Leveraging Federal Funds for Housing, Community, and Economic	 
Development (25-MAY-07, GAO-07-768R).				 
                                                                 
Each year the federal government funds numerous affordable	 
housing and community and economic development initiatives	 
through an array of programs, such as the Department of Housing  
and Urban Development's (HUD) Section 108 Loan Guarantee (Section
108) program. Yet, the need for federal money to fund these	 
initiatives has continued to grow, while the federal budget	 
increasingly has been strained by other competing funding	 
priorities. To help finance their initiatives and achieve program
goals, recipients of funding under these federal programs often  
have combined or "leveraged" their funds with other federal,	 
state, local, and private sector resources. While leveraging is  
generally recognized favorably by public and private sector	 
officials, its use in federal programs has not been widely	 
analyzed. This report responds, in part, to Congress's request	 
that we examine leveraging as it relates to federal housing,	 
community, and economic development programs. Specifically, this 
interim report (1) examines the perspectives of 		 
stakeholders--government and industry officials, academics, and  
others with knowledge of or experience with leveraging--on the	 
use, implications, and measurement of leveraging in housing and  
community and economic development programs and (2) describes the
type of data HUD collects that could be used to determine the	 
extent of leveraging in the Section 108 program. Additionally,	 
enclosure II describes how federal funds may have been or could  
be leveraged in the Section 108 program.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-768R					        
    ACCNO:   A69950						        
  TITLE:     Leveraging Federal Funds for Housing, Community, and     
Economic Development						 
     DATE:   05/25/2007 
  SUBJECT:   Community development programs			 
	     Economic development				 
	     Federal aid for housing				 
	     Federal funds					 
	     Government guaranteed loans			 
	     Grants						 
	     Housing						 
	     Housing programs					 
	     Lending institutions				 
	     Program evaluation 				 
	     Urban development programs 			 
	     Stakeholder consultations				 
	     HUD Section 108 Loan Program			 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-07-768R

   

     * [1]Results in Brief
     * [2]Background
     * [3]Leveraging Can Occur in Different Ways and for Different Rea

          * [4]According to Stakeholders and Literature, Leveraging Can Occ
          * [5]Although Generally Regarded Favorably, Leveraging Also Has I
          * [6]Leverage Ratios Are Commonly Used to Measure the Extent of L

     * [7]HUD Data Could Be Used to Estimate the Extent of Leveraging
     * [8]Agency Comments
     * [9]Enclosure I
     * [10]Objectives, Scope, and Methodology
     * [11]Enclosure II
     * [12]Descriptions of Proposed Sources and Amounts of
     * [13]Funds Used to Finance 50 Section 108 Projects
     * [14]Enclosure III
     * [15]Descriptions of Programs or Entities We Included Under Categ
     * [16]Enclosure IV
     * [17]GAO Contact and Staff Acknowledgements
     * [18]PDF6-Ordering Information.pdf

          * [19]Order by Mail or Phone

May 25, 2007

The Honorable Maxine Waters
Chairwoman
Subcommittee on Housing and Community Opportunity
Committee on Financial Services
House of Representatives

Subject: Leveraging Federal Funds for Housing, Community, and Economic
Development

Dear Madam Chairwoman:

Each year the federal government funds numerous affordable housing and
community and economic development initiatives through an array of
programs, such as the Department of Housing and Urban Development's (HUD)
Section 108 Loan Guarantee (Section 108) program.1 Yet, the need for
federal money to fund these initiatives has continued to grow, while the
federal budget increasingly has been strained by other competing funding
priorities. To help finance their initiatives and achieve program goals,
recipients of funding under these federal programs often have combined or
"leveraged" their funds with other federal, state, local, and private
sector resources. While leveraging is generally recognized favorably by
public and private sector officials, its use in federal programs has not
been widely analyzed.

This report responds, in part, to your request that we examine leveraging
as it relates to federal housing, community, and economic development
programs. Specifically, this interim report (1) examines the perspectives
of stakeholders--government and industry officials, academics, and others
with knowledge of or experience with leveraging--on the use, implications,
and measurement of leveraging in housing and community and economic
development programs and (2) describes the type of data HUD collects that
could be used to determine the extent of leveraging in the Section 108
program. Additionally, enclosure II describes how federal funds may have
been or could be leveraged in the Section 108 program.2

1As described in further detail in this report, the Section 108 program
allows communities to borrow against their current and future Community
Development Block Grant allocations to fund larger-scale housing and
community and economic development projects.

2Also as will be discussed in this report, the Section 108 data derive
from information on proposed sources and amounts of funding at the time of
application for program funding. Because the data do not represent actual
funding, we describe the funding conditionally--for example, "may have
been leveraged."

To examine the perspectives of stakeholders on the use, implications, and
measurement of leveraging in housing and community and economic
development programs, we reviewed academic, industry, and other literature
and interviewed stakeholders. To describe the type of data HUD collects
that could be used to determine the extent of leveraging in the Section
108 program, we interviewed HUD officials, reviewed relevant program
regulations and guidance, and reviewed our prior reports in this area and
reports of others. To describe how funds may have been leveraged in the
Section 108 program, we collected information on the proposed sources and
amounts of funds used to finance a random sample of 50 proposed Section
108 projects. For a detailed description of our scope and methodology, see
enclosure I. Enclosure III describes how we categorized some of the types
of funding sources that can be leveraged with Section 108 funds and
selected programs under those categories. We conducted our work in
Washington, D.C. and Chicago from November 2006 to May 2007 in accordance
with generally accepted government auditing standards.

As agreed with your office, we will provide a final report in the fall of
2007, which will address any further information we have gathered relating
to the objectives listed above. For example, we plan to assess how
generally accepted measurements of leveraging can be used in combination
with other indicators to measure the performance of housing and community
and economic development programs. In addition, we plan to review how or
the extent to which leveraging occurs in the following additional
programs: the Department of the Treasury's Community Development Financial
Institutions (CDFI), Low-Income Housing Tax Credit, and New Markets Tax
Credits programs; and HUD's Community Development Block Grant (CDBG), HOME
Investment Partnerships (HOME), and HOPE VI programs.

Results in Brief

Leveraging can be a useful tool for financing affordable housing and
community and economic development and generally is regarded favorably by
public and private sector officials; however, its use may have unintended
consequences, and commonly used measures of leveraging have certain
limitations. Leveraging can occur at an institutional level (to fund
multiple initiatives) and at a project level (to fund a discrete activity
or development). Leveraging also may occur because programs require that
program dollars be matched with other funds or because program dollars are
limited and participating communities or other recipients need to seek
additional funds for their initiatives. Although stakeholders we
interviewed and the literature we reviewed generally regarded leveraging
as useful, they also noted that it may have implications such as
inefficiencies resulting from differing application and reporting
deadlines in public programs and the potential substitution of federal for
private funding, which could direct scarce federal funds from the neediest
communities. Finally, stakeholders and the literature agreed that the most
common way to describe the extent of leveraging for programs or projects
is through a ratio, which expresses the proportion of dollars that other
sources contributed against dollars that the program contributed. However,
most of our interviewees said that what a ratio can reveal about the
success or efficiency of funding a program or project depends partly on
the circumstances of the development, such as its location and the
availability of potential investors.

HUD collects data on the other sources and amounts of funds communities
plan to leverage with Section 108 loan funds to finance various housing
and community and economic development projects. HUD maintains these data
in Section 108 memorandums, which the agency prepares as a record of
actions taken with respect to a Section 108 loan guarantee application.
However, because these data represent projected sources and amounts of
funding, they cannot be used to determine the actual amount of leveraging
in the Section 108 program. Nonetheless, available data on projected
funding can provide insight into the extent to which communities planned
to leverage Section 108 loan funds with other federal, state or local, and
private sources. See enclosure II for information about the Section 108
projects we reviewed.

Background

Traditionally, a range of governmental and financial entities and
academics have defined or conceptualized leveraging as using one source of
funds to attract additional sources of funds.3 Thus, for example, a
low-income housing development in which the federal government's initial
investment attracted, or was the impetus for, additional private or other
investment could be seen as a project that involved leveraging. However,
some have said that leveraging also can be thought of broadly to mean the
combining of multiple sources of funds.4 Under this broader
conceptualization, the investment of federal funds does not necessarily
have to be the impetus for the investment of other funds.5 Thus, for
example, a low-income housing development for which the federal government
provided "gap" financing also could be seen as a project that involved
leveraging.6 For purposes of this report, we refer to leveraging in this
broader sense--the combination of multiple sources of funds, including
other federal, state, local, and private funds, to finance development
projects, among other things.

3The traditional conceptualization of leveraging includes financial
leveraging--the degree to which a business or an investor utilizes
borrowed funds. For example, a company that uses borrowed funds to invest
in a real estate development project is considered to be using leverage to
carry out its investment strategy.

4For example, see R. Quercia, W. Rohe, and D. Levy, "A New Look at
Creative Finance," Housing Policy Debate, 11, issue 4 (2000): 943-972.

5We have referred to leveraging in both the traditional and the broader
sense in several reports. See GAO, Empowerment Zone and Enterprise
Community Program: Improvements Occurred in Communities, but the Effect on
the Program Is Unclear, GAO-06-727 (Washington, D.C.: Sept. 22, 2006);
Public Housing: HOPE VI Leveraging Has Increased, but HUD Has Not Met
Annual Reporting Requirements, GAO-03-91 (Washington, D.C.: Nov. 15,
2002); and Urban Action Grants: An Analysis of Eligibility and Selection
Criteria, and Program Results, GAO/RCED-89-143 (Washington, D.C.: July 7,
1989).

6Gap financing is a source of funds that is used to complete a project's
funding needs when all other available sources of funds have been
exhausted.

Congress established the Section 108 program in 1974 as a part of the CDBG
program.7 As amended in 1977, the law permitted entitlement
communities--generally cities designated as central cities of metropolitan
statistical areas, other cities with populations of at least 50,000, and
qualified urban counties--to borrow up to three times their current year's
CDBG allocation to obtain additional resources for financing larger-scale
housing and community and economic development projects that otherwise
could not be accomplished with a single year's CDBG allocation.8 In 1990,
the Cranston-Gonzales National Affordable Housing Act extended
participation in the program to nonentitlement communities--smaller
communities, including many rural communities whose CDBG programs are
administered by the state--and raised the amount communities could borrow
to five times their current year's CDBG allocation (or in the case of
nonentitlement communities, five times the state's allocation).9

Eligible communities must apply to HUD to obtain approval for a Section
108 loan guarantee. Both HUD field offices and headquarters play a role in
managing the loan program. Generally, field offices assist communities and
states in preparing their applications, make recommendations to
headquarters to approve or deny loans, and monitor funded activities.
Headquarters provides final approval for all loan guarantees, negotiates
loan terms with applicants, and arranges for the sale of loans. The
maximum amount HUD can commit to guarantee to a community is fives times
the community's annual CDBG allocation, and HUD guarantees repayment of
100 percent of the community's Section 108 indebtedness.

Under the Section 108 program, a community's current and future CDBG
allocations serve as the principal collateral for the loan (that is, a
community or state's CDBG funds are used to make payments due on the
guaranteed loan if other funds, such as project-related income, are
insufficient for that purpose). To date, HUD has not been required to make
a payment to the holder of a note guaranteed under Section 108 as a result
of a default.

The Section 108 program does not require communities to leverage program
funds as a condition of receiving a loan guarantee. However, Congress
created two sources of funds for use specifically in conjunction with
Section 108 loan proceeds--Economic Development Initiative (EDI) and
Brownfields Economic Development Initiative

742 U.S.C. S 5308.

8Communities can use Section 108 loan funds to carry out these activities
themselves or can reloan the funds to a third-party borrower.

9P.L. 101-625, S 910.

(BEDI) grants.10 HUD awards grant funds under both programs to states and
communities undertaking initiatives funded in whole or in part with
Section 108 loan funds.11 As discussed later in this report, communities
often leverage (combine) Section 108 loan funds with other federal, state
or local, and private sources of funds.

From 2001 through 2006, federal commitments to proposed Section 108
projects--that is, reservations of funds to guarantee loans--averaged
approximately $290 million annually. Commitments declined sharply between
2005 and 2006, from approximately $337 million to $220 million. During the
same period, advances--Section 108 loan funds provided to a
community--averaged $325 million annually.12

From 2001 through 2006, HUD approved 358 applications for loan guarantees.
The number of applications HUD approved ranged from 36 (2006) to 73 (2002)
and averaged approximately 60 per year. Most of the communities HUD
approved for loan guarantees during this period proposed using their
Section 108 loan funds for economic development and physical
infrastructure projects (see fig. 1).

Figure 1: Proposed Section 108 Projects by Type, Fiscal Years 2001 through
2006

10The EDI program was established in 1994 to encourage communities to make
greater use of Section 108 loan guarantees by providing additional
financing for projects and paying for some costs of borrowing under
Section 108. BEDI was established in 1998 to support state and local
efforts to start or continue redevelopment on brownfields
sites--abandoned, idled, or underused real property where actual or
potential environmental contamination complicates redevelopment--and
enhance the viability of projects financed with Section 108 loan
guarantees. By statute, HUD must make BEDI grant awards contingent on
applicants getting a Section 108 loan guarantee (42 U.S.C. S 5308(q)).
Communities have 5 years from the date grants are committed to use them.

11HUD stopped making competitive grants under EDI in 2001. However, HUD
still may make special-purpose or targeted EDI grants to qualifying
communities pursuant to Congressional directives. HUD still makes
competitive BEDI grants.

12This average excludes advances made in 2005. Advances made in this year
were artificially low (approximately $168 million) because no public
offering was held that year. HUD obtains funding for Section 108 loans
though public offerings of pooled loans on the private sector capital
market. The average for advances can exceed the average for commitments
because communities have up to 5 years from the date of commitment to use
their loan funds.

Leveraging Can Occur in Different Ways and for Different Reasons, but Its
Relationship to Success or Efficiency in Funding Is Not Well Understood

Based on our conversations with stakeholders and a review of the
literature, we found that leveraging occurs in different ways and for
different reasons, depending on the program. Further, the stakeholders
with whom we spoke discussed several unintended implications of leveraging
that were echoed in some of the literature. Finally, while the most common
way to express the extent of leveraging is through a leverage ratio,
stakeholders agreed that what a ratio can reveal about the success or
efficiency of an institution in funding a program or project has certain
limitations.

According to Stakeholders and Literature, Leveraging Can Occur at Different
Levels and for Different Reasons

Leveraging can occur at the institutional or at the project level (see
fig. 2). At the institutional level, an institution or organization pools
funds from multiple sources, which later are used to finance individual
projects. For example, under the CDFI program, the federal government
makes investments in certified institutions, which the institutions use to
leverage (in this case match) additional sources of funds.13 The certified
institutions then determine how they will use these pooled resources to
finance a range of housing and community and economic development
activities. In comparison, at the project level, a community or other
development authority leverages funds as necessary for discrete projects.
For example, under the Section 108 program, communities may use Section
108 loan funds to finance a variety of projects, and each individual
project may contain a different mix of funding sources, depending on its
size and type. As previously described, at either level, leveraging may
occur in the traditional sense--federal program funds are used to attract
other sources of funds--or in the broader sense--sources of funds are
combined for development, but no one source of funds is specifically
intended to attract the other sources of funds.

13Congress created the CDFI Fund under the Riegle Community Development
and Regulatory Improvement Act of 1994 (P.L. 103-325) to promote economic
revitalization and community development through investment in certified
institutions. The CDFI Fund makes financial assistance awards in the form
of equity investments, loans, deposits, or grants to certified
institutions. Before receiving any financial assistance through the CDFI
program, a CDFI must be certified by the CDFI Fund--which does so after
determining that a program has a primary mission of promoting development,
its predominant business activity is lending or investing in development,
and it serves (an) economically distressed investment area(s) or targeted
population(s). Institutions must match these investments dollar for dollar
with funds of the same type from nonfederal sources. For purposes of this
report, we considered matched funds to be leveraged funds.

Figure 2: Leveraging at the Institutional and Project Levels

Leveraging also may occur as a result of statutory or regulatory
requirements, program design, or for other reasons. For example, the HOME
program statute generally requires states and communities to match 25
percent of their HOME allocations on an annual basis.14 According to HUD
officials, Congress thought it was important for states and communities to
make permanent contributions to the development of affordable housing in
their areas, so it included a matching (leveraging) requirement in the
HOME statute. Under the New Markets Tax Credit program, leveraging is not
legally required, but applicants that propose projects that leverage
additional funds are rewarded with additional points in the competitive
application process for issuance of tax credits.15 Finally, some programs,
such as the Section 108 program, do not require or provide incentives for
recipients of program funds to leverage, but leveraging often occurs
anyway in these programs--for example, to stretch limited federal dollars
or promote partnerships among public and private investors.

Finally, many with whom we spoke said that while leveraging is often a
useful tool for improving communities, it may be harder to do in highly
distressed urban areas or in rural areas than it is in more developed
urban areas. They explained that the risk of investment in highly
distressed urban areas is often too high to attract significant private
investment.16 For example, in our 2002 report on the HOPE VI program--a
program designed to improve severely distressed public housing, which is
often located in distressed urban communities--we found that 79 percent of
the funds contributed to HOPE VI projects were from federal sources while
12 percent were from private sources.17 Our 1989 report on the Urban
Development Action Grants (UDAG) program similarly found that
more-distressed cities expected to need more UDAG funding to complete
projects and had lower amounts of leveraging than less-distressed cities
that received UDAG funds.18 Similarly, some stakeholders said that the
number of investors in rural areas may be limited. An Office of Thrift
Supervision report on rural development noted that it is not uncommon for
only one or two financial institutions to serve a rural community, and
some communities lack access to such institutions.19

1442 U.S.C. S 12750. Under HOME, HUD provides formula grants to states and
localities to fund activities that build, buy, or rehabilitate affordable
housing for rent or home ownership or provide direct rental assistance to
low-income households.

15See "Notice of Allocation Availability Inviting Applicants for the 2007
Allocation Round of the New Markets Tax Credit Program," 71 Federal
Register 70835, 70841 (Dec. 6, 2006).

16Investment risk is the potential for fluctuation in the value of an
investment, which could result in loss of principal.

Although Generally Regarded Favorably, Leveraging Also Has Implications Such as
Potentially Substituting Federal for Private Funding

Many with whom we spoke and much of the literature we reviewed indicated
that leveraging can help facilitate housing and community and economic
development.20 For example, as discussed previously, leveraging is often
used as a way to stretch scarce federal funds and promote partnerships
between the public and private sectors to improve conditions in
communities. However, leveraging at the project level can be challenging
and inefficient, partly because federal, state, and local funding sources
often have different application and other requirements and deadlines. For
example, the Low-Income Housing Tax Credit program requires developers to
complete housing projects within 2 years of receiving a tax credit
allocation from a state. 21 However, according to some stakeholders with
whom we spoke, this 2-year deadline can make it difficult to leverage the
tax credits with certain other federal financing sources, such as HOPE VI
grants because such large-scale developments can take more than 2 years to
complete.

17GAO-03-91. HOPE VI provides demolition and revitalization grants to
public housing authorities. Demolition grants fund the demolition of
distressed public housing, the relocation of affected residents, and
provision of supportive services for permanently relocated residents.
Revitalization grants fund the capital costs of major rehabilitation, new
construction, and other physical improvements; demolition of severely
distressed housing; and community and supportive service programs for
residents, including relocated residents. To increase the number of
affordable housing units developed at HOPE VI sites, HUD encouraged
housing authorities to use their grants to leverage funding from other
sources.

18GAO/RCED-89-143. Under the terminated UDAG program, HUD granted funds to
distressed cities to combine with private funds for investment in
industrial, commercial, and neighborhood projects. HUD defined
"distressed" cities as those that ranked among the needier half of all
U.S. cities under measures such as the communities' percentage of pre-1940
housing, poverty, and unemployment.

19Office of Thrift Supervision, "Best Practices in Rural Communities"
(Washington, D.C.: 1998).

20For example, see L. Riggin, P. Grasso, and M. Westcott, "A Framework for
Evaluating Housing and Community Development Partnership Projects," Public
Administration Review, 52, no. 1 (1992): 40-46; M. Nenno, "State and Local
Governments: New Initiatives in Low-Income Housing Preservation," Housing
Policy Debate, 2, issue 2 (1991): 467-497; and R. Quercia, W. Rohe, and D.
Levy, "A New Look at Creative Finance," Housing Policy Debate, 11, issue 4
(2000): 943-972.

The inclusion of federal funds in housing and community and economic
development project finance also helps to spread the investment risk
between potential private sector investors and the federal government,
thereby encouraging private sector participation in development. However,
some of the literature we reviewed noted the potential in public-private
partnerships for the uneven distribution of investment risks among
investors, with the federal government often bearing greater risks and
costs relative to the partnership benefits.22

According to some stakeholders, at the institutional level, communities
and investors generally are not encumbered by differing application and
other requirements, and investors generally are isolated from the
investment risks associated with particular projects, and thus may be more
willing to invest in housing and community and economic development
initiatives. However, when federal funding is provided at the
institutional level, the market could play a greater role in influencing
what development is completed because the federal government plays a more
limited role in determining how funds are used at this level than it does
at the project level. Moreover, when funding is provided at the
institutional level, it may be difficult to trace federal funding down to
specific projects because of its more limited role.

Finally, some of the literature we reviewed suggested that a proportion of
projects that involve leveraging also likely involve some level of
substitution--that is, the replacement of private dollars that otherwise
would have been invested in a project (if lower-cost public funding were
not available) with public dollars.23 One suggested means of limiting the
level of substitution and appropriately sizing public subsidies is the
inclusion of a "but for" test--a test designed to determine whether a
project would have been completed but for, or in the absence of, the
investment of public funds.24 However, such tests may not be good at
predicting, for example, the private sector's willingness to absorb risk
and thus the appropriate proportion of private investment and public
subsidy for a project.25 Some stakeholders said that the amount of
substitution in federal programs can be minimized through the inclusion of
matching requirements. However, others said that requirements to leverage
might preclude certain communities (for example rural and severely
distressed urban communities) from receiving federal funds because they
would be unable to attract sufficient additional funding. Further, such
requirements may provide incentives for more developed communities to
apply for federal funds because they can easily match them with private
sources, substituting private funding with public funding and potentially
diverting scarce federal resources from the projects where they were most
needed.

21Under the Low-Income Housing Tax Credit program, states are authorized
to issue federal tax credits for the acquisition, rehabilitation, or new
construction of affordable rental housing. The credits generally are sold
to investors, including individuals, financial institutions, and
corporations to raise development funds for a project. These outside
investors use the tax credit to offset taxes otherwise owed on their tax
returns. See also M. Stegman, "The Excessive Costs of Creative Finance:
Growing Inefficiencies in the Production of Low-Income Housing," Housing
Policy Debate, 2, issue 2 (1991): 357-373.

22For example, see S. Mullin, Econsult Corporation for the U.S. Economic
Development Administration, "Public-Private Partnerships and State and
Local Economic Development: Leveraging Private Investment," (Philadelphia,
Pennsylvania: 2002).

23See GAO, Federal Grants: Design Improvements Could Help Federal
Resources Go Further, GAO/AIMD-97-7 (Washington, D.C.: Dec. 18. 1996) and
C. Walker and others, The Urban Institute for the U.S. Department of
Housing and Urban Development, "Public-Sector Loans to Private-Sector
Businesses: An Assessment of HUD-Sponsored Local Economic Development
Lending Activities," (Washington, D.C.: 2002). For the replacement of
state funds with federal funds see GAO/AIMD-97-7 and J. Gerenrot, D.
Cashin, and A. Paulson, "Community Development Spending, 1981-2004,"
Chicago Fed Letter, no. 232 (Chicago, Illinois: 2006).

Leverage Ratios Are Commonly Used to Measure the Extent of Leveraging, but They
Have Certain Limitations

Based on our conversations with stakeholders and our review of the
literature and housing and community and economic development program
guidance, a common way of expressing the extent or amount of leveraging
that occurs at either the institutional or the project level is with a
leverage ratio. A leverage ratio relates the dollars other sources provide
to the dollars a program provides to an institution or a project. For
example, the leverage ratio for a particular project may be 1:1, meaning
that the other federal, state, local, and private sources collectively
contributed a dollar for every program dollar contributed to the project.
In general, an institution or project with a high leverage ratio is one in
which the investment of all other funds is large relative to the
investment of program funds (for example, 10:1 or 25:1). Similarly, an
institution or project with a low leverage ratio is one in which the
investment of all other funds is reasonably small relative to the
investment of program funds (for example, 2:1 or 0.5:1).

However, stakeholders identified some limitations in the usefulness of
leverage ratios for conveying detailed information on a program or
project. According to stakeholders, at the institutional level, leverage
ratios are a useful expression of the success or efficiency of the
institution in attracting or combining resources for future development
initiatives--at this level, a higher ratio generally would indicate more
success or efficiency than a lower ratio. But, at the project level,
factors such as the local economy and the availability of investors could
have a positive or negative impact on a project's ability to leverage
additional funds, and thus its leverage ratio. In addition, ratios used
alone cannot convey information on the level of substitution in a project.

24The UDAG program included such a test. The UDAG statute specified that
grants could be made under the program only when HUD determined that there
was a strong probability that (1) the nonfederal investment in the project
would not be made without the UDAG grant and (2) the grant would not
substitute for nonfederal funds that were otherwise available to the
project. 42 U.S.C. 5318 (j). Cities and private investors were required to
certify that projects that received UDAG funds were in compliance with the
statutory requirements.

25For example, see C. Walker and others, "Public-Sector Loans to
Private-Sector Businesses: An Assessment of HUD-Sponsored Local Economic
Development Lending Activities."

As part of our ongoing work in this area, we plan to interview additional
stakeholders to obtain a broader understanding of the perspectives that
exist on the use, implications, and measurement of leveraging for housing
and community and economic development programs. We also plan to further
review how leverage ratios, in combination with other indicators, can be
used to measure the performance of housing and community and economic
development programs.

HUD Data Could Be Used to Estimate the Extent of Leveraging in the Section 108
Program

Although HUD does not calculate a leverage ratio for the Section 108
program, the agency collects and maintains some information that may be
used to estimate the extent to which projects supported by Section 108
loan guarantees plan to leverage other federal, state or local, and
private funds.26 Specifically, HUD collects information on sources and
amounts of funds that communities plan to use in conjunction with Section
108 loan funds and documents this information in a Section 108 memorandum.
In most cases, these memorandums list the type--for example, EDI and BEDI
grants, tax-exempt bond and tax credit proceeds, and developer equity--and
amount of proposed funding sources for projects that will be supported by
Section 108 loan guarantees. See enclosure III for more information on how
we categorized some of the types of funding sources that can be leveraged
with Section 108 funds and selected programs included under those
categories.

However, agency officials acknowledged a limitation to the data that
affects the extent to which it can be used to accurately measure
leveraging in the Section 108 program. In particular, HUD only has data on
what sources and amounts of funds a community proposes to use (at the time
of its application to HUD for a Section 108 guarantee) to complete a
project. According to HUD, proposed sources and amounts may differ from
the actual sources and amounts used to complete a project, and do not
represent firm commitments. Some HUD data provided limited support for
this statement: in fiscal year 2006, HUD reported $1.8 million in
unplanned uses of CDBG funds to make payments on Section 108 loans,
indicating that the sources--in particular CDBG funds--communities used in
conjunction with Section 108 loan funds can change over time.27

Nonetheless, information from these memorandums provides some insight into
the extent to which communities planned to leverage Section 108 loan funds
with other sources of funds to finance development projects. For example,
the total number of proposed sources of funds for each of the 50 projects
we reviewed ranged from 1 (Section 108 loan funds only) through 15.28 The
number of other sources used to finance a project could be related to,
among other things, its size and type. For example, projects that used
Section 108 loan proceeds as the only source of funding generally were for
small physical infrastructure improvements in a community, such as the
construction of a youth sports center or the repair of sidewalks and
gutters. On the other hand, those projects that used multiple sources of
funds often were larger-scale, such as the renovation of a brownfields
site into a mixed-use commercial and residential complex. Enclosure II
provides more detailed information on proposed sources and amounts of
funds for the 50 projects we reviewed.

26Because Section 108 does not have a leveraging requirement, HUD is not
required to and does not collect data that could be used to calculate an
actual (as opposed to an estimated) leverage ratio, as discussed in this
report. According to HUD, the agency is considering changing its
Integrated Disbursement and Information System (IDIS) to include
information on sources and amounts of funds for Section 108 projects. HUD
said that such changes would be subject to the results of the Office of
Management and Budget's ongoing Program Assessment Rating Tool (PART)
evaluation of Section 108 and that any changes would not take effect prior
to 2009.

27Communities make unplanned uses of CDBG funds when an intended source of
funds, such as project-related income, is not used to make a payment on
the loan. Communities are expected, but not required to report unplanned
uses to HUD. As a result unplanned uses may exceed $1.8 million.

In 2002, the Urban Institute found that each Section 108 dollar leveraged
an additional $1.54 in private funding and $0.68 in other public funding,
for a total of $2.22 in other funds leveraged.29 In other words, the
program had a 2.22:1 leverage ratio. Because of the small sample of
Section 108 memorandums we reviewed, for purposes of this report we were
not able to calculate a similar ratio.30

As part of our ongoing work for you in this area, we plan to assess what
data are available to measure the extent of leveraging in several other
federal programs including the Department of the Treasury's CDFI,
Low-Income Housing Tax Credit, and New Markets Tax Credits programs; and
HUD's CDBG, HOME, and HOPE VI programs and provide information on how
these programs leverage federal funds for housing and community and
economic development.

Agency Comments

We provided HUD with a draft of this report for review and comment. The
agency provided technical comments, which we incorporated in the report as
appropriate.

                                    - - - -

28One loan guarantee in our sample (Monessen, Pennsylvania) supported 38
different projects proposed by multiple nonentitlement communities that
formed a consortium. For each individual project described, the community
did not list more than 15 sources of funds, although the aggregated number
of sources for all 38 projects was 95.

29The Urban Institute collected leveraging data by reviewing loan files
for a sample of 201 Section 108 loans made to third parties from 1994
through 1999 in 51 communities determined to be the greatest utilizers of
such third-party loans (in terms of dollar-volume). However, the
researchers acknowledged a limitation--missing leveraging data--and noted
that leveraging results for Section 108 loans were from data collected on
149 economic development projects. Although the 51 communities accounted
for 96 percent of Section 108 third-party lending during that period,
Section 108 loans are often used by communities themselves in order to
undertake various local projects. For purposes of calculating the
leveraging ratio, the study defined "public" funds to include Section 108,
EDI/BEDI, other federal loans, state and local, and other CDBG funds, and
"private" dollars to include private lending, equity, stock, personal
borrowing, and other funding.

30Due to the small sample size (50 proposed projects), our results cannot
be projected with enough precision to provide accurate generalizations to
all projects with Section 108 loan guarantees.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies of this report to the
Ranking Minority Member, Subcommittee on Housing and Community Opportunity
and the Secretary of Housing and Urban Development. We will also make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions concerning this report, please
contact me at (202) 512-8678 or at [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. Key contributors to this report are listed in
enclosure IV.

Sincerely yours,

William B. Shear
Director, Financial Markets and Community Investment

Enclosures - 4

Enclosure I

                       Objectives, Scope, and Methodology

The objectives of this interim report were to (1) examine the perspectives
of stakeholders on the use, implications, and measurement of leveraging in
housing and community and economic development programs and (2) describe
the type of data the Department of Housing and Urban Development (HUD)
collects that could be used to determine the extent of leveraging in the
Section 108 Loan Guarantee (Section 108) program. Enclosure II contains
the results of our review of the potential extent of leveraging in 50
selected Section 108 projects. See enclosure III for a description of how
we categorized some of the types of funding sources that could be
leveraged (combined) with Section 108 funds and selected programs included
under those categories.

To examine the perspectives of stakeholders on the use, implications, and
measurement of leveraging in housing and community and economic
development programs, we reviewed academic, government, and industry
literature related to leveraging in the housing and community and economic
development fields. To identify this literature, we conducted a literature
search on research databases and agency Web sites using each of the terms
"leveraging," "leverage," "private investment," and "public-private
partnership" in combination with each of the terms "housing," "community
development," and "economic development." For example, we searched using
the phrase "leveraging and housing." We also interviewed representatives
of several federal agencies, including the Department of Agriculture, the
Department of Commerce, the Department of the Treasury, HUD, and the
Office of Management and Budget, as well as representatives of industry
groups and other organizations involved in housing and community and
economic development initiatives, including the Coalition of Community
Development Financial Institutions, the Council of State Community and
Economic Development Agencies, Enterprise Community Partners, the
International Economic Development Council, Harvard University's Center
for Housing Studies, the John D. and Catherine T. MacArthur Foundation,
Living Cities: The National Community Development Initiative, the Local
Initiatives Support Corporation, the National Association of Affordable
Housing Lenders, the National Association of Development Organizations,
the National Community Development Association, the National Council of
State Housing Agencies, NeighborWorks America, and the New Markets Tax
Credit Coalition.

To describe the type of data HUD collects that could be used to determine
the extent of leveraging in the Section 108 program, we interviewed HUD
officials to identify what data the agency collects for the Section 108
program. HUD officials explained that the agency maintains information on
the sources and amounts of funds communities proposed using to finance
development projects in Section 108 memorandums. HUD officials provided us
with several examples of these memorandums, which we reviewed prior to
submitting a request for further documentation, as described below. We
also reviewed relevant program regulations and guidance, budget documents,
GAO reports, HUD Inspector General reports, and other literature to
determine what other information was available on the extent of leveraging
in the program.

To describe how federal funds may have been leveraged in the Section 108
program, we randomly selected a sample of 50 loan guarantees using a
summary spreadsheet containing high-level project information on the 358
loan guarantees committed from fiscal years 2001 through 2006, and
requested copies of the Section 108 memorandums for each of the 50
projects.31 We chose this period for review because HUD officials said
that those were the only years for which the agency maintained electronic
copies of Section 108 memorandums. In addition to interviewing a HUD
official knowledgeable in the procedures used to collect and maintain the
data contained in the Section 108 memorandums, we reviewed the sample of
50 memorandums for their accuracy and completeness and summarized project
information in them, including sources and amounts of funds. We found that
the data contained in these memorandums were sufficiently reliable for
describing how communities planned to leverage Section 108 loan funds with
other sources of funds. To simplify the presentation of funding source
information for each project (please refer to enclosure II), we classified
sources into three broad categories:

           o other federal funding sources,
           o state or local funding sources, or
           o private funding sources.

Enclosure III describes how we defined these categories and some of the
funding sources we included under each of the three categories. However,
due to the small sample size, our results cannot be projected with enough
precision to provide accurate generalizations to all projects with Section
108 loan guarantees.

We conducted our work in Washington, D.C., and Chicago from November 2006
to May 2007 in accordance with generally accepted government auditing
standards.

31To determine the accuracy and completeness of the information provided
in the summary spreadsheet, we performed basic checks on the data and
interviewed a HUD official who is responsible for maintaining the
spreadsheet. Based on these checks and HUD's responses to our questions
about the completeness and accuracy of the data in the spreadsheet, we
determined that the data were sufficiently reliable for the purposes of
selecting the sample of Section 108 memorandums for our further review, as
well as reporting the total number of applications for Section 108 loan
guarantees HUD approved from 2001 through 2006 and the amounts of Section
108 loan funds committed and advanced from 2001 through 2006.

Enclosure II

                Descriptions of Proposed Sources and Amounts of
                 Funds Used to Finance 50 Section 108 Projects

To determine how funds may have been leveraged in the Section 108 program,
we examined a random sample of 50 proposed Section 108 projects to
determine the types and amounts of funding sources communities planned to
use to finance these projects. In varying amounts of detail, the figures
below illustrate how communities planned to leverage Section 108 loan
funds with other sources of funds for development. Due to the small sample
size, our results cannot be projected with enough precision to provide
accurate generalizations to all projects with Section 108 loan guarantees.

Figure 3 provides information, by fiscal year, on the projected sources
for each of the 50 Section 108 projects we reviewed. Sources are
categorized by Section 108 loan funds, other federal funding sources,
state or local funding sources, and private funding sources.

Figure 3: Summary of Projected Sources for the Sample of 50 Section 108
Projects, Fiscal Years 2001 through 2006

Note: ED (economic development), HSG (housing), PI (physical
infrastructure)

Figures 4 through 7 provide information on the proposed funding sources
for the 50 projects in our sample by project type--economic development,
physical infrastructure, housing, and multiple-type projects.

Figure 4: Proposed Funding Sources for Section 108 Economic Development
Projects, Fiscal Years 2001 through 2006

Figure 5: Proposed Funding Sources for Section 108 Physical Infrastructure
Projects, Fiscal Years 2001 through 2006

Figure 6: Proposed Funding Sources for Section 108 Housing Projects,
Fiscal Years 2001 through 2006

Figure 7: Proposed Funding Sources for Section 108 Multi-Type Projects,
Fiscal Years 2001 through 2006

Figures 8 through 13 provide more detailed information on several of the
Section 108 projects we reviewed.

Figure 8: Proposed Funding Sources--Denver, Colorado

Figure 9: Proposed Funding Sources--Flint, Michigan

Figure 10: Proposed Funding Sources--Tempe, Arizona

Figure 11: Proposed Funding Sources--Rialto, California

Figure 12: Proposed Funding Sources--Maunabo, Puerto Rico

Figure 13: Proposed Funding Sources--North Tonawanda, New York

Enclosure III

 Descriptions of Programs or Entities We Included Under Categories for Federal,
                  State or Local, and Private Funding Sources

As described in our report and in enclosure II, communities often leverage
Section 108 funds with other sources of funds to finance development
projects. We classified each of the sources of funds listed in our sample
of 50 HUD Section 108 memorandums into three general categories: "other
federal funding sources," "state or local funding sources," and "private
funding sources." Generally, we considered federal funding to be that
which is appropriated or otherwise authorized by the U.S. Congress. We
considered state or local funding to be that which is appropriated or
otherwise authorized by state or local governmental entities. Finally we
considered private funding to be that which is contributed by a private
source, such as a bank or a foundation. This enclosure describes more
fully some of the funding sources we placed into these categories.

Other Federal Funding Sources

Brownfields Economic Development Initiative (BEDI) Grant Program

Established in 1998 and administered by the U.S. Department of Housing and
Urban Development (HUD), the BEDI grant program supports state and local
efforts to commence redevelopment or continue phased redevelopment efforts
on brownfields sites.32 The BEDI grant program serves a purpose similar to
that of the Economic Development Initiative grant program when it was
first established--to enhance the viability of a project financed with a
Section 108 loan guarantee. Currently, HUD makes BEDI grant awards
contingent upon applicants also obtaining a Section 108 loan guarantee.

Community Development Block Grant (CDBG) Program

Through CDBG, HUD provides annual formula grants to states and local
jurisdictions called "entitlement communities." States distribute the
funds to localities that do not qualify as entitlement communities. CDBG
funds can be used to implement a wide variety of community and economic
development activities directed toward neighborhood revitalization,
economic development, and improvement of community facilities and
services. We consider CDBG to be a federal source because the grants are
originally funded at the federal level through Congressional
appropriations.

Economic Development Administration (EDA) Public Works and Economic
Development Grant Program

The Department of Commerce's EDA Public Works and Economic Development
Grant Program provides funds to help distressed communities attract new
industry and business growth, diversify local economies, and create jobs.
These grants
support various types of projects such as water and sewer system
improvements; access roads to industrial parks or sites; business
incubator facilities; and other infrastructure improvements needed for
business retention and expansion. Generally, the grants are targeted to
communities demonstrating the greatest need for such improvements. Grant
recipients are required to match up to 50 percent of the amount of the
award with local matching funds. The amount of matching funds required is
based on the level of economic distress in the recipient community.
Recognized Indian tribes may be eligible for up to 100 percent assistance,
and may not have to provide matching funds.

32HUD defines brownfields as abandoned, idled, or under-used real property
where actual or potential environmental contamination complicates
expansion or redevelopment.

Economic Development Initiative (EDI) Grants Program

HUD's EDI program was established in 1994 to encourage communities to make
greater use of the Section 108 loan guarantee program, by providing an
additional source of financing for projects and reducing or paying for
some of the costs of borrowing under the loan program. HUD stopped making
competitive grants under the EDI program in 2001; however, HUD may still
make special purpose or targeted EDI grants to qualifying communities
pursuant to Congressional directives.

Historic Rehabilitation Tax Credit Program

Historic Rehabilitation Tax Credits are available for work on certified
historic structures that will need substantial rehabilitation. Eligible
applicants receive a tax credit equal to 20 percent of the amount of
qualified rehabilitation expenditures.

HOME Investment Partnerships (HOME) Program

Through HOME, HUD provides annual formula grants to states and localities
to fund a wide range of activities designed to build, buy, or rehabilitate
affordable housing or provide direct rental assistance to low-income
people. Specifically, states and localities use HOME funds for grants,
direct loans, loan guarantees or other forms of credit enhancement, rental
assistance, and security deposits. We consider HOME funds to be a federal
source because the grants are originally funded at the federal level
through Congressional appropriations.

Low-Income Housing Tax Credit Program

Under the Low-Income Housing Tax Credit program, states are authorized to
issue federal tax credits for the acquisition, rehabilitation, or new
construction of affordable rental housing. The credits generally are sold
to investors, including individuals, financial institutions, and
corporations to raise development funds for a project. These outside
investors use the tax credit to offset taxes otherwise owed on their tax
returns. To qualify for credits, a project must have a specific proportion
of its units set aside for lower-income households, and the rents on these
units must be
limited to 30 percent of qualifying income.33 Investors may claim these
credits on their tax returns annually for 10 years. Each state receives an
annual allocation of $1.75 per capita, adjusted each year by a cost of
living adjustment factor. States must reserve a minimum of 10 percent of
the credit for nonprofit developers. Although some consider these tax
credits to be either a state or private source of funds, we consider them
to be a federal source because they represent foregone federal income and,
therefore, are a direct cost to the federal government.

New Markets Tax Credit Program

The New Markets Tax Credit program was established by Congress in 2000 to
help revitalize impoverished, low-income communities. Tax credits are
allocated to Community Development Entities, who sell the tax credits to
investors--including individuals, financial institutions, and
corporations--who in turn use the proceeds to make investments in
low-income communities and eligible businesses. The tax credit allows the
investors to reduce their tax liability by 39 percent of the amount of the
investment over a 7-year period. The New Markets Tax Credit is
nonrefundable, meaning that taxpayers do not receive payments for tax
credits that exceed their total tax liability. Although some consider
these tax credits to a private source of funds, we consider them to be a
federal source because they represent foregone federal income and,
therefore, are a direct cost to the federal government.

State or Local Funding Sources

Housing Trust Funds

Housing trust funds are funds established by cities, counties, and states
that permanently dedicate a source of public revenue to support the
production and preservation of affordable housing. There are at least 257
housing trust funds in the United States.

Tax Increment Financing (TIF)

TIFs allow a municipality to provide financial incentives to stimulate
private investment in a designated area (a TIF district) where blight has
made it difficult to attract new development. The TIF program can be used
to support new development or the rehabilitation of existing buildings in
industrial, commercial, or residential projects. Funding for TIF eligible
activities is derived from the increase in incremental tax revenues
generated by new construction or rehabilitation projects within the
boundaries of the TIF district. States determine what activities are
eligible with TIF funds, and these activities may include land
acquisition, site preparation, building rehabilitation, public
improvements, and interest subsidy.

33Projects must meet one of two low-income occupancy requirements: (1) 20
percent of the units must be reserved for households with initial,
qualifying incomes at or below 50 percent of area median income or (2) 40
percent of units must go to households with initial, qualifying incomes at
or below 60 percent of area median income.

State Tax Credit Programs

States may also administer tax credit programs to support activities such
as historic preservation and economic development. For example, Michigan
sponsors a historic preservation tax credit program where a state income
tax credit of up to 25 percent is available for preservation of certain
historic properties; however, if combined with a federal historic
preservation tax credit of 20 percent, a project only will be eligible for
an additional 5 percent state tax credit. The State of Michigan also
administers the Brownfield Single Business Tax Credit program, which
provides an incentive in the form of a tax credit for eligible
redevelopment investments on a brownfield property. The credit is applied
against the Single Business Tax liability of the developer.

Private Funding Sources

Nonprofit organizations, developers, private banks and lending
institutions, businesses, and individuals provide an array of financial
support--such as developer fees, private loans, grants, land donations,
and individual financial contributions--to Section 108 and other federal
housing and community and economic development projects.

Enclosure IV

                     GAO Contact and Staff Acknowledgements

GAO Contact: William B. Shear, (202) 512-8678 or [email protected]

Staff Acknowledgements: In addition to the contact named above, Charles
Wilson, Jr., Assistant Director; Marianne Anderson; Alison Martin; John
McGrail; Marc Molino; LaSonya Roberts; Barbara Roesmann; Cory Roman; and
Jim Vitarello made key contributions to this report.

(250324)

This is a  work of the  U.S. government  and is not  subject to  copyright
protection in the United States. It  may be reproduced and distributed  in
its entirety without  further permission from  GAO. However, because  this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if  you wish to reproduce this  material
separately.

GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site. To
have GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
[email protected] Automated answering system: (800) 424-5454 or (202)
512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548

Public Affairs

Paul Anderson, Managing Director, [email protected] (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

*** End of document. ***