HomeMy WebLinkAboutITEM VI ONE STOP CENTER
Interoffice Memorandum
To: Auburn City Council Committee of the Whole
From: AI Hicks
cc: Mayor Lewis, Michael Davolio
Date: 10-25-06
Re: Section 108 Loan Guarantee Fund
INTRODUCTION
As a result of its participation in the Community Development Block Grant Program, the City of
Auburn is able to access the Department of Housing and Urban Development's Section 108
program. Section 108 is the loan guarantee provision of the Community Development Block
Grant (CDBG) program. Section 108 provides CDBG communities with a means of leveraging
their CDBG funds to obtain additional financing resources for economic development, public
facilities, large-scale physical development projects and housing rehabilitation.
The loan guarantee program enables CDBG communities to borrow up to 5 times their CDBG
entitlement amount from the federal government for use in conjunction with CDBG eligible
activities. Loans have an attractive interest rate, repayment can be spread from 10 to 20 years
and CDBG funds can be used to repay the loan.
For the first year of the loan, the interest rate will be the "interim rate." At the conclusion of the
first year the rate can become a fixed rate loan or remain at the "interim rate," which can change
period ically.
Regulations governing the Section 108 program may be found at Title 24 Code of Federal
Register Part 570, Subpart M "Loan Guarantees" or on the Internet at:
http://www. hud .gov/offices/cpd/communitydevelopmentlprograms/1 081
ELIGIBLE APPLICANTS AND ACTIVITIES
Eliqible Applicants. Within HUD's Northwest/Alaska region, eligible applicants include the
following public entities:
. CDBG entitlement entities, and
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. Non-entitlement communities that are assisted in the submission of applications by States
that administer the COBG program.
Eliqible Activities. Activities eligible for Section 108 financing include:
. Economic development activities eligible under COBG;
. Acquisition of real property;
. Rehabilitation of publicly-owned real property;
. Related relocation costs;
. Clearance, demolition, and removal on acquired or rehabilitated public property (including
environmental cleanup);
. Site preparation including construction, reconstruction, or installation of public facilities related
to property acquired or rehabilitated using Section 108 funds or for economic development
purposes;
. Payment of interest on the guaranteed loan and issuance costs of public offerings;
. Oebt service reserves;
. Housing rehabilitation eligible under COBG; and
. In limited circumstances, housing construction as part of community economic development.
Public entities may re-Ioan funds to business, non-profits or other third parties to undertake
eligible activities. For purposes of determining eligibility, the COBG rules and regulations apply.
As with the COBG program, all projects and activities must either principally benefit low and
moderate income persons, 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 requirement that
70% of all COBG funds benefit persons of low and moderate income.
HOW THE PROGRAM OPERATES
Maximum Commitment Amount. Commitments are limited as follows:
. An entitlement entity may apply for up to five times the public entity's latest COBG entitlement
amount, minus any outstanding Section 108 commitments or principal balances on Section
108 loans.
. The Section 108 loan program requires an 80% loan to value ratio.
Financinq Source. Section 108 obligations are financed. annually through underwritten public
offerings in which fixed rate notes are sold to private investors. To ensure the marketability of
Section 108 notes, HUO provides a 100 percent full faith and credit guarantee to investors.
Financing between public offerings is provided through an interim lending facility established by
HUO. Although HUO coordinates the funding process, it does not have a direct role in the flow of
funds. The interim lender and investors provide funds, underwriters and the Fiscal Agent manage
the transactions, and the locality and any third party participants actually borrow the funds.
Security. Security for the loan guarantee includes a pledge by the public entity or State (in the
case of non-entitlement entities) of its current and future COBG funds. Additional security will
also be required to assure repayment of the guaranteed obligations. The additional security
requirements will be determined on a case-by-case basis, but will include assets financed by the
guaranteed loan. Should the Section 108 loan funds assume a subordinate security position, a
pledge by the borrower to repay the loan from its general fund is required.
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Loan Repayment. The maximum repayment period for a Section 108 loan is 20 years. Interim
loan interest payments are due quarterly on the first day of the months of February, May, August,
and November. On permanent loans, principal payments are due once a year on August 1 and
interest payments are due twice a year on August 1 and February 1. Principal payments must be
made in increments of $1,000. Interest begins accruing from the date the funds are deposited in
the entity's account. HUO has the ability to structure the principal amortization to match the
needs of the project and borrower.
Prepayment. Investors buying the Section 108 notes are guaranteed the timely payment of
principal and interest for a ten-year period. Technically, the borrower cannot prepay the loan
during this period. However, by guaranteeing the income stream to the investor through a
deposit of funds with a Fiscal Agent, the borrower is defeasing or voiding the Section 108
obligation. Loans under the interim financing are not subject to the ten-year prepayment lock out.
Interest Rates. Interest rates on interim borrowing are priced at the three-month London
Interbank Offered (L1BO) rate plus 20 basis points (0.2%). Interest rates on obligations sold in
public offerings will be determined by market conditions at the time, but generally will be slightly
lower than yields on Federal agency securities (e.g. Fannie Mae and Freddie Mac) with
comparable terms.
Financinq Fees. The only financing fees of the Section 108 program are those related to
issuance of the Section 108 notes, such as fees to the underwriters and the Fiscal Agent and any
other expenses relate to the offering. Total financing fees will generally be one-half to one percent
(0.5% - 1.0%) of principal. Other than these up-front fees, no additional maintenance fees are
charges for Section 108 notes.
Requlations. All COBG program regulations such as citizen participation, Oavis-Bacon, and
relocation/displacement compliance must be met. The environmental assessment must be
completed prior to incurring or expending any project costs.
Oevelopinq an Application. Applications for Section 108 guarantees are accepted throughout the
year. Public entities wishing to apply for Section 108 loan guarantee assistance are advised to
collaborate with HUO for guidance in preparing an application.
SECTION 108 LOAN and the "ONE STOP CENTER" FOR HUMAN SERVICES
Local human service agencies are collaborating to develop a "One-Stop" Center for human
services. Several agencies would locate their activities in the Center, while others would maintain
their current facilities but have a "presence" in the Center to engender agency collaboration and
client referral.
While the agencies have not yet developed a diagram of a facility or firmly established space
needs, early estimates have placed the cost of an existing 35,000 - 40,000 square foot facility at
approximately $5,000,000. A site selection committee has identified an optimal facility that the
King County Assessor has valued at approximately $3,000,000.
The current City of Auburn annual COBG entitlement is $400,000. The agencies have asked for
the City to financially assist in the acquisition of a facility. While the annual COBG entitlement is
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inadequate to substantially assist in the acquisition of a facility to be used for human services, the
Section 108 Loan Guanantee Program could provide a substantial portion of the money needed
for acquisition. At this time, the City could borrow up to $2,000,000 through the Section 108
program.
The Section 108 loan will provide less than half the money required for a $5,000,000 project.
The agencies will need to raise the balance of the money through grants and private fund raising,
a commercial loan, or any combination of fund raising, grants and a commercial loan.
In order to qualify for a conventional loan, it is probable the lender will want to be in "first position."
This means that the City and the Section 108 loan will be subordinate to the first loan. In case of
default the conventional loan would be satisfied first. Should this be the case, HUO will ask the
City to pledge to repay the loan from its COBG funds or, in the absence of COBG funds, its
general fund.
Potential Tenants. At this time there are several potential tenants for a One-Stop Center. The
Auburn Food Bank will need to move to a new facility in the near future, and has been an active
participant in the process. The Oepartment of Public Health has expressed an interest in locating
in the One-Stop Center. Children's Home Society has acknowledged a willingness to sell their
current Auburn facility and relocate to the One Stop Center. A YR has indicated an interest in
space. Other agencies have expressed a desire to co-locate at the One-Stop Center.
Some of these tenants may be in a position to bring equity with them. This would help reduce the
cost of a facility. At the same time, agencies such as the food bank have not been paying rent
and may find it difficult to pay the cost of leasing a large facility.
In order to repay the loans needed to acquire and renovate a facility, tenants in a One-Stop
Center will need to pay rent for the space they occupy.
Loan Repayment. Once the loan funds are obtained, the City can loan the Section 108 funds to
the non-profit owning the One-Stop Center. As long as the City complies with the COBG
regulations, it has the ability establish the terms and conditions it feels to be appropriate for the
loan.
The City will need to decide the term and the interest rate, if any, for the loan. The City could loan
the money repayment free for as few as 10 years or up to 20 years, using some or all of its
COBG entitlement to repay the loan. The City could repay the principal and require the non-profit
responsible for the One-Stop Center to pay the interest. The City could loan the Section 108
money to the non-profit at a rate equal to or greater than the rate charged by HUO.
In considering the terms under which the money is loaned and how it is to be repaid, the City may
want to take into consideration the amount of money raised as well as the per square foot cost
charged the agencies in order to repay any commercial loans.
Ultimately, the goal is to encourage agencies to locate at the One-Stop Center, thereby
engendering collaboration between the agencies and facilitating a holistic approach to client
services. The expected outcome is to help clients to improve their status by making available a
series of opportunities that will meet the entire range of needs of a client, rather than addressing
a single, immediate problem.
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