Black and yellow graphic with the title community development lending, explained

Community Development Lending, Explained

For anyone seeking to access lending for community development projects, understanding the different types of loans can be confusing.

At Capital Impact Partners, our commitment to fostering positive social impact drives us to support mission-aligned real estate developers and community development leaders with a range of flexible and affordable financing solutions.

Our community development lending offerings include predevelopment loans, real estate acquisition loans, construction loans, working capital loans, refinance loans, New Market Tax Credit (NMTC) leverage loans, and NMTC Qualified Low-Income Community Investment (QLICI) loans.

Our loan products are designed to help our borrowers achieve their goals and revitalize disinvested and underestimated communities, whether that constitutes developing or preserving affordable housing, creating jobs through a small business, or building the resilience of communities through access to health care, healthy food, and education.

In this series of blogs, we aim to shed light on the diverse types of loans we offer and explore their significance within the context of Capital Impact’s mission-driven financing, in the hope that it will provide clarity to help borrowers make informed decisions about applying for community development loans.

Black and yellow graphic with the title community development lending, explained

We walk through the different types of loans we use to support developers and community leaders in bringing their community-centered projects to life:

  • Predevelopment Loans
  • Real Estate Acquisition Loans
  • Construction Loans
  • Business Acquisition Loans
  • Working Capital Line of Business
  • Refinancing Loans
  • New Market Tax Credit (NMTC) Leverage Loan
  • New Market Tax Credit NMTC Qualified Low Income Community Investment (QLICI) Loan
Black and yellow graphic featuring the Momentus Capital logo with the title community development, demystified: a glossary.

Community Development, Demystified: A Glossary

As a mission-driven developer, organization, or business looking into community development projects, you may be coming across language that might sound confusing and be challenging to understand. What is a CDFI? What is NMTC? What is LTV?

At the Momentus Capital branded family of organizations, we leverage the combined expertise of Capital Impact Partners, CDC Small Business Finance, Ventures Lending Technologies, and Momentus Securities to expand capital and opportunities for underestimated communities.

At Capital Impact Partners specifically, we offer flexible and affordable financing to a broad range of community development projects that deliver social impact, including community health centers, public charter schools, small businesses, cooperatives, healthy food retailers, affordable housing developments, and dignified aging facilities.

This glossary aims to demystify terms to help you navigate through our lending and programmatic services and offerings. Below you will find definitions of terms divided into the following thematic sections:

Yellow and black graphic with the text: Community Development, Demystified: A Glossary

General

Community Development Financial Institutions (CDFIs)

Community Development Financial Institutions (CDFIs) are mission-driven private sector financial institutions that focus on serving people living with low incomes and people who have historically been locked out of the financial system. Their work entails providing lending for small businesses and community projects, affordable housing, and essential community services in the United States.

As a CDFI, Capital Impact Partners has delivered community facility financing, capacity-building programs, and impact investing opportunities to champion key issues of equity and social and economic justice since 1982.

Community Development 

Community development activities tackle underestimated populations that do not have equitable access to affordable housing, health care, healthy food, and education, nor connections to capital, entrepreneurship, and quality jobs, to help them become stronger and more resilient.

At Capital Impact Partners, and together with the Momentus Capital branded family of organizations, we offer a continuum of capital products and services to transform how capital and investments flow into underestimated communities and drive community-led solutions that support economic mobility and wealth creation.

Lending Process

Debt Coverage Ratio (DCR)

Debt coverage ratio (DCR) is a measurement of a firm’s available cash flow to pay current debt obligations. While a DCR of 1.25 is the minimum requirement for most lenders, a higher number — such as 2 — shows lenders you are financially stable and can repay your debts. A higher DCR can also mean a potentially lower interest rate as lenders see you as less of a risk for defaulting on your loan.

Loan Term

The term of a loan is the period of time a borrower has to repay the loan. This choice affects their monthly principal and interest payment, their interest rate, and how much interest they will pay over the life of the loan.

Loan-to-Value (LTV)

The loan-to-value (LTV) ratio is a measure comparing the amount of one’s mortgage with the appraised value of the property. The more equity put into a loan transaction, the lower the LTV ratio.

Term Sheet

A term sheet is a nonbinding agreement that shows the basic terms and conditions of an investment. The term sheet serves as a template and basis for more detailed, legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is drawn up.

Underwriting

Underwriting is the process of your lender verifying your income, assets, debt, credit, and property details to issue final approval on your loan application.

Loan Types 

Predevelopment Loan

A predevelopment loan serves as a critical lifeline during the earliest stages of a development project.  It specifically targets the upfront costs associated with project planning and preparation, enabling developers to refine their visions and align them with the needs and aspirations of the communities they aim to serve. This loan bridges the gap between concept and execution, ensuring a solid foundation for success.

Real Estate Acquisition Loan

A real estate acquisition loan is a type of loan that is used to purchase real estate. This type of loan is often used by community developers to acquire existing property or development land that they plan to preserve or redevelop for affordable housing, commercial development, or other community-benefit purposes.

Construction Loan

A construction loan is a short-term loan that propels your development project from the drawing board to a physical structure. It provides the necessary funding to cover the costs associated with building, renovating, or expanding community assets. Construction loans may also cover the costs of buying land, drafting plans, taking out permits and paying for labor and materials. Construction loans typically have higher interest rates than other types of loans because lenders are taking on more risk by financing the construction of a new property.

Business Acquisition Loan

A business acquisition loan is a financial instrument designed to provide funding for individuals or businesses to purchase an existing business. These loans are often sought by entrepreneurs looking to expand their business portfolio, individuals seeking to become business owners, or existing business owners interested in diversifying their operations by acquiring complementary businesses. In the case of community developers, the specific goal would be to further community development initiatives.

Loan Refinancing

A refinance refers to the process of revising and replacing the terms of an existing credit agreement. Borrowers usually choose to refinance a loan seeking to make favorable changes to their interest rate, payment schedules, or other terms outlined in their contract. If approved, the borrower gets a new contract that takes the place of the original agreement.

New Market Tax Credit (NMTC) Qualified Low-Income Community Investment (QLICI) Loan

Community development entities, such as Capital Impact Partners, use New Market Tax Credit (NMTC) allocations to provide subsidized financing for qualifying businesses or real estate projects. Projects must meet the federal definition of a Qualified Active Low-Income Community Business (QALICB) to be eligible for NMTC financing. QALICBs are businesses that are located in, or provide services to communities living with low incomes.

The capital that a community development entity provides to a qualifying project is known as a Qualified Low-Income Community Investment (QLICI) and it is a seven-year, interest-only loan.

Health Care 

Integrated Care

Integrated care is a unique approach to health care that is characterized by close collaboration and communication between multiple doctors and healthcare professionals. In other words, it is a type of healthcare where all of your doctors work together to solve issues with your physical, mental, and behavioral health. At Capital Impact, we support the Integrated Care model because it improves the quality of care, promotes better health and lower costs while creating thousands of jobs, spurring economic development.

PACE (Program of All-inclusive Care for the Elderly)

The Program of All-Inclusive Care for the Elderly (PACE) provides comprehensive medical and social services to certain community-dwelling elderly individuals, most of whom are dually eligible for Medicare and Medicaid benefits.

Affordable Housing

Area Median Income (AMI)

Area Median Income is the income for the median household in a given region. If you were to line up each household from poorest to wealthiest, the household in the very middle would be considered the median.

Tenant Opportunity to Purchase Act (TOPA)

TOPA, or “Tenant Opportunity to Purchase Act”, is a type of anti-displacement housing policy that gives tenants options to have secure housing when the property they rent goes up for sale, while also preserving affordable housing.

Cooperatives

Food Co-ops

A food co-op is a grocery store that is totally independent and owned by the community members who shop there. An illustrative example is ChiFresh Kitchen, a food co-op owned by justice-involved Chicagoans, primarily Black women. ChiFresh won a Co-op Innovation Award and was not only able to continue its expansion, but also pivot to provide freshly cooked and culturally appropriate foods to those impacted by COVID-19.

Housing Co-ops

A housing co-op provides an alternative to the traditional methods of acquiring a primary residence. It is a type of residential housing option that is actually a corporation whereby the owners do not own their units outright. Instead, each resident is a shareholder in the corporation based in part on the relative size of the unit that they live in. Capital Impact Partners has helped ROC USA, a nonprofit that helps residents form cooperative corporations to purchase their manufactured home communities from private owners and manage their neighborhoods in perpetuity. They have gone on to become a powerhouse in this area, helping thousands of residents become homeowners and community stewards.

Worker Co-ops

Worker cooperatives are values-driven businesses that are owned and operated by their employees. Capital Impact has made a $1 million preferred equity investment in Obran Cooperative, a unique company that operates a number of worker-owned healthcare companies.

Worker Co-op Conversions

Worker co-op conversions – or employee ownership conversions –  occur when businesses transition from a traditional ownership structure to employee ownership. Essentially, the business owner sells the business to the employees. These conversions (PDF) can drive company productivity while rewarding the people who are contributing to the company’s success, as well as helping to preserve the company’s mission and values.

In 2021, Capital Impact Partners financed the worker co-op conversion of Ward Lumber. This new cooperative is another example of the power of worker co-op conversion to maintain and increase wealth and stability within communities.

A mother poses with her two sons in a school library.

Momentus Capital’s Approach to Social Impact Measurement

Across the Momentus Capital branded family of organizations, we know that to maximize our impact, we need to first understand it. Building and sustaining healthy, inclusive, and equitable communities requires capital and resources – but without measuring outcomes, it’s impossible to develop effective interventions at scale.

That’s why we’ve developed a comprehensive Impact Framework to help us track the results of not only our loan offerings but also the capacity-building programs, technical assistance, and tools that make up our continuum of capital (PDF).

This framework is at the center of our decision-making process as we work toward our mission of helping to build inclusive and equitable communities by providing people access to the capital and opportunities they deserve.

So, what are we measuring, and why?

To learn more about what we are measuring and why, read the full article on Momentus Capital’s blog.

A family poses in front of a produce section at the supermarket.

How Momentus Capital Supports Economic Stability

Across the Momentus Capital branded family of organizations, our mission is to ensure people and communities have the capital and opportunities they deserve to overcome a history of systemic disinvestment.

To support underestimated communities in achieving positive social and economic outcomes, we need a shared understanding of what that looks like, and why those outcomes are so important. This blog will outline how we at Momentus Capital define economic stability and why it is important, how it is tied to the other social determinants of health, and how we are working to promote economic stability through our work.

Read the full article on Momentus Capital’s blog.

Group photo of the Momentus Capital lending operations team.

Driving Change with a Human Approach to Lending Operations

By Alexander McDonald, Senior Director of Lending Operations

For communities to thrive, they need resources — but too often, small business owners, developers, and local community development leaders lack access to the capital they need to drive progress.

Across the Momentus Capital branded family of organizations we are on a mission to change that through a community-first approach to lending grounded in our commitment to diversity, equity, and inclusion. And for us, that includes much more than the actual continuum of capital we deliver, but also HOW engage with our borrowers and partners to do that. Every aspect of our lending operations is built on our values, which means taking out a loan from Momentus is a much different experience than borrowing from a traditional financial institution. 

But our approach doesn’t just feel good. It also leads to exceptional outcomes. The secret to our success? Putting the borrower first with superior client service, competitive products, and scaffolded support.

And our lending operations team is at the heart of what makes Momentus unique. 

To learn more about how our lending operations team works with borrowers and supports social impact, please read our full blog on the Momentus Capital website.

Four developers of color smiling

How We Updated Our Credit Guidelines to Support Developers of Color

By Masouda Omar, Head of Small Business & Community Development Credit – Lending Operation

As a Community Development Financial Institution (CDFI), Capital Impact Partners has played a part in both upholding and dismantling systemic racial bias in the credit system.

Since our inception, we have served sectors, industries, and borrowers not served by the traditional financial system.

Like many CDFIs, Capital Impact provides more flexibility than traditional lenders in some key areas like loan-to-value limits and financial covenants that borrowers must meet.

However, our credit guidelines – the policies that guide our loan structures and lending decisions – are built on the traditional approach to credit that has deep roots in a financial system that intentionally excluded people of color for much of its history. Often, our lending team seeks one or several “exceptions” to our credit guidelines to accommodate the diverse needs of our diverse borrowers.

Creating flexible financing is both a mindset and an approach. To do so, we need input from our clients and communities to rethink and reshape our products and requirements. When done correctly, this approach gears us away from the extractive patterns of traditional financing and closer to confirming that when people are given the opportunity to succeed, their communities, local residents, and our country thrive.

Graphic with five colorful blocks each illustrating one of the five building blocks to increase racial equity in CDFI lending

Five Ways CDFIs Can Increase Equity in Lending Practices

Graphic with five colorful blocks each illustrating one of the five building blocks to increase racial equity in CDFI lending

Community Development Financial Institutions (CDFIs) were born out of the civil rights movement to ensure that nonprofits and businesses — particularly those in communities of color and communities with lower incomes — have equitable access to loans. Yet, CDFIs are part of a financial system embedded with discriminatory lending practices which need to collectively be addressed in order to fully achieve the intended goal of equalizing access to financial resources for all people. 

Momentus Capital’s family of organizations, including Capital Impact Partners, CDC Small Business Finance, and Ventures Lending Technologies, is working to help support economic mobility and wealth creation through more equitable access to capital for communities that have been long overlooked by traditional financial organizations. 

In line with this commitment, and in recognition of discriminatory lending practices identified within CDFIs, Capital Impact Partners collaborated with Nonprofit Finance Fund (NFF) to identify and address policies and practices that contribute to it. We conducted research to understand how some local and national CDFIs have successfully taken steps to address inequity within their own lending practices. 

Learn more about the partnership and read the full report here.

Graphic with a yellow background, computer, cell phone, and other office accessories with 2023 goals ahead.

Predictions 2023: What to Expect for Capital Deployment, Small Businesses, and Mission-Based Lending

Graphic with a yellow background, computer, cell phone, and other office accessories with 2023 goals ahead.

As the first quarter of 2023 unfolds, Momentus Capital team members are starting to see trends for an exciting year ahead. And while 2022 proved to be another rollercoaster ride for the economy and small businesses, our experts still forecast plenty of opportunities to make 2023 a groundbreaking year in mission-based lending.

In this year’s predictions, we take a deep dive into a wide range of topics, including how communities can lead the way to greater economic prosperity, how we can get more capital into the hands of small businesses, and potential legislative changes on the horizon. Ultimately, we remain focused on how these factors could impact our borrowers, partners, investors, and the communities we serve. This valuable foresight serves as a compass for existing entrepreneurs and those embarking on their ventures.

Please read the rest of this blog on the Momentus Capital website.

Real estate developer in conversation with lender

The Top 10 Questions To Ask Your Community Development Real Estate Lender Before Starting Your Development Project

As a real estate developer looking to deliver social impact, the process of finding and engaging with a lender can be hard. Once your mind is set on starting a community development real estate project, who do you turn to? Where do you find them? What is the process like? 

As part of the Momentus Capital family of mission-driven lenders, Capital Impact Partners – a  certified Community Development Financial Institution (CDFI) – provides flexible and affordable loans of $650,000+ ($350,000 under special circumstances) to finance key community pillars, including health centers, education facilities, food retailers, affordable housing, small businesses, and cooperatives.

We are a national lender, capable of providing loans across the country, but we also have a place-based focus in specific regions, including California, Michigan and northwest Ohio, the New York Tri-State Area, the Southeast, Texas, and the Washington metropolitan area.

We know you have got questions about the community development real estate process. To help get your process started, we offer some answers here about working with a CDFI lender.

 

1. When in the development process should I start working with a CDFI lender?

It is never too early to start gathering information from lenders, but you’d ideally want to get started when you are about six months from starting construction.

By then, you would have a good estimate for the timing of obtaining permits and starting construction. 

CDFIs such as Capital Impact Partners will work hand in hand with real estate developers looking to deliver social impact

2. What types of reserves will a CDFI lender require?

Lenders will have contingencies on your project that may go above and beyond what you have budgeted; usually 7.5-15% of hard costs expenses and 5% of soft cost expenses.

If you are capitalizing interest during construction, which is recommended when there are no operations ongoing during construction, that will need to be included in the overall project budget. 

Once construction is completed, there may be lease up reserves, debt service reserves, and/or facility maintenance reserves. 

3. Where does the capital that CDFIs lend come from?

CDFIs serve as capital aggregators that attract capital from the market, banks, government sources, and foundations. 

4. Will a CDFI lender hold the loans or will they sell them?

CDFIs do both. At Capital Impact, if they are sold, we ensure that there is no impact on the Borrower’s experience or relationship. 

5. What influences CDFI lenders’ rates?

Primarily it is the Treasury rates, unless the CDFI has a sector/geographic fund that is independent of Treasuries. 

6. Who approves the loan and how does the loan committee work?

CDFIs have groups that review deals. Capital Impact has an internal credit committee that reviews deals on a weekly basis.

Some CDFIs or specific loan products require external review and approval. Underwriting packages must be submitted at least a week in advance to receive approval the following week.

The committee cares about the financial strength of the transaction, the deal fitting into our established credit guidelines, and the impact of the transaction on the community.  

7. What are some typical terms for underwriting? 

Capital Impact typically provides 1-10 year loans for $1-10 million that fund construction of facilities. The loan is typically interest only during construction and can amortize longer than the maturity, resulting in a balloon payment at maturity. 

8. Who will be my main contact for loan closing and will it change afterwards?

You may first interact with a business development officer or someone with a similar position, who will be the initial point of contact until a term sheet is signed.

Then you’ll speak with a loan officer who will underwrite your transaction until it is approved.

Once approved, a legal and closing team will drive the process, but the loan officer will remain involved to ensure the loan is closed according to what was agreed to with the borrower and as outlined in their underwriting. 

9. As a non-legal person, how do I review a loan agreement?

Consider seeking legal counsel to review a loan document. But generally, check that the interest rate, fees, and dates match your understanding. Check the reporting and financial covenants to ensure you can meet them. 

10. What should I do if I think I am going to default on my loan?

Tell your lender as quickly as possible. CDFIs are lenders with a mission to provide fair, responsible financing, and they will work closely with you when things are tough. Another very important element to take into consideration when looking to establish a relationship with a community development real estate lender is that lender’s value system. You have the right and responsibility to vet the lender to make sure that their values, goals, and philosophies align with yours. It is a two way street and any conversation about funding should be as much about the entrepreneur evaluating the funder as the funder evaluating the entrepreneur.

Video: Momentus Capital’s Senate Testimony Champions Community Advantage for Small Business Support

 

Momentus Capital’s Chief of External Affairs, Robert Villarreal, recently testified in front of the Senate Committee on Small Business and Entrepreneurship about improving access to capital in disinvested communities through the Small Business Administration (SBA) Community Advantage (CA) loan program.

The Community Advantage pilot program was launched in 2011 to expand the points of access that small business owners had for getting loans from mission-driven financial institutions. These lenders intentionally support underestimated community members, businesses, and organizations – with an emphasis on assisting people of color, women-owned businesses, and startups.

Read the rest of the blog and watch the testimony on the CDC Small Business Finance website.