TO: Mayor and Members of City Council
THRU: Kelly Olivera, Assistant City Manager
FROM: Christopher Cauley, MPA, Economic and Community Development Director
DATE: August 26, 2024
RE:
Title
Administrative Report - Section 108 Policy Draft for Development Finance
end
COUNCIL DISTRICT(S):
Council District(s)
All
b
Relationship To Strategic Plan:
GOAL II: The City of Fayetteville will have a Responsive City Government supporting a diverse and viable economy.
GOAL III: The City of Fayetteville will be a city invested in Today and Tomorrow.
GOAL IV: The City of Fayetteville will be a highly desirable place to live, work and recreate.
Executive Summary:
Economic and Community Development staff have been working for the past year with outside legal counsel from The Banks Law Firm to draft a policy for the City to utilize its borrowing capacity under the Section 108 Loan Program offered through the U.S. Department of Housing and Urban Development (HUD). Essentially, the Section 108 Loan Program allows the City to take on larger Community Development Block Grant (CDBG) funded activities than the City typically has the resources for on an annual basis. This administrative report and attached DRAFT policy are submitted as an informational update to City Council.
Background:
The Section 108 Loan Guarantee Program, administered by HUD, provides communities with a crucial source of financing for economic development, housing rehabilitation, public facilities, and large-scale physical development projects. To promote larger-scale economic development, housing, public facilities, infrastructure, and other physical development projects, the City of Fayetteville may consider projects with greater funding needs for financing based on the City’s participation in the Department of Housing and Urban Development’s Section 108 Loan Guarantee Program. The Section 108 Program enables the City to leverage portions of its CDBG funding to obtain federally subsidized loans of up to five times the City’s annual CDBG allocation. The City may then use those funds to assist with the financing of economic development projects which enhance the City’s tax base, revitalize its business district, increase housing options, and offer greater employment opportunities.
Issues/Analysis:
Local governments must pledge their current and future CDBG allocations as security, however, additional security is sometimes required such as local cash contributions to a sinking fund or legal interest in the property. The City would always secure investment with a mortgage loan agreement, deed of trust, and promissory note at a minimum. Projects should provide sufficient cash flow to repay the loan without any need for current or future CDBG contributions, but public projects can be fully funded with CDBG revenues (i.e. public park or infrastructure. Any project receiving financing under the Section 108 Loan Program must include elements that principally benefit low- and moderate-income persons, aid in the prevention or elimination of slums or blight, or address conditions that pose a serious and immediate threat to the health and safety of City residents.
Issuance of section 108 financing is subject to review by the Local Government Commission and HUD. Projects can accomplish a variety of City goals but are typically led by a private developer. Goals such as:
Economic Development: Supports projects that stimulate job creation and economic growth. Construction or rehabilitation of commercial or industrial buildings, infrastructure improvements, and microenterprise assistance.
Housing: Funds rehabilitation and infrastructure development of low- and moderate-income housing.
Public Facilities or Large-Scale Projects: Enables the development or improvement of public facilities, such as utilities, streets, sidewalks, community centers, libraries, and parks.
Once the policy is finalized, the City may adopt the Policy and develop an application for financing at the staff or City Council level. After adoption, City staff could identify potential projects that meet HUD eligibility such as: grocery stores, housing developments, parks facilities, historic redevelopments, hotels, and business parks. To advance these efforts the City may play a role in the private development process by purchasing property, conducting market analysis or feasibility studies, and developing detailed project requests to secure development partners. Ultimately, City staff would initiate discussion with HUD for Section 108 loan application and approval. This process is lengthy but can allow conditions for development projects that otherwise would not happen due to current market conditions.
Budget Impact:
The current Fiscal Year 2025 loan authority for the City is five times its annual allocation which amounts to $8,544,340. According to HUD, every $1 of Section 108 financing can attract up to $4.62 in other funding. Financing can be combined with other public/private financing sources such as New Market Tax Credits, Historic Preservation Tax Credits, Low Income Housing Tax Credits, Private Activity Bonds, Opportunity Zone Tax Credits, traditional bank financing, and other sources of funds.
Options:
This report is for informational purposes only.
Recommended Action:
This report is for informational purposes only.
Attachments:
Section 108 Loan Fund Policy DRAFT Clean