City of Boston officials have finally divulged some details as to how they will implement the $40 million development gap financing program announced in December by Mayor Thomas Menino.
The $40 million loan program, which the city will administer on behalf of the U.S. Department of Housing and Urban Development (HUD), represents 20 percent of the $200 million in available cash HUD has on hand until the start of the 2010 fiscal year, said Evelyn Friedman, director of Boston’s Department of Neighborhood Development (DND).
Friedman told the Boston City Council today that DND expects to begin distributing the loans in May. Priority will be given to projects topping $10 million and 20,000 square feet. The city expects to secure HUD approval of the loan program by the end of February, allowing it to solicit applications shortly thereafter
The city will set aside $4 million for small-scale neighborhood commercial projects between 5,000 and 20,000 square feet, and valued under $500,000.
"We’re targeting large-scale commercial developments that are ready to start construction, but for their financing," Friedman said. "You have to be ready to go."
In his December announcement, Menino painted the gap financing program as a way to "put people to work, move projects forward, and generate a return on our investment." However, the loans will not represent a significant source of financing for stalled projects. Friedman told the City Council that DND expects the loans to fill the gap in projects that have already secured financing for 60 percent of project costs. The city will require projects to have a minimum of 30 percent equity financing, she said.
Individual loans will be capped at $15 million, though the program will target $10 million disbursements.
Keith Hunt, an aide to Friedman, said the city will price the loans at cost, plus at least one percent. The city expects to receive an additional "success" fee when the projects that use the loans are sold or refinanced.
The loans will be secured by junior collateral positions. If borrowers default, Friedman said, HUD would deduct the default amount from the city’s annual Community Development Block Grant (CDBG) allotment. That’s why the city is requiring significant equity commitments, and a 1.5 debt service coverage ratio on projects’ senior mortgages.
"We need to be very cautious about underwriting," Friedman said.
The City Council is expected to sign off on the program Wednesday.
