In this series about community development lending, we aim to shed light on the diverse types of loans we offer, in the hope that it will provide the clarity our borrowers need to make an informed decision about applying for a community development loan.
In this second installment, we explain what real estate acquisition loans are, and how developers and community leaders can utilize them to bring their community-centered projects to life.
What is a 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.
How are Real Estate Acquisition Loans Used in Community Development?
Real estate acquisition loans can be used to purchase a variety of properties, including:
Vacant land for the development of new affordable housing, commercial space, or other community facilities
Existing buildings that will be renovated or converted into community facilities
Distressed properties that need to be rehabilitated or redeveloped to revitalize a neighborhood or community
Vacant land for the development of new affordable housing, commercial space, or other community facilities
Capital Impact Partners has closed on a real estate acquisition loan to Medici Road to purchase a vacant plot in Washington D.C.’s Ward 7. Medici Road plans to develop the land into a 17,000-square-feet building with 12 condo units for sale at prices affordable to D.C. residents earning 80 percent of the Area Median Income – a path to intergenerational wealth building, and a way for long-time residents to stay local in a gentrifying neighborhood.
Existing buildings that will be renovated or converted into community facilities
The Betty M. Condra School for Education Innovation in Lubbock, Texas, was acquired with a real estate acquisition loan issued by Capital Impact Partners. The acquisition of this two-story building increases the school’s capacity by 70 percent.
Distressed properties that need to be rehabilitated or redeveloped to revitalize a neighborhood or community
An illustrative example is that of Skyland Apartments in Washington, D.C. ‘s Ward 8, which was acquired by Enterprise Community Development (ECD), a leading nonprofit affordable housing development firm in the Mid-Atlantic region. With an acquisition loan issued by Capital Impact Partners, ECD’s development of Skyland Apartments preserves 224 affordable residential units and eight commercial units. The residential units are occupied by families earning at or below 60 percent of the local Area Median Income.
Access to Capital, Flexibility, and Partnership Building
Real estate acquisition loans can provide a number of benefits for community development projects. They can provide community developers with the financial resources they need to purchase land or properties that they might not be able to afford otherwise. The flexibility of being able to purchase any property allows community developers to tailor their projects to the specific needs of the communities they serve.
Real estate acquisition loans can also help community developers to build partnerships with other organizations, such as lenders, investors, and government agencies. These partnerships can provide additional resources and support for community development projects.
Check out our mission-driven lending page for more information about our products to find out which might work best for you.
In this series about community development lending, we aim to shed light on the diverse types of loans we offer at Capital Impact Partners, in the hope that it will provide the clarity our borrowers need to make an informed decision about applying for a community development loan. In this first installment, we delve into the essence of predevelopment loans, exploring what they are and how developers and community leaders can utilize them to bring their community-centered projects to life.Â
What is a 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.
Exploring Site Selection and Due Diligence
Choosing the right location is paramount in community development projects. Predevelopment loans allow developers to explore potential sites, conduct due diligence, and assess the feasibility of their projects; this phase involves considerable research and assessment. From evaluating zoning regulations and environmental factors to assessing community demographics and market demand, developers can make informed decisions that contribute to the long-term success of their initiatives.
Capital Impact has financed a predevelopment loan to Chestnut Neighborhood Revitalization Corporation (CNRC) to assess the feasibility of constructing The Ivory, a five-story, mixed-used, mixed-income development in the Chestnut neighborhood of Austin, Texas. The Ivory’s construction is expected to preserve the history, legacy, and culture of Chestnut, once a flourishing artistic, cultural, and commercial hub for the African-American community.
Engaging Stakeholders and Building Partnerships
Predevelopment loans not only provide the financial means for planning but also facilitate collaboration and partnership building. Developers can leverage these loans to engage with stakeholders, including community members, local organizations, and government agencies. Through consultations, workshops, and community meetings, developers can gather valuable input, build consensus, and establish partnerships that enhance the overall project design and increase its positive impact.
An illustrative example is Russell Woods, a 102-unit assisted living senior housing development located in Detroit. Capital Impact has financed a predevelopment loan to Icon Heritage Partners to ensure that collaboration with the City of Detroit was established so that the renovation of the property fit within the city’s Strategic Neighborhood Plan.
Navigating Regulatory Requirements and Permitting
Complying with regulatory requirements and obtaining necessary permits can be complex and time-consuming. Predevelopment loans enable developers to navigate these processes efficiently by allocating funds for legal and consulting services, permit fees, and other regulatory expenses. This support streamlines the development timeline and minimizes potential obstacles, ensuring smoother project progression.
Mitigating Risks and Demonstrating Viability
Developing a successful community-centered project involves potential risks. Predevelopment loans mitigate these risks by providing financial resources to overcome obstacles encountered during the planning phase. By demonstrating project viability and commitment, developers enhance their credibility when seeking additional financing from lenders or investors for subsequent project stages.
TBV Courtyard, a 12-unit affordable multifamily development in the South Annex neighborhood of Richmond, California, is a great example of how additional project financing comes more easily when project viability is demonstrated. TBV Courtyard represents phase two of a larger development plan to provide a total of 105 units of affordable housing to the neighborhood. Given that phase one’s predevelopment studies proved viable, the process to receive financing for phase two was seamless.
Check out our mission-driven lending page for more information about our products to find out which might work best for you.
Stay tuned for the next installment in our blog series, where we explore real estate acquisition loans, another type of loan that moves community development projects forward.
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 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.
We walk through the different types of loans we use to support developers and community leaders in bringing their community-centered projects to life:
As we begin 2024, we at the Momentus Capital branded family of organizations want to thank all of you – whether you are a borrower, a partner, an investor, or a member of the Momentus community –Â for being part of our work to reimagine and build an economic system that includes everyone.
Read what our President and CEO, Ellis Carr, has to say about the impact you helped us create in 2023 and about the outlook for the year to come on the Momentus Capital blog.Â
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.
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.
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.
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?Â
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.Â
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.Â
Once construction is completed, there may be lease up reserves, debt service reserves, and/or facility maintenance reserves.Â
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.Â
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.Â
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.Â
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. Â
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.Â
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.Â
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.
2022 is a special year for us at Capital Impact Partners as it marks our 40th anniversary. Four decades of leaning into helping people build communities of opportunity and developing pathways to success.
And while this is an exciting time for us as we embark on a new strategy under Momentus Capital, it is equally important to remember our roots as a champion for the cooperative movement.
By Ellis Carr, President and CEO of Capital Impact Partners and CDC Small Business Finance (each is part of the Momentus Capital branded family of organizations)
In 2022, a Fast Company piece by Porter Braswell released new statistics that painted a telling picture: in 2021, only 1.4% of Black founders received venture capital funds. That’s a stark number when you consider that more than 13 percent of the U.S. population is Black or African American. It is not surprising, however, given that Black investors only make up 3% of the venture capital industry. The numbers are similarly poor for women-led startups, which only receive 2.3% of venture capital funding, and whose leaders only make up 5.7% of venture capital partners.
When you think that racial inequality, specifically as it relates to Black Americans, has cost our economy over $16 trillion over the last 20 years, it’s clear that our approach to investing in diverse entrepreneurs needs to change.
Companies serving historically disinvested communities, especially those led by entrepreneurs of color, often face barriers to securing the investments that they need to grow. This may include business knowledge that is limited as a result of not having a formal education or not being able to pursue an advanced degree. Limited networks and lack of access to family wealth can create obstacles to securing basic startup costs or working capital. Seeking traditional financing has been an ongoing barrier to success for generations due to systemic biases.
Entrepreneurs of Color traditionally face multiple barriers to launching and growing their business. The Momentus Capital branded family of organizations’ Impact Investing program is designed to support those growth-staged businesses that have a positive impact on communities.
While local leaders are best positioned to drive community-driven solutions, they still consistently butt up against systemic barriers to accessing capital. It is often confusing for business owners to know where to start or who they can turn to. This situation often forces entrepreneurs to rely on extractive capital or on the onerous requirements of debt like putting up collateral or personal guarantees that are often predicated on and exacerbate an inequitable system. Generations of inequality have made it harder for entrepreneurs of color and women to accumulate wealth that could be leveraged for investment. Having less existing wealth means one receives less favorable terms of financing, putting at risk the disproportionately smaller amount of wealth one does have.
The Momentus Capital branded family of organizations aims to interrupt this vicious cycle. We envision an economic system that respects and uplifts all peoples’ right to achieve the dreams they have for themselves, their communities, and generations to come by changing the way community-centric businesses secure capital.
Turning Traditional Venture Capital on its Head
Led by a diverse team of experts, Momentus Capital’s approach is fundamentally different. Starting with a listen-first approach, our focus is on social impact and on growing companies in a culturally respectful manner.
We are uniquely positioned to grow mission-aligned companies by acting as a single source with the ability to provide them with a continuum of financial, knowledge, and social capital.
To us, this takes many forms:
We provide financial capital through flexible financing options – a range of debt and equity products to meet our partners’ needs, as well as access to new markets and investors.
We provide knowledge capital through business advising, assistance, and training.
We provide social capital through connections to networks and people that can help our partners succeed.
In addition to this holistic approach, where we truly differentiate ourselves from traditional venture capitalism is through our philosophy on equity. It is our intention that any impact investment we make is designed to be regenerative or non-dilutive. Our end goal is focused on helping companies grow while also ensuring that the entrepreneurs, employees, and community members retain the equity.
Momentus Capital is uniquely positioned to grow mission-aligned companies by acting as a single source with the ability to provide them with a continuum of financial, knowledge, and social capital.
Investments That Support Community-Focused Companies
Our impact investments team also takes a unique approach that begins by getting to know the company from the inside. This helps us understand what impact the company wants to have on its community; what unique solutions it is seeking to deliver that support equitable outcomes for health and wealth building; and what challenges the company has faced in raising capital as a result of being led by an entrepreneur of color or of serving a disinvested community.
Armed with that knowledge we can develop a flexible and patient approach that is first and foremost designed to help businesses achieve their growth visions sustainably.
non-dilutive preferred equity whereby cash flow positive businesses pay a fixed payment and dividend
revenue/profit-sharing structures that are structured to help companies manage volatility
Our Sector and Geographic Focus
We put these tools to work by engaging with diverse entrepreneurs focused on building healthy, inclusive, and equitable communities. This includes companies that:
Create economic opportunities to support intergenerational wealth-building
Improve access to affordable, healthy food
Improve access to healthcare and insurance
Grow employee-ownership structures such as cooperatives
We’re further helping to fuel economic growth and opportunity by fostering deep connections in our communities. Currently, the Momentus Capital impact investments program target geographies include Atlanta, Ga.; California; Detroit, Michigan; the Washington, D.C. metropolitan region; Miami, Florida; New York Tri-State area; and the Texas Triangle (Austin, Dallas, and Houston).
We envision an economic system that respects and uplifts all peoples’ right to achieve the dreams they have for themselves, their communities, and generations to come by changing the way community-centric businesses secure capital.
Demonstrated Success
We’ve already demonstrated the positive impact that our approach is creating with and for community-minded companies.
Take, for example, Abner Mason the president and CEO of SameSky Health. Mason launched SameSky in 2013 to advance health equity for Americans who are marginalized or under-resourced by helping them better navigate the complex health care system.
To grow his company, Mason needed investors but has long been frustrated by those who either would not invest in him as a Black CEO, or were not supportive of his solutions that focused on disinvested communities.
Where others saw risk, we saw an opportunity. Through our impact investing program, we provided SameSky Health with a $5 million venture debt bridge loan to support the growth of the company as they progress to raise Series C funding.
We also worked with Obran Health, a unique company that operates worker-owned health care companies designed to give decision-making processes and capital back to caregivers, operators, and health care workers. A lot of Orban’s affiliates are managed by worker-owners who are women of color, and so this was an excellent opportunity to make an investment that supported wealth building in a way that would stay with the employees in their communities.
When Obran Health sought to acquire Physicians Choice Home Health, a home health care provider in Los Angeles, we provided a $1 million preferred equity investment. This allowed Obran to avoid the traditional route of syndicated loans and debt which would have hampered their long-term growth.
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