The City of Billings purchased seven (7) lots located along South 27th Street and between 5th and 8th Avenues South utilizing Community Development Block Grant (CDBG) funding as part of a large-scale urban redevelopment project (see attachment). CDBG funding has been utilized to pay for maintenance of the lots and they remain listed as available properties for sale on the City of Billings website at www.ci.billings.mt.us/cdland.

On December 17, 2012, the United States Department of Housing and Urban Development (HUD) notified the City of Billings of a finding of non-compliance with regulations relating to the maintenance of these lots. Under 24 CFR 570.201(b), disposition is for property acquired through the sale, lease or donation of property acquired with CDBG funding or its retention for public purposes including reasonable costs of temporarily managing such property or property acquired under urban renewal. These properties subsequently must meet a HUD objective, such as low income client benefit.

As the property was acquired from 1980-1984, continued management of the property is no longer a valid use of CDBG funds as HUD considers the City's involvement as long-term rather than temporary. Further, the City is prohibited from utilizing CDBG funding to maintain the lots and is required to sell the property at market value as established by a certified appraisal.  Staff has ordered an appraisal and should have the report by the end of February 2013.

Proposed Remediation
The City received $257,250, or $5.25/square foot, for the sale of Lots 1-12, 20 and 21 in Block 245 in August 2012. Proceeds from this sale have been set aside in the General Fund for future allocation by the City Council. Although the lots on Block 245 were not purchased with CDBG funds, the lots were included in a large-scale effort to redevelop the neighborhood in which CDBG funds played a significant part in funding the overall project. Immediately following the sale, Community Development staff was asked to prepare an estimate of staff/maintenance costs specific to Block 245. The Division's total investment was estimated at $52,954 (see attachment); this includes $44,128 in maintenance costs and $8,826 in staff costs to manage the properties.

In order to resolve the immediate finding with HUD, and prevent further findings with this project, staff recommends reserving the program income received from the sale of Block 245 and authorizing repayment to HUD for the appraised value of the remaining CDBG lots to immediately clear the finding (estimated at $128,625 based on $5.25/square foot). Staff also requests allocation of $52,954 to reimburse the Division for the maintenance and management of Block 245 lots. These actions should clear all findings due to project management for the South 27th Street Redevelopment project.

Future Use of Lots
Repayment to HUD alleviates the City's CDBG restrictions on the lots and they can be sold at any time for use deemed appropriate by the City Council.

The City is required to respond to this finding within 60 days, or by February 14, 2013.

The City Council may:

• Approve repayment to HUD and Community Development with proceeds from Block 245, or
• Not repay the funds and provide other guidance for remediation to staff.

The City purchased the lots on Blocks 184 and 226 utilizing $103,800 in CDBG funds and utilized an estimated $51,462 in maintenance and staff costs to manage the land; totalling $155,262. Should the City receive an appraised value at $5.25/square foot, CDBG would have maintained a loss overall for the land sale.

Proceeds from the transfer of funds will be submitted to HUD for deposit and later added to the Billings CDBG line of credit for allocation to eligible projects. The City would retain the lots as an asset for future sale without HUD restriction.

City staff recommends allocating program income received from the sale of Block 245 totalling up to $257,250 to the Community Development Division. Funds will be utilized to remit the appraised value of Block 184 Lots 23-24, Block 226 Lots 4-5 and 6-8 to HUD and repay administrative costs for property management for Block 245.