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Study Examines CDBG Loan Guarantee Program

HUD has sponsored a study that investigates Section 108, the provision in CDBG’s authorizing legislation that allows grantees to borrow up to five times the amount of their annual grant through loans backed by the full faith and credit guaranty of HUD. These loans markedly expand the size and reach of local community development projects completed with CDBG funds and are especially important to local governments struggling to finance development needs during the economic recovery. The resulting report, “Study of HUD’s Section 108 Loan Guarantee Program,” describes this recent investigation of how communities used Section 108 funds and reports on the project outcomes from loans made in fiscal years 2002 to 2007.

Earlier studies by the U.S. General Accounting Office, the White House Office of Management and Budget, HUD’s Office of Policy Development and Research, and the Urban Institute have examined various questions raised about the Section 108 program: How are the loan funds used? Does Section 108 unnecessarily duplicate other federal economic development efforts? What risk does HUD assume by guaranteeing these loans? What are the outcomes of this resource for communities?1 The new study attempts to answer these questions using data collected and analyzed from surveys, site visits, and administrative records for projects funded during the study period.

Diverse Projects, Minimal Duplication and Risk, and the Need for Better Performance Measurement

HUD’s Section 108 loan commitment from 2002 to 2007 totaled $1.4 billion. The average loan size was $4.9 million for 296 projects across the country, ranging from $159,000 to more than $59 million. Researchers found that the most common types of projects funded with these loans involved economic development (60%), public facilities (31%), and housing (9%). These activities are consistent with the CDBG program’s national objectives, which are to benefit low- and moderate-income people, eliminate or prevent slum and blight conditions, and meet other urgent, recently emergent community needs. The prevailing activity was hard cost construction (visible physical improvements such as foundations, walls, roofs, electrical work, and plumbing), which accounted for almost half of all planned project expenses. (See table 1).

Table 1. Projected Uses of Project Funds Based on Section 108 Project Application Materials

Funding Use and Number of Projects
Hard Cost—Construction (142) Hard Cost—Equipment (37)
Acquisition of Land (127) Public Facility Development (37)
Professional Services—A&E (79) Environmental Review— Mitigation/Remediation (34)
Soft Cost—Other (75) Relocation (33)
Cost of Financing (62) Soft Cost—Financial Reserve (29)
Soft Cost—Construction Contingency (61) Soft Cost—Fees (29)
Interest Payments (59) Infrastructure—Streets (27)
Rehabilitation/Renovation (52) Soft Cost—Management and Administration (26)
Site Improvements (45) Soft Cost—Developer/Owner Overhead Profit/Fee (25)
Demolition/Clearance or site preparation (43) Infrastructure—General/Other (16)
Loans and Grants (41) Infrastructure—Water and Sewer (13)
Other (38) Infrastructure—Utilities (13)
Professional Services—Other (38) Environmental—Other (8)

Source: “Study of HUD’s Section 108 Loan Guarantee Program,” table 16, 22–23.

Researchers identified 679 unique sources for (and 1,074 unique uses of funds by) these Section 108 projects. Grantees were not required to leverage outside funding for projects that used Section 108 loans, but for those that did, each Section 108 dollar generated an average of $4.62 of largely private monies. In some cases, the leveraged funds were conditioned on approval of the Section 108 loans, whereas in others, these funds bridged the gap between Section 108 dollars and other committed funding to meet total project costs. Loan repayment took various forms, but most economic development projects depend on program-generated revenue such as rent, sales, third-party loan repayments, and increased tax collection. When interviewed, grantees and field office personnel emphasized how important it was to vet projects and structure Section 108 loans properly to avoid repayment difficulties. Both primary and secondary funding sources are pledged in the loan application, all of which would have to fail before a default occurred. As for grantee failures to meet loan obligations, HUD has never had to use its full faith and credit guaranty as a backstop and has never used credit subsidy funds reserved for future loss.

To explore the question of whether Section 108 duplicates existing federal efforts, the research team examined 10 federal programs that support economic development to see if those funds might have been used in lieu of Section 108. The researchers concluded that the superficial similarities to other programs were less significant than the distinctive urban development targeting and flexible requirements of the Section 108 program. Three-fourths of grantees stated that their projects would not be possible without Section 108 funding. Communities view Section 108 as a valuable tool that is flexible, supports a variety of activities, has low interest rates, provides seed money and gap financing, makes large projects feasible, and complements other programs and funding sources.

To study the results of Section 108 projects, researchers investigated how outcomes are measured, reported, and documented. Although the study team was able to obtain some results, complete data on project accomplishments were not uniformly available. Staff shortages, the length of HUD’s approval process, lack of technical expertise, local regulations, and reluctant reporting by private businesses all hindered efforts to maintain accurate documentation. Some information exists; grantees report accomplishments in annual reports, and HUD keeps relevant financial information (including contracts and promissory notes) for Section 108 loans on file. HUD also has some outcome data for individual projects and maintains a database reflecting respective projects’ anticipated job creation and retention rates.

Overall, researchers determined that the Section 108 program works well in diverse communities. Room for improvement clearly exists in several administrative areas, such as streamlining application procedures, instituting a more formal approval process for necessary changes in ongoing projects, and creating a reporting system with standard performance measures that permit meaningful program assessments and improvements. The study team suggests that implementing these recommendations could better demonstrate Section 108’s ability to fill a crucial funding void for economic development projects in local communities. Some administrative improvements are already under consideration.