St. Clair County officials are looking to start a loan program with federal money to spark economic development.
Under the program, which still needs federal approval, the county would borrow money through the Department of Housing and Urban Development’s Section 108 Program against its annual allotment for community block grant dollars, which is about $3.2 million a year, including the allotments for East St. Louis and Belleville. The county’s borrowing limit would be $15 million.
Projects would have to benefit low-and moderate-income people, help prevent or eliminate blight or meet an urgent need in the community, according to HUD. Eligible uses include economic development activities, property acquisition, rehabilitation of publicly owned property, construction of public facilities such as streets and sidewalks, and housing rehabilitation, among other things.
The County Board will vote Monday night on whether to apply to HUD to be allowed to start a Section 108 Program.
Beach said he is not sure when HUD would respond, but the county is hoping to learn quickly.
We’re the lender of last resort We’re the ones who make the project move forward that might be stalled for a short period of time because there is a gap in financing.
Terry Beach, executive director of the St. Clair County Intergovernmental Grants Department
Several times a year, HUD raises money to put into letters of credit for municipalities to draw down from in order to help make economic development loans for large projects, Beach said.
Projects would have to be in areas that show some distress. For example, money can be loaned to a developer who may want to take over an abandoned industrial plant, with environmental concerns involved, or for a significant housing development, where the private sector is involved along with the public sector.
Projects would have to be large “game changers” for the county to provide the gap financing, Beach said. For example, if a project was $10 million to $30 million, the county might be willing to invest 10 percent, or $1 million to $3 million.
The rest of the money for a project would come from developers or other lenders financing the project, among other sources.
“We’re the lender of last resort,” Beach said. “We’re the ones who make the project move forward that might be stalled for a short period of time because there is a gap in financing.”
The maximum length of a loan is 20 years. The interest rate the county would charge on the loans would be probably be a 3 percent fixed rate, Beach said.
Section 108 Program projects that receive gap financing would have to benefit low- and moderate-income people, help prevent or eliminate blight, or meet an urgent need in the community, according to HUD guidelines.
The county would have an inter-creditor agreement where the main lenders, including the county, would each be paid first on a pro-rata basis, Beach said. Monthly payments would then be due to the county, for the county to pay back HUD.
However if there is a default on the loan, the money borrowed from HUD would be taken out of the county’s annual community block grant allocation.
“That’s how HUD guarantees repayment,” Beach said. “It’s a secured loan. We have to repay back HUD.”
Beach said the county may not take the first project that comes along and applies for gap financing.
“We will have to advertise to see what’s out there,” he said. “We want to prioritize to be certain it’s the most bang for the buck.”
If the program is approved, the county would form a committee with county staff members, County Board members and local bankers to make decisions on applications for the gap financing.
“We have to be very judicious in our use,” Beach said. “It’s not for small business loans, mom and pops; we have other funding sources for that. This is for big, big projects, where we provide ... gap financing.”
Michael Lundy, the executive director of the Southern Illinois Development Authority, said a program like this could be beneficial.
A large development or manufacturer could have a gap and could use an additional low-interest loan, Lundy said.
“Sometimes a bank is only willing to come so far (with financing),” Lundy said.
Wayne Barber, a principal at the BarberMurphy Group, said lenders considering gap financing would ask if a project merits financing and whether it could stand on its own.
“Many times when there is a gap it’s more due to the nature of the ability of developer to finance on his own terms,” Barber said. “Any lending institution has to be cautious.”
When working with a developer, Barber said, a lender should look at their experience to make sure the developer has a good track record and has the financial wherewithal to complete a project.
Barber said the county would have to be cautious if the gap is too wide and added the county would need to ask specific borrowers why they would have trouble gaining complete financing.
“Sometimes it maybe the location of a project,” Barber said. “That might be more justifiable then.”
HUD allows communities to apply for loan pools, as is the case with St. Clair County, or apply for individual loans.
Rockford has used Section 108 loans for two individual projects, opening a grocery store in an under-served area, and helping with the expansion of MegaFab, a manufacturer in the city, said Todd Cagnoni, community development director for the city.
The city provided gap financing for each project and the projects would not have gone forward without the loans, Cagnoni said.
There are seven years left on the grocery store’s 20-year loan, and MegaFab is on track to finish its payments next year.
Cagnoni added there was a worry MegaFab would leave town.
Cagnoni said communities that go through a loan pool process, would need to have a process in place on how future loans are approved.
“It all comes down to underwriting,” Cagnoni said. “That’s where you want to have a committee doing it.”
Jerry Brown, a spokesman for HUD, said when communities apply for Section 108 financing, they usually have specific projects in mind.
He said these loans sometimes are very successful. “It really depends on the city and the plan,” Brown said.
HUD last year approved a $3.5 million guaranteed loan for Champaign for its Bristol Park Neighborhood Redevelopment Project. The two-phase project includes 80-120 mixed-income, mixed-tenure housing units, development of public facilities, such as parks, and a public mixed-use structure housing a new fire station, public storm shelter and a neighborhood community center.
“You stand a better chance of approval when it appears you have a solid plan that leads toward results,” Brown said.