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Boston lisc etodaf_concept_paper_12-5-2

  1. 1. Equitable TOD Accelerator FundConcept Paper12-5-12IntroductionLISC is seeking to capitalize an Equitable TOD Accelerator Fund (ETODAF) with privateand public capital. LISC anticipates assembling a $4-$6 million loan fund (the “Fund”)with a public sector top loss reserve to leverage capital from Massachusetts CDFIlenders (“Lead Lenders”). Together, the Fund and Lead Lenders will finance strategicacquisition and key predevelopment and project costs in areas near transit. ETODAF willpromote development of affordable and mixed income housing and mixed usedevelopment near transit.The Fund will catalyze and accelerate equitable transit oriented development to insurethat households of all incomes, but particularly low and moderate income households,benefit from access to transportation and jobs and have quality housing opportunitiesclose to both. Market rate TOD development in strong locations is occurring on its own.But there is a need for affordable housing near transit at a wide range of locations toalleviate gentrification pressures in some areas, to catalyze revitalization activities andincrease mobility and opportunity in others, and to create new mixed income housing ina broad range of neighborhoods. In addition, it is important to preserve existingaffordable housing along transit corridors to avoid displacement of lower incomefamilies.Community-based developers are positioned to play a critical role in developingMassachusetts’ TOD vision and keeping equity an important focus as transit optionsincrease and state policy moves more households to transit from cars. Thesedevelopers need additional supports to bring important TOD projects to fruition and toensure that that equity concerns continue to be part of the discussion.Benefits of TOD and Equitable TODTOD is a place-making initiative that brings together a broad range of interests topromote dense, sustainable, walk-able, mixed use communities that have access toquality education, services, jobs and transportation. The goals of TOD are to reducepollution and transportation costs, provide access to jobs, and to create healthy mixedincome, mixed use communities. TOD, with its appeal to economic, communitydevelopment, environmental and health agendas is an idea that has captured theimagination of policy makers and philanthropists. Whether it is called “smart growth”,“great neighborhoods”, or “sustainable communities,” the stakeholders share principlesof minimizing sprawl and pollution while increasing public transit ridership, promotingefficient land use, diversity, quality education, proximity to services and jobs, andcreating and preserving affordable and mixed income housing.Boston LISC ▪ 95 Berkeley Street Suite 301 ▪ Boston MA 02116 ▪ 1
  2. 2. There are many benefits of transit oriented development to the residents, neighborhoodand broader community and municipality. These benefits include:  Increases housing and transportation affordability  Expands housing choices and prevents displacement  Catalyzes and leads development in areas that can benefit from market investment such as Gateway Cities.  Supports economic development  Reduces vehicle miles traveled and green house gas emissions  Increases transit ridership and fare revenue  Reduces sprawl and land consumption  Improves healthLISC’s Equitable Transit Oriented Development VisionSupporting equitable transit-oriented development (ETOD) is central to LISC’s largervision of supporting community efforts that revitalize underinvested communities andcreate healthier and more prosperous communities where families of all incomes canthrive. While LISC’s engagement with TOD began prior to the undertaking of ourResilient Communities/Resilient Families initiative1, we view the ETODAF as an importanttool to leverage and support these efforts by bringing to fruition concrete improvementsto the physical infrastructure of the three RC/RF neighborhoods as well as othercommunities where residents have come together to articulate a vision for their sharedfuture. ETODAF will be available not only in these neighborhoods, but also incommunities throughout Greater Boston and beyond, wherever community-baseddevelopers are seeking to achieve their local goals by capitalizing on the proximity ofdevelopment and transit.The ETODAF embodies many of the core values of community development. It is a wayto create good homes and better jobs for families and communities; to maximize accessto jobs, education and services; and it is part of ensuring that low and moderate-incomeresidents of the region benefit from transit service in communities, including thosewhere few such residents currently live.By helping to accelerate the development of affordable housing and jobs near transit,we hope to make progress toward the following outcomes: 1) Help low-income families decrease their combined housing and transportation costs and increase wealth. 2) Decrease commuting times for low and moderate income households (research2 shows that they have longer commutes). 3) Improve health by fostering opportunities for active transportation in combination with TOD that improves air quality. 4) Lower greenhouse gas emissions by reducing vehicle miles traveled (VMT) for households living in transit-oriented developments.1 Resilient Communities/Resilient Families, “Staying on Track”,, Dukakis Center forUrban and Regional Policy, Northeastern University, December 2012Boston LISC ▪ 95 Berkeley Street Suite 301 ▪ Boston MA 02116 ▪ 2
  3. 3. 5) Catalyze private investment in key low and moderate-income transit-accessible locations by both developing new affordable and mixed-income housing and improving infrastructure and safety in transit nodes, thus effectively leading and stimulating the market.We anticipate that the ETODAF will be used in three different kinds of communities,each of which offers a demand for investment in affordable and mixed income housing,and a varying need for commercial real estate investment: 1. Disinvested communities where access to transit is part of a community revitalization strategy through investments in both housing and commercial development: In these settings, TOD is an element of improving the physical condition of the community and catalyzing a broader redevelopment which includes private capital investment. 2. Communities where there are already perceived (or real) market pressures on what has historically been an economically diverse community: In these places, equitable TOD is an important element of a strategy to ensure that low and moderate-income residents have homes in and see themselves as part of the future of their communities. Preservation of existing affordable housing near transit in these communities is important, as indicated by MAPC’s recent Orange Line Opportunity Corridor Study3, as is new development of affordable and mixed income housing. 3. Strong market communities where there is access to jobs and/or high quality education but few affordable housing opportunities: In these communities, affordable and mixed income transit-oriented housing is part of increasing choices for low-income families in a way that minimizes both housing and transportation costs, and connects these families to jobs and services.OrganizationThe ETOAF will be administered and managed by Greater Boston Local InitiativesSupport Corporation (LISC). Key funders are:  State Government - EOHED is considering a $2 million MassWorks grant (which will pass through MassDevelopment) for the fund’s top loss reserve. The top loss is a reserve to cover loan losses in the fund, prior to other fund investors experiencing losses. A top loss reserve allows the fund to take a riskier Loan to Value (LTV) and subordinate position than typical.  Local Funders - The Boston Foundation and Hyams Foundation are considering PRIs for the fund to catalyze equitable development near transit.  National Funders and Other Funders- LISC intends to seek PRIs from national funders and other local funders interested in participating.3 “Orange Line Opportunity Corridor Study”,, MAPC, November2012Boston LISC ▪ 95 Berkeley Street Suite 301 ▪ Boston MA 02116 ▪ 3
  4. 4.  Grant funders - Barr Foundation has awarded LISC a two year grant for start up costs; Hyams Foundation is supporting fund development with grant funding also.LISC is an established national lender for affordable housing and communitydevelopment, with a strong presence in Boston. LISC nationally has provided over $400million in loan capital in community development investments since 2004. Boston LISChas a long lending history with a successful track record, having made $45 million inloans in our 30 year history with a loan loss rate of about 1% of total disbursed loans.Boston LISC is overseen by a Local Advisory Board, and has a local credit committeewhich approves all loan actions.Need and System GapsTransit system expansion is occurring in several greater Boston locations, and the statehas a goal of significantly increasing transit ridership over the next 10 years. Expandingtransit access and increasing transit ridership creates opportunities. In order to ensurethat low and moderate income residents can benefit from those opportunities, we needto work pro-actively to ensure that equitable TOD is planned for a variety of transit richneighborhoods. Community developers and CDCs are poised to play this role, butadditional supports are needed. Community developers of (TOD) projects need patient,low cost capital in order to secure key sites along transit corridors for futuredevelopment; they need assistance with carrying costs during the predevelopmentphase; and they need access to predevelopment funding to jump start projects furtheralong in the development process.The proposed targeted fund addresses key gaps in the system in order to providedevelopers with the financing tools needed to create a strong pipeline of TOD projects inGreater Boston and beyond.Financing Challenges to an Equitable TOD Development AgendaDespite a sophisticated system of debt financing and an abundance of lenders inMassachusetts, there are significant gaps in the system that impede the long term,strategic acquisition of sites near transit lines, and delay progress of projects already inthe development process. In spring 2010, LISC undertook an environment scan of theexisting funder network. Among the findings, we determined that non-profit developersface significant challenges:  Capacity: CDCs need strong balance sheets to compete for tax credits in the post recession marketplace. Holding costs during the carry period can strain fragile organizations.  Loan to Value Gap: Current lenders limit acquisition financing to 80-90% of the value of the property, and do not fund holding costs. This creates a burden for non profit developers who have to fund these costs with limited capital.  Site assembly: Entrepreneurial, small scale land assembly is critical to creating larger parcels but such assembly is perceived as risky by lenders who want to know exactly what will happen on the site(s) and if projects will ultimately be financeable.  Feasibility: Market matters. Lenders look at length of holding time, real value of property and trends over time. An extremely competitive funding environmentBoston LISC ▪ 95 Berkeley Street Suite 301 ▪ Boston MA 02116 ▪ 4
  5. 5. means that projects often wait 2-3 funding rounds or over 2 plus years to receive funding awards. This unpredictability of funding impairs pipeline planning and acquisitions.  Coordination: While coordination among public agencies of infrastructure improvements is improving the process can be further accelerated by more explicit coordination between housing and infrastructure resources to scale up progress on transformative efforts.  Predevelopment funding: Access to predevelopment funding is not certain or smooth at various stages of development.These gaps, though daunting, are not insurmountable. A public and philanthropiccommitment to equitable TOD can address financing and underwriting concerns.Providing funding that enables loans to exceed traditional loan-to-value (LTV) ratios andcan fund holding costs expands the ability of CDCs to acquire properties and to moveTOD projects forward expeditiously.As part of the TOD Financing Project funded by Sustainable Communities, GLCDevelopment Resources recently completed a TOD financing gap analysis whichreinforced many of the earlier findings. It identified the need for more flexiblepredevelopment funding and indicated that non-profit developers’ financial capacity canbe strained by the long holding period that some projects require.Fund OverviewBased on the findings of these studies and the needs LISC has encountered in its role asan early stage project funder, we have developed a fund that streamlines access toacquisition and predevelopment capital for equitable TOD projects, and can be a flexiblesource of funding that can adjust to the project specifics.For acquisition, the fund will lend as much as 100% of the current value of the property(i.e., the value prior to redevelopment). The fund will allow additional funding above100% for interest costs and predevelopment (total loan amount must be able to berepaid through the development scenario). Acquisition loans will be secured by realestate collateral; most predevelopment loans will be secured by real estate collateral,but unsecured loans may be available for publicly owned sites and other projects on acase by case basis.The fund will provide second mortgages or participations to cover the loan-to-value(LTV) gap and the holding costs of TOD acquisitions. Recoverable grants will beprovided for option payments on sites or other alternative site control structures, andsome early predevelopment expenses.Coordinated with existing capital networks, this targeted TOD fund would leverageexisting acquisition loan capital with significant impact. There are benefits to utilizingexisting lending capacity with an enhanced pool of mission-oriented funding that isspecifically designed to address the identified gaps. Rather than create a new fund forTOD acquisition and predevelopment lending, we propose to build on the strong lendingcapacity of existing lenders and intermediaries. This approach engages a variety ofBoston LISC ▪ 95 Berkeley Street Suite 301 ▪ Boston MA 02116 ▪ 5
  6. 6. lenders and borrowers, leverages their capital and expertise and creates a crediblenetwork of stakeholders helping to advance the TOD agenda.Ready-to-go and more traditional projects could utilize existing funding entities with helpfrom the new fund for holding costs, filling the LTV gap or other risk mitigation. Longerterm, strategic acquisitions may use a portion of the fund, with public investment, tohold properties.A fund comprised of public and philanthropic sources and administered by anexperienced intermediary lender such as LISC, and coordinated with policy changes tofavor TOD development, would accelerate projects and unlock existing loan capital.Investors and public entities contributing to a highly leveraged, revolving fund of $4-$6million could unlock and leverage $30,000,000 in acquisition and predevelopmentlending from quasi-public and conventional lenders. The Fund will create over 1,500units of housing and 325,000 sq. ft of commercial space in mixed use projects. Theprojects created by this fund would have a total development cost of almost half abillion dollars.Fund StructureKey pieces of fund structure include:  ETODAF LLC - Boston LISC will create a new Limited Liability Corporation (LLC) with local members, known as the ETODAF LLC. The LLC will pool investor funds to be lent, with underwriting and Fund Management services from Boston LISC, into CDFI-originated projects. This structure will allow local decision-making on fund loans rather than through LISC’s national structure, while benefiting from LISC’s loan underwriting and servicing capacity.  Top Loss – EOHED is considering a request for $2 million for the fund’s top loss reserve. If awarded, ETODAF will receive the top loss grant funds from EOHED, through MassDevelopment. The top loss reserve will be maintained in a non- interest bearing account and the funds will be utilized to cover loan losses (after all recoveries from collateral and guarantees).  PRIs - The Program-Related Investments (PRIs) will be made directly to the LLC. Funds will be drawn from PRI funders as loans close (to minimize negative arbitrage and keep fund expenses low).  Side by Side Loan Structure - and the Fund will make second mortgages (or participations) in Lead Lender loans or to make predevelopment loans.  Risk Sharing with Lead Lenders – LISC anticipates negotiating an intercreditor agreement with fund Lead Lenders to require that some portion of the Lead Lender’s loan be in a senior loss position before the foundation PRI capital.Boston LISC ▪ 95 Berkeley Street Suite 301 ▪ Boston MA 02116 ▪ 6
  7. 7.  LISC anticipates that the fund will have a ten year term. The Fund will revolve during that period with loan terms to borrowers of 2-3 years.Loan Products  Pre-development and acquisition loans would fund traditional third party mortgageable project expenses, holding costs and some project management costs.  Bridge financing to bridge Low Income Housing Tax Credit (LIHTC) equity or committed public subsidy funding during the construction or early occupancy periods.  Leveraged loans (permanent) for community facilities being funded with New Market Tax Credits (NMTC) will be considered based on fund availability, risk, and potential project impacts.  Recoverable grants will be available for option payments and other alternative site control arrangements and early feasibility costs.Eligible Projects and BorrowersEligible borrowers will include non profit and for profit borrowers working on equitable,TOD projects. For purposes of the fund, TOD projects must meet requirements forproximity and connectivity to demonstrate that they are truly transit-oriented and willresult in fewer VMT and other benefits.Proposed eligibility definitions include: PROXIMIITY Proximity to Transit – Subway, BRT, or High Frequency Bus by pedestrian routes Less than .5 miles Proximity to commuter rail projects Less than .25 miles or Less than .5 miles with connections to other transit and amenities (i.e. buses, circulator buses, town centers, and other services) CONNECTIVITY Potential borrowers should describe plans for a pedestrian, bike friendly environment, connectivity to adjacent services and overall neighborhood and how the project connects to transit, which will be evaluated by LISC and the Fund credit committee.For purposes of the TOD fund, “Equitable” projects are those that include low andmoderate income units, in a higher proportion than already required by zoning and otherregulations. The fund encourages mixed income, mixed use projects.Risk and Risk MitigationBoston LISC ▪ 95 Berkeley Street Suite 301 ▪ Boston MA 02116 ▪ 7
  8. 8. The loan fund structure treats risk as follows:  $ 2 million of MassWorks funding would provide top loss reserve protecting all fund investors.  Second tier is PRI funders (with a to-be-negotiated small percentage of the loss to be borne by the originating lenders).  Third tier of risk is the Lead Lenders.Risk Mitigation for strategic acquisitionsThe risk is mitigated by:  Boston LISC’s strong credit analysis and underwriting.  Feasible exit strategies in place to take out the acquisition loans.  Buy-in by the Commonwealth through the top loss fund and clear signals from the Patrick Administration as well as key municipal decision makers that TOD will be a priority.  Assurance that holding costs are reimbursable costs for subsidy providers and could reasonably be recovered as part of mortgageable costs and/or secured by developer fee.  Confidence in the funding and political system that it values and will protect mission investors’ important contribution.  Recourse to project sponsor.Public investment  Public investment in an acquisition fund is an important platform for foundation investors and to insure public sector buy-in to the TOD fund goals and system changes needed. It sends a signal that this is an important policy goal of the Commonwealth.Coordination with Healthy Neighborhoods Equity FundLISC intends to coordinate this funding with Healthy Neighborhoods Equity Fund,currently under development by Conservation Law Foundation Ventures (CLFV) and theMassachusetts Housing Investment Corporation (MHIC). The ETODAF is focusedprimarily on early stage capital, and HNEF is funding for the construction and permanentstages. Both funds may be financing mixed income and mixed use projects, and LISCintends to coordinate with CLFV and MHIC to ensure eligible projects benefit from bothfunds.OutcomesAs described previously, a highly leveraged, revolving fund of between $4-6 million offoundation investment, along with the $2 million public investment for top loss, couldaccess up to $30,000,000 in acquisition and predevelopment lending and create over1,500 units of housing and 325,000 sq. ft of commercial space in mixed use projects.The projects created by this fund would have a TDC of almost half a billion dollars.Equitable TOD developments will provide affordable housing near transit, increasingconnections and access to jobs and services, will create economic opportunities in theneighborhoods which will have a revitalizing effect and attract private investment, andcreate additional affordable housing in high opportunity communities.Boston LISC ▪ 95 Berkeley Street Suite 301 ▪ Boston MA 02116 ▪ 8