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How to finance your development project

By Whitney Terrill

May 6, 2021, 3:39 p.m.

Welcome back to our Community Development Playbook. The next part of our series walks you through the best practices we’ve seen in finding money for your community-oriented development projects. Figuring out the right combination of financial options, or capital stack, is important for making community development projects a reality. There are three types of funding that we will discuss: loans, grants and equity. How to finance your development project

Loans: Capital to borrow

Getting a loan is a common strategy for many projects. A loan is money that is borrowed and may be paid off with some interest. When looking for a loan, there are a few common places to look first. Those are retail banks, Community Development Financial Institutions (CDFIs), credit unions, and other local development funds.

Retail banks, CDFIs and credit unions are very similar in terms of offering loans. In an oversimplified way, the biggest difference is in who can qualify for a loan from each of these institutions. Retail banks are for-profit institutions that are focused on returns. Examples include Chase, Bank of America, Wells Fargo and Citibank. If you have good credit and your project is set to make a decent amount of profit, then corporate banks are an option.

Credit unions, also known as community banks, are nonprofits. This means they are less focused on making money. If your project is not set to make a high profit, then a credit union is a good option to consider.

Community Development Financial Institutions (CDFIs) are institutions focused on providing banking to low-income, low-wealth, or otherwise marginalized communities. We are excited that CDFIs will receive an infusion of $3 billion in dedicated grants through a new federal infrastructure bill under the Emergency Capital Investment Program. You can learn more about the funding announcement here. The multi-billion dollar investment is seeking to remedy the fact that not all communities have historically had equal access to fair lending and capital, especially along racial lines.

Last are local loan funds or revolving loan funds. A loan fund is a short term source of loans or grants that usually runs through development organizations. A revolving loan fund is similar except that it lasts longer because it uses money made from interest on the loans to pay for future loans. An example of a local fund is when Detroit brought together private banks and public partners to create a $75M Detroit Housing for the Future Fund. This fund offers loans and grants for affordable housing projects in Detroit. An example of a revolving loan fund is the $1.8M fund established by the CARES Act to help businesses with COVID recovery. You can search for local funds by searching “[city] [project type] fund.” For example, if your project is a housing development in Detroit, try searching “Detroit Housing Fund.” To find revolving loan funds, the CDFA Revolve Loan Funds Resource Center is a great place to start.

Grants & Subsidies

Grants are funds given with specific requirements from a foundation or other funder and do not have to be paid back. They are often intended to fulfill a specific purpose with required deliverables. The more money you can get through a grant versus a loan, the easier it will be to get a return because you owe less money to a bank. Some institutions that give out loans may also give out grants. An example of a grant is the CARES Act COVID Relief Fund which offered businesses and institutions relief from economic impact related to COVID-19.

Look for resources from your state, county, city or neighborhood economic development offices. These can be found by googling “[State/county/city] economic development” and finding the agency that comes up. For neighborhood, try searching for ‘[Neighborhood] community development corporation.”

Equity and Tax Incentives

Equity, sometimes also known as investment, is when someone gives you money for owning a part of the project. The idea is that the investor makes their money back from owning part of the profits later down the line. Sometimes the government will give incentives, such as tax breaks, to investors so that they will invest more money in projects. There are a wide range of incentives for investment to explore at the national, state, and local levels, but we are outlining a few below.

Opportunity Zones (OZ) allow you to invest in distressed communities by offering an incentive to defer capital gains tax. To see if your project might qualify, look up your project in this OZ map from EIG.

Federal Empowerment Zone (EZ) is an older program that operates similar to OZs by encouraging investment in distressed communities. Here is a map to see if your project is in an EZ, and to find further resources we suggest searching “empowerment zones [your state]”

Low-Income Housing Tax Credit (LIHTC) primarily encourages affordable housing development in low-income, underserved communities in urban and suburban areas. This Urban Institute report provides good context on the program. We recommend reaching out to your local housing authority to determine if your project is eligible.

New Market Tax Credit Program (NMTC) incentivizes private investment in historically underserved communities that are burdened with unequal access to affordable housing, vacant commercial or manufacturing space, or underfunded education systems. Use this CDFI site to find sources of NMTC in your state.

Main Street Tax Credit Program offers tax incentives to organizations working to vitalize a downtown space or main street for smaller cities or towns. Every state’s program works differently, but here is a list of main street programs by state.

Federal Historic Preservation Tax Credit program, known as Historic Tax Credit (HTC) for short, incentivizes preservation of historic buildings, and offers a 20% tax credit during the first five years a building is operational. The federal program is run through the National Park Service, whose website has details on how to apply, but some states have their own historic tax credit as well which can be searched for here.

Tax Increment Financing (TIF) gives projects a tax break by freezing the property value (and thus property taxes) for a certain amount of time. TIF incentives vary by location so we suggest searching for TIFs in your state or city to find out more.

Conclusion

We have seen projects fly or never take off depending on the capital stack for the project. We wish there was an easy formula for your capital stack, but simply put, every project will be different. When it comes to putting your stack together, we have one more resource to share. At The Opportunity Exchange we have created a tool called GroundUp, which walks you through the steps of understanding the potential sources of income for your OZ project and how they will affect your project's returns. Sign up for free today.

We hope this piece helps you understand how to finance your project. Our mission at The Opportunity Exchange is to help you and your community generate community projects that are successful. We look forward to being your partner in this work!

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