03-05-2019 Section 108 Loan2016 Annual Action Plan
Section 108 Loan – Conversion from Variable Rate to Fixed Rate
Federal Way
City Council
March 5, 2019
Staff Contacts:
Jeffrey Watson, Community Services Manager
Sarah Bridgeford, CDBG/Human Services Coordinator
Policy Question
Should City Council authorize the City to participate with the US Department of Housing & Urban Development (HUD) in a public offering to convert the Section 108 interim variable rate
loan to long-term fixed rate 20-year bond status?
Section 108 Loan
Loan received in 2016 from the U.S. Department of Housing and Urban Development (HUD) in the amount of $3,030,000.
Loan was part of the financing package for the Performing Arts and Event Center.
Loan is being repaid with annual CDBG grant.
Paid to-date:
$318,000 – Principal
$129,571.75 - Interest
Section 108 Loan
Current Source of Loan from HUD is considered an interim loan with a variable interest rate.
Variable interest rate financing not intended to be permanent financing source.
Variable interest rate financing is made available to ensure borrowers have immediate access to funding for approved projects prior to public offerings.
HUD expects most communities to lock in permanent fixed rate financing at the earliest opportunity to reduce risk.
Conversion from Interim, Variable Rate to Long-Term Fixed Rate
On or about March 28, 2019, HUD will convert interim Section 108 loans to long-term loans via public offering.
The City has the opportunity to lock-in fixed interest rates for the remainder of the term of the loan (though 2035).
Notification to HUD by Monday, March 11, 2019
Benefits of Conversion
Eliminates uncertainty.
Permits accurate budgeting of principal and interest payments.
Interest rates for interim financing have increased by 52% over the past 52 weeks; long-term interest rates have also increased, but are still at historically low levels.
Variable Rate is LIBOR 90-Day plus 20 basis points (3/4/2019 - 2.61%)
Estimated Interest Rates and Payment Amounts
Maturity
Section 108 Coupon
Principal Balance
Principal Payment
Interest Payment
Total Payment
8/1/2019
2.57%
$2,712,000
$159,000.00
$69,780
$228,780
8/1/2020
2.64%
$2,553,000
$159,000.00
$67,501
$226,501
8/1/2021
2.67%
$2,394,000
$159,000.00
$64,016
$223,016
8/1/2022
2.68%
$2,235,000
$159,000.00
$59,786
$218,786
8/1/2023
2.77%
$2,076,000
$159,000.00
$57,526
$216,526
8/1/2024
2.82%
$1,917,000
$159,000.00
$54,079
$213,079
8/1/2025
2.94%
$1,758,000
$159,000.00
$51,720
$210,720
8/1/2026
2.97%
$1,599,000
$159,000.00
$47,522
$206,522
8/1/2027
3.10%
$1,440,000
$160,000.00
$44,582
$204,582
8/1/2028
3.15%
$1,280,000
$160,000.00
$40,269
$200,269
8/1/2029
3.27%
$1,120,000
$160,000.00
$36,579
$196,579
8/1/2030
3.32%
$960,000
$160,000.00
$31,834
$191,834
8/1/2031
3.37%
$800,000
$160,000.00
$26,928
$186,928
8/1/2032
3.42%
$640,000
$160,000.00
$21,862
$181,862
8/1/2033
3.47%
$480,000
$160,000.00
$16,637
$176,637
8/1/2034
3.52%
$320,000
$160,000.00
$11,251
$171,251
8/1/2035
3.57%
$160,000
$160,000.00
$5,706
$165,706
8/1/2036
3.62%
$0
$0.00
$0
$0
Conversion
City’s current note balance is $2,712,000.
Principal and interest payments have and will continue to be paid from the City’s annual CDBG grant.
Other conditions:
Issuance Costs: Costs are expected to approximately 0.5% of the note balance, or $13,560, and may be paid using CDBG funds.
Prepayment Options: the note will not be prepayable for the first ten years, but may be defeased at any time.
Semi-annual payments: payments will be made semi-annually rather than quarterly.
Conversion Comparison
Principal Payments via CDBG
Interest Payments via CDBG
Annual Principal Payments
Quarterly Interest Payments
Bi-annual Interest Payments
Variable Rate
Fixed Rate
Job Creation
National Objective
Job Creation / National Objective Limitation on CDBG Use
Job Creation / National Objective Repayment Requirement
Quarterly Loan Fee ($100)
Variable Rate Loan
√
√
√
√
√
√
√
√
√
√
Fixed Rate Loan
√
√
√
√
√
√
√
√
√
Questions ??
Section 108 Loan – Conversion from Variable Rate to Fixed Rate
Federal Way
City Council
March 5, 2019
Staff Contacts:
Jeffrey Watson, Community Services Manager
Sarah Bridgeford, CDBG/Human Services Coordinator