HUD grants new life to brownfields

Secretary of the U.S. Department of Housing and Urban Development (HUD) Andrew Cuomo stated, "One of the primary missions at HUD is to help cities get the funding, resources and technical assistance they need to turn underused areas of urban communities into thriving centers for jobs." HUD financing is used to leverage private equity capital, not to replace it. In fact, many brownfields cannot attract private investors or lenders without the boost provided by various HUD programs.

Community development block grants
HUD's Community Development Block Grant (CDBG) program provides money for community and economic development, including brownfield redevelopment projects. In fiscal 1998, HUD provided $4.675 billion to about 950 communities, 50 states and Puerto Rico. Your projects must meet one of three national objectives to receive a block grant:

1) Benefit low and moderate income persons;

2) Prevent or eliminate slums or blight; or

3) Address conditions that present a serious and immediate threat to the health and safety of the community.

Section 108 loan guarantees
Local governments use Section 108 loan guarantees from HUD to support economic development projects. The funding can total up to five times a local government's CDBG entitlement. Section 108 provides financing for economic development, public facilities and brownfield activities. Again, the activities funded from loans guaranteed under Section 108 must meet one of the three national objectives of the CDBG program.

Because Section 108 loans are treated like commercial loans, adequate security must be pledged. Interestingly, part of the security for these loans can be satisfied by local government pledges of annual CDBG funds. Of course, risking CDBG funds forces local governments to manage risk like any good lender. This includes making sure that non-CDBG collateral is adequate to fully secure Section 108 loans. The balance of the collateral can include a broad range of assets, including the property being redeveloped, equipment, pledges of tax revenues and accounts receivable. As you can see, 108 loans are bottom-line oriented and should only be used to finance economically viable projects.

People and news
Let's take a look at an organization that works with HUD to offer block grants and 108 loans - the Philadelphia Industrial Development Corporation (PIDC). Philadelphia Mayor Ed Rendell describes PIDC as "one of the most effective economic development corporations in the country." Its president, Bill Hankowsky, tells us that one of the corporation's missions is to provide financing for businesses expanding or locating to Philadelphia. PIDC has and will continue to achieve its objectives by funding brownfield revitalization.

PIDC uses a variety of tools, including block grants and 108 loans, to finance projects. HUD lends 108 money to PIDC in the following manner: HUD sells debentures - interest-bearing bonds issued against HUD's general credit - to raise cash that is then loaned to PIDC. PIDC then lends the money to developers. PIDC charges developers a higher rate of interest than it pays to HUD. This allows PIDC to repay HUD, while also building up loss reserves to cover bad debts.

PIDC accepts a variety of security for 108 loans, including tax incremental financing (TIF). There are several types of TIF, but one of the most popular is the property tax TIF. Generally, this type of TIF causes property taxes to be frozen at predevelopment levels. The incremental increase in property taxes due to the development goes toward debt repayment, not the municipal government. Unlike most sources of financing, which consist of an initial investment, grant or loan, tax incremental financing does not involve granting, lending or investing capital. Instead, property tax TIF provides a predictable and steady stream of income for the repayment of funds secured from another source, in this case 108 loans.

Many brownfields produce no property taxes before redevelopment. Therefore, the local government does not lose money by offering property tax TIF. By making redevelopment possible, local governments can ensure that there will be long-term tax revenue from the site. And, on a short-term basis, the property tax TIF facilitates redevelopment by providing quality collateral for Section 108 loans.

Brownfield Economic Development Initiative
In 1998, HUD introduced the Brownfield Economic Development Initiative (BEDI) grant program with $25 million, doubled to $50 million in 1999. BEDI should be used for redevelopment projects that offer "near-term" results, including job creation and an increase in the local tax base. BEDI increases collateral for 108 loans and, thus, helps to ensure that CDBG security is never called on. BEDI also helps overcome the cash flow challenges that exist at the beginning stages of many redevelopment projects.

For more information, call HUD's Community Connections hotline at 800-998-9999, or see HUD's brownfields redevelopment initiative Web site at www.hud.gov/progdesc/brownf.html.

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This article originally appeared in the 09/01/1999 issue of Environmental Protection.

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