitation eligible under CDBG;
- Construction, reconstruction, or installation of public facilities (including street, sidewalk, and other site improvements);
- Related relocation, clearance, and site improvements;
- Payment of interest on the guaranteed loan and issuance costs of public offerings; and
- Debt service reserves.
All projects and activities must either principally benefit low and moderate income persons, aid in the elimination and prevention of slums and blight, or meet urgent needs of the community.
Section 108 offerings are financed through underwritten public offerings. Financing between public offerings is provided through an interim lending facility established by HUD. Interest rates on interim borrowing are priced at the 3 month LIBO rate plus 20 basis points (0.2%). Permanent financing is pegged to yields on U.S. Treasury obligations of similar maturity to the principal amount. A small additional basis point spread, depending on maturity, will be added to the Treasury yield to determine the actual rate.