Community Development Finance
There has been a great deal of discussion about the lack of affordable housing, nonprofit office space, homeless housing and artists’ housing in Oakland due to the tragic warehouse fire, the issues associated with SROs and their conversions, the need for broader community development options and programs, the lack of good jobs, problems faced by small businesses, bank closures, and the overall increasing pressures from gentrification including rent and housing sales price increases. These same conditions exist throughout the Bay Area for the most part.
Many excellent solutions presently exist and are in operation, and many excellent recommendations have been made. On housing policy for example, these proposals include various approaches to land use (condo conversion limits, use of publicly-owned land), zoning (inclusionary requirements, in-law and ADU housing), code enforcement, streamlining the approval process, seismic improvement requirements, advocacy programs, tenant protections, moratoria, legal approaches (limiting SRO conversions, regulating short-term rentals, anti-discrimination laws), planning approaches (state fair share laws), new construction and acquisition of existing affordable units, a bond issue to help fund affordable housing, etc.
Most of these suggestions are excellent and needed for the most part. But they are insufficient by themselves to address the depth of the issue. They represent a great emphasis on governmental policies, programs and regulation of the private sector. Potential partners are not included. Massive capital and subsidy needs are not fully addressed. Legal, land use and zoning approaches do not solve all the issues when ownership and long-term affordability also are needed. Necessary flexibility to be able to move quickly in the marketplace is missing. And, an adequate infrastructure to implement these policies does not fully exist.
The need for additional strategies and a more encompassing approach have become clear from several recent events.
- The remaining 19 SRO’s in downtown Oakland and their low income tenants are endangered by conversions of various sorts. One of the suggested solutions was having the City buy them and turn them over to nonprofit developers. A very appropriate recommendation, but there are large questions associated with this suggestion: Are there enough nonprofits to take on the development and management of these buildings? And, if there were adequate development and management capacity, how would the financing be put in place and would it need to be done with a unique financing effort for each SRO or is there an existing way to purchase and develop a larger number of properties very quickly? An adequate development and financing infrastructure would make addressing the SRO and other housing matters more efficient and much faster.
- Similarly, the need for affordable live/work space for artists has been highlighted by the Ghost Ship warehouse fire tragedy in 2016. Creation of development capacity and financial support mechanisms would allow a much more rapid response to this issue through acquisition and development of existing facilities, conversions of other properties, and new construction compared to a piecemeal, one-at-a-time response.
- The same issue applies to nonprofit office and services space. Nonprofits have been priced out of San Francisco for many years and now the same thing is occurring in Oakland with rapidly ballooning rents. Here, too, this process can be better addressed by creating the development and financing infrastructure to allow a larger scale response to this issue and create affordable space to allow more nonprofits to remain in Oakland.
- Affordable and homeless housing is the largest need for Oakland and many other regional cities. The recent actions of Moms 4 Housing highlighted this issue along with the rapid growth in the number of homeless people and of homeless encampments throughout the city and the region as a whole. Right now, each new development solution tends to be created through its own unique process. A more complete financing infrastructure would assist more rapid and efficient development of affordable housing.
- Many small businesses are being displaced by commercial landlords who are raising rents very quickly and steeply to significantly higher levels. Long-time, local entrepreneurs are being displaced, losing their businesses, losing important opportunities to generate wealth, facing major threats to their capacity to generate any profit, and ending local employment opportunities. The newer businesses also may represent non-local owners who would take more revenue out of the local neighborhood and the city as a whole. In addition, many small business owners are not receiving adequate lending support even with all of the available alternatives.
- There is ongoing and great concern for low income people who are unbanked and underbanked and who are at the mercy of predatory institutions. There now are proven ways to address these concerns, but few if any direct steps to build solutions at scale are taken. Capital support, among other solutions, is needed in this area also.
- A private company in San Francisco decided to sell 76 of its rental properties – about one third of its inventory totaling about 2,000 units. City officials were concerned that such a large sale would impact the market and the buyer likely would be another large corporation which would result in some level of displacement. The buildings first were offered to nonprofits in December 2019 and city officials later asked for an additional 60 days, but apparently was rebuffed by the seller. Even if the buyer would slow the process, there likely would be difficulties in making a large scale purchase:
The (Mayor’s Office of Housing and Community Development) has an acquisition and preservation program, but “given limits on available funding, it would be difficult for us to fund the purchase of a significant portion of the overall portfolio, though we are currently evaluating what possibilities there may be,” MOHCD said in a statement. (1)
- Also in San Francisco, board and care homes and residential facilities housing extremely vulnerable people including the elderly, homeless, and people fighting mental illness and substance abuse have been closing for a while due to many issues including economic infeasibility – over one quarter of these beds have been lost since 2012 at a time of greatly increased need. The City has started a new program and is negotiating to purchase two facilities with 38 beds. (2) But there are many more future properties that will likely fall into this same situation.
- Oakland, Berkeley and the State are considering right-of-first-refusal legislation to give tenants and nonprofits the right to first purchase rental properties before going on the market. But are the financial resources in place to allow effective use of this type of programs? Here too, a financial vehicle to speedily and efficiently allow these purchases at a large scale could be very useful.
Other Approaches Needed – A New Strategy
Therefore, additional approaches could be considered. They could focus on creating an infrastructure that would allow a large scale, rapid response needed to address continuing community development needs in the region. One focus could be the financing and development of existing and new affordable housing and of commercial facilities for nonprofits, artists and others now being forced out of their homes throughout the region, the most immediate issue at this time. But they also could focus on a wide range of other community development needs that also are going unmet or not fully attended to including small business lending and displacement, consumer financial services, health and child care facilities, etc. This approach would represent the creation of an infrastructure needed to facilitate the development and financing of affordable properties and community development programs at scale. The program itself would need to be very large scale to have adequate impact and to increase the efficiency and speed of developing large scale alternatives.
This strategy has three parts:
- Create a very large, central development fund (Pool) of different kinds of low-cost capital for financing and subsidizing development of affordable housing, small businesses, commercial facilities and other community development programs and strategies. This approach would make it easier to avoid the present approach of single, case-by-case developments in response to specific events or opportunities.
- Create other mechanisms – security enhancement program, venture capital fund, equity capital fund – to support affordable housing development and a wide range of other community development activities.
- Create a developer/development entity for artists’ housing, live/work and performance space, nonprofit office space and small business/entrepreneurial space. It also could be used to add to the developer capacity for affordable housing if needed, particularly for special types of housing such as SROs.
First, create a large fund (Pool). Housing, small businesses, individuals, organizations and nonprofits all need access to lending capital on reasonable terms – low rates, longer terms, flexible conditions and underwriting. This type of capital often is difficult to access even with all the CDFIs and public sector and foundation programs that exist now. The capital also often needs to be able to be accessed very quickly, often in large amounts, for short and longer terms. Right now, especially outside of San Francisco, communities react to individual situations like the Moms 4 Housing situation, the Ghost Ship, homelessness, etc. Maybe some issues are addressed with individual, ad hoc responses, but then people move on and there is no long term resolution. There needs to be an infrastructure in place to deal with these issues on an ongoing basis rather than with individual, ad hoc responses to each individual case. A very large, lasting infrastructure needs to be put in place to help finance various community development efforts, including low income housing efforts such as new construction and the purchase existing single family, small multi-family and larger multi-family residential properties in addition to commercial and retail properties and to offer direct loans to small businesses and to assist with viable financial services alternatives. This Pool could be created to have a size of tens of millions of dollars up to the low to middle hundreds of millions. It would be created, staffed and controlled by a separate nonprofit organization. For example, the funds would be lent to nonprofit housing developers to:
- Own and develop residential, retail and commercial properties.
- Keep rents lower/affordable and maintain property condition for the long-term.
- Make strategic acquisitions to stall or block gentrification pressures and/or to maintain low income housing in gentrifying areas.
The Pool also would support other key issues throughout the region by funding various other community development efforts including small business lending, non-predatory financial services and personal lending programs, child and health care facilities, neighborhood commercial redevelopment, social services, etc.
One bank would be selected as the lead lender of a Pool of banks and other financial institutions (insurance companies, religious institutions, pension funds, corporations, foundations, etc.) to make loans to nonprofit developers and other types of borrowers.
- Offer most of the financing needs for development: permanent, construction, short term, acquisition and perhaps even land acquisition and predevelopment financing.
- Lend funds at a below-market interest rate.
- Pool purchase of 501c3 bonds to create a lower, negotiated rate on private placements.
- Have the Pool banks obtain federal Community Development Financial Institutions Fund Bank Enterprise Act funding to make long-term, low-rate investments.
- Create a pool of subsidy funds from the pool members (and others) to make grants and investments for property equity and operating costs of nonprofits.
- Sell applicable bank REOs (foreclosed properties) to the nonprofits at affordable prices.
- Develop additional programs to assist marketplace acquisitions: acquisition line of credit, security enhancement program, land banking, etc.
- Modify underwriting as appropriate, such as the use of lower Debt Service Coverage ratios (with guarantees if needed) to lower rents and/or needed subsidy amounts.
While the banks would form the core of the Pool, other funding sources could be included:
- Allocate some of the funds from various bond issues to provide equity/subsidy.
- Use other City and County funds (e.g. Community Development Block Grants) for equity requirements.
- Bring other funders into the Pool to provide both loans and grants. Foundations could be an important source for subsidy and financing and socially-responsible private investors might be another source for below market financing.
- Create limited partnerships to assist with funding through tax credit purchases by the banks in the Pool and by other Bay Area corporations, tech companies and others.
This type of funding mechanism would create a financial infrastructure to allow efficient aggregation and use of resources which does not now exist. It would be faster and more efficient than normal financing and it could include subsidy funding for grants, project equity and nonprofit operations on a more limited basis. It would allow coordination of multiple projects simultaneously rather than single developments created in an uncoordinated manner that respond to specific events. It would leverage available resources and generate a greater level of funding than using existing funds on a case-by-case basis. It would be based on a financial mechanism that banks are very comfortable with and participate in commonly: participation loans – they know the process well and they like it because it spreads the risk and lowers administration and underwriting costs. (Please note that most of these programs and approaches were used successfully 25 years ago by a local nonprofit financial institution. The Low Income Housing Fund or LIHF [and now called the Low Income Investment Fund] created 4 of these bank pools 25 years ago (Bay Area, LA, NYC, Sacramento and the foothills) and they were able to move very quickly. LIHF also created acquisition lines of credit for nonprofits to be able to enter the competitive marketplace and compete with private developers to enable the speedy funding of property acquisition.)
Second, create ancillary but essential financial programs to support community development in general. These programs could be part of the larger organization housing the Pool or be part of a separate organization or organizations.
- Venture capital. Small businesses, community ventures of various kinds, nonprofits etc. often lack access to capital needed to start new ventures, experiment, try new ideas. Foundations are the only or primary source at present, plus perhaps occasionally public sector money. But both these sources are limited, slow to make decisions, very difficult to access, and often available mostly to already-large organizations that most likely have the capacity to fund these efforts anyway. It would be a type of nonprofit venture capital funding because this type of support is so limited at this time unless the effort is in the private sector, the tech sector, or where major connections exist, etc. The VC industry is the strongest in the world here in the Bay Area. But there is very little to no community development or nonprofit venture capital.
- Security enhancement. There are many ventures that are slightly or more heavily beyond the risk levels that most capital institutions support but are important ideas that need to be tested and implemented. This can occur on the individual loan basis or on a program or organizational basis. The first type of this organization was recently created – the Community Investment Guarantee Pool in Virginia. Community Development Finance (CDF) worked briefly on creating a credit enhancement organization about 20 years ago and it seems even more necessary now. LIHF also created a number of types of guarantees over 30-35 years ago as banks were unwilling to fund nonprofit housing when President Reagan eliminated so many of the federal housing programs that existed then. LIHF was operating out of the ED’s house at the time and was using $250,000 to provide guarantees to Bank of America, SAMCO which was a consortium of S&Ls, Equitable Life, a religious pension fund, and other lenders for over $7 million in loans that they would not have made otherwise. Each guarantee was structured individually in order to meet the different concerns of each lender. There still are large gaps in funding at this time that similarly would benefit from security enhancement mechanism.
- Equity capital. This often refers to the equity needed to make low income housing economically feasible. But it can also mean helping to make other types of developments economically feasible, to build the balance sheets of nonprofits, to invest in small businesses, to provide needed capital for existing or new staffing for community development programs of all kinds – basically operating funds to build internal capacity. These funds can be very difficult to obtain. The City of San Francisco has built the nonprofit housing development sector for decades in supporting the internal capacity of nonprofit housing developers and the result is some really strong capacity for many of these organizations; it also shows the weaknesses that exist in most other parts of the Bay Area, which has a few very strong developers but not enough of them.
Third, create a development entity that would focus on the creation of properties that would develop space for the other uses: artists’ housing and work space, nonprofit offices and nonprofit services facilities, child and health care facilities, small business parks with controlled rents, etc. This organization also could be used for other somewhat unique activities such as residential hotels. It also could be used to purchase and develop commercial space for local small businesses and entrepreneurs so that rent increases could be limited over time. And it also could be used to develop more traditional affordable housing if there were inadequate development capacity to handle all the necessary development opportunities. It would develop specialized expertise in these areas that are not well known in the nonprofit development world at this time. This organization would require some operating support from the Pool, the City, and foundations, certainly in the beginning until more traditional forms of revenue could be generated.
Similar to the way of creating increased financing infrastructure through a Pool, this type of developer would create a widened developer infrastructure to allow the more efficient and rapid use and absorption of available development funds for types of development that typically are less well known to nonprofit housing developers.
Together, these steps could augment the range of other programs and approaches that are being recommended. They would attract additional partners and a much higher level of funding needed to efficiently create and use new and existing resources. They would add to the existing infrastructure needed to keep more people, organizations and businesses from being forced out of the Bay Area. They would not solve the gentrification pressures and other community development issues by themselves, but they greatly would assist large numbers of people and organizations to remain in the region.
- “Fight Ensues Over SF Landlord’s Sale of Thousands of Rent-controlled Apartments”, San Francisco Chronicle, Amy Graff, January 30, 2020.
- “SF rescues homes for elderly, homeless and mentally ill on the verge of closing”, San Francisco Chronicle, Trisha Thadani, Feb. 10, 2020.
Dan Leibsohn. communitydevelopmentfinance.org [email protected] 510 848-1174