Module #9 – Funding Community Development
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Module #9 – Funding Community Development. Introduction & Overview. Connecting the Dots in Community Economic Development (CED) Build Wealth and Value Neighborhoods City State Prioritized Projects Strategic Planning Outgrowth Assigning Responsibility Identifying Resources

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Module #9 – Funding Community Development

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Module 9 funding community development

Module #9 – Funding Community Development


Introduction overview

Introduction & Overview

  • Connecting the Dots in Community Economic Development (CED)

    • Build Wealth and Value

      • Neighborhoods

      • City

      • State

    • Prioritized Projects

      • Strategic Planning Outgrowth

      • Assigning Responsibility

      • Identifying Resources

    • Project Opportunities

      • Attract Investment

      • Debt and Equity

      • Better the Community


Introduction overview1

Introduction & Overview

  • Finance: Fuel to Facilitate Programs & Projects

    • Programs

      • Longer Timeframes

      • Multiple Initiatives

    • Projects

      • Better Defined Time Horizons

      • Clearer Benchmarks

    • Focus for Leaders

      • Match Financial Resources With…

      • Project Opportunity


Introduction overview2

Introduction & Overview

  • Finance: Fuel to Facilitate Programs & Projects

    • Mix of Resources

      • Private

      • Public

      • Nonprofit

    • Amount of Resource Intervention

      • Risk Profile of Opportunity

      • Feasibility and Value

      • Extent of Conventional Sources

      • Size of Funding Gap


Framework of cd finance

Framework of CD Finance

  • Why Community Development Finance?

    • Project Life Cycle

      • Gestation

      • Growth

      • Maturity

      • Stabilization

    • Cycle Characteristics

      • Growing Risks

      • Differing Levels of Commitment

      • Different Players or Sources


Framework of cd finance1

Framework of CD Finance

  • Why Community Development Finance?

    • Funding Gaps Inevitable

      • Frustration

      • Overwhelmed

      • Do Nothing

      • Procrastination

      • Missed Opportunity

    • Fundamental Truth About Community Development Lending and Investment

      • Financial Matter First

      • Not Social

      • Projects Must Pencil Out

      • Fundamentally Sound


Framework of cd finance2

Framework of CD Finance

  • What is Community Development Finance?

    • Not Tool for Fixing Flawed Projects

      • Faulty Business Model

      • Dismal Location

      • Non-marketable Concept

      • “Lipstick on the Pig” Principle

    • Market Punishes Poor Projects

      • Financial Damage

      • Credibility Damage

      • Financial Partners Exit

      • Community Leadership Frustration

      • No-win Proposition


Framework of cd finance3

Framework of CD Finance

  • What is Community Development Finance?

    • Sharp Pencil Due Diligence

      • Equity Already Committed

      • Collateral Value of Assets

      • Reliable Cost Estimates

      • Expertise and Capabilities

    • Focus of Community Development Finance

      • Fill Private Market Resource Gaps

      • Ensure Capital Available When Private Sources Unwilling or Unable


Framework of cd finance4

Framework of CD Finance

  • What is Role of Finance in Community Development Process?

    • Finance Only One Component

      • Necessary But Not Sufficient

      • Other Elements Needed

    • Fundamentally Sound Local Economy

      • Growth Even if Slow

      • Demand for Goods and Services

      • Room for New Market Entrants

    • Availability of Suitable Workforce

      • Educated and Trained

      • Possible Misuse of Incentives if Lacking


Framework of cd finance5

Framework of CD Finance

  • What is Role of Finance in Community Development Process?

    • Community Infrastructure

      • Physical

      • Technical

      • Educational

      • Financial

    • Infrastructure vs. Projects

      • Both/And Not Either/Or

      • Priorities/Choices/Trade-offs

      • Success and Sustainability


Framework of cd finance6

Framework of CD Finance

  • Alternatives for Filling Funding Gaps

    • Adapting Existing Private Financial Institution Activities

      • Include Community Development as Part of “Normal” Business

      • Reduce Market Imperfections

      • Good Project and Market Information for Due Diligence

      • Regulatory Dilemma: Safety and Soundness vs. Community Reinvestment

    • Creating Alternative Funding Sources/Financing Entities

      • Public, Private and Nonprofit Sources

      • See Appendix A

      • Caution: Substitution of Capital


Who are the major players in community development finance

Who Are the Major Players in Community Development Finance?

  • Public Sector

    • Broad Policy Goals

    • Promote Public Good

    • Regulations to Ensure Equity and Fairness


Who are the major players in cd finance

Who Are the Major Players in CD Finance?

  • Federal Level

    • Department of Housing & Urban Development (HUD)

    • Economic Development Administration (EDA)

    • Department of Agriculture (USDA)

    • Environmental Protection Agency (EPA)

    • Small Business Administration (SBA)

    • U.S. Treasury

      • Community Development Financial Institutions (CDFI)

      • New Markets Tax Credits (NMTC)

      • Historic Tax Credits (HTC)

      • Low Income Housing Tax Credits (LIHTC)


Who are the major players in community development finance1

Who Are the Major Players in Community Development Finance?

  • State Level

    • Piggyback Conduits for Federal Programs

    • Revolving Loan Funds (RLF)

    • Equity Capital and Subordinated Debt

    • Targeted Tax Credits

    • Industrial Revenue Bonds


Who are the major players in community development finance2

Who Are the Major Players in Community Development Finance?

  • Local Level

    • Piggyback Conduits for State and Federal Programs

    • Revolving Loan Funds (RLF)

    • Technical Assistance

    • “One-Stop Shops”

    • Municipal Bonds

      • General Obligation Bonds

      • Revenue Bonds

    • Tax Increment Financing

    • Tax Abatements

      • Full or Partial

      • P.I.L.O.T.’s


Who are the major players in community development finance3

Who Are the Major Players in Community Development Finance?

  • Private Sector

    • Primary Motivations

      • Make Profit

      • Create Value

      • Build Wealth


Who are the major players in community development finance4

Who Are the Major Players in Community Development Finance?

  • Commercial Banks and Thrifts

    • Community Vested Interests

      • Attract Deposits

      • Make Loans

      • Declining Community Damages Balance Sheet and Profitability

      • Good Business

      • Community Reinvestment Credits


Who are the major players in community development finance5

Who Are the Major Players in Community Development Finance?

  • Commercial Banks and Thrifts

    • Business Decision Framework

      • Continued Evolution

      • Globalization of Finance

      • Cycles of De-Regulation/Re-Regulation

      • Tough Competition

      • Tight Margins

      • Limited Latitude for Mistakes

      • Balance Sheet Management


Who are the major players in community development finance6

Who Are the Major Players in Community Development Finance?

  • Individual Investors

    • Usually with Local Vested Interests

    • Individuals or Groups

      • Providing Equity

      • Legal Entities (LLC’s, Partnerships, etc.)

    • Institutional Investors

      • Linked to Local Wealth or Institutions

    • Property Owners

      • Strategic Parcels or Buildings

      • Possible Resistance

        • Legal Impediments

        • Tax Liability


Who are the major players in community development finance7

Who Are the Major Players in Community Development Finance?

  • Nonprofit Sector Players

    • Mission Not Profit-Driven

      • But Must Make Money

      • Operating Excess

    • Not Extensions of Government

      • Facilitated by Tax Exempt Status

      • Conduits for Federal, State and Local Government Funding

      • Prolific Growth Particularly in Community Development Sector


Who are the major players in cd finance1

Who Are the Major Players in CD Finance?

  • Nonprofit Sector Players

    • Community Development Corporations (CDC’s)

      • Housing and Commercial Revitalization Focus

      • Improve Quality of Life, Attract Jobs and Private Investment

      • Entrepreneurial CDC’s Create Profit-Focused Subsidiaries

    • Bank CDC’s

      • Special Form Sanctioned for Nationally Regulated Banks

      • Profit or Nonprofit Status

      • Co-Labor with Community-based CDC’s


Who are the major players in cd finance2

Who Are the Major Players in CD Finance?

  • Nonprofit Sector Players

    • Faith-based Organizations (FBO’s)

      • Partner with Bank CDC’s in Housing and Commercial Revitalization Projects

      • Provide Financial and Technical Assistance to Build Sustainability

    • Foundations

      • Privately Endowed

      • Corporate Endowed

      • Mission Focused Programs

      • Highly Competitive Grants Process

      • Program Related Investments (PRI’s)

        • Direct Equity Investment

        • Below Market Subordinated Debt

        • Not Grant But Discounted Return Investment


Structuring community development finance opportunities

Structuring Community Development Finance Opportunities

  • Debt and Equity Mix

    • Both Expect Returns

    • Both Take Many Forms

    • Driven by Nature and Value of Assets Financed

    • Pure Equity Has No Fixed Return

      • Cash

      • Ownership Interest Contribution

      • Tax Credit Purchase


Structuring community development finance opportunities1

Structuring Community Development Finance Opportunities

  • Debt and Equity Mix

    • Debt Has Fixed Cost by Contract

      • Repay Principal Plus Interest

      • Structured: Term vs. Amortization

      • Pledge of Collateral as Security

        • Additional Guarantees May Be Necessary

        • Credit Enhancements

      • Default to Foreclosure

      • Performance Covenants


Structuring community development finance opportunities2

Structuring Community Development Finance Opportunities

  • Value: The Underlying Criteria, What Drives It and Measuring It

    • Market Value of Assets Important

      • Funding Decisions

      • Funding Gaps

      • Finance Interventions and Enhancements

    • Four Determinants of Value

      • Demand

      • Utility

      • Scarcity

      • Transferability

    • Quantifying Value

      • Appraisal

      • Market and Economic Feasibility Analysis


Structuring community development finance opportunities3

Structuring Community Development Finance Opportunities

  • Measuring, Compensating and Pricing Risk

    • Risk Avoidance vs. Risk Mitigation

      • Avoidance Impossible

      • Mitigation By Strategic Structuring

      • Sharing vs. Shifting Risks

    • Credit or Business Risk

      • Revenue Shortfalls to Cover Operating and Financing Costs

      • Net Operating Income (N.O.I.)

      • Debt coverage Ratio (DCR)


Structuring community development finance opportunities4

Structuring Community Development Finance Opportunities

  • Measuring, Compensating and Pricing Risk

    • Liquidity or Marketability Risk

      • Convert Loan to Cash

      • Secondary Markets

      • Loan Participations

    • Maturity Risk

      • Long vs. Short Loan Repayment

      • Value Erosion Due to Inflation

      • Increased Default Risk

      • Term vs. Amortization Period


Structuring community development finance opportunities5

Structuring Community Development Finance Opportunities

  • Measuring, Compensating and Pricing Risk

    • Interest Rate Risk

      • Loan Value Decrease Due to Market Interest Rate Changes

      • Floating or Variable Rate Loans to Mitigate

    • Cost of Debt

      • Risk Free Rate

      • Plus: Risk Premiums

      • Market Competition

      • Compressed Risk Compensation


Putting community economic development projects together the strategic business plan

Putting Community Economic Development Projects Together: The Strategic Business Plan

  • Define Strategic Intent and Goals

    • Guides Entire Process

    • Goals and Objectives

    • How Achieved?

    • By Whom?

    • By When?

    • Plan “B”?


Putting community economic development projects together the strategic business plan1

Putting Community Economic Development Projects Together: The Strategic Business Plan

  • Describe Organizational Plan and Identify Key Personnel

    • Invest in People First; Opportunities Second

    • People’s Gifts, Talents, Abilities Make Projects Happen

    • Identify Strategic Players

      • Why on the Team

      • What They Will Do

      • What They Will Bring

    • Legal Structure of Deal

      • Ownership Interest of Players

      • Controlling Players

      • Key Individuals


Module 9 funding community development

Putting Community Economic Development Projects Together: The Strategic Business Plan

  • Provide Analysis of Project’s Market Dynamics

    • Market-driven Rationale for Project

      • Does It Fill a Niche?

      • What Is Market or Business Risk Profile?

    • Sources of Market Demand

      • How Deep?

      • Where Are They?

      • How Will They Support Project?

    • What is the Competition?

      • Pricing Structure

      • Observed Demand

      • Strengths and Weaknesses

      • Existing and Future Competitors


Putting community economic development projects together the strategic business plan2

Putting Community Economic Development Projects Together: The Strategic Business Plan

  • Describe and Fully Document Project’s Financing Structure

    • Detailed Start-up Capital and Operating Costs

    • Five-Year Operating Budget and Cash Flow Statement

      • Sources and Uses of Funds

      • Funding Schedule By Source

      • Maximum Initial Commitments

      • Willingness, Ability and Cost to Increase Commitment

    • Quantify Returns for Investors

      • Cash-on-Cash

      • Internal Rate of Return

      • Non-Financial Returns


Putting community economic development projects together the strategic business plan3

Putting Community Economic Development Projects Together: The Strategic Business Plan

  • Describe and Fully Document Project’s Financing Structure

    • Estimate Cash Burn Rates

      • Strategies for Filling Cash Needs

    • Indentify Exit Strategies

      • Take-out Permanent Loans

      • Refinancing

      • Disposition of Assets


Module 9 funding community development

Putting Community Economic Development Projects Together: The Strategic Business Plan

  • Describe Project Implementation and Stakeholder/Participant Risks and Rewards

    • Key Questions for Stakeholders

      • Why Are We Doing This?

      • What Are We Getting Out of This Project?

      • How Do We Get Out of This Project – Successfully?

    • Establish Periodic Benchmarks

      • Voluntary vs. Contractual Deadlines

      • “Drop-Dead” Dates

        • Non-Performance Penalties

        • Who Is Held Responsible?


Putting community economic development projects together the strategic business plan4

Putting Community Economic Development Projects Together: The Strategic Business Plan

  • Describe Project Implementation and Stakeholder/Participant Risks and Rewards

    • Identify Project Rewards for Stakeholders

      • Private Investors: Returns and Value Appreciation

      • Private Lenders: Interest Earnings and Regulatory Compliance Credits

      • Local Economic Developers: Job Creation and New Capital Investment

      • Local Government: Tax Revenue Growth and Infrastructure Enhancements


Module 9 funding community development

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