How does pre-development and acquisition financing work?

Pre-development and acquisition financing is provided by both state and local governments to assist with the early expenses associated with developing affordable homes. Some communities offer loans that are restricted to the costs related to just pre-development or just acquisition while other communities have broader programs that can be used to finance both types of expenses. The loans generally have low or no interest and may be deferred (i.e., not paid back) until the development has received permanent financing, which can be used to repay the pre-development loans.

Some communities will forgive pre-development loans if permanent financing cannot be obtained, an important feature that allows affordable housing developers to investigate alternative sites and pick only those most likely to succeed. Financing is typically provided through a revolving loan fund that recycles the assistance to support many affordable housing developments over time. Funds for the loan programs come from various sources including housing trust funds, appropriations, and allocation of federal HOME dollars.

Communities that do not currently have a pre-development or acquisition program may wish to consider starting one to expand the capacity of non-profits and small for-profits to produce affordable homes.

Communities that already have a program may wish to consider expanding its funding and/or the outreach needed to ensure a steady stream of applications. Since the ability to use these funds successfully requires affordable housing developers with high capacity, communities with an undersupply of developers may wish to consider supplementing a loan fund with technical assistance and other efforts to build the necessary capacity. One promising approach to building capacity among smaller organizations is to provide a steady stream of operating revenue tied to developmental milestones.

Communities can also facilitate access to funds for pre-development and acquisition expenses in ways other than providing direct financing. Loan guarantees or credit enhancements can help reduce the interest rate on private financing. Policies that permit or encourage non-profit housing developers to accumulate more working capital can also help by allowing non-profits to fund their own pre-development and acquisition costs.
The Role of CDFIs

Community Development Financial Institutions (CDFIs) help to make credit and other financial services available to nonprofit organizations, affordable housing developers, and other entities and individuals that may not be served by traditional financial institutions. These mission-driven, private-sector institutions focus solely on community development initiatives, and may be incorporated as banks, credit unions, community development corporations, and in other forms. The US Department of the Treasury certifies CDFIs and provides competitive grants to support their activity through the CDFI Fund.

While CDFIs' mission is broader than affordable housing, these institutions can play an important role in providing predevelopment and acquisition funding to small nonprofit developers. For example, in addition to working with partners to build or renovate homes in North Carolina, the Durham-based Center for Community Self-Help - one of the country's largest CDFIs - offers loans to support the purchase of homes to be used for supportive housing for people with disabilities.

Similarly, Urban Partnership Bank, a Chicago-based CDFI, provides lines of credit that enable developers to purchase vacant single-family homes and small multifamily properties for redevelopment as affordable homes. The Florida Community Loan Fund supports nonprofit organizations through acquisition and site control loans for the purchase of affordable homes, including affordable rentals that have expiring federal subsidy contracts.

Solutions in Action
Low Income Investment Fund

The Low Income Investment Fund (LIIF) is a Community Development Financial Institution that serves low-income families and communities through investments in affordable housing, childcare, education, and related community development projects. To support acquisition and development of affordable homes, LIIF makes available predevelopment and acquisition loans of up to $3.5 million to nonprofit organizations, mission-based for-profits, and public and quasi-public entities. As of 2008, LIIF helped to make available 54,000 units of affordable housing and invested nearly $500 million in capital and technical assistance to affordable and special needs housing developers. Visit LIIF's web page to learn more about their work.

Click on the links below to learn more about what communities can do to provide pre-development and acquisition financing:

Via RobleState programs
Find examples of state programs for pre-development and acquisition financing. Examples include Nebraska, California, and Mississippi.

One Church StreetLocal programs
Some local governments have also created loans or loan guarantee programs to facilitate access to pre-development and acquisition financing. Examples include New York City and Washington, DC.