CDBG ECONOMIC DEVELOPMENT UNDERWRITING GUIDELINES Appendix A to

CDBG ECONOMIC DEVELOPMENT UNDERWRITING GUIDELINES Appendix A to Part 570—Guidelines and Objectives for Evaluating Project Costs and Financial Requirements

The objectives of the underwriting guidelines are to ensure: • (1) that project costs are reasonable; • (2) that all sources of project financing are committed; • (3) that to the extent practicable, CDBG funds are not substituted for non-Federal financial support; • (4) that the project is financially feasible; • (5) that to the extent practicable, the return on the owner's equity investment will not be unreasonably high; and • (6) that to the extent practicable, CDBG funds are disbursed on a pro rata basis with other finances provided to the project.

Review of Application for Assistance Key Documents & Other Considerations • Key Documents • Sources and Uses of Funds Statement • Operating Proforma for project • Market studies/appraisal • Statement of qualifications • Other Considerations • Site control • Experience of developing entity (if real estate development) • Collateral

Reasonable Costs • Risks: • Inflated costs • Understated costs • Excessive fees • Assessing costs: • Experienced reviewer • Independent quotes • Cost estimating services • “Arms-length” relationship missing

Commitment of Other Sources • Issue is whether sufficient funds are available to complete project. • Before CDBG disbursed, all debt and equity committed to project • Letter from lender(s), investors, etc. /copy of agreements • Carefully review conditions applicable to other financing source(s)

Necessity of CDBG Funding • Should not substitute CDBG for other available funds • Verify: • Feasibility/status of private debt • Rate of return on equity return • Microenterprise

Project Feasibility • Project is financially feasible with assistance • Project is viable for the term of assistance or regulatory restrictions • Terms of CDBG loan: • Reflect the ability to repay without threatening the success of project

Reasonable Return & Terms • Loan terms can be subsidized so long as not result in excess return to borrower • Don’t over-subsidize private participation (undue enrichment) • Compare to market: Is developer/owner making more/less than conventional? • Take risk & incentives into account

Pro Rata Disbursement of CDBG • Reasons why CDBG funds are spent first • CDBG usually costs less than other funds • Pressure from other sources • May result in CDBG investment in uncompleted projects and audit/monitoring findings • CDBG should be drawn in same proportion to other funds