Financing

Bond Issues: While this is a difficult time for municipalities to take on debt, bond issues are a traditional tool for cities to raise money for major investments. For instance, in 2006, to finance Philadelphia’s ambitious Neighborhood Transformation Initiative (NTI), the City authorized the issuance of $300 million in bonds over five years to eliminate vacant and dangerous buildings and to provide support for neighborhood preservation initiatives in so-called transitional neighborhoods—those neighborhoods that have a low number of vacant units and stable housing market values. As credit becomes more readily available, cities should consider bond issues to finance foreclosure recovery. In some jurisdictions this may require voter approval.

Community Development Block Grant (CDBG): The Community Development Block Grant (CDBG), one of the longest-running programs of the U.S. Department of Housing and Urban Development, funds local community development activities such as affordable housing, anti-poverty programs, and infrastructure development. CDBG, like other block grant programs, differ from categorical grants, made for specific purposes, in that they are subject to less federal oversight and are largely used at the discretion of the state and local governments and their sub-grantees.

Community Revitalization Act Investment: This law, passed in 1977 and revised in 1995, encourages depository institutions to help meet the credit needs of communities in which they operate, including low- and moderate-income neighborhoods. The Act requires federal agencies responsible for supervising such institutions to evaluate their compliance periodically and to take their records into account in considering applications for deposit facilities. CRA encourages financial institutions not only to extend mortgage, small business, and other types of credit to lower-income neighborhoods and households, but also to provide investments and services to lower-income areas. Banks can fulfill their CRA obligations by donating their foreclosed, REO properties, or selling them at a discount, to nonprofit community development organizations if the organizations will use the homes for qualified CRA purposes such as offering them as affordable housing for low- to moderate-income homebuyers. Providing foreclosed homes to local government or nonprofits provides an investment opportunity with a reasonable return for investors.

EQ2 Investments: Equity Equivalent Investments, or EQ2, are bank loans that are deeply subordinated and have a rolling term so that they function like equity. The Wells Fargo Community Development Corporation, for example, offers EQ2 to nonprofits or government agencies that are buying foreclosed homes for rehab and re-sale to low- and moderate-income owners. In the Wells Fargo program, applicants may receive up to $1 million with a 2 percent interest rate and loan maturity in five years. The Cincinnati Development Fund uses the EQ2 loan as one of 6 types of loan funds available for financing community development. The loans typically provide bridge financing for projects. To apply, contact a federally regulated financial institution.

Developer Incentives such as Tax Abatements: Cities across the country, in an effort to encourage real estate development, offer property tax abatements for most new construction and for significant improvements to existing buildings. In Philadelphia, tax abatements were responsible for generating approximately two-thirds of the residential development since 2000, representing investment and construction that otherwise would not have occurred in the City because market values were so low and building costs so high. Other cities provide low interest loan or gap financing or some other incentives to build in their cities. By providing incentives for those who responsibly acquire, rehab and re-sell foreclosed properties, cities can help get these back into productive re-use more rapidly.

Federal Home Loan Banks: The affordable housing and economic development programs of the twelve Federal Home Loan or FHL Banks consist of grants and low-interest loans to member financial institutions to provide financing for economic development and housing activities. In 2006, a combined total of $295 million was made available for regional housing projects. The Community Investment Program (CIP) is a lending program that provides below-market-rate loans that enable banks to extend long-term financing for housing and economic development that benefits low-and moderate-income families and neighborhoods. The Affordable Housing Program (AHP) is a competitive program that provides grants twice a year through financial institutions for investment in low- or moderate-income housing initiatives. Member banks partner with developers and community organizations to finance the purchase, construction, or rehabilitation of owner-occupied or rental housing.

FHA 203K Loan (combination purchase and rehabilitation loan): The Federal Housing Administration funds FHA 203K, a mortgage program for the repair and rehabilitation of single-family dwellings. FHA 203K can be combined with HUD’s HOME, HOPE, and CDBG programs to finance both acquisition and rehab of a property, with the mortgage amount being based on the projected value of the property after rehab is completed. Eligible properties are one-unit to four-unit dwellings, can include mixed-use buildings and groups of row houses, and can include condominium units if individual condominium buildings contain a maximum of four units each. FHA-approved lenders are authorized to provide the loans.

FHA 602 Disposition Agreements to acquire all FHA foreclosures in an Asset Control Area: FHA’s 602 Nonprofit Disposition Program allows a nonprofit and/or municipality to buy from HUD all of the FHA foreclosures in a designated Asset Control Area (ACA) at a substantial discount below appraised values. The purchases occur within a 60-day window. The nonprofit or municipality must agree to take all the properties regardless of their condition and then rehabilitate the homes and within 18 months offer them all for sale to owner-occupants. The ACA is an area judged to be attractive to purchasers after home rehab is complete. Within the 602 program, purchasers must be low-income households and must complete HUD counseling; these buyers may receive other subsidies in addition to 602. The re-sale price of a property must be anticipated to be high enough to cover acquisition and repair costs, so in many cases the ACA is located in a healthy neighborhood with relatively high property values. However, with declining values, this is not always the case. For instance, in Rochester, NY, home prices in the ACA were not high enough to cover the acquisition and rehab costs: homes rehabbed under the 602 Program sold for $22,000 less than development costs, so the City earmarked additional subsidies to cover the extra costs.

Foundations and Philanthropic Organizations – Private foundations are providing grants and loans to support many types of foreclosure recovery, including purchase, rehab, and re-sale of foreclosed properties. In Chicago, for instance, the MacArthur Foundation is giving $68 million to both foreclosure prevention and the mitigation of urban problems caused by foreclosed properties. Nationally, Living Cities is providing $7 million to fund the most promising local approaches for returning foreclosed properties to catalyze and test models and to extract and disseminate knowledge to the field.

Historic Tax Credits: The federal government and many state governments have historic tax credit programs designed to preserve historic buildings and communities. The federal program, Historic Tax Credits, allows owners of homes built before 1936 to take between 10 percent and 26 percent of rehabilitation costs as a tax credit (closer to 10 percent for structures built before 1936, and upwards of 20 percent for structures certified as historic) on their federal taxes. State Tax Credit programs vary widely but many could be utilized to acquire, rehabilitate and re-sell foreclosed properties. For instance, in Hartford, Connecticut, the Northside Institutions Neighborhood Alliance purchased 11 foreclosed, bank-owned properties, rehabbed them, and sold them to owner-occupants. The Alliance relied on State Historic Credits to make up the difference between the cost to acquire, hold and rehab the property and the re-sale price.

HOME Funds: HOME provides formula grants to States and localities that communities utilize – often in partnership with local nonprofits – to fund a wide range of activities that build, buy, and/or rehabilitate affordable housing for rent or homeownership, or provide direct rental assistance to low-income people. HOME requires that participating jurisdictions match 25 cents of every dollar of funding using nonfederal sources, which can include donated materials, labor, bond financing, and other sources. In addition to using HOME money for building, buying, or rehabbing affordable housing, communities may use it for site acquisition or improvement, demolition in preparation for new development, or payment of relocation expenses. HUD now has various resources in place to help communities use HOME money for the creation of energy-efficient and environmentally friendly housing in order to improve long-term affordability.

Housing Trust Fund: Funds established by cities, counties and states that dedicate sources of revenue to support affordable housing. Trust funds are usually created by legislation or ordinance to receive ongoing deposits of public funding, making affordable housing independent of annual budget allocations. Trust funds allow municipalities to create housing programs and give developers a reliable funding source. At present, there are more than 38 state housing trust funds, and more than 550 city and county funds, in the United States. The Center for Community Change and the National Low Income Housing Coalition both provide information about HTFs. In addition PolicyLink published an equitable development tool and a report on HTF financing sources. Most trust funds are financed with real estate transfer taxes or deed and mortgage recording fees. As a result, trust fund resources have declined as real estate activity has come to a near stop in many communities.

HUD Section 4 Capacity Building For Affordable Housing And Community Development Grants (14.252): A grant open to four national organizations, Enterprise Community Partners, Inc. (formerly The Enterprise Foundation), Local Initiatives Support Corporation, Habitat for Humanity, and YouthBuild USA, to help improve the capacity of community organizations to develop affordable housing and other community development projects. Grantees may use the grant for training and education or loans and grants to CDCs and community housing development organizations (CHDOs).

Loan Fund: Both Los Angeles and New York City have created loan funds to finance the construction of affordable housing from foreclosed properties and through other resources. With the help of Enterprise Community Investment, Inc, Los Angeles has created a New Generation Fund. The New Generation Fund LLC offers acquisition and pre-development loans to developers committed to the creation and preservation of affordable housing in the City of Los Angeles. Based on soft commitments from public agencies to provide subsidies and financing in the future, the Fund makes loans to developers of affordable housing to bridge the period between acquisition and final construction. The Fund finances both the new construction of affordable housing and the preservation of at-risk affordable housing. The Fund serves both nonprofit and for-profit borrowers and provides both flexible underwriting criteria and expedient turn-around time. Nonprofit borrowers are eligible for a maximum loan-to-value of 130 percent, including capitalized interest; for-profits are eligible for up to 95 percent. The Fund’s loans are interest-only, with principal re-paid from construction loan proceeds. The maximum loan term is 36 months. The City created the New Generation Fund with $10 million of general budget funds and $5 million from foundations. This $15 million leveraged a $120 million credit line.

Neighborhood Stabilization Program: HUD’s Neighborhood Stabilization Program (NSP) provides emergency assistance to state and local governments to acquire and redevelop foreclosed properties that might otherwise become sources of abandonment and blight within their communities. The program is authorized under Title III of the Housing and Economic Recovery Act of 2008. See the What is It section for a further description of NSP.

New Market Tax Credits: As part of the Community Renewal Tax Relief Act of 2000, an individual or corporate investor who makes an investment in a Community Development Entity (CDE), including Community Development Financial Institutions (CDFIs), receives a tax credit worth 39 percent (30 percent net present value) of the initial investment, distributed over 7 years, along with any anticipated return on their investment in the CDE. The CDE must then make a Qualified Equity Investment or loan to a qualified business in a Qualified Low-Income Community (LICs). Most commercial and mixed-use real estate development projects located in LICs are qualified businesses. (Residential projects without a commercial component do not qualify.) The New Markets program is designed to encourage investments in LICs that traditionally have had poor access to debt and equity capital.

Pension Funds: Pension fund investment in America's cities has grown dramatically. While some of this investment is in infrastructure, equally important components in investors’ portfolios are property, real estate and development projects. For instance, the City of San Diego is gathering private money to buy, rehabilitate, and re-sell hundreds of foreclosed properties. Two of the pension fund investors are the California State Retirement System and Washington Mutual bank. In New York City since 2002, four of the five pension funds have been investing in the AFL-CIO Housing Investment Trust (HIT), which is working to expand the supply of affordable housing in the city.

Private Redevelopment Dollars: Private development dollars can be used in a variety of ways, from financing home purchase and rehabilitation or accomplishing demolition to obtaining loans for the responsible nonprofits or the new homeowners. In Cleveland, the Hough Initiative, aimed at revitalizing a neighborhood beset by foreclosures, is being funded by the national law firm of Morris|Hardwick|Schneider, The Lucian Development Group, the 4KIDS Leadership Endowment Foundation, and the Consortium for Economic and Community Development. The Hough Initiative is not using government funding, but rather depends on the contributions of private sponsors and partners. The 4KIDS Foundation works with families and organizes the efforts of the various program partners. Morris|Hardwick|Schneider works with asset managers at banks to identify and research land titles on properties that are selected by the Consortium for Community and Economic Development. The Lucian Development Group works on securing private equity funding and assistance from lenders and donors.

Section 108 Loan Guarantees: The Section 108 Loan Guarantee Program, which is part of the CDBG program, finances economic development, housing rehabilitation, public facilities rehab, construction, or installation for the benefit of low- to moderate-income persons, to aid in the prevention of slums, or to meet urgent community needs. Local governments can turn part of their CDBG funds into federally guaranteed Section 108 loans that are large enough to finance substantial projects with neighborhood-wide impact. Local governments pledge their current and future CDBG allocations to cover the loan amounts and provide security for the loans. Projects that are eligible for Section 108 financing include economic development activities eligible under CDBG; purchase and rehabilitation of property; housing rehab; construction of public facilities such as sidewalks, and some housing construction.

State Housing Finance Agency Grants or Loans: State Housing Finance Agencies (HFAs) are state-chartered authorities designed to meet the affordable housing needs of their states by administering affordable housing and community development programs. Cities, counties, and nonprofits may apply for funding for acquisition, rehab, or construction of homes. Check with the State Housing Finance Agency for more information.