Can This 'Best Kept Secret' Help Boost CRE's Financing, Tax Credits, Diversity And Equity?
As the industry continues to push for progress against structural racism while navigating a recession, Community Development Financial Institutions are becoming important commercial partners for developers and planners looking to revitalize distressed areas.
CDFIs, which provide financial services to underserved communities, have been around since the CDFI Fund was established as an agency of the Department of the Treasury in the mid-1990s. The fund promotes capital investment in low-income communities through direct awards, New Markets Tax Credit Program allocations and other initiatives.
The institutions provide crucial market intelligence about the communities they serve while increasing focus on providing equity for all local stakeholders, including women and BIPOC — all while knowing the latest tax credits for distressed areas, making them catnip for savvy development teams.
Because CDFIs have to invest in properties and communities most in need of redevelopment, CDFIs do not face the same loan-to-value constraints as traditional banks regulated by agencies like the Federal Deposit Insurance Corp. That makes them a more flexible financing option for both local investors and developers alike.
"If there is a neighborhood that has suffered decades of disinvestment and blight, typically the rents that developers are going to be able to charge ... are going to be depressed compared to a healthy market," Joe Huber, chief lending officer of the Cincinnati Development Fund, a greater Cincinnati-focused CDFI, said in an interview.
"What CDF can do, since we're local, is understand what other types of activity are going on in the neighborhood as far as investments from the city, from community groups and from other CDFIs," he said. "And we can feel confident that rents are going to go up to a healthy level."
To date, over 1,100 CDFIs have been designated, and the agency has made over $2B in direct awards to mission-driven organizations and allocated over $50B in tax credits meant to spur more economic opportunity in underserved communities. As such, CDFIs have perhaps never been as crucial or busy, executives Bisnow interviewed say.
“CDFIs have never been more important," Raza Development Fund Chief Investment Officer David Clower said. Raza, which invests capital and arranges financing to support Latino communities, has invested over $1B in capital in its 20-year history.
"We provide essential front-line financial support and, very importantly, a lot of technical assistance to low-income communities. These communities are oftentimes systemically overlooked by traditional financial services companies," he said.
On top of equitable development, many CDFIs are working to diversify the CDFI and commercial real estate industries' ranks.
Invest Detroit, which received its CDFI designation in 2011, is focused on financing equitable development in 10 neighborhoods and is taking advantage of its CDFI status to do so, according to Invest Detroit Senior Vice President of Lending Tosha Tabron. In Detroit, where about 80% of residents identify as Black, people of color are historically underrepresented in the city's CRE industry, she said.
“Part of what we want to accomplish in that is making sure that the demographic of real estate professionals, not just developers, but architects and all of the other complementary businesses and professionals that support developers, also reflect the neighborhoods that we’re developing in," Tabron said.
As a result, at least 20 of the 40 projects Invest Detroit expects to do in 10 neighborhoods in the next five years will have minority-led or women-led developers. It will also broaden its acceptance of such projects, Tabron said.
Such targets go hand in hand with programs by the federal government, which offers over $1B in funding for minority-led businesses, and also state governments like Michigan. A new $100M coronavirus crisis-recovery program established by the Michigan Economic Development Corp., for instance, reserves at least 30% of funds for women-owned, minority-owned and veteran-owned businesses.
“Where our traditional banking partners may require 60 or 70% loan to value, what we require is 90% as a CDFI in general. But for our projects that are led by minority teams or women teams, we’re looking at 5% equity," she said. "That provides a much easier entryway into projects when we alleviate the burden of the amount of cash we have to bring into a project to get started."
In Cincinnati, Huber and CDF have looked to do just that in the city's Findlay Market area, where projects CDF has helped finance include combinations of new market tax credits, low-income housing tax credits and historic tax credits, which promote historic building preservation. It is also involved in the capital stack with nonprofit 3CDC and the city of Cincinnati on developer Model Group's $50M mixed-use project in the city's Over-the-Rhine neighborhood.
"It's taken a mix of all those tax credit programs and traditional debt and in some cases opportunity zone funding to make the area around Findlay Market viable," Huber said. "These developments don't happen with just the market forces going on. You have to create an economic environment that will attract this reinvestment."
CDFIs are also important tools used to help rectify decades of inequitable development that has tended to leave communities of color underserved, according to Huber and others.
Primary Care Development Corp. was formed in the early 1990s as a nonprofit meant to address the lack of primary healthcare capacity in the state of New York. Since then, it has gone national, facilitating over $1B in capital invested in primary care development across 36 states.
“The focus right now on structural racism kind of goes hand in glove with the COVID-19 problem," PCDC Chief Lending Officer Bill O'Brien said. “We are very focused on looking at communities of color and trying to get capital directly into those communities, both in terms of organizations that are led by people of color and serve people of color."
Among the financial services Invest Detroit offers are new markets tax credits, which CDFIs Bisnow spoke with described as being in very short supply relative to the demand.
Community First Fund, a Pennsylvania-focused CDFI received its first NMTC allocation in 2014. "When we get those credits, which we don't get every year, we are immediately bombarded with lots of requests," Community First Fund Chief Lending Officer Jim Buerger said.
Community First Fund is helping finance a 40K SF Latinx-owned grocery store development in Reading, Pennsylvania. The $9M project will replace the 6K SF store of the grocer, which previously had trouble getting financing from a traditional bank but whose growth is essential to the local community, Buerger said.
“It took off and is producing about $1,500 per SF a year in sales, which is phenomenal, probably three or four times what a normal grocery would do,” he said. “It’s a source of fresh food in a food desert where people don’t have easy access to good, healthy food."
It is one of several projects that Community First Fund has been involved in that takes the crucial step of helping line up pre-development financing before tax credits — in Super Natural & Fresh Produce's case, new markets tax credits — have been awarded, Buerger said.
Another is a 60-unit or so senior affordable housing project in Harrisburg, Pennsylvania, for which Community First Fund just closed a loan. Half of the units will be supported by Section 8 contracts and thus be extremely affordable, according to Buerger.
“A lot of banks will do the funding once, in this case, a low-income housing tax credit, is awarded to [a project], but it’s hard to find anyone that will do pre-development loans on a project that’s still in its infancy, that does not yet have tax credits awarded," he said.
Pre-development costs like environmental and appraisal work can easily amount to prohibitively expensive levels like $250K, Buerger said. CDFIs also offer especially timely services to help survive a pandemic-era recession.
Community First Fund did almost 500 Paycheck Protection Program loans, which had a median value of about $20K, helping many smaller businesses often left outside the traditional client base of larger banks, according to Buerger.
Clower said Raza, the Phoenix-based CDFI, will look to address both a growing need for affordable housing and a demand for charter schools and other alternative education models, where about a third of its investments go. It is close to wrapping up a partnership with the Bill & Melinda Gates Foundation to help fund facilities for startup charter schools in Washington as part of a $50M initiative, Clower said.
"As our country struggles to navigate our very complex socioeconomic challenges and those made even more difficult by this unfolding financial crisis, the role of CDFIs has never been more critical to the overall health of our local and national economies," Clower said.
But Clower said an already massive need for RDF and other CDFI services, including for affordable housing, is likely to grow in the next few years because of the coronavirus pandemic. It has been allocated over $250M in tax credit authority over the past eight years and has typically had five times that in demand for its capital, he said.
PCDC, too, sees enormous demand for its segment of the CDFI industry. After receiving $65M in tax credits from the Treasury Department's CDFI fund in July, the organization has since received about $450M in inquiries, all for primary care financing, O'Brien said.
“It seems like we were always the best kept secret no matter what we tried to do to raise awareness," Buerger said. "I think the COVID crisis has actually raised awareness … about the critical nature of CDFIs.”
CORRECTION, SEPT. 9, 8:39 A.M. PT: A previous version of this story misspelled Raza Development Fund Chief Investment Officer David Clower’s name. The story has been corrected and updated.