HUD’s Section 108 Loan Guarantee: A Flexible Tool for Inner City Economic Development

The federal Department of Housing and Urban Development (HUD) is perhaps best known for its affordable housing programs or programs to help disadvantaged residents find safe, secure housing alternatives. These programs are critically important for our inner cities, as are HUD’s financing tools that help fill developers’ capital stacks when building new housing.

But HUD also offers other programs that are important catalysts for inner city economic revitalization. The popular Community Development Block Grant Program (CDBG), for example, provides eligible communities with an annual grant allocation that can be used flexibly to support local economic development, housing rehabilitation, public facilities, and large-scale development projects designed to benefit low- and moderate-income (LMI) residents. CDBG funds are often deployed to support projects in the urban core.

Through the CDBG program, HUD also offers a tool known as the Section 108 Loan Guarantee program. Though Section 108 has been around since 1974, it’s often overlooked by cities as an economic growth and development strategy. Section 108 allows communities to transform a small portion of their CDBG entitlement into federally guaranteed loans large enough (up to $140 million) to pursue physical and economic revitalization projects that can renew entire neighborhoods. Communities work with HUD to structure the terms of the Section 108 loan repayment, which may include a repayment period of up to 20 years.

All activities undertaken using the Section 108 program must meet one of CDBG’s three national objectives:

1. Principally benefit LMI people;
2. Assist in the elimination or prevention of slum and blight conditions; or
3. Meet other community development needs that have a particular urgency and are of very recent origin.

Across the country, cities like Memphis, Tennessee, Vallejo, California, and Atlantic City, New Jersey are leveraging the Section 108 program, showcasing its power to catalyze local economic development.

Memphis, TN: Sears Crosstown Multi-Use Redevelopment

The City of Memphis is using a $4 million Section 108 loan to provide assistance with a massive adaptive reuse project known as Sears Crosstown. The project is intended to create an economic anchor in northwest Memphis, and will include office, retail space, medical and healthcare services, education and cultural space, and approximately 265 residential units. The project is led by a nonprofit developer with the goal of transforming a vacant 10-story, 1.5 million square foot former distribution facility that dates back to the 1920s. In total, the building will have 886,000 net rentable square feet, of which 60% has already been leased. The City estimates that the project will create more than 800 full time jobs, of which at least 51% will be reserved for LMI residents.

The City structured this loan to be repaid over a 20-year period, the maximum allowed under the program. The City will make interest-only payments during the first seven years of the loan using the New Markets Tax Credit (NMTC) financing structure.

While the Section 108 loan is only one small piece of a $200 million redevelopment effort, every penny counts. Joel Superfon, partner at Phoenix-based Dudley Ventures and one of the investors in the project, elaborates: “I think it’s such a massive project [that] when people saw it on paper, I think a lot of them thought ‘How could this be done?’ This was truly one of the most remarkable transactions we’ve been involved in.”

Vallejo, CA: North Mare Island Acquisition and Demolition

Many cities struggle to attract private sector interest to redevelopment opportunities. To overcome this hurdle, cities will often take on the heavy lifting of predevelopment activities (site planning, zoning, land assembly, demolition, etc.) to make the site more “development ready.” In doing so, cities eliminate a lot of the unknowns associated with major redevelopment projects.

The City of Vallejo is leveraging a $4.7 million Section 108 loan to this end. It will assist with site acquisition and demolition on North Mare Island, where a former U.S. Naval Shipyard was once located. The Navy has deeded a 125-acre parcel of the site to the City already, and the loan will allow the City to acquire the remaining 32 acres and begin the demolition of 30 vacant, deteriorated buildings as part of site preparation efforts. Given the island’s proximity to Oakland (30 minutes) and San Francisco (45 minutes), and more importantly, its proximity to the Port of Oakland, the City sees this as an ideal location for commercial and light industrial development. The City has rezoned the land for up to 1.2 million square feet of new development, but the site acquisition and demolition made possible by Section 108 is key to attracting the private sector interest necessary to move this project forward.

The City plans to repay the loan guarantee over an eight-year period. At a minimum, the project is expected to create 135 jobs for LMI residents. If the site is fully-built out, the project could create more than 1,200 jobs for local residents.

Atlantic City, NJ: Business Loan Pool

Atlantic City’s use of a Section 108 loan guarantee demonstrates the program’s flexibility. Unlike the other examples which were focused on physical redevelopment, Atlantic City has decided to create a Business Loan Pool (BLP) using a $2 million Section 108 loan guarantee. The City will use the BLP to make loans to local, for-profit businesses that fall into one of two categories:

• Small- to medium-sized businesses are eligible for loans up to 40% of project costs or $400,000, whichever is lower; and
• Small businesses (including family-owned businesses) in need of microloans ranging from $1,000 to $35,000.

The loans are intended to fill a common financing gap between private-sector lending and the small businesses’ equity contributions for a project. BLP loans are offered at both fixed and variable interest rates, but the rates clock in lower than the market average. To be eligible for the larger loans, businesses must have been operating for at least two years and must be able to demonstrate sufficient profitability to repay the loan. Preference for microloans is given to recipients who have been in business for at least six months. Both loan categories also require the borrower to create a certain number of jobs for local, LMI residents (a number that depends on the size of the loan). In total, Atlantic City expects to create 57 new full-time jobs through this business loan pool. Atlantic County, NJ has created a similar Business Loan Pool using a $3.4 million Section 108 loan guarantee.

As ICIC research shows, access to capital is one of the largest barriers to growth for inner city businesses – so Atlantic City’s BLP will be a tremendous, low-cost resource for the businesses that are otherwise underserved by traditional loan products.

As is highlighted in the three examples above, the Section 108 program can be used for a broad range of inner city revitalization strategies—from real estate redevelopment to financing small businesses. The countless other examples of cities leveraging HUD’s Section 108 program also demonstrate the program’s flexibility. This allows communities to get creative in how they use the loan guarantees to support economic growth and development. Although Section 108 falls under the radar compared to the CDBG program or HUD’s housing programs, it’s a vital resource for communities and one that policymakers should add to their economic development toolboxes.

Learn more about the Section 108 Loan Guarantee program here.