HUD Section 108 Loan Guarantee Program

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) programSee 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. 

For an example of Section 108 funds at work, see my post on February 7, 2012

Updates on NJ Tax Credit Legislation

In the past we have written and presented on various tax credit programs. One of the most successful has been the program created pursuant to the Urban Transit Hub Tax Credit Act, signed into law as N.J.S.A. 34:1B-207 et seq. Its success has led to the subsequent passage of the Grow New Jersey Assistance Act earlier this year. That Act has been codified under N.J.S.A. 34:1B-242 et seq. Their success has significantly reduced the availability of credits which, arguably, deprives worthy projects of much needed capital.

To remedy this shortage, lawmakers have introduced A2442 and S1562 in the current legislative session. These bills propose to expand the allowable tax credits under the Urban Transit Hub Tax Credit Program from $1.5 Billion to $2.5 Billion and also to expand the allowable tax credits under the Grow New Jersey Assistance Program from $200 Million to $400 Million. 

Despite the success of the Urban Transit Hub Tax Credit program, the extent of the legislation’s fiscal impact is unclear and that may be a deterrent to passage. The Office of Legislative Services (OLS) has calculated a potential loss of revenue to the state equaling $1,000,000,000 through fiscal year 2027 on both that program’s and Grow New Jersey tax credits. There is also the potential for lost opportunity costs as the State’s funding is directed from one economic activity to another. These losses are potentially offset by the realization of capital projects in eligible areas which will benefit both the State and local governments.

Notwithstanding the uncertainty of projected fiscal impacts, the senate bill (S1562) extending the amount of allowable tax credits has been reported favorably by two committees—the Senate Economic Growth Committee and more recently the Senate Budget and Appropriations Committee. A2442 has been referred to the Assembly Commerce and Economic Development Committee. For further information regarding the Grow New Jersey Assistance Act, please refer “New Jersey’s Latest Tool for Economic Growth”, Real Estate Department Alert (January 2012). Please contact us for information on our webinar on the Urban Transit Hub Tax Credit program presented in December 2011.

In the February 2012 issue of “In The Zone”, we reported on pending legislation, A1450 and S141, commonly referred to as the Historic Property Reinvestment Act. This Act seeks to establish a New Jersey historic tax credit which can potentially be twinned with the Federal Historic Tax Credit administered by the National Parks Service. The State proposal targets both homeowners and businesses. While it caps a homeowner’s historic tax credit at $25,000, there is no cap for businesses. Further, the incentives differ, providing more flexibility with the tax credit program for businesses. Last year, nearly identical legislation, A1851, made its way through both legislative houses only to be vetoed by Governor Christie.

These bills are moving at a disappointing pace since their introduction earlier this year. As of this writing, only one legislative committee, the Senate State Government, Wagering, Tourism & Historic Preservation Committee, has conducted hearings on S141 and filed a favorable report with amendments to that legislation. The amendments are technical in nature and do not substantially change the bill as S141 was pre-filed for introduction in the 2012-2013 session pending technical review. In March, the committee performed its review and amended S141 to extend the deadlines by one fiscal year.

For further information, please refer to our article entitled The New Jersey Historic Tax Credit – Is Now The Right Time? published in the February 2012 edition of In The Zone or contact Jeffrey N. Hall or Daniel V. Madrid.