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 real estate 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.

Photo showing group of food entrepreneurs smiling during a training session

Nourish DC: Technical Assistance Helps Food Entrepreneurs Build Their Business Acumen

A strong local food ecosystem is essential to community health and economic prosperity — and in Washington, D.C., food deserts (areas without full-service grocery stores) in communities living with lower incomes are a significant factor in persistent food insecurity. Building local food businesses in underinvested communities can help support healthier neighborhoods, build economic prosperity, and increase access to high-quality jobs. 

In 2021, Capital Impact Partners and the Government of the District of Columbia – along with a group of partners – launched the Nourish DC Collaborative, an initiative that supports the development of locally owned food businesses in D.C. communities to create vibrant, healthy neighborhoods.

Nourish DC offers flexible loans, grants, and technical assistance to emerging and existing food businesses. While it serves the entire District, the collaborative focuses on supporting businesses in underestimated neighborhoods, which are more often owned or led by people of color.

In this blog series, learn how food business owners are supporting their local communities and how technical assistance offered through Nourish DC helped them create change.

National Day of Racial Healing, #HowWeHeal

Racial Healing: The Path to Racial Equity Starts Here

Since the racial reckoning of 2020, the term racial equity has been used consistently to talk about the goal of organizations like ours. Racial equity works to address hundreds of years of injustice perpetuated on the basis of race in this country: from the Indian Removal Act to chattel slavery and Jim Crow to the Chinese Exclusion Act and Japanese internment, and so many other examples of discrimination and oppression. In this light, the need for racial equity is clear, but what about racial healing?

Read about how we, at the Momentus Capital branded family of organizations, are working alongside our communities and partners to start the healing that is needed to build equitable, inclusive communities. 

Independent Drivers Guild members pose together as a group in front of their signage.

Our Impact in 2023

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

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.

Exterior of Supreme Court showing inscription saying: "Equal Justice Under Law"

Momentus Capital President & CEO Ellis Carr Reflects on Supreme Court Rulings

 

Exterior of Supreme Court showing inscription saying: "Equal Justice Under Law"

By Ellis Carr, President and CEO

At Momentus Capital, we envision a future where everyone has the capital and opportunities they deserve – especially those who have been excluded from both for so long. 

Our President and CEO Ellis Carr reflected on the contrast between Independence Day celebrations and a set of Supreme Court decisions that challenged promises about democracy, opportunity, and the pursuit of happiness. 

His reflections tackle a few areas:

  • How promises about democracy, opportunity, and the pursuit of happiness have been shaken;
  • How these decisions will have negative consequences on fellow citizens who have faced long decades of discrimination; and
  • Momentus’ commitment to continue to speak and work in support of underestimated communities. 

Read Ellis’ reflections on the Momentus Capital website.