Special Notice / Hearing: None__
Vote Required: Majority
To: Honorable Board of Supervisors
From: Raymond Hodges, Director of Housing
Subject: Section 108 Loan Guarantee Program Application
RECOMMENDATION:
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Adopt a resolution authorizing and directing the Director of the Department of Housing or the Director’s designee, as the County’s official representative, to submit an application and amendments thereto and all understandings and assurances therein, to the U.S. Department of Housing and Urban Development for a loan of up to $10 million from the Section 108 Loan Guarantee Program, and to provide such additional information as may be required.
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BACKGROUND:
The Section 108 Loan Guarantee Program (Section 108) provides communities with a source of low-cost, long-term financing for economic and community development projects. Section 108 financing provides an avenue for communities to undertake larger, more costly projects, where they may have limited resources to invest upfront.
Section 108 can fund economic development, housing, public facilities, infrastructure, and other physical development projects, including improvements to increase project resilience against natural disasters. This flexibility of uses makes it one of the most potent and important public investment tools that the U.S. Department of Housing and Urban Development (HUD) offers to states and local governments.
Section 108 loans can be deployed by the County either directly to carry out an eligible project, or indirectly by re-lending (or, in limited circumstances, granting) the funds to a developer or business to undertake an eligible project.
The program is authorized under Section 108 of the Housing and Community Development Act of 1974 as the loan guarantee component of the Community Development Block Grant (CDBG) Program. The specific regulations governing the Section 108 Program may be found at 24 CFR 570, Subpart M, Loan Guarantees.
The County would be required to furnish security for the Section 108 loan by pledging current and future CDBG allocations to repay and secure the loan. In addition, the County would be required to pledge additional security for the loan. Additional security may include property liens, tax increment revenue, or other collateral as determined appropriate by HUD. HUD is flexible and will work with local governments to identify proper collateral, including accepting a subordinated position behind the primary lender.
DISCUSSION:
The Department of Housing (DOH) manages approximately $2.35 million each year allocated from the Community Development Block Grant program (CDBG), plus an additional $300,000 to $900,00 yearly in program income received as repayments from previous loans of CDBG funds. Funding is allocated each year through a Notice of Funding Availability (NOFA) issued each December and approved by the Board of Supervisors at a public hearing each April or May.
HUD monitors the DOH’s efficiency yearly through a “timeliness test” at the end of April to ensure that DOH has no more than 1.5 years’ worth of funding on hand at that time. To meet this timeliness test, DOH must fund projects, to the extent possible, that make immediate use of the CDBG funding. DOH failed the timeliness test last year, for the second time in the past 10 years, due to waning interest from the development community resulting from constraints on CDBG funding. DOH submitted a workout plan to HUD to satisfy the timeliness test in this coming year, but DOH management believes that utilizing the Section 108 Loan Guarantee Program is a reasonable means of ensuring ongoing compliance with the timeliness requirement and more efficiently serving the needs of lower income individuals and households in San Mateo County.
Participation in the Section 108 Loan Guarantee Program would be fiscally sound given current and anticipated CDBG funding. Currently, as allowed by statute, DOH allocates 20% of each CDBG allocation to administrative expenses, 15% to public service programs, and about 30% to minor home repair and economic development programs operated on a continuing basis in the county. Another 21% has been used to repay an existing Section 108 loan that helped fund a housing development project. There are three payments left on the existing Section 108 loan. Given these percentages, 14% of the yearly allocation could be used for repayment of a new Section 108 loan, or approximately $330,000. After the final repayments on the existing Section 108 loan, that number will increase to 37% of the yearly allocation, or approximately $887,000.
The current interest rate for Section 108 loans is approximately 4.55%. HUD estimates that a $10 million loan would require a yearly repayment of about $700,000, well within the funding that will be available once the existing Section 108 loan is fully repaid, less the continuing programs detailed above. In addition to the annual CDBG fund allocation, there is also the program income that could be used for loan repayment or for funding other projects proposed in any given NOFA.
A number of projects have been considered by DOH for potential funding using the Section 108 loan pool. These include improvements to a homeless shelter being redeveloped by WeHope, buildout of the childcare facility at Middlefield Junction, new elevators at two of the HomeKey projects, and assistance with rebuilding balconies at an apartment building serving very low-income households. Each project is a pressing need that could utilize the Section 108 funding in a timely manner. Applications for Section 108 loans require the County to satisfy certain public participation requirements, including making the application available to the public for review prior to submission to HUD.
Applications to the Section 108 programs are due by early June, though HUD will accept and evaluate early submissions as received.
The County Attorney has reviewed the proposed resolution as to form.
EQUITY IMPACT:
The Section 108 loan pool will be used to support continued work addressing the needs of very low- and low-income individuals and households in San Mateo County, a disproportionately high number of these individuals identify as Black, African American, African, Native Hawaiian, Pacific Islander, or Hispanic/Latino/a/e compared to the general population of the County.
FISCAL IMPACT:
The Section 108 loan would require the County to guarantee repayment with CDBG funding, either entitlement or program income, and furnish additional security as deemed appropriate by HUD. Projects anticipated to be funded with the Section 108 loan would not generate sufficient income to cover repayment of loans made with the Section 108 funds, so the CDBG allocation (and program income) would bear the full cost of repayments. It is not expected that the loan would require repayments from any other County funding source. There are no net County costs anticipated with the Section 108 loan.