June 15, 2011
Once a region plans a transit line, it’s expected that property in the vicinity will appreciate. Whether you’re a lender, a property owner or a developer, the question is when it makes financial sense to invest based on the expectation of a future return — or to preserve affordable housing and encourage new mixed-use, multi-income development.
Local governments and community development organizations typically don’t have the capital to fund acquisition of large parcels for major transit-oriented development projects. But once speculators jump in the market and land values start to rise, it will be more even difficult to acquire properties.
The Twin Cities already have government and non-profit groups looking at these questions, and a number capital sources and collaborations exist today. In a session sponsored by the Funders Collaborative, representatives of these groups met last week to learn more about national initiatives and to consider whether local efforts might have more strategic influence on large-scale development in the Central Corridor.
John Moon of Living Cities, Inc. talked about national experiments with “structured funds.” Structured funds are an emerging form of collaborative investment being used for financing early stage transit-oriented development projects.
Structured funds aggregate large amounts capital from multiple investors into a separate pool that can invest in projects that might be too far ahead of the market or otherwise might not qualify for market-rate financing. Uses of this capital can include acquiring and holding land for future development (land banking); clearing parcels for development; preserving existing housing units; and constructing new affordable housing.
Investor groups typically include government, philanthropic, community development financial institutions and private lenders. Each charges a different rate that when blended results in a below-market rate for borrowers. The fund structures repayment terms with private capital as senior lenders to be paid first.
Government participation is seen as critical, both to reduce the overall cost of funds and to signal commitment to the projects. In turn, private capital leverages the public investment, about 5:1 in the examples studied by Living Cities. It expects to publish a report of its research in August.
A study funded by the Funders Collaborative and led by the Center for Transit-Oriented Development investigated how a property acquisition fund and/or related activities might support development of mixed-use, mixed-income projects in the Central Corridor. The yearlong study — Central Corridor TOD Acquisition Fund Framework —was completed in 2009 at a time when the national funds were still in the early stages of formation.
Nadine Fogarty of CTOD reported that within St. Paul alone, there are 488 acres of underutilized or vacant property in the area impacted by LRT. Given the challenging near-term market and timeline for the LRT line to start operating, the prospects for development are more than five years out. Yet, most of the currently available financing tools and funds are designed for ready-to-go projects — not for long time horizons or to buy-and-hold for future unspecified projects.
Given these conditions, the study identified three critical needs for:
- Patient, flexible capital for property acquisition
- Entities to acquire, hold and develop the properties
- Strategic coordination of the many activities that are geared toward implementing.
Market forces will largely determine the long-term economic impact on the line. But meanwhile, policy, foresighted planning and “patient capital” also will play roles — particularly in preserving the affordable housing and commercial rents in the Corridor that provide opportunity for lower income households.
Existing Resources for TOD Acquisition
Gretchen Nicholls (LISC) described an inventory of existing financing tools and funds available through public and private sector programs in the region, which meet some of the needs identified in the 2009 TOD Acquisition Fund report.
One reason for the inventory is to encourage new ways of combining public, philanthropic and private dollars to finance site acquisition for affordable housing, transit-oriented districts and enhanced walkable communities. She also presented a list of resources that can be tapped specifically for site acquisition.
One Current Approach: Land Banking
Land banking is a “buy and hold” acquisition strategy most often used in weak real estate markets to preserve land for future development or preserve existing housing and commercial properties.
The Twin Cities Community Land Bank [TCCLB] was formed by the Family Housing Fund in response to the foreclosure crisis in 2009. The TCCLB acts as an intermediary for government and private sector investment to help neighborhoods stabilize and recover, by acquiring residential and commercial properties, selling or holding them for future development, and providing grants and loans for rehabbing properties.
Rebecca Rom provided an overview of the TCCLB’s core activities and its role in the Corridors of Opportunity, the local collaborative in the Living Cities Integration Initiative, which also involves the Family Housing Fund and Local Initiatives Support Corporation (LISC).
TCCLB has successfully land banked properties for short term holds (up to two years) but identified challenges for land banking on a large scale and over the longer term required along light rail corridors. Challenges include the lack of grants, low cost loans, and other financing tools needed to support acquisition and holding costs and the absence of a public commitment to minimize certain holding costs, such as property taxes.
The session highlighted the fact that the Twin Cities already have lots of good, innovative tools. Because of the complexities identified with these TOD-related investments, we need to narrow in on our exact goal, before we know if we can use existing tools or need to create a new structured fund.
Twin Cities LISC is working with the Cities of Minneapolis and Saint Paul and others on a coordinated affordable housing plan for the Central Corridor that will gather information about objectives in the two cities, the direction of affordable housing development decisions and how groups working along the Central Corridor can have an impact. It’s expected in October and will identify the affordable housing financial ‘tools’ that are missing.
The Family Housing Fund is engaging a consultant to narrow in on the goals for, and feasibility of, a potential strategic acquisition fund in the Twin Cities. This work will help to answer questions about fund goals and focus efforts to develop such a fund.
Finally, the TCCLB and partners are organizing a learning opportunity for mid-September with representatives from the strategic acquisition funds that have been set up in Denver and the Bay Area.
Together, these three concurrent steps will help further the local conversation about the benefit and potential of a strategic acquisition fund.