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 third installment, we turn our attention to construction loans, the financial cornerstone that transforms plans into reality and buildings into vibrant community assets.
What is a 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.
Turning Blueprints Into Bricks
At the heart of any community development project lies the construction phase. This is where ideas take shape, and communities begin to witness tangible progress. Construction loans provide the essential capital for hiring contractors, purchasing materials, and overseeing the entire construction process. They also empower developers to maintain high standards of quality by financing skilled labor, sustainable materials, and adherence to safety standards. Moreover, construction loans cover costs at various stages of construction, from groundbreaking to final touches, keeping the project on track and minimizing delays so communities can start benefiting sooner.
How are Construction Loans Used in Community Development?
Construction loans enable developers to borrow money to purchase materials and pay for labor necessary to build or rehabilitate a real estate project. Unlike traditional loans, construction loans are tailored to the unique financial needs and timelines of development projects, ensuring that funds are available precisely when they’re needed the most. Because construction loans generally are intended to cover the building process, they’re typically issued for a period of 12 to 18 months. Community developers can use construction loans towards projects such as building or rehabilitating spaces into affordable housing. Capital Impact Partners has closed on a loan to finance the construction of a 37-unit apartment building for veterans and their families living with very low incomes and experiencing homelessness. Once completed, the six-story, 28,0000-square-foot apartment building in the Brightwood Park neighborhood of D.C. will play an important role in building the resilience of the local community.
Construction loans can be used towards the rehabilitation or construction of charter schools as well. Capital Impact Partners has closed on a construction loan to fund the renovation of a 25,000-square-foot former Kaplan College into the Betty M. Condra School for Education (Condra School) in Lubbock, Texas. When complete, the renovations will allow the Condra School to increase its capacity by 88 percent to 375 students, with larger classrooms and more play spaces to benefit students with attention-deficit/hyperactivity disorder (ADHD).
Flexible, Short-term Financing for Long-term Impact
In the case of a construction loan, disbursement happens in phases. This means that the lender pays the developer in installments, called “draws,” instead of transferring a lump sum. This is to ensure that the developer is using the loan funds for the intended purpose. Each installment coincides with an important phase of the project, such as pouring the foundation, framing, and finishing work.
One benefit of construction loans is that developers would only pay interest on installments that have been drawn, versus paying interest on the entire loan amount. Another benefit is that construction loans offer more flexibility in terms of loan terms, compared to traditional loans. Developers can make loan terms around the needs of their 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, 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, & 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.
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 & 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 & 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 & 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 & 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.
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 – 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.
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?
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.
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.
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.
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