Can Section 108 be used to help develop an LIHTC?


One of the most flexible, yet undersubscribed, financing tools for housing and community development offered by the U.S. Department of Housing and Urban Development (HUD) is the Section 108 Loan Guarantee Program. Section 108 program has over 300 active participants despite over 1,200 eligible recipients, a $300 million fiscal year 2022 authorization, and multiple eligible uses.

One of the many ways to use Section 108 loans is to facilitate Low-Income Housing Tax Credit (LIHTC) transactions. Some municipalities are finding creative ways to use the Section 108 program to acquire properties for LIHTC development and to fund infrastructure improvements.

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Using Section 108 with the LIHTC

Through the Section 108 Loan Guarantee Program, HUD offers Community Development Block Grant (CDBG) recipients the opportunity to leverage their annual grant allocation for long-term, low-cost funding for economic development, infrastructure, housing and public facilities projects. Section 108 is often used as top-up financing for large developments and can be used to catalyze other public and private loans or grants.

In order to use Section 108, the CDBG grant recipient must propose a financially feasible transaction and must commit their CDBG funds to secure the Section 108 loan. In turn, the recipient can access Section 108 loans. up to five times the amount of their most recent annual CDBG allowance.

Some of the eligible activities under Section 108 include:

  • Acquisition of real estate,
  • Rehabilitation of real estate in the public domain,
  • Rehabilitation of eligible CDBG housing,
  • Construction, reconstruction or installation of public facilities, and
  • Related relocation, mine clearance and site improvements.
Journal Graphic: Marisol Village in Sacramento, CA, photo 2

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Using Section 108 to support the development of the LIHTC is possible, if properly structured. CDBG rules allow CDBG funds to be loaned to a community development organization for the construction of new rental housing, but not to a for-profit developer. In the following two case studies, municipalities have found innovative ways to support LIHTC construction with Section 108, even while working with for-profit developers.

Case Study: High Point, North Carolina

The city of High Point, NC has five 9% LIHTC developments, the last four of which have been built since 2016 using Section 108 funding for acquisition and public infrastructure. High Point’s newest LIHTC development supported by Section 108 is Avondale Trace Apartments, a 72-unit new construction property that has leveraged $650,000 in federal funds with $10.4 million in private capital. Of the $650,000 Section 108 loan, $425,000 was used for site acquisition and $225,000 was used for site improvements that were contracted and paid for by the city.

Avondale Trace Apartments Funding Sources

  • $1 million conventional first mortgage
  • $800,000 loan for the North Carolina Housing Finance Agency (NCHFA) ​​rental production program
  • $7.5 million in equity proceeds from LIHTC
  • $650,000 High Point Section 108 Loan
  • $250,000 NCHFA Workforce Housing Loan
  • $226,010 deferred developer fee

Total sources: $10.5 million

Due to CDBG program rules, High Point initially acquired the LIHTC property and made improvements to the site before turning over ownership to the for-profit developer.

“Without Section 108, I don’t think we could have done the things that we did,” said Thanena Wilson, acting director of community development and housing for the City of High Point.

“For a city of our size, because we are not a big right, [Section 108] definitely provides an additional development tool and resource that we can use,” Wilson said. “That’s the biggest advantage is that it opens up additional resources for us. On average we get around $950,000 in CDBG funding and around $550,000 in HOME funding, so when it comes to making multi-million [developments]it certainly gives us more resources and capabilities.

Wilson said High Point is considering pushing for a rule change that would allow municipalities to exceed the current Section 108 cap by five times the amount of the annual CDBG allocation. “If a [development] is sustainable and payments can be made and the city has the ability to make those payments, you really shouldn’t be limited to those five times [caps]”Wilson said. “There aren’t a lot of people using Section 108. When I look at North Carolina, they have the ability to borrow over $40 million and it’s totally untapped. “

Case Study: Sacramento, California

Sacramento, California is another city that has successfully used Section 108 to support new LIHTC construction development. The City of Sacramento, Sacramento County Housing Authority (HACOS), Sacramento City Housing Authority and Sacramento Housing and Redevelopment Agency (SHRA) and McCormack Baron Salazar (MBS), a for-profit developer, are working together to rebuild Sacramento’s oldest public housing community with the five-phase new construction of 427 Mirasol Village apartments. HACOS, the landowner, leases the land to MBS.

The massive redevelopment required major infrastructure upgrades that were financed with proceeds from the Section 108 loan, including new sewers and water lines, a site-wide storm water retention system, roads , bike paths, sidewalks, a community garden and a public park.

“The community will include a dog park, walking trail and early childhood education centre,” said Victoria Johnson, SHRA’s deputy director of development. “A local nonprofit will develop a public market with a farmers’ market, food trucks, and a kitchen where people can cook and sell their wares. Section 108 is the kind of resource that makes this level of neighborhood transformation.

Infrastructure development costs were allocated to each phase of the development on a pro rata basis, with each development partnership purchasing completed improvements with an infrastructure repayment loan between SHRA and the partnership.

As a recipient of the CDBG grant, the City of Sacramento was authorized to leverage its 2020 CDBG allocation of $4.8 million into a Section 108 loan amount of up to $24 million. He used a Section 108 loan of approximately $16.5 million for Mirasol Village.

Sources of funding for the village of Mirasol (first phase)

  • $25 million in equity proceeds from LIHTC
  • $13.5 million private first mortgage lender
  • $12.9 Million California Housing and Community Development Loan for Affordable Housing and Sustainable Communities
  • $8 million loan for the implementation of the HACOS neighborhood of choice
  • $3.8M SHRA Infrastructure Loan (Section 108 Repayment)
  • Deferred developer fees of $615,374
  • $158,400 HACOS land lease loan

Total: $64.1 million

Considerations for other cities

When asked what cities need to know about Section 108, Wilson said don’t be afraid to use it. “That’s one of the biggest hesitations or things we’ve heard because people don’t understand Section 108,” Wilson said. “They’re scared to commit future federal allocations in this area, but we’ve been working with the sponsor, looking at the repayment schedule and it really could be a great funding mechanism to do that. [developments] love this job and get more units in the field.

Johnson advises municipalities to consider using Section 108 to leverage or match other funding sources. For the village of Mirasol, a portion of the proceeds from Section 108 was originally intended for a community park. However, the redevelopment agency applied for and received a state grant which was used in lieu of Section 108 to build the park. This in turn freed up some of the proceeds from Section 108 to build an early childhood education center. Johnson said Section 108 has helped secure funding from state grants and other sources. “Each funder is encouraged to participate when they know there is a match,” Johnson said.

Conclusion

When properly structured, the Section 108 loan is a flexible and valuable tool for CDBG recipients to provide supplemental financing that can benefit affordable rental housing developments and their communities. Potential or current Section 108 borrowers can contact HUD’s Section 108 office for technical assistance from conceptualization through application, financing, and implementation.

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