Healthy neighborhoods equity fund design paper 12 5-2012


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Healthy neighborhoods equity fund design paper 12 5-2012

  1. 1. HEALTHY NEIGHBORHOODS EQUITY FUNDBackground and ContextGreater Boston is characterized by a strong regional economy and real estate market, but is also marked bypockets of intense poverty and a high degree of racial and income segregation. Although the region as awhole has weathered the recession and foreclosure crisis better than most parts of the nation, lower-income communities in Boston as well as the regional urban centers throughout Greater Boston havesuffered from skyrocketing unemployment and high foreclosure rates. Since 1990, the number of poorpeople in Massachusetts has grown by one-fifth, while the number of Massachusetts residents living in high-poverty neighborhoods has increased by nearly one-third. Over the last decade, the number of householdsin Massachusetts spending more than 35 percent of their income on housing has gone up by 66 percent.This has become an urgent economic development issue, threatening the state’s competitiveness as growingnumbers of individuals and families are unable to afford the combined costs of housing and transportation.Significant challenges have also emerged with respect to community health. In spite of Greater Boston’sstatus as a world leader in health services and research, the state has seen an alarming rise in obesity andchronic disease over the past decade. The MA Department of Public Health (MDPH) estimates that $1.82billion per year in medical expenses in the Bay State are directly attributable to adult obesity, a knowncorrelate with hypertension, dyslipidemia, type 2 diabetes, coronary heart disease, stroke, osteoarthritis,respiratory problems, and certain cancers, including endometrial, breast, and colon cancer.i These impactsare especially acute in low-income neighborhoods and communities of color, as evidenced by a 2007 studyby the Commonwealth of Massachusetts Executive Office of Health and Human Services highlighting thedisproportionately high rates of obesity, hypertension, diabetes, and asthma among Blacks and Hispanics.In addition to economic and health concerns, the Commonwealth of Massachusetts faces significantenvironmental challenges related to greenhouse gas emissions (GHGs). The transportation sector, as thelargest single contributor to GHG emissions, represented 40 percent of total emissions in 2005. Of particularconcern is the rapid growth in transportation-related emissions in Massachusetts over the past two decades;from 1990 to 2000, these emissions rose by 19 percent, and from 2000 to 2005 they rose an additional 7percentii. For these reasons, the future environmental health of the region will be determined in part by theextent to which new development occurs in neighborhoods with access to transit and services that producefewer VMTs (Vehicle Miles Traveled).All of these trends point to the growing importance of walkable, mixed-use, transit-oriented neighborhoods(TOD) as a centerpiece of any future growth strategy for Greater Boston. The metropolitan Boston area isfortunate to have a strong network of CDCs, for-profit developers, a progressive state government, and awell-utilized transit system. However, there is no comprehensive approach to TOD across municipal lines.New financing tools, alongside policy and regulatory action, will be necessary to accelerate TOD projects at December 2012 Page 1
  2. 2. the pace that is required to meet MetroFuture planning goals and address the interwoven challenges ofeconomic development, public health, and GHG emissions reduction.Goals and ObjectivesIn response to these challenges, CLF Ventures and the Massachusetts Housing Investment Corporation(MHIC) are working in collaboration with the Local Initiatives Support Corporation (LISC), Metropolitan AreaPlanning Council (MAPC), and the other partners in the Metro Boston Sustainable Communities Consortiumas well as the Executive Office of Housing and Economic Development to accomplish the following goals: Attract new sources of private equity (including PRI) to support moderately priced and market-rate housing, local job creation, and healthy, walkable, mixed-use neighborhoods in a variety of TOD settings; Align equity investments with other sources of funds, including the distinct but complementary LISC Equitable TOD fund and state housing, economic development, and infrastructure dollars, in order to catalyze and accelerate the development of high-impact TOD projects along key transportation corridors.The Role of Private EquityBased on our work to date, which has focused on mixed-use, mixed-income TOD projects that have realpotential to be transformative in terms of jobs, health, and climate impacts, it is clear that the toughestfinancing gaps to solve are related to moderate-income and market-rate housing and retail/commercial andindustrial space. Simply stated, the markets in most locations are not strong enough (or have not yet proventhemselves to be strong enough) to support these kinds of uses at scale without some combination of deepsubsidies and/or long-term equity investments. The available subsidies are very limited and highlycompetitive, and most developers do not have sufficient equity to self-fund projects of this scale. Furthercompounding this issue, project underwriters have generally been unwilling to finance future (unproven)value. For example, in large scale (over 100 units) TOD housing projects, the market rate component ofthose projects in LMI neighborhoods is actually a financial drain on the pro-forma. This is because projectcosts are relatively high (comparable to any other dense residential project), but the rents that can beunderwritten are limited by the rents in the surrounding neighborhood and typically lenders have believedthat the risk of obtaining rents (or sales prices) greater than current market should be borne by equity. Thisis also true with retail and commercial in these neighborhoods. Over time, real estate values in theneighborhood will undoubtedly grow, but the developer has no way to monetize this long-term growthpotential.Therefore, Triple Bottom Line (TBL) equity funds such as ours, which provide new patient capital fromprivate equity, philanthropic, and high net worth social impact investors, can enable larger-scale TODprojects to move forward that would not otherwise be feasible in a transitional real estate market. Theseequity funds also leverage as much as 4:1 other sources of public and private financing, including bothconventional debt and tax credit equity, and provide greater assurance to other private lenders and publicagencies that the projects are worthy of investment.Fund MetricsThe Healthy Neighborhoods Equity Fund (HNEF) will prioritize projects that create measurable benefits forresidents and employees, the neighborhood, and the metropolitan region. The HNEF will look to fundprojects that advance the goals outlined in MetroFuture with a particular focus on forwarding the vision toachieve greater regional equity. The Fund will partner with projects that implement a community vision that December 2012 Page 2
  3. 3. reflects the needs and interests of local residents, businesses, and civic institutions and capitalizes on theinvestments made already by other funding sources and the state.The Fund will make investments in selected neighborhoods in Massachusetts using the following screeningcriteria to determine eligibility:  Proximity to Transit: The Fund will make investments in transit-accessible neighborhoods that have the potential to become more walkable and less auto-dependent. To be eligible, projects must be located within a quarter-mile to a half-mile walk of an existing or planned transit station (including subway, commuter rail, and/or high-speed bus service).  Health Status: The Fund will make investments in neighborhoods with significant health disparities, as measured by quality and length of life, productivity losses due to illness and disability, and average cost of care. In particular, the Fund is interested in health impacts that are influenced by the built environment, including obesity, diabetes, heart disease, asthma, and depression.  Economic Opportunity: The Fund will make investments in economically disadvantaged neighborhoods, as measured by median household income, unemployment, educational attainment, and environmental justice status. In addition, the Fund will consider investments in more prosperous neighborhoods if the proposed project will strengthen the supply of affordable and/or workforce housing and provide new access to jobs and services for disadvantaged populations.  Growth Potential: The Fund will invest in neighborhoods that are well-positioned for substantial long-term growth and have clear potential to become healthier communities. This evaluation will consider the physical form of the existing neighborhood (e.g. scale and size of buildings and blocks; existing or potential open space and recreation; presence of previously developed sites that offer opportunities for redevelopment); current zoning and permitting requirements; and other existing and planned investments nearby.In this context, the Fund will prioritize residential and commercial projects that create new economicopportunities and/or expanding the range of quality housing options to include new moderate-income andmarket rate housing. Individual projects will be evaluated based on their potential to increase block-scaleand neighborhood scale walkability; grow the overall mode share for transit, walking and cycling; reduce thetotal number of VMTs; and maximize energy and environmental performance. In addition to thesemeasures, the data for which can be obtained from the developer and/or existing information sources, weare working to identify a research partner that can help design and implement a reliable measurement toolfor longitudinal analysis of health impacts connected to these projects and other investments in thesurrounding neighborhood.Fund Development/Execution1. Fund Development and Project Candidates Fund development is focused on alternatives for bringing new resources (e.g. private equity) to support high-quality, high-impact TOD projects that bring measurable community benefits. The metrics for these outcomes are intended to ensure that the fund finances projects that reflect this commitment. The project team expects that the equity fund will be of interest to a mix of non-profit and for-profit December 2012 Page 3
  4. 4. developers who share this commitment and that bringing equity to the table will ensure that projects are consistent with a community vision and generate real value for the neighborhood. The Sustainable Communities Consortium is coordinating an active effort to identify a handful of high‐impact areas for investment, including transit corridors in greater Boston and commuter rail station areas in several suburban or Gateway Cities. Preliminary candidates in Greater Boston include Jackson Square, Dudley Square, the Green Line extension in Somerville /West Medford, the Fairmount Corridor, and Chinatown. Suburban or Gateway Cities of interest include Chelsea, Revere, Quincy, Lowell, Fitchburg, and Lawrence.2. Pro-forma Expectations The HNEF is being designed to provide gap financing for transit-oriented development projects that promote improvements in community health outcomes and provide economic opportunity for community residents. HNEF equity is expected to finance 5% to 25% of total development costs of a project with patient equity. This range reflects the differing ability of project developers to: (a) obtain public subsidies or philanthropic resources to fund their project; and (b) invest their own equity. It also reflects projects’ varying degree of upside potential. Projects will deliver return to investors over a 7 to 12 year period. Investor returns will be generated via a share of project cash flow, along with priority distributions from refinancing or equity take-outs, and is expected to be in the range of 8-15%. HNEF is not designed to finance affordable housing, but rather to finance mixed-use office, retail, and moderate- and market-rate housing where there is anticipated increase in value from future rent increases and/or neighborhood transformation. While HNEF improves project feasibility, the trade-off is that it also requires the developer to share future upside with the HNEF investors.3. Fund Structure and Capitalization The HNEF will be a structured fund with a capital stack aimed at ensuring the fund can make transformative investments while meeting institutional investors return expectations. There will be a “top loss” investor with a tolerance for absorbing risk and lower return expectations, which will offset the return expectations of other investors. Program related investments from foundations and social impact investors will form the second tier, who can be expected to moderate their return expectations depending on the strength of the other bottom lines. Institutional investors will make up the balance of the fund. The overall goal of capital development will be to attract investors that will (on a blended basis) tolerate an 8-15% return. Another objective of the Fund will be to create a blended equity structure with different timing and risk requirements to meet the complex needs of various TOD projects. The HNEF will be closed with commitments from the various investors in the fund as specific projects are underwritten, so that return expectations are known at the time of investment. Projects will be underwritten for financial feasibility by MHIC, while CLF will review for conformance with HNEF’s healthy community goals. Investors will review and approve individual projects for HNEF investment via participation on an Investment Committee (as is MHIC’s current practice on its LIHTC Investment Committee). MHIC and CLF will jointly present investment opportunities to the Investment Committee. MHIC will manage the closing and management of approved investments. Synergy with LISC Fund Building healthy communities in TOD locations requires a mix of uses, including affordable and market rate housing, as well as retail and commercial development. The CLF Ventures/MHIC and LISC Funds December 2012 Page 4
  5. 5. complement each other in filling the financing gaps necessary to create such communities. But the two Funds differ in three clear ways: type of capital, timing, and project type. The LISC fund is predominantly debt and HNEF predominantly equity. The LISC revolving fund is intended to support early pre-development financing to accelerate the development of affordable housing and other uses in TOD locations. The CLF/MHIC Fund is intended to finance larger mixed-use projects that include market and moderate income housing, as well as commercial and retail uses. LISC and CLF Ventures/MHIC will be productive partners on larger mixed-income, mixed use, multi- developer projects where acquisition, infrastructure, and permitting challenges threaten momentum and where intervention by state or municipal interests might accelerate critical infrastructure improvements or target needed subsidies. The availability of a wider menu of flexible, risk tolerant capital can actually increase the effectiveness of limited public subsidies and enhance the prioritization of high visibility TOD opportunities in targeted transit corridors.i Levine, D.A., Cohen, B. Common Health for the Commonwealth: Massachusetts Trends in the Preventable Determinants of Health.Massachusetts Health Council, Inc. 2010, p. 26.ii Metropolitan Area Planning Council: MetroFuture Plan, December 2012 Page 5