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Module #9 – Funding Community Development

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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  1. Module #9 – Funding Community Development

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. Who Are the Major Players in Community Development Finance? • Public Sector • Broad Policy Goals • Promote Public Good • Regulations to Ensure Equity and Fairness

  13. 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)

  14. 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

  15. 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

  16. Who Are the Major Players in Community Development Finance? • Private Sector • Primary Motivations • Make Profit • Create Value • Build Wealth

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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)

  27. 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

  28. 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

  29. 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”?

  30. 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

  31. 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

  32. 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

  33. 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

  34. 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?

  35. 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

  36. LouisianaCommunityNetwork.org

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