Transcript WELCOME [ncdaonline.org]

An Introduction to
ECONOMIC DEVELOPMENT
Using CDBG
WELCOME!
1
Course sponsor

Training workshop sponsored by the
NCDA

Conducted by ICF International
 Carole Norris, Vice President, San
Francisco Regional Office
2
THE PROCESS
Economic
Analysis
Evaluation &
Refinement
Strategy
Development
Program
Implementation
3
ECONOMIC ANALYSIS

Assess qualitative and quantitative
conditions

Evaluate business and social
environment

Assess monetary, human, and
physical resources & obstacles
4
STRATEGY DEVELOPMENT

Choose priority outcomes and
market sectors

Determine how to direct your
assistance: locational approach;
minority business; sectoral approach

Choose activities to match intended
outcomes
5
IMPLEMENTATION

Describe goals

Written strategy summarizes plans
and needs

Action plan implements the strategy

Plan is iterative and refined based on
monitoring and evaluation
6
USING CDBG FOR ED

CDBG Regulations
 Found at 24 CFR 570
 1980s/early 1990s: the context for
change
 ED edits published 1/5/95
 Consolidated rule effective 11/9/95
 Revised rule 4/29/96
7
KEY ED CHANGES

Microenterprise eligibility category

Job training flexibilities

Public benefit standards for ED

National objective criteria and
presumptions

Neighborhood Revitalization Strategies

CDFI and CBDO flexibilities
8
ELIGIBLE ED ACTIVITIES

Four major types:
 Special economic development (570.203)
 Microenterprise assistance (570.201(o))
 Commercial rehabilitation (570.202)
 Assistance to CBDO (570.204)

Section 108 and BEDI are special CDBG
enabled ED options
9
SPECIAL ECONOMIC
DEVELOPMENT

570.203

a) Commercial/industrial
improvements by recipient or
subrecipient

b) Assistance to for-profit business

c) Economic development services
in conjunction with above activities
(including job training)
10
MICROENTERPRISE





570.201(o)
Financial assistance
Technical assistance
General support
Training and TA to increase capacity
of recipient/subrecipient to work with
microenterprise businesses
11
MICROENTERPRISES
DEFINED
Five or fewer employees,
including owner

Commercial enterprise

Existing business or persons
developing microenterprises
12
COMMERCIAL REHAB

570.202

Limited types of rehab on
commercial structures

If for-profit owned, only exterior
improvements or correction of code
violations
13
CBDO ACTIVITIES

570.204

Neighborhood revitalization

Community economic development

Energy conservation
14
INELIGIBLE ACTIVITIES

Buildings for conduct of government

General government expenses

Political or religious activities

New housing construction

Income payments

Purchase of equipment

Operations and maintenance (some
exceptions for ED activities and CBDOs)
15
NATIONAL OBJECTIVES

570.208

All CDBG activities must either:
(1) Benefit low and moderate income persons
 70% of funds must be spent this way
(2)
Prevent slums and blight
 used only in specific area or for
specific structure
(3)
Meet urgent needs
 only used in emergencies
16
NATIONAL OBJECTIVES
 Area
Benefit
 Limited Clientele
LOW/MOD
BENEFIT
Housing
 Jobs

 Area
SLUM/BLIGHT
URGENT NEED
17

Spot
LMI: AREA BENEFIT

Activity that benefits all residents of area
 Where 51% of residents are LMI
 That is primarily residential
 That meets the needs of the residents




Street improvements
Water/sewer lines
Commercial façade programs
Upper-quartile exception, area benefit only
18
AREA BENEFIT

Need to determine the area served by the
business

Need to determine whether the service
area is
 Primarily residential
 51% LMI

Area will differ with various kinds of
businesses…. examples
19
LMI: LIMITED CLIENTELE

Activity that benefits specific
population
 Presumed clientele; or
 Eligibility requirements limit participation to LMI; or
 Documentation that 51% participants are LMI; or
 Nature and location indicate LMI; or
 Removal of architectural barriers (some activities);
 Microenterprise activities with LMI owners; or
 Certain types of job training efforts.
20
LMI: HOUSING ACTIVITIES

Permanent housing where 51% of
occupants are LMI (based on HH inc!)

Ownership or rental w/ ‘affordable’ rents

Single-unit structure: LMI occupied

2 units: at least 1 occupied by LMI

3 + units: 51% or more LMI

New, MF, non-elderly: 20% or more
21
HOUSING NATIONAL
OBJECTIVE

What type of businesses can meet
this national objective?
22
JOB CREATION &
RETENTION

Must create or retain jobs

51% of jobs must be held by or
available to LMI persons

Most common national objective for
economic development
23
JOB RULES

Permanent FTE basis, no temporary jobs

For each business: 51% of jobs must be
held by or available to LMI persons

Can aggregate jobs if:
 Property development only (incubator)
 Loans are provided by a CDFI
24
LMI PRESUMPTION

Job can be presumed LMI if either:
 Job holder resides in

Census tract with 20% poverty & general distress;

Census tract with 30% poverty, CBD, & general distress;

EZ/EC area; or

Census tract/block group with 70% LMI.
 Business and job located in

Census tract with 20% poverty and general distress;

Census tract with 30% poverty, CBD, and general distress;
or

EZ/EC area.
25
JOBS “AVAILABLE TO” LMI

No special skills/education beyond HS
required, or if so, business will train

Ensure that LMI persons receive first
consideration

Must have a written agreement

Reasonable application process, pool of
applicants, and no logistical barriers
26
JOBS “HELD BY” LMI

51% of the FTE jobs must be held by
LMI persons

Must document income of LMI
persons or evidence of presumption

Can use self-certification from
person

Must have a written agreement with
business
27
ACTIVITIES THAT
RETAIN JOBS

Document that jobs would be lost
without CDBG and that:
 Job currently held by LMI person;
or
 Job expected to turn over in 2
years and will be filled by/available
to LMI person
28
SLUM AND BLIGHT: AREA

Area must meet state/local definition

Substantial number of deteriorated
buildings/ all infrastructure in
disrepair
 Activity must address these
conditions

Occasionally used for ED when
working in specified renewal area
29
SLUM & BLIGHT: SPOT

Activities that address specific
condition

Acquisition, clearance, relocation,
historic preservation, building rehab

Rehab limited to public health and
safety

May rarely use for ED given limited
eligible activities
30
URGENT NEED

570.208 (c)

Activities that alleviate emergency
conditions
 Threat to health/welfare of the community
 Recently became urgent
 Inability of recipient to finance the activity on
their own
 No other means of funding
31
PUBLIC BENEFIT
STANDARDS

Measures $ cost in CDBG funds
against benefits derived

# Jobs or LMI persons served used
as “benefit” criteria

Grant or loan, does not matter

Applies to 570.203 activities, some
570.204 activities, and infrastructure
undertaken as jobs activity
32
INDIVIDUAL STANDARDS

Create/retain 1 Job per $50,000
CDBG funds
OR

Goods and services to 1 LMI person
per $1,000 CDBG
33
AGGREGATE STANDARDS

Create/retain 1 Job per $35,000
CDBG funds
OR

Goods and services to 1 LMI person
per $350 CDBG
34
APPLYING INDIVIDUAL
STANDARDS

If activity creates jobs and provides
goods/services, qualifies as long as
it passes at least one criteria

Applied at time of obligation
35
APPLYING AGGREGATE
STANDARDS

All activities obligated during any
program year

Categorize each activity as either
jobs or goods/ services! But meet
both criteria!

Some job activities may be excluded:




Unemployed
Homeless
Low-skill, LMI w/ clear advancement
Highly distressed or
36 NRS areas
ADMINISTERING ENTITIES

Options:
 Grantee staff
 Subrecipients
 CBDOs
 Contractors
 CDFIs
37
CBDO -- DEFINITION

Association or corporation organized under state law to
engage in community development w/i jurisdiction

Primary purpose is the improvement of service area

May be nonprofit or for profit (under certain circumstances)

51% of governing body is LMI or representative

Not a public agency

Governing body is nominated by membership

Assets do not revert to grantee

Free to contract for goods and services
38
OTHER ADMINISTRATIVE
ISSUES

Compliance with OMB Circulars
 Grantee and subrecipients

Ensure proper use/accounting for
program income

Comply with other Federal
requirements
39
SMALL BUSINESS
DEVELOPMENT

Development of small business is
important activity for economy and
many grantees

Two types:
 Micro business
 Small business

Existing

Start-ups
40
WHAT IS A SMALL
BUSINESS?

Relative

Typical thresholds
 Number of employees
 Project size
 Sales
 Net profit after tax; net worth
41
SMALL BUSINESS AND
ECONOMIC DEVELOPMENT

Business attraction
 Focus on Fortune 1000

Birch Report
 Importance of small and medium
sized businesses

Business Retention
42
CDBG ASSISTANCE TO
SMALL BUSINESS

Typically done under 570.203,
Special Economic Development
 Permits wide range of assistance
to for profit entities
 Includes
financial assistance (direct loans,
guarantees, equity, leases, etc.) and TA
 Triggers public benefit
considerations
43
TECHNICAL ASSISTANCE

Helps reduce risk

Often focused on business plan
development or legal and accounting
issues

Often offered in conjunction with
financial assistance

Critical to programs directed to startups
44
PROVIDING TA UNDER
CDBG

Under CDBG:
 As part of special economic
development

Caveat: public benefit
 Public service
 Through a CBDO

Public benefit
45
FINANCIAL ASSISTANCE

Usually done under Special
Economic Development
 Grants
 Loans
 Guarantees

May meet several different national
objectives
46
SMALL BUSINESS PROGRAMS -OTHER SOURCES

Small Business Administration and partners:
 Small Business Development Centers
 Service Corps of Retired Executives
 Business Information Centers
 Small Business Institutes
 Women's Demonstration Program
 Women's Network for Entrepreneurial Training
 Minority Enterprise Network
47
MICROENTERPRISE
ASSISTANCE

CDBG can fund micro enterprise
loans

Microenterprise =
 Owners or persons who work
toward developing business
 Commercial enterprise with
employees (including owner)

570.201(o)
48
NATIONAL OBJECTIVE

Limited clientele if the owner is LMI

Otherwise:
 Job creation/retention

Presumptions
 Possibly under LMI area benefit or
area slum and blight
49
WHAT IS MICRO BUSINESS
ASSISTANCE?

Assistance to small companies
 Funding
 Technical Assistance
 Training
 Support Services (such as
childcare or transportation)
50
CDBG RULES II

Can do TA and training to increase
capacity of recipient/subrecipient to do
micro programs

No limit on amount or type of CDBG
loan/grant to micro

Not subject to public benefit test if
separate program

Owner not required to be LMI but
remember national objective
51
KEY STEPS IN SETTING UP A
SMALL BUSINESS PROGRAM

Define program objectives
 What do you want to achieve?

Know your target market
 Geographic area
 Who or what targeted?
52
KEY STEPS II

Determine technical and credit needs
 Other sources of financing
 Types of credit needed

Develop lending program
 Underwriting criteria
 Administrative procedures
 Loan criteria and fees
53
KEY STEPS III

Design TA and training
 Offer in conjunction with financing

Ensure program has funding and
implement

Monitor and evaluate progress
54
SUMMARY: MICRO AND SMALL
BUSINESS ENTERPRISES

TA is an important element

Labor intensive

High transaction costs

Separate Micro Loan Program from
other economic development
revolving loan fund
55
SUMMARY: MICRO AND SMALL
BUSINESS ENTERPRISES II

Beware closing costs

Many prospects for one funded deal

Ensure the venture has a reasonable
chance of success
56
WHAT ARE BUSINESS
INCUBATORS?

Typically facility where businesses share
expertise and costs

Offer access to expertise and services through:
 Shared office space
 Research or manufacturing space
 Business support
 Common equipment
 Mentoring
 Joint marketing

Incubators without walls
57
INCENTIVES

Lower break-even point
 Reduced rent
 Shared services, facilities and equipment

Peer reinforcement

TA
58
FINANCIAL BURDEN

Incubator is a specialized real estate transaction

Cash flow must fund operating expenses, capital
expenditures and debt service

Successful incubators balance real estate
realities with enhancing survival of fledgling
businesses
 Keep capital costs low as possible
59
USE OF CDBG

Fund construction/development

Provide assistance to businesses
locating within incubator
60
FUNDING INCUBATOR
CONSTRUCTION

Typically under special economic
development eligibility category

Remember public benefit test!
61
FUNDING BUSINESSES
WITHIN INCUBATORS

Typically under microenterprise
(570.201)
 Must meet the tests for this
assistance

May do other types of business
assistance under special ED
(570.203)
62
CLUSTER INCUBATORS

May focus on a particular industry

Fosters information sharing,
alliances, promoting identity

Examples: software; food; health
care; advanced technology
63
EVALUATING INCUBATOR
APPLICATIONS

Evidence of need and support

Qualified management

Cluster concentration within the
community

Ability to leverage

Plan for self-sufficiency
64
INCUBATOR
DEVELOPMENT

Prepare a feasibility analysis

Locate site

Do financials and marketing plan

Identify resources

Develop
65
INCUBATOR RESULTS

Enhanced employment & earnings

Expanded networking

New business formations
66
SUMMARY: INCUBATORS

TA is important

Business in incubator may need financing
assistance

Ultimately, incubator is a real estate deal
 Facility may need operating subsidies
 Complete total analysis before funding
acquisition
67
JOB TRAINING & OTHER
PUBLIC SERVICES
 What is it?
 CDBG Rules
 Structuring and supporting job
training
68
WHAT IS JOB TRAINING?

Help unemployed or under-employed
gain skills in demand in the labor
market

Frequently linked to job placement

TA and entrepreneurial training to
owner of micro-enterprise
69
HOW IS JOB TRAINING
ELIGIBLE UNDER CDBG?

Public service -- 570.201(e)

As part of special economic
development project -- 570.203 (c)

By CBDO -- 570.204

As part of micro-enterprise efforts -570.201(o)
70
IF UNDERTAKE TRAINING
AS PUBLIC SERVICE

Qualify under LMI limited clientele:
 Document family size and income
& ensure that 51% are LMI
persons;
 Limit to only LMI persons;
 Serve only a presumed group; or
 Document based on location (very
difficult)
71
IF UNDERTAKE TRAINING
AS PART OF SPECIAL ED

Qualify under EITHER:
 LMI Jobs, if clear connection to
jobs being created or retained; OR
 LMI Limited Clientele, if CDBG is
provided to business to pay only
for training & the % of total project
costs paid with CDBG is < % of LMI
persons trained;
72
WHO CAN UNDERTAKE
JOB TRAINING?

Grantee

Other government agencies

Subrecipients

Businesses

CBDOs
73
TYPES OF JOB TRAINING
PROGRAMS

Job search assistance

Short-term classroom training

Long-term classroom training

Subsidized employment
74
KEY STEPS IN SETTING UP A
JOB TRAINING PROGRAM

Conduct a needs assessment

Identify employment opportunities

Form partnerships

Address barriers
 Can provide subsistence payments as a
loan to people in job training programs
75
KEY STEPS II

Develop “soft skills” training

Create a flexible program

Define performance measures

Consider other funding sources
76
SUMMARY: JOB TRAINING

Link training to skills that employers need

Unemployed persons may need training in areas
not directly related to performing the job
 Punctuality
 Dressing appropriately
 Interviewing
 Dealing with conflict
 Absences

Enforce provisions related to job creation in loan
agreements
77
OTHER PUBLIC SERVICES
HELPFUL TO ED

May wish to consider other services
such as:
 Child care
 Transportation
 Crime prevention
78
PUBLIC SERVICE
REQUIREMENTS

New service or increase in existing
service previously funded with local
or state $ (no substituting)

Level funding is OK once CDBG is in

CDBG can substitute for private or
other Federal $
79
PUBLIC SERVICES CAP

15% of grant allocation plus 15% of
last year’s program income

Public services carried out by
subrecipients are included in the cap

However…. there are flexibilities!!!
80
FLEXIBILITY

TA, training, support to microenterprises
(570.201(o)

Special economic development (570.203 (c)) -Services in connection with eligible special ED
activities, including training for persons filling
jobs

CBDO job training/placement/support activities
that increase economic opportunities (570.204(b))

Any CBDO service under a Neighborhood
Revitalization Strategy (570.204(b))

Any job training done by a CBDO
81
LARGE SCALE PROJECTS
AND INFRASTRUCTURE

Covers:
 What is commercial/industrial
development
 CDBG Rules
 Key steps
82
WHAT ARE LARGE SCALE
PROJECTS?

Activities such as:
 Retail centers
 Office buildings and other
commercial
manufacturing/industrial facilities
 Public commercial development
 Infrastructure related to ED
83
TYPICAL
CHARACTERISTICS
1. Large financial investment
2. Large impact
3. Real estate development
4. Multiple financing
5. Large scale infrastructure
84
BE ACTIVE

Projects are complicated

Screen early
 Risk
 Eligibility
 Consistency with public policy
85
ACTIVE (CON’D)

Identify appropriate form of public
participation
 Negotiate
 Know the cost of commitments
before making them
86
MANAGE THE PROCESS

Develop project schedule
 Prepare task list with due dates
and responsibilities

Commit to writing and revise as needed
 Keep all vested parties informed

Ensure benefits are commensurate
with public participation
 Ensure benefits materialize
87
CDBG ROLES

Financing

Lease

Ancillary facilities

Assist with equipment or working
capital

Services

Infrastructure
88
CDBG AND LARGE SCALE
DEVELOPMENT

Typical Section 108 activity

May also do under special economic
development (570.203)

Community-Based Development
Organizations (570.204)

Commercial Rehab (570.202)

Infrastructure as part of economic
development project (570.201)
89
SPECIAL ECONOMIC
DEVELOPMENT ACTIVITIES

Acquisition, construction,
reconstruction, rehabilitation or
installation by recipient or
subrecipient

Assistance to for profit

Economic development services

Remember public benefit test!
90
OTHER ELIGIBLE
ACTIVITIES

Community-based development
organizations can undertake under
certain circumstances
 Limitations of nonprofits as
developers of large scale projects
Capacity
 Financial resources


Commercial rehab may be possible
under limited conditions
91
WHAT IS
INFRASTRUCTURE?

Non-housing activities

Public works
 Transportation facilities
 Water, sewer, drainage

Community facilities
 Parks, recreational facilities, senior
centers
 Neighborhood service centers
 Social services buildings
92
TYPICAL ED INFRASTRUCTURE
ACTIVITIES

Roads, streets, sewers that are:
 Leading to business location
 Within an industrial park
 On a business site

Special rules when doing infrastructure as
an ED activity
 Public Benefit Standards Apply if CDBG
expenditure is more than $10,000/job
93
SECTION 108 AND LARGE
SCALE DEVELOPMENT

Eligible activities

Sample projects
 Neighborhood shopping center
 Grocery store
 Mixed use-retail and housing rehab
 Industrial expansion
 Infrastructure
94
NATIONAL OBJECTIVE

Job creation/retention

Area benefit

Area slum blight

VERY FEW under spot slum blight
95
COST BENEFIT ANALYSIS

Assess risk

Determine amount of public
participation- all costs

Calculate benefit stream
 Jobs
 Tax increments
 Payments

Relate risk and cost to benefits over
96
time
KEY STEPS IN DESIGNING
LARGE SCALE PROJECTS

Decide if want to target
neighborhoods

Ensure potential projects meet HUD
criteria

Choose projects that are generators

Assess and control lending risks
 Screen early
97
SUMMARY: LARGE SCALE
PROJECTS

Manage the process

Be active

Don’t forget “singles”
98
FINANCING ECONOMIC
DEVELOPMENT PROJECTS

Covers:
 Financing options
 Revolving loan funds
 Other economic development
programs
 Role of CDFIs
99
METHODS OF FINANCING

CDBG is very flexible
 Grants
 Debt
 Guarantees
 Equity
 Sale/ lease of assets

Remember! All special ED projects
must meet public benefit test
100
INVESTMENT
THRESHOLDS

Business loans
 Amount down
 Monthly payment

Developer deals
 Amount down
 Monthly payment
 Return on equity
101
INCENTIVE VARIABLES

Availability

Term

Interest rate

Percentage of financing
102
PROGRAM VARIABLES FOR
COMMUNITY

Risk

Amount of funds available

Niche program wishes to address

Leverage

Goals, benchmarks

Staff
103
GRANTS

Cash contribution or principal
reduction

Plus:
 Easy to administer
 May be only available $$ source

Minus:
 Resources not replenished
 Business commitment?
Politics
104
GRANT EXAMPLES

Interest subsidy/ principal reduction

Rehabilitation rebate
105
DEBT OPTIONS

Direct loans
 Subordinated loans
 Tandem loans

Repayment structure
 Self amortizing
 Contingent payment
 Partial or full forgiveness
106
AMORTIZING DIRECT
LOANS

Loans that are paid back over time

Plus:
 Ensures business commitment
 Extends resource
 Interest can multiply impact

Minus:
 Need loan processing/servicing skills
 Must have default procedures
 May not be financially feasible
107
CONTINGENT PAYMENT
LOANS

Part or all of repayment depends on future
events, usually performance

Example

Caveats
 Use simple, quantifiable measures
 Avoid “net” thresholds
 Requires constant monitoring

Forgiveness is inverse concept
 More common for housing loans
108
LOAN GUARANTEE

Pledge loan repayment in event of
default

Example

Variables
 Percentage of guarantee
 Priority of loss
 Timing of payment
 Leveraged guarantee
109
LOAN GUARANTEES
(Cont’d.)

Plus:
 Lender more willing/flexible
 Not necessarily cost CDBG funds

Minus:
 Can be difficult to structure
 Underwriting can be risky
110
EQUITY

Definition

“Near”equity

Advantages

Disadvantages
 Exit strategy
 Lack of borrower recourse, fear of
failure
111
PURCHASE AND SALE OR
LEASE

Entity purchases asset and sells or leases
asset to borrower at a negotiated price

Advantages
 Reduce equity investment
 May lower cash flow burden

Disadvantages
 Subordination issues of ground leases
 Requires specific skills
112
WHAT IS AN RLF?

FUND
 A source of money which usually is a loan

LOAN
 Proceeds of fund are used to make loans
usually to small and medium size
businesses

REVOLVING
 The small business loans are repaid and
reloaned. With interest, the fund can
increase and become an endowment.
113
TYPICAL BORROWERS

Existing businesses

Start-up ventures

Developers

Nonprofits

Micro businesses
114
SOURCES OF CAPITAL

CDBG

EZ/EC

Small Business Administration

Economic Development
Administration

Department of Agriculture

Private lender CRA activities

Nonprofits and foundations
115
CDBG RULES FOR RLF

Must be separate, interest bearing
fund

Payments to account used for similar
activities

Interest earned by RLF loans is
program income

Interest earned while RLF funds in
bank must be remitted to Treasury
116
STEPS -- DEFINE MARKET
AND CONDUCT CLIENT SCAN


Confer with professionals and borrowers to
identify the market
 Bankers
 Realtors
 Economic development personnel
 Trade associations
 Local officials
 Small business groups or associations
What gap in funding exists?
 Understand existing efforts
 Who will the effort serve?
117
STEPS -- SELECT RLF
ATTRIBUTES & FUNDING

Borrowers

Minimum/maximum loan amounts

Minimum leverage

Cost per job

Minimum equity requirements
118
STEPS: SELECT RLF ATTRIBUTES &
FUNDING SOURCES

Determine loan:
 Rate
 Maturity
 Subordination
 General liens
 Underwriting criteria

Seek funds that will capitalize the
RLF
119
STEPS-- SELECT
ADMINISTERING ENTITY

Who will administer the program?
 City
 Existing nonprofit
 New organization

Does staff have the necessary skills
to implement?
120
STEPS-- DEVELOP
ORGANIZATIONAL PROCEDURES

Determine roles of board, loan
committee, etc.

Role of elected officials?

Is operating budget reasonable?
121
STEPS-- MARKETING AND
IMPLEMENTATION

Establish systems for delivery
 Marketing
 Screening
 Application
 Approval
 Closing
 Disbursement
 Portfolio Management
122
STEPS-- MAKE AND SERVICE
LOANS

Loan based on procedures

Review periodically and adjust
123
SECTION 108 BASICS

Covers:
 General program overview
 Section 108 process
 Advantages
124
WHAT IS IT?

Method of expanding funds by using
future CDBG grant as collateral to
borrow:
(1) Community applies to HUD
(2) Based on community’s pledge, HUD
issues notes
(3) $$$ from sale of notes used for
Section 108 eligible project
(4) Notes are repaid
125
CHARACTERISTICS OF
SUCCESSFUL COMMUNITIES



Utilize “systems” approach
Screen early
Acknowledge, assess and manage
risk
126
PROGRAM UNIQUENESS


Risk
 Not “sophisticated
grantsmanship”
 If 3rd party does not repay, locality
must
 Escalates cost/benefit analysis
Leverage potential
127
SOURCES OF REPAYMENT



Pledge of future CDBG entitlement
Program income
“Additional security”
128
UNDERWRITING
GUIDELINES




Credit Reform Act
OMB establishes loss reserve
(“credit subsidy”)
Guidelines (low risk) reflect loss
reserve funded
Additional security
129
FORMS OF ADDITIONAL
SECURITY








Specific liens
General liens
Tax increment
Portfolio income
Parking revenue
Leases
Non tax revenue
Assets
130
OVERVIEW OF DELIVERY






Screen project
Submit application
Approval
Close
Disburse
Service
131
PROGRAM PARAMETERS

Maximum loan = 5 times annual
entitlement

Maximum loan term = 20 years
132
ELIGIBLE APPLICANTS

Entitlements

Non-Entitlements through the State
133
ELIGIBLE ACTIVITIES

Acquisition

Rehab of publicly owned property

Clearance, demolition, site prep

Economic development activities

Housing rehab

Finance costs

Infrastructure/public facilities
134
PROGRAM
REQUIREMENTS

National objectives

Other Federal requirements
(relocation, Davis Bacon,
environmental, etc.)

Public benefit test for economic
development

70% rule

Certifications
135
INELIGIBLE ACTIVITIES

Construction of governmental
buildings

Non-federal share

Long term planning
136
THE SECTION 108
GUARANTEE
HUD
Guarantee
Interim Lender
Guarantee
Pledge of CDBG
Funds
Investors
Locality
137
LEVELS OF TRANSACTION

# 1 Communities borrow from
investors via notes

#2 Communities undertake activities
or re-lend
138
LEVEL #1 TRANSACTION
HUD
CDBG PLEDGE
INVESTORS
$
139
LOCALITY
LEVEL #2 TRANSACTION
HUD
CDBG PLEDGE
INVESTORS
$
LOCALITY
140
$
THIRD
PARTY
PLAYERS AND THEIR ROLES

Community

HUD

Underwriter

Fiscal Agent

Private Investors

Third Party Borrowers
141
TYPICAL USES

Industrial expansion

RLF

Retail

Incubator

Office

Housing rehab
142
ADVANTAGES OF
SECTION 108

Leverage CDBG

Avoid referendum -- Not a general
obligation

Receive funds now (no pay as you go)

Spread costs

Avoid private benefits restrictions

Access funds at AAA rate

Fixed rate
143
INTERIM LOANS

Public offering usually once a year

Interim loan available until public offering
 Must close Level # 1 transaction
 Fiscal Agent makes interim loan

Interest rate: 90 LIBOR + 20 basis points

HUD guarantees obligation
144
BROWNFIELD ECONOMIC
DEVELOPMENT INITIATIVE

Competitive grant program
 Stimulate and promote economic
development
 Assist with the redevelopment of
abandoned and underused
industrial and commercial facilities
 Burdened by real or potential
environment contamination
145
BEDI PURPOSE

Spur the return of brownfields to
productive economic use
 Provides financial assistance or
security to improve the viability of
a project financed with Section 108
loan guarantee
146
ELIGIBLE BEDI ACTIVITIES

Land Writedowns

Site remediation costs

Funding reserves

Over-collateralizing the Section 108 loan

Direct enhancement of security for
Section 108 loan

Low interest rate loan to for-profit
business
147
BEDI

All activities must meet a national
objective

Minimum BEDI to Section 108 ratio is
1:1

Maximum grant amount is $1million
148
UNDERWRITING

Covers:
 Important components
 Underwriting criteria
 HUD criteria
149
UNDERWRITING DEFINED

Underwriting is the process for
determining project risk and
evaluating rewards

Public underwriting differs from
private

Within CDBG, portions of this
analysis are known as
“appropriateness evaluation”
150
UNDERWRITING

Business loans
 Definition
 Example

Real estate loans
 Definition
 Example
151
UNDERWRITING CRITERIA

Business loans
 Ability to repay
 Collateral
 Commitment to project
 Balance sheet analysis
 Management experience
 Character
152
ABILITY TO REPAY
DCR = CASH FLOW
DEBT SERVICE
1.25 = $100,000
$80,000
153
DCR GUIDELINES

The higher the better

Use known cash flow or a
conservative estimate

Generally private lenders want a DCR
between 1.2 and 1.3

Limit the number of deals with DCR
<1.1

Avoid deals with DCR <1
154
COLLATERAL
Loan to value = Loan amount
Value/Cost of
assets
securing the loan
.80 =
$1,000,000
$1,250,000
155
WHAT IS VALUE?
Fair market value
Cost
Liquidation value
Salvage value
Value in use
Replacement value
Investment cost
156
ACCEPTABLE LOAN TO
VALUE RATIO

HUD has no requirement but
generally 80%

Loan to value is matter of judgment

No definite standards

Do not exceed 100% loan to value
157
RULES OF THUMB FOR
LOAN TO VALUE

Commercial buildings (80%)

Home mortgage (80%)

Machinery and equipment (50-70%)

SBA 504 (90%)

Inventory (50-80%)

Receivables (80%)
158
LOAN TO VALUE
GUIDELINES

The lower the better

Loan portfolios should have only a
few loans with a loan to value more
than 90%

Cash flow is more important than
collateral

Lenders avoid projects with a loan to
value over 100%
159
COMMITMENT

Commitment by owners is critical!

Owner guarantee may be
proportional to interest
160
BALANCE SHEET

Look at soundness:
 Collection of receivables
 Payment of bills
 Management of inventory
 Owner bleeding the company?
 Cash relative to needs
161
MANAGEMENT

Must be experienced in all areas of
business

Should have direct or transferable
skills
162
CHARACTER

Favorable credit history

Good & fair reputation

No recent bankruptcy

Clean criminal report
163
SMALL START-UPS

Likely to have a higher default rate

Look for:
 Business plan
 Borrower commitment
 Personality
 Niche
164
UNDERWRITING CRITERIA

Real Estate
 Ability to repay
 Collateral
 Commitment to project
 Experience of development team
 Character
165
ABILITY TO REPAY
DCR = NOI
Debt Service
n
Usually conventional lenders look at 1.25 - 1.3
n
Usually public lenders look at 1.1 - 1.15
166
COLLATERAL

Use Loan to Value Ratio

Appraiser normally determines value

Be certain to carefully review
appraisal

Generally LTV ranges from 75% to
90%
167
COMMITMENT TO
PROJECT

Ways to show commitment
 Completion guarantee
 Recourse
 Deferral of development fee
 Guarantee cash flow shortfalls
 Equity
168
EXPERIENCE &
CHARACTER

Be certain development team has
significant similar experience

Developer should have good credit
and be reputable
169
FINANCIAL ANALYSIS
(UNDERWRITING)

Recommended, not mandatory

Reasonable costs

Commitment of other financing sources

Necessity of assistance (non-substitution)

Feasibility of project

Reasonable financial terms/return

CDBG funds disbursed pro-rata
170
REASONABLENESS OF
PROPOSED PROJECT
COSTS
Risks:
Inflated costs
Understated costs
Excessive fees
Contribution:
Independent quotes
Scrutiny of budget
Cost certification
Retainage
171
COMMITMENT, NON-SUBSTITUTION,
PRO-RATA DRAW DOWN

CDBG funds may be contingent upon
other financing

No substitution of private funds with
CDBG

CDBG funds should be disbursed at
a rate no greater than other sources
of funds
172
IDENTIFYING NEED FOR
PUBLIC FUNDS: GAPS

Financing gap

Rate of return gap

Locational gap
173
FINANCING GAP
+
Reasonable cost
-
Conventional debt
-
Other debt
-
Conventional equity
= Financing gap
174
RATE OF RETURN
+
Reasonable cost
-
Conventional debt
Equity needed
Market rate
of return
gap?
+
Benefits to investors
+
Equity Invested
= Project rate
of return
175
LOCATIONAL GAP
+
Cost of project in location X
-
Cost of project in location Y
=
“Locational” gap
176
PROJECT FEASIBILITY AND
RETURN

Terms of CDBG loan reflect the ability to
repay without threatening the success of
project

Project is financially feasible with
assistance


Terms don’t over-subsidize private
participation (undue enrichment)
Terms of CDBG loan affect conventional
debt and equity
177
SUBSIDIZING
PARTICIPATION

Use public funds to balance interest of
those participating

Example of participants in investor deals:
 developer
 lender
 investors

Repayment terms of public funds are
structured such that each receives a
market (but not above) yield/fee
178
GETTING STARTED

Who should undertake the program?

How much will it cost?

Where and how will the program
occur?

How will it be “sold”?

What records must be kept?

How well are strategic objectives
met?
179
WHO WILL MANAGE &
IMPLEMENT?

Grantees have options:
 Staff
 Subrecipients
 CBDOs
 CDFIs
 Third Party Contractors
180
WHAT WILL IT COST?



Estimate likely revenues from
service delivery and miscellaneous
sources
Evaluate operating expenses
carefully
If new to economic development,
consider Business Plan and a startup budget
181
WHERE & HOW?

Help guide program decisions

Plan should include:
 Overview of goals & objectives
 Description of eligible participants
 Description of services
 Overview of industry targets if any
 Overview of selection process
182
WHERE & HOW (LENDING)

Managing the loan:
 Packaging the loan
 Underwriting
 Legal counsel
 Disbursement methods
 Business counseling
183
HOW WILL IT BE SOLD?

Develop a roll-out strategy &
schedule:
 Step-by-step timetables
 Technical assistance hurdle
 Milestones
 Assignment of marketing
responsibility
184
MARKETING

Develop a marketing plan!

Tools include:
 Advertising, billboards, brochures,
endorsements, direct mail, editorials,
networking, community meetings, news
conferences, news releases, newsletters,
posters, public speaking, PSAs, events, trade
fairs, videos

Look for ways to save on marketing
costs
185
RECORDKEEPING

Important element!

Must be well-thought out and
efficient
 How?
 Who?
 What?
186
COORDINATING WITH
OTHER PLANS

Consolidated Plan

Plans by other organizations &
agencies

Neighborhood Revitalization
Strategy
187