Section 108
I. INTRODUCTION
Section 108 is the loan guarantee provision of the Community Development Block Grant (CDBG) program. The authority for funding is found in section 108 of the Housing and Community Development Act of 1974, as amended. Regulations are found in 24 CFR 570.700 The section 108 Loan Guarantee program differs from traditional HUD development programs in the Section 108 funds are extended as loans to the localities. The Department of Housing (DOH) must pledge future CDBG funds which serve as backup security to project assets. Of all the uses of these loans, the most common is for economic development activities, which involve the expansion, retention or creation of for-profit business or industry. During this "Demonstration" period, the Department of Housing's Section 108 Loan Guarantee Program is making the program available for housing rehabilitation and economic development projects only. The amount of funds committed to particular projects will be based on risk analysis, financial need and feasibility and public benefit.
Public facilities may be added in subsequent years if this demonstration program proves successful. Also, total Section 108 authority available Statewide is over $70 million; but the State is electing to open only $14 million on this demonstration basis until some program experience can be obtained.
DOH Section 108 process involves four steps:
(1) Pre-application submission and approval
(2) Final Application submission and approval
(3) Financial Closing and record keeping
(4) Monitoring and reporting
The following material thoroughly covers the program details and Step 1, the Pre-application requirements. [See Exhibit A for Process Overview]
Program Limitations:
Each state that administers the Section 108 Loan Guarantee Program establishes program limitations. Connecticut’s program limitations are as follows:
- Statewide assistance is limited to $14 million or no more than $1,500,000 principal and interest payments annually.
- The minimum amount per project is $500,000.
- The maximum loan guarantee per applicant or per project will not exceed $3.75 million.
- The maximum loan term will be 20 years.
- Loans will be capped at 75% to 80% Section 108 loan to collateral value pledged.
- Repayment feasibility must be reasonably assured.
- Each project must demonstrate at least 10% equity participation.
- Section 108 loan funds cannot constitute more than 90% of total project costs.
- For Economic Development projects, the cost per FTE job cannot exceed $35,000 in Section 108 funds. (All jobs must be "permanent")
- For Economic Development projects, Section 108 assistance is limited to a maximum of $350 per LMI resident served.
- The interest rates charged will be pegged to cost of funds, which track treasury rate(s).
- For housing rehab projects, maximum assistance and availability to LMI will be consistent with HOME program guidelines.
HUD must approve all Section 108 projects; as you will see after reading this document, a lot of information is required. The Department of Housing will assist applicants, but it is the responsibility of the business or industry being assisted and the applicant locality to provide the information requested to ensure timely review and approval of projects.
Federal regulations require that any proposed use of Section 108 funds for assistance to for-profit entities first be determined to be eligible and meet certain underwriting criteria. This means, given the public benefits to be derived from the project, that the amount of Section 108 assistance and the financial terms are based upon need and no entity will be unduly enriched. In order to assure that such assistance is not excessive, DOH will verify the applicant’s financial analysis of each proposal to determine eligibility of Section 108 assistance. This
Pre-application Package is the vehicle for the Department’s determination and provides summary information about the Section 108 process.
General Principles to be Considered by DOH:
1) ensure that funds are not being substituted for available private debt financing or equity capital
2) ensure that there is likelihood of project success
3) ensure that the proposed project meets a national CDBG objective and is eligible.
4) the financial and program risks to the State are not unreasonable.
Purpose of the Pre-application:
This Pre-application package is used to determine if a Section 108 proposal meets eligibility and feasibility criteria for submission to HUD for further consideration. This screening process will identify meritorious projects, which are candidates for Section 108 funds, and will eliminate ineligible projects (projects having unacceptable credit risks, or projects, which conflict with the program above cited "general principles"). With this initial screening, the desk analysis can make an early determination about a project before going through the entire application process. The Pre-application will not require extensive work or materials from the private sector. That comes later in the Final Application.
The Pre-application package is supplemental to HUD’s Section 108 Proposal format, which must be submitted for their consideration for each prospective project upon approval of the Pre-application. DOH reserves the right to make determinations of award on a case-by-case basis.
During this demonstration period Section 108 applications will be considered on a first come/first completed basis, until initial $14 million authority is exhausted. If two or more completed Pre-applications for Section 108 funding are being considered for funds - and the balance of $14 million demonstration authority will not adequately fund both, the State’s Small Cities competitive award criteria will be employed. Project’s requiring approvals for which all financing has not "closed" within 12 months of conditional approval by HUD will be subject to "authority" recapture. Upon review and approval of the Pre-application the Final Application will be invited, and that step will require additional information from the ultimate borrowers.
The Pre-applications Will be Reviewed for the Following:
- Eligibility of the proposed activity
- Eligibility with respect to a national objective
- Consistency with Section 108 general principals and State’s Consolidated Plan
- Appropriateness of assistance to for-profit businesses
- Preliminary Credit analysis of project and third party participants
The information provided by firms in this Pre-application Package will be kept s strictly confidential, in accordance with Connecticut Freedom of Information Act, which protects this type of information.
Completing the Pre-application:
There are a number of steps that all Section 108 applicants must take in order to complete a Pre-application.
- Review the Section 108 Program requirements.
- Determine the needs of your community and to formulate a list of potential projects that could be applied for. This can be done through the completion of a need assessment and/or request for local development proposals (RFP). Marketing materials attached could be used in conjunction with RFP [See Exhibit B]. Not understanding these requirements may cause you to expend great time and effort on an activity that cannot be funded.
- Complete the Pre-application materials found later in this material. The Pre-application should be based on community’s needs and priorities as identified in the need assessment. Citizen participation should be encouraged at all steps in the process.
- If the Pre-application is approved for submission of a Final Application, a local public hearing and citizen participation must be carried out pursuant to 24 CFR 570.704 (a)(2) [See Exhibit C].
Please be sure you complete all parts of the Pre-application. If you are submitting proposals for several distinct activities, you must complete an application for each. If a question or Exhibit is not relevant to your project, place "N/A" (not applicable) in the space. All parts of the application and required Exhibits must be completed for the Pre-application to be eligible for evaluation.
The Pre-application must be signed by the Chief Executive Officer of the applicant.
Pre-application Package Submission:
A Pre-application package may be submitted at any time. An original and three copies of the Pre-application package should be sent to:
Dimple Desai, Community Development Director
Department of Housing
505 Hudson Street, Hartford, CT 06106-7106
II. PROGRAM OVERVIEW
What is Section 108:
Section 108 is the loan guarantee provision of the Community Development Block Grant (CDBG) program. In Connecticut, Section 108 provides communities with a source of financing for economic development and housing rehabilitation projects.
What is the Process - The Big Picture:
The project and the annual CDBG State entitlement assumes the ultimate risk of paying back the Section 108 notes. To ensure the marketability of Section 108 notes, HUD provides a 100% full faith and credit guarantee to the private investors who purchase the State or local taxable notes at the public offering.
Legal Authority:
In Connecticut Section 108 of the Housing and Community Development Act of 1974, as amended. (24 CFR 570.700 or Subpart M, "Loan Guarantees").
Eligible Applicants in Connecticut:
Eligible applicants include the following public entities:
- All non-entitlement communities that are assisted in the submission of applications by States that administer the CDBG program
Regulatory Controls:
With its origin derived from CDBG legislation, Section 108 is subject to most CDBG requirements. The following key criteria is the same for both CDBG and Section 108:
- National Objectives: Low Moderate Benefit, Slums or Blight or Urgent Need
- Davis – Bacon Federal Wage Rates
- Environmental Clearance
- Public Benefits for economic development projects
- 30% limitation on Slums or Blight; Statewide average
- Many Certifications
One difference is in determining eligible activities, Section 108 can fund only a subset of the CDBG eligible activities; namely, the following activities . . .
Section 108 Eligible Activities in Connecticut (Demonstration Program):
Another difference important to Section 108 is the need to complete a project "underwriting" which will demonstrate both adequate collateral and cash flow to insure repayment of the Section 108 debt. [See Exhibit D]
All illustrated above, the eligible activities are quite broad. Communities can finance operating businesses and developers, micro-loans (via economic development) and Fortune 500 companies, machinery and equipment, working
capital, leasehold improvements, as well as furniture and fixtures. All these categories, however, carry burden of meeting "underwriting" for project feasibility.
Examples of Completed Projects:
- Mobile Home Park acquisition by tenant coop
- Industrial expansion
- Neighborhood shopping center
- Expansion of an accounting practice
- Warehouse facility
- Industrial park
- Incubator
- Creation of a retail business
- Office building
- Housing rehabilitation by a nonprofit
- Grocery store
- Bio-Tech facility
Loan Repayments:
Loan terms in range from 90 days to 20 years.
The term of the loan should be consistent with the economic life of the asset(s) being financed and/or used as security.
HUD has the ability to structure the principal amortization to match the needs of the project and borrower. The community has SOME discretion in structuring the terms of repayment. The community can add a debt service reserve the loan amount, structure interest only payments for a reasonable amount of time and can earn an "interest spread" subject to negotiations with the State.
Repayments from third parties are considered program income and a third party loan, a note receivable all of which will be pledged to the State and HUD.
Collateral and Cash Flow [Exhibit D for more detail]:
Projects can provide collateral and cash flow from the project itself (i.e., "in Project") or "outside" sources.
"In Project" Sources include . . .
- Loan repayments, mortgages on real estate, personal property, business assets, etc.
"Outside Project" cash flow and collateral (which are optional) examples include:
- Tax or other assessments (e.g., utility user charges);
- Income stream from a "seasoned" loan portfolio;
- Parking revenue pledge;
- Pledge of tax increment from a tax increment financing district;
Lease revenue;
- Pledge of fees/licenses;
- Pledge of tolls;
- Pledge of land or property (must have value); and/or
- General obligation of the community (rarely used, and not required).
Players/ Roles:
Eligible Community
All Connecticut non-entitlement communities are eligible. The community incurs the ultimate risk of the Section 108 borrowing. If the community manages risk prudently and transfers the risk and cost to the third parties, the community can accelerate CDBG activities and achieve tremendous leverage. To secure Section 108 debt, the State must pledge future CDBG entitlements, program income and additional security, as HUD deems necessary.
HUD
Once U.S. Department of Housing and Urban Development (HUD) approves the application it provides the 100% full faith and credit guarantees of the U.S. government.
Underwriters
A consortium of national brokerages, which sell the Section 108 taxable notes to private investors. The underwriters receive a fee for their services and HUD competitively bids the proposal on a periodic basis.
Fiscal Agent
The fiscal agent selected by HUD (generally a bank) acts as a trustee for the investors and manages disbursements and repayments to the community applicant.
Private Investors
The private investors fall into two major groups: Individuals or institutions. The investors are buying notes issued by the applicant, which has fixed rates and has nominal credit risk (due to the full faith and credit guarantee). The Section 108 notes are roughly equivalent to Treasury issues but are slightly different. Accordingly, they carry a premium over the Treasuries, ranging from one eight of a percent (1/8%) in the shorter maturities to six tenths of a percent (6/10%) in the longer terms.
Third Party Borrowers
DOH envisions that most localities will re-lend Section 108 funds to (A) for-profit businesses to create or retain jobs or provide goods or services to low or moderate income residents; or (B) non-profits for housing rehabilitation.
Default:
In the event of default (i.e., failure of the applicant community to make the note payments),HUD would continue to make a substitute payment to the investor notes in accordance with its terms. The source of payments by HUD, pursuant to its guarantee would almost always be pledged CDBG funds.
Timing of the Process:
Generally, the State will review the Pre-application as quickly as possible, generally within 30 days.
After the Pre-application submission (Initial Screening) has been reviewed and approved for submission of a Section 108 project, the locality prepares and submits a Final Application to start a HUD review. Development of Final draft application by locality may take 45 days to several months (develop project, publish notice, hold hearing, collect details from the borrower, etc.). Applicants must address the concerns brought forward in the public hearings before the Final Application can be submitted to the State for preliminary financial underwriting. Once approved, the State then authorizes (signs CDBG Pledge), the applicant to submit the application to HUD.
Review by HUD field office, (15 to 30 days)
The field office is required to review the application for eligibility, compliance with a national objective, and capacity of the locality to successfully carry out the activity. The field office will normally accept the standard certifications unless relevant information requires additional clarification. The field offices can request additional information, if necessary. Once the review is completed by HUD field office, it is forwarded to HUD Headquarters office in Washington.
In general, HUD Headquarters takes another 30 to 60 days to review applications.
The review assesses the risks, reasonableness and cash flow/collateral of the proposed project. After satisfactory review by HUD Headquarters staff, the application is sent to the Assistant Secretary for Community Planning and Development for "conditional approval."
Application Process Flowchart:
- Locality prepares Pre-application package and submits to DOH
- DOH reviews Pre-application package for eligibility and feasibility
- If Pre-application is approved by DOH, locality prepares Final application, meets public hearing requirements, submits to DOH for review and approval
- State agrees to pledge and forwards Final Application to HUD’s field office
- HUD field office reviews application, makes comments, requests information; submits to HUD Headquarters
- HUD Headquarters reviews, submits results to Assistant Secretary for Community Planning and Development "Conditional Commitment Approved"
- Applicant requests notes to execute contract to sign from HUD
- Applicant holds 2nd public hearing prior to disbursement of funds
- HUD contract signed, 3rd party borrower signs loan documents, and applicant executes notes returns all to HUD/Fiscal agent and copies all Documents to DOH
- Funding is wired into trust account and proceeds appropriately disbursed, report and files sent to DOH
- Applicant monitors project collects loan repayment, make payments to trustee and prepares progress reports for DOH
Compliance:
Applicant reports and State reviews for various issues such as of Davis-Bacon, Environmental Review, Historical Preservation, National Objectives, Underwriting, Public Benefits Criteria, Fair Housing and Equal Opportunity, and financial standards. For job creation/attraction, as well as provision of product/service post closing compliance monitoring will be required by the applicant and reviewed by DOH.
Reporting:
Final determination of expenditures as summarized in annual Grantee Performance Report or Performance Assessment Report must show that at least 70 percent of all CDBG expenditures (including Section 108 loan guarantee funds received) benefit low and moderate income individuals. Other compliance reporting will be required.
III. PRE-APPLICATION REQUIREMENTS
Eligibility of the Proposed Activity:
Does the activity qualify as an eligible activity under Connecticut’s Section 108 Program?
Does the activity meet one of the CDBG three national objectives?
Consistency with Local Goals and Objectives:
Is the activity consistent with the locally adopted Community Development Plan, Comprehensive Housing Assistance Strategy, or Statement of Community Development Objectives?
• As part of the Final Application process, the locality must comply with CDBG citizen participation requirement, including a public hearing on the Section 108 project. The public hearing must be held on the Draft Final Application and local approval given before the Final Section 108 application can be submitted. As part of the certification process, a locality is required to have approval from its local legislative body for the submission of a proposed Section 108 project at the Final Application step.
Appropriateness of Assistance:
For economic development purposes, when for-profit enterprises participate as third party borrowers, are the project costs and financial requirements an "appropriate" use of Section 108 Funds? Is there "appropriate" public benefit to warrant the cost incurred by the locality?
- When a Section 108 project provides assistance to for-profit enterprises, [Cite 24 CFR 570.703(i)(1) and (2)] and for some public facilities [Cite 24CFR 570.208(a)(4)(vi)(F)(2)] the locality, in conjunction with the state, must determine whether or not public funds should be used. A Section 108 loan cannot inordinately benefit a for- profit business, nor can it substitute for a private source of funds.
- The "appropriateness" analysis helps the locality, the State and HUD understand what financing is required under what reasonable terms, and why Section 108 is a suitable financial tool. This analysis includes public benefit requirements of $35,000 of Section 108 assistance per one permanent job full time equivalent (FTE), or $350 per low moderate income resident served. The primary difficulty encountered by most localities when fulfilling the appropriateness requirement is that they have not documented their analysis when deciding to use Section 108 funds for a project.
The CDBG appropriateness documentation must address the following six specific issues to HUD satisfaction:
- The costs of the activity are reasonable: Note: This text also applies to Housing Rehab projects
- To the extent practicable, reasonable financial support has been committed for the activity from non-Federal sources prior to disbursement of Federal funds
- To the extent practicable, any loan amounts to be provided to the activity do not substantially reduce the amount of non-Federal financial support
- The activity is financially feasible
- To the extent practicable, the activity does not provide more than a reasonable return on investment to the third party, taking into account the inherent project risks
- To the extent practicable, loan amounts used for the cost of the activity are disbursed on a pro rata basis with amount from other sources
- The Section 108 financial underwriting must address the cash flow and collateral issues. [See Exhibit D]
Compliance with HUD National Objectives:
A single loan to a business or developer must benefit LMI individuals or meet the Slum or Blight national objective criteria.
There are two ways a business may benefit LMI individuals:
1. Creation or retention of jobs "available to," "taken by," or "held by" LMI individuals; this is defined as a "direct benefit"
2. Through the provision of basic goods and services to a market which contains at least 51% LMI residents. This is defined as "area benefit:"
• If an area benefit is claimed, describe the business, its service, and document the % of LMI residents served. Census data is the most readily available source of information for this purpose other surveys are accepted on occasion (e.g., customer surveys).
Slum or Blight National Objective can be met two ways:
1. Area wide Slum or Blight
2. Spot Slum or Blight
The activity must address one or more cause/symptoms of the Slum or Blight. Slum or Blight projects must be balanced on a statewide basis, so the funding average cannot exceed 30% of the state’s CDBG entitlement.
Credit Analysis of Project and Participants:
What are the exact financial needs of the project? Are the third parties financially responsible and accountable?
- Determining the financial needs and the feasibility of a project requires careful analysis of its capital costs and its operating revenues and expenses.
- It is important to reiterate that Section 108 program requires full repayment of the loan. Credit analysis helps localities assess the risk of taking on Section 108 debt, especially when relying on third party borrowers. Applying good credit analysis techniques can help reduce the likelihood that future CDBG will be needed to repay the Section 108 loan extended to the third party.
- The locality and State assume the initial burden of credit review and analysis, but HUD Headquarters will complete a final review which may require the applicant to re-negotiate certain terms; especially those related to cash flow and collateral conditions.
IV. PRE-APPLICATION FORM
State of Connecticut Department of Housing
Section 108 Loan Guarantee Program
"Demonstration Application"
APPLICATION INFORMATION
Applicant Name ____________________________________________________
Address __________________________________Zip Code ______________
Contact Person ________________________Title _______________________
Telephone ( ) ____________________ Fax ( ) ___________________
Project Name:_____________________________________________________
Amount of Financial Assistance Requested $____________________________
Term Requested ___________________________________________________
PROJECT DESCRIPTION
Describe the proposed project, including an explanation of how all activities to be funded by Section 108 and other funding sources fit into the implementation of the project.
Address the following and Attach
- What is the purpose of the project?
- What is the nature of the project?
- Whom is it designed to benefit?
- To what extent does it benefit the neighborhood, municipality, and region?
- At what stage are you on the planning and implementation of this project?
- Any unique situations or anticipated problems in the development of the project
- Any special conditions/requirements imposed by others.
- If it involves relocation identify the numbers of individuals, families or businesses to be relocated
- For economic development projects, demonstrate how the business assistance is necessary or appropriate to create or retain jobs and address where there is a justifiable public benefit to be derived
Type of Activity (check the appropriate category)
_____ Economic Development
List the specific "Uses" of the funding (e.g., loan for purchase of equipment)
_____ Housing Rehabilitation
List the specific "uses" of the funding (e.g., loan for acquisition and rehab)
Project Location
Project Address: ______________________________________________
Census Tract: _________________________Block No. ______________
CONSISTENCY WITH LOCAL GOALS AND OBJECTIVES
Attach:
CITIZEN PARTICIPATION REQUIREMENTS
The applicant community is alerted to important citizen participation requirements as detailed in 24 CFR 570.704(a)(2) which must be satisfied prior to submission of Final Application. Citizen participation is encouraged at the earliest stages, even at the Pre-application step.
COMPLIANCE WITH HUD NATIONAL OBJECTIVES
How will your project address one of the following Objectives? (Briefly explain)
1. Benefit 51% Low and Moderate Income persons
2. Address or Eliminate Slums or Blight
3. Address Urgent Need.
Program Benefit To Low and Moderate Income Persons (LMI) Chart
Complete the attached chart :
Benefit Chart
Low and Moderate Income (LMI)
and
Public Benefit for Economic Development Projects
JOBS BASIS
National Objective(1) Public Benefit(3)
# # % # $/Job
Permanent FTE(2) Jobs All LMI LMI Permanent FTE(2) Jobs All LMI
Created ____ ____ ____% Created ____ $____
Retained ____ ____ ____% Retained ____ $____
Total ____ ____ ____%(5) Total ____ $____(6)
PRODUCT, SERVICE OR HOUSING BASIS
National Objective(1)
# # %
Area Served Total Pop. LMI LMI %(5)
Persons ____ ____ ____%(5)
Limited Clientele ____ ____ ____%(5)
# Units # Units % Units
Total LMI LMI
Housing Rehab ____ ____ ____%(5)
Public Benefit(3)
# # $/LMI Person
Total LMI
Pop. Pop.
Residential Area Served: _____ _____ $_____(7)
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(1) "Slum or Blight" or "Urgent Need" National Objectives alternatives need not complete this portion.
(2) FTE can mean two permanent part-time jobs at 20 hours per week, which equals one FTE.
(3) For Economic Development projects only under 24 CFR 570.203.
(4) This includes all FTE jobs, not just LMI ones.
(5) Must be equal to or greater than 51%.
(6) Must be equal to or less than $35,000/Job.
(7) Must be equal to or less than $350 per LMI resident some under 24 CFR 570.204.
APPLICANT CAPACITY
Provide Narrative and Attach
- Describe you municipality’s ability to administer the project and who will be designated as the responsible local official.
- Provide a staffing plan for the program, including roles and responsibilities, and tasks.
- If a delegate agency, such as a local redevelopment agency or a non-profit will be given responsibility for administering and implementing the program, describe their abilities, experience and key project personnel.
- If a consultant will be used to administer any portion of the loan, describe both the proposed roles of the consultant and the oversight responsibilities that municipal staff will have. Demonstrate cost reasonableness of fee.
IDENTIFY THIRD PARTY BORROWERS, IF ANY, THAT WILL BE INVOLVED IN THE PROPOSED PROJECT:
Company Name: _______________________________________________
Contact/Title: __________________________________________________
Address: ____________________________________________________
Telephone:_____________________________Fax_________________
Have any of the third party borrowers declared bankruptcy or been an officer
of a company or organization where bankruptcy has been declared?
_____ Yes (if yes, attach explanation) ______ No
Have third party borrowers or any of its principals been the subject of an unresolved CDBG funding?
_____ Yes (if yes, attach explanation) ______ No
LIST ALL OFFICERS, DIRECTORS, OWNERS (10% OR MORE), PARTNERS (10% OR MORE), AND/OR STOCKHOLDERS (10% OR MORE) OF THE COMPANY.
| Name | % Stock Ownership | Office Held |
Other Public Agency Participation:
Complete if the locality has designated another public agency to carry out the Section 108 activities:
Name: ________________________________________________
Contact: _______________________________________________
Address: _______________________________________________
Telephone: _________________________Fax_________________
Litigation:
Is the applicant or other participant entity facing any litigation related to housing, economic development, and community development activities?
_____ Yes ______ No
If yes, indicate the nature of the litigation and the status of that litigation and attach
Taxes:
Do any of the participants (individuals or entities with 10% or more ownership) owe past due Federal, State or Local taxes?
_____ Yes ______ No
If yes, explain in detail include any plans to become current.
SOURCES AND USES OF FUNDS
Identify all potential sources of financing for this project in order of lien position. Include funds already acquired, funds needed, use of funds, and long-range needs. Include the amount of the loan(s), interest rate, terms and conditions, and the security required for the debt and any conditions on equity participation.
A. Submit Budgets: "Sources and Uses," as well as an "Operating Budget" for first 5 years.
B. Verify the cost of items to be purchased with loan proceeds (these will need to be verified at Final Application step)
C. Identify other funding sources (Note: if Pre-application is approved, other sources will have to provide conditional commitments for Final Application.)
D. Document why CDBG funding is necessary. If conventional financing application was denied, attach turndown letters.
E. Justify financing terms and demonstrate that the project has adequate "collateral" and "cash flow" [See Exhibit D].
Security/Collateral Proposed Estimated Value (Check where appropriate, fill in values)
_____ Real Property $ ___________
_____ Inventory $ ___________
_____ Accounts Receivable $ ___________
_____ Personal Guarantee $ ___________
_____ Corporate Guaranty $ ___________
_____ Machinery and Equipment $ ___________
_____ Other (please specify) $ ___________
F. Demonstrate that the amount of CDBG funds is in proportion to the public benefit
1. Divide total CDBG amount by the amount of total jobs created or retained.
2. Will this project provide needed goods and services for LMI individuals? If so, explain including $ of Section 108 assistance per LMI resident.
3. Will the project increase the tax base, spur additional development or have other positive impacts on the community’s economy?
PROJECT TIMETABLE
All projects must be completed within tow (2) years of the award. A financial Closing must occur on the project within one (1) year from HUD’s Conditional Commitment. Complete and attach narrative to reflect how you will expend funds within that period.
Provide an estimate of the timing of the project including the scheduled date of Closing, construction start-up and the expected completion date. Identify any state, local or federal government actions related to this project that are required and status of each.
(Examples: environmental review, zoning actions, building permits or other permits/reviews)
MAP REQUIREMENTS
Submit a map (indicating of your municipal jurisdiction) displaying the following information:
A. Location of the proposed activity and /or boundaries of the service area(s) for the program;
B. Location of areas with minorities, showing number and percent of these individuals; and
C. Census tract boundaries, census tract numbers, and the percentage of LMI person for each census tract.
Next Steps
If Pre-application is approved, the Final Application [See Exhibit E] will be invited and will include . . .
1. Answers to staff questions/concerns;
2. Business Plan [See Exhibit E];
3. Conditional Commitments from other sources of funds [See Exhibit E];
4. Environmental assessment/analysis (Phase I);
5. Evidence of public hearing and citizen participation;
6. Certifications;
7. Connecticut Development Authority Application [See Exhibit F]
Exhibit A
State of Connecticut Section 108 Program Process Overview
(1) Pre-application:
- CEO Signs
- Project Detail
- Citizen Participation Encouraged
- No Public Hearing
- No Extensive Private Sector Material "Business Plan"
- No Certifications
- No Council Vote
(2) Final Application: First Public Hearing
- Full 3rd Party - Borrower Detail "Business Plan"
- All Certifications
- HUD Form SF-424
- Elected Body Vote
- State Forms - CDA Application
- Software Template completed for HUD’s 108 Application format
- Repayment Schedule
- Environment Studies
(3) Financial Closing: Appraisals
- Legal Commitments
- Surveys
- Note Sale
- Security Agreement
- Final Public Hearing prior to Disbursement
Exhibit B
Sample
Economic Development or Housing Rehabilitation Notice of Financing Availability
The jurisdiction of _____ announces that it will accept "letters of interest" from entities seeking debt capital for projects that will generate PUBLIC BENEFITS.
THE DEBT
- Up to $3,750,000 in available authority
- Rates approximately 1/2% over treasury rates (est. 6%)
- Term 90 days to 20 years
- Up to 75% loan to collateral value
- Repayment feasibility a must
THE PROJECT:
- Must demonstrate substantial public benefits like . . .
* 51% more jobs retained or created for low or moderate income persons, or
- Provides goods or services to a low/moderate income area, or
* Provides 51% or more rehabilitated housing units to low and moderate income persons
THE PROCESS:
- Provide project details in letter of interest and mail to _____________ by _______
- More details and an interview will be conducted for those selected for processing
Exhibit C
24 CFR 570.700 Regulations on Section 108 Program
Exhibit D
Collateral and Cash Flow Requirements / Targets
U.S. Department of Housing and Urban Development and State of Connecticut require certain financial feasibility thresholds as displayed in the following ratios and targets. Each project will be evaluated individually and on merits versus risk.
Collateral (LTV)
Ratio: 75% to 80% of Section 108 loan to total (unencumbered and verifiable) collateral.
Samples: Appraisal value of real estate, machinery and equipment, accounts receivable, personal guarantees, lease assignments, low income housing tax credits, inventory, assets of the applicant, loan loss reserves, bank balances, securities, and cash value of insurance.
Cash Flow (D.S.C.)
Ratio*: Actual and/or forecast revenue in excess of cash expenses in an amount equivalent to 1.1 to 1.2 and over P & I debt service payments.
Samples: Generally the State will look to the assisted project for cash flow coverage of debt service. However, if there is a shortfall, other sources of cash can be pledged, such as investor calls, revolving loan fund income, tax increment increases, land sale/lease proceeds. To illustrate a real estate D.S.C. ratio analysis: Income - Expenses = Net Operating Income (NOI) divided by sum of Principal (P) and Interest (I) = 1.2 or
Income - Expenses = NOI / P + I = 1.2
* The precise definition of this ratio varies between "real estate" projects and "business" projects.
Exhibit E-1
Section 108 Program Demonstration
These "Final Application" requirements are provided here so potential applicants are knowledgeable of the full level of effort necessary if their Pre-application is accepted.
FINAL APPLICATION REQUIREMENTS
PARTS
1. Detailed Answers to DOH staff questions generated by Pre-application.
2. Business Plan of 3rd party borrower, if any. [See Exhibit E-2]
3. Conditional Commitments (e.g., subject to receipt of Section 108 loans, appraisals, etc.) from other funding sources.
4. Environmental Assessment: Clean Phase I or Phase II with estimated "remediation costs."
5. Evidence of Public Hearing on Final Draft Application pursuant to 24 CFR 570.704(a)(2).
6. Certifications - "A" through "E" signed by applicant and "F" signed by the State
7. Other Forms
(a.) HUD SF-424 Application for Federal Assistance
(b.) Proposed Section 108 payback schedule*
(c.) State of Connecticut to insert - Pledge of future CDBG funds
8. Appendix
(State of Connecticut to insert)
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* TARGETS: Permanent Loan: Interest only in February; P & I in August: level Principal Payment, Principal payments annually, round to nearest $1,000.
Interim Loan: Interest only every 90 days.
Both permanent and interim schedule negotiable.
Exhibit E-2
Section 108 Loan Guarantee Program Information to be included in Business Plan*
As a condition of completing the Final Application Package for the Section 108 Loan Guarantee program, the company proposed to receive the assistance must prepare a Business Plan and provide to municipality for inclusion in package to DOH for review. DOH will make a decision to process a Section 108 Loan Guarantee application based on this information. The following information should be included in your Business Plan:
1. Company History – Provide a history of the business. Include date established, geographic location, previous and current ownership. Start-ups are eligible, but must meet more stringent tests on feasibility and market analysis.
2. Product(s) to be produced – Provide a description of the product(s) that will be produced by your company. Include specific benefits of the product, present state of development, product life cycle, competitive advantage; patent information, future activities, etc.
3. Operational Process – Provide a detailed overview of the process(es) used to produce your product. Include list of suppliers, availability of supplies, operating competitiveness, production capabilities, delivery procedures, etc.
4. Market Analysis – Provide a detailed description of the industry. Include size of industry, industry characteristics, list of customers, industry outlook, regulatory restrictions, etc.
5. Competition – Provide a detailed description of competitors. Include their names and addresses, market share, strengths, weaknesses, etc.
6. Market Strategy – Provide a detailed description of your market strategy. Include your market penetration/growth strategy, distribution channels, sales force, geographic target; target market size, pricing/margin strategy, etc.
* To be included with Final Application
7. Operational Facility – Provide a description of your operational facility. Include basic floor plan and layout, size of facility, facility limitations, map of the general area with facility highlighted, etc.
8. Management and Ownership – Provide a detailed description of the management and ownership of the company. Include their percentage ownership and for those with 10% or more give background and skills, resumes, organizational charts, planned additions, current owners, current directors, legal structure of business, information on parent company, etc.
9. Funding Requirements – Provide a detailed description of the funding required for your project. Prepare a "Sources and Uses" statement. Include debt and equity already acquired, funds needed, use of funds, long-range needs, etc. In addition, please provide the following: Provide letters of commitment from participating lenders or indicate when they will become available. Include the amount of the loan(s) interest rate, terms and conditions and the security required for the loan. Demonstrate at least 120% of collateral over debt principal is available in security.
10. Project Timing – Provide an estimate of the timing of the project including the scheduled date of construction start-up and the expected completion date. Identify any state, local or federal government actions related to this project that are pending.
11. Financial Statements Provide the following financial information:
- Financial statements for the previous three (3) years and the most recent quarter. Please include income statements, balance sheets, and cash flow statements. Please include all accompanying notes prepared by accountant including any which describe special conditions or treatments. If audited financial statements are not available, prepared statement must be signed and certified by the appropriate individuals or corporate officials. IRS tax forms can be substituted if working papers are organized and in an easily followed format.
- Projected income statement and balance sheets for the first three years of the operations.
- Projected monthly cash flow (sources and uses of funds) statement showing the uses of cash expenditures and the amount and sources of cash receipts for each month of the first year’s operating period.
- Current (less than 90 days old) personal financial statements from individuals who have a 10% or more ownership interest in the operation and corporate financial statements from any parent company.
12. Program Requirements- Provide the following information, in detail:
- If a claim is made that private financing at reasonable rates and terms is not available, please provide two letters from private lenders documenting the claim or an accountant or financial expert letter indicating that conventional debt is not available to the project.
- A description of the real estate being purchased, specifications of the building being constructed, and/or an itemized list of machinery and equipment being purchased with individual values/cost.
- If Section 108 loan proceeds are to use to purchase an existing facility, a value estimate must be submitted indicating the present value of the land and building. If loan proceeds are to be used to construct a new facility, a value estimate must be submitted with an opinion of value on an "as completed basis". Preliminary value estimate will be necessary for all assets prior to closing more detailed appraisals are required.
- For new construction or renovations, please submit construction cost estimates as prepared by the general contractor or builder.
- If Section 108 loan proceeds are to be used to purchase used machinery and equipment, an appraisal must be submitted indicating the fair market value and orderly liquidation value of the machinery and equipment.
- A copy of purchase agreement for real estate and/or machinery and equipment to be purchased with the loan proceeds.
- A list of the company’s existing debt obligations. Please include name of lender, original amount, interest rate, term of loan, monthly payments, and current balance. Also provide a name and telephone number of a contact person with each lender.
- If real estate is being purchased, a clean Phase I environmental analysis will be required prior to Closing on the Section 108. If a "tainted" or non-conclusive Phase I is submitted a detailed Phase II may be required with a full cost estimate and plan of clean-up. Applicants are advised to address environmental concern early rather than later.