Insights Revolving Loan Funds in Community Development Block Grants
By David Bennett, Senior Manager, Community Development
Federal funds, specifically Community Development Block Grant (CDBG) and Home Investment Partnerships Funds (HOME) dedicated to affordable housing and economic development undertakings, have decreased over the past ten years. Entitlement communities and participating jurisdictions as well as smaller communities that access these funds through competitive state pools are struggling to continue funded projects and programs as well as plan for future undertakings. Since CDBG’s authorization in 1974, over $143 billion has been allocated to entitlement and non-entitlement grantees. In the first program year, nearly $2.5 billion was allocated to 594 entitlement grantees; in 2014, approximately $3 billion was allocated to 1,193 grantees. In essence, the 2014 allocation was one-fourth of the 1974 allocation when Consumer Price Index (CPI) adjusted and was shared by nearly twice as many grantees.
It was not uncommon in the early days of CDBG for communities, flush with these federal entitlement dollars from a program specifically designed to deliver flexibility to provide funding for a myriad of housing and human service programs, to give outright grants or forgivable loans to nonprofit and for profit affordable housing developers for the purpose of:
- Preservation, rehabilitation, and development of rental housing units
- Down payment and closing cost assistance for eligible low/moderate income single family homeowners
- Loan and business rental assistance for small low/moderate income owner businesses
As funds started to dwindle, many communities changed their local program guidelines to include repayment stipulations based on no or low-interest terms.
Under federal program guidelines, CDBG and HOME loan repayments and interest are acceptable and these funds are considered “program income.” Under CDBG guidelines, however, program income is counted along with current-year entitlement dollars when determining if a recipient community is spending funds in a timely fashion. By April 15 of each year, a recipient community is prohibited from retaining more than 150% of its current year entitlement as available funds (including program income and past year/years unprogrammed entitlement). For example, if “Smith County’s” current year entitlement is $1,000,000, by April 15 of the next year, it cannot be sitting on more than $1,500,000 in undisbursed current and past year(s) entitlement funds and program income. The HOME program has similar restrictions, but looks at funds which are not committed (allocated toward a project in progress) as HOME allows for new construction which CDBG does not which commonly takes a longer time for funds to be disbursed during the construction phase.
A benefit of a recipient community receiving program income through loan repayments is that it also allows that recipient community to expand its administrative and public services caps. If, for example, Smith County receives the current $1,000,000 per year CDBG entitlement, it can use no more than 20% ($200,000) for administrative costs to manage the CDBG grant. Generally, jurisdictions will pay local civil servants out of the grant and they must dedicate a proportionate amount of their time to administering the CDBG grant. A recipient community may also use up to 15% ($150,000 in Smith County’s case) of its annual entitlement for public service projects. These projects are generally human service activities carried out by the jurisdiction or local nonprofits who have competed for grant funding as a “subrecipient” in a standardized and well-managed program that addresses gaps in the recipient community’s human services network. As with all CDBG funds, beneficiaries of these CDBG-assisted programs must be verified low/moderate income residents of the community and have legal presence in the United States. Examples of public service projects may include youth/elder specific programs, job readiness/skills training, ESL classes, free clinics, dental programs, financial literacy programs, and first-time homebuyer education courses. If Smith County received $500,000 program income in its previous fiscal year on repayment of CDBG loans, the current allocation of $1,000,000 and the $500,000 receipted past year program income allows the administrative cap for the current year to rise from $200,000 to $300,000 and the public services cap to rise to $225,000.
CDBG does, however, allow for program income to be categorized in a unique fashion. A recipient community can establish a revolving loan fund or multiple revolving loan funds. A revolving loan fund is a source of money from which loans are made for specific types of projects. Most revolving loan fund programs have a maximum allowable payback period for projects and are structured to cycle loan payments back to the capital base to pay for administrative fees, thereby facilitating relatively lower interest rates, and allowing additional loans to be made. As such, the fund becomes an ongoing or "revolving" financial tool. In addition to being used for affordable housing and economic development projects, revolving loan funds have become popular strategies to support historic preservation, energy efficiency, water conservation, and other sustainability projects.
Applied to CDBG programs, a revolving loan fund allows for the flexibility of keeping program income funds on hand until they are required for future projects without counting against the timeliness of disbursement each April 15. Revolving loan funds do, however, trigger certain programmatic requirements:
- In setting up a revolving loan fund, the community must notify HUD and gain approval from the local field office. Notification must include program guidelines for that specific revolving loan fund. A single-family housing rehabilitation program, for example, would require guidelines for loan underwriting criteria, repayment terms, permissible types of rehabilitation, and clearly defined program criteria. If a community also wished to categorize loan repayments from multifamily projects as program income, it would need to set up another revolving loan fund specific to multifamily projects and have guidelines and program parameters established for that program.
- Program income counted as revolving loan funds must be kept in an interest-bearing account. On a twice-yearly basis, interest earned on that account must be remitted to the US Department of Treasury.
- If, for example, Smith County has outlined through citizen participation in its Five Year Consolidated Plan and subsequent Annual Action Plans that a critically needed effort is affordable multifamily rental housing development and the political body of Smith County has also added local tax dollars and state funds to this effort, loan packages that are cobbled together out of multiple funding sources must be treated with care. When repayment occurs, local/state/CDBG/HOME/other federal funds may not be commingled in a revolving loan fund. Smith County would have to clearly set up separate bank accounts for each source of funds in the repayment—HOME program income funds would have to be remitted to the HOME Multifamily Rental Revolving Loan Fund, CDBG program income would have to be allocated to the CDBG Multifamily Rental Revolving Loan Fund, and so on. In HUD’s view when it comes to audit the CDBG and HOME programs, it will critically look at the issue of commingling and interest remittance to the US Treasury. What Smith County does with the local and state funds that are repaid is irrelevant to HUD, but best practices and the law would expect careful treatment of those funds as well.
- The purpose of establishing a revolving loan fund may not be violated. If, for example, Smith County has set up a revolving loan fund specifically for the purpose of affordable housing developers to access funds to preserve and rehabilitate affordable housing, it could not use funds out of this revolving loan fund to pay for a feasibility study on revitalizing a specific distressed area of the county. While it is permissible for CDBG to pay for such a study as long as Smith County can prove that the beneficiaries of such a study are ultimately predominantly low/moderate income persons, this activity was not authorized under the intent of creating the multifamily revolving loan fund.
- If Smith County set up a revolving loan fund for down payment and closing cost assistance for first-time low/moderate income homebuyers and after two years due to a downturn in the housing market no new beneficiaries were applying to the fund, Smith County would have to notify in writing their local HUD field office that the County would be closing that particular revolving loan fund. It would be an option for the County to place those funds in either a functioning revolving loan fund or place the funds back into its general program income. As stated earlier, though, the latter choice would impact Smith County’s balance on hand at the April 15 timeliness disbursement deadline.
Revolving loan funds, along with the Section 108 Loan Securitization Program, allow for a recipient community to stretch its CDBG dollars and plan “big.” Even in Smith County’s case, a large mixed-use revitalization project with a budget of over $20,000,000 would not be unimaginable. Careful stewardship, accurate accounting, strict policy and procedure control, transparency, buy-in of community stakeholders, and distant horizon planning allow for these community wishes and aspirations to come true.
As stated above, repayment of loans as program income allows for the 15% administrative cap in a given year to be expanded. This enables an entitlement community to be nimble in funding eligible human services activities within the cap. Generally, funded public service projects are in the forms of grants, rather than loans, because no capital or business projects were assisted that would generate repayments over a period of time.
For communities that are single or multi-year one-time subgrantees of state CDBG pools and wish to set up a revolving loan fund that will perpetually capitalize a program such as low/moderate income homeowner single family rehab, more likely than not it will lack dedicated staff and institutional knowledge to remain compliant and design a program. Part of the state CDBG grant (20%) may be used for program design and administration which is usually left to a contractor, solicited through a competitive RFP process, to administer. As part of our commitment to all communities and localities and in support of our mission, IBTS provides full program assistance to small, non-entitlement communities, beginning with the requisite citizen participation process, and continuing through the state applicant process, program implementation construction management, beneficiary and contractor relationship management, and grant close-out. IBTS is also strategically partnering with another non-profit that provides localities with loan servicing and portfolio management of outstanding CDBG, HOME, and local funded loans. As with any federally-assisted project or program, ensuring compliance, performance, and accountability by a recipient or subrecipient community are key to ensuring future funding eligibility and the overall survival of federal programs.