Community Development Block Grant (CDBG) – Section 108 Loan Guarantee

Community Development Block Grant (CDBG) – Section 108 Loan Guarantee is a grant program from the Pennsylvania Department of Community & Economic Development (DCED) that enables local governments to obtain federally guaranteed loans to fund large economic development and community revitalization projects.

Under Pennsylvania's Section 108 initiative, loans are guaranteed by the Commonwealth, committing future CDBG allocations to repay the loan in case of default. Eligible uses include special economic development activities and certain public facilities.

Eligible applicants are Pennsylvania local governments that receive CDBG funds through DCED; urban areas receiving CDBG funds directly from HUD are not eligible for this initiative but may apply directly to HUD. Loan amounts vary based on project scope and available CDBG entitlement.

Section 108 Program - PA Department of Community & Economic Development Section 108 enables states and local governments participating in the Community Development Block Grant (CDBG) program to obtain federally guaranteed loans to fund large economic development projects and undertake revitalization activities.

Under Pennsylvania’s initiative to use Section 108 the loans are guaranteed by the Commonwealth, committing the use of future CDBG funds to pay off the loan in case of default.

Standards for Underwriting Special economic development activities Certain public facilities Loan Guarantees as security for federal loans Local governments that are not designated by HUD as urban counties or entitlement municipalities Refer to program guidelines Section 108 enables states and local governments participating in the Community Development Block Grant (CDBG) program to obtain federally guaranteed loans to fund large economic development projects and undertake revitalization activities.

Under Pennsylvania’s initiative to use Section 108 the loans are guaranteed by the Commonwealth, committing the use of future CDBG funds to pay off the loan in case of default. Who is eligible to apply? Communities that receive CDBG funds through the Department of Community and Economic Development are eligible to apply.

Urban areas that receive CDBG funds directly from HUD are not eligible for this initiative. They can still apply directly to HUD without state involvement. Currently, these HUD CDBG urban areas consist of 30 cities, boroughs and townships and the 13 largest counties in the state.

All other areas in the Commonwealth will be able to apply through DCED. How is this program changing? While all communities are currently eligible to apply for Section 108 without any significant state involvement, this plan makes it easier in three ways for smaller communities to apply for these funds.

First, it expedites access to funds by creating a process to help applicants overcome some of the initial approval hurdles by applying in advance on behalf of communities for future projects. Second, it develops underwriting guidelines to help communities evaluate their projects. And third, it will offer training and technical assistance to leverage the use of Section 108 resources.

What kinds of activities can be funded? Section 108 loan guarantees must be used for activities that meet one of the national CDBG objectives. They must: (1) benefit low-and-moderate-income persons; (2) prevent or eliminate slums or blight; or (3) meet other urgent community development needs.

Eligible activities include property acquisition; rehabilitation of publicly owned property; housing rehabilitation; economic development activities; acquisition, construction, reconstruction, or installation of public facilities or improvements. Do CDBG rules govern the Section 108 Loan Program? For purposes of determining eligibility, the CDBG rules and requirements apply.

As with the CDBG program, all projects and activities must either principally benefit low-and- moderate-income persons, or aid in the elimination or prevention of slums and blight, or meet urgent needs of the community. Section 108 loan guarantee funds are included in the determination that 70% of CDBG funds benefit persons of low-and-moderate-income over a one, two, or three-year period. How does HUD fund the program?

Section 108 obligations are financed through an annual underwritten public offering. Financing between public offerings is provided through interim financing established by HUD with a private financial institution. Generally, public offerings are held annually.

Is it a direct loan or a guarantee? A Section 108 Loan Guarantee is a mechanism that HUD uses to pledge the full faith and credit of the US Department of Housing and Urban Development (and the Federal Government) to secure a loan between the private sector and the eligible applicant. HUD is not the lender, but is the guarantor of this loan.

CDBG funds are used to guarantee that loan payments will be made to the creditor. Why are CDBG funds pledged as well as collateral even if there is other state backing? The pledge of CDBG funds is a statutory requirement, as is the requirement for additional collateral.

Requiring additional collateral allowed Congress the flexibility to terminate the CDBG program without putting previously issued Section 108 Loan Guarantees at risk. Can Section 108 Loans be in subordinated positions or do they have to be in first position?

As long as the applicant can meet the collateral requirements and tax-exempt financing is not involved, Section 108 Loan Guarantees can be in a subordinated position (but, usually, not lower than 2nd priority). What types of funds can be used for making the repayments?

Repayment sources include (but are not limited to): CDBG funds (grants and program income); tax revenues; loan repayments; general revenue funds (but such use is not typical); and proceeds from the sale of land owned by the applicant. How are the interest rates set? Interest rates charges on interim borrowings are priced at the three month London Interbank Offered Rate (LIBOR) plus 20 basis points.

Interest rates on obligations sold in public offerings will be determined by market conditions at the time of the offering. However, rates on non-callable obligations in the Section 108 public offering have been slightly lower than the yields on Federal agency securities (e.g., Fannie Mae and Freddie Mac) with comparable terms.

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