Acquisition funds provide patient and affordable capital that may be used to secure sites for the development or preservation of affordable and mixed-income housing as they become available—in some cases, well in advance of installation of a new transit line or other infrastructure investment from which existing and/or future residents will benefit.
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Acquisition funds are also used commonly to cover legal and design fees and other pre-development costs associated with determining the feasibility of a particular project. Depending on how the fund is structured, administrators may purchase the property directly or issue low-cost loans to enable acquisition by a third party. While project sponsors still need to obtain permanent financing through conventional sources, acquisition funds enable local communities and non-profit or mission-driven developers to act quickly and early, before property values appreciate significantly or the property is acquired by another party.
What types of activities do acquisition funds support?
Acquisition funds may be structured to support a variety of uses related to the purchase of targeted properties, depending on the goals of the community and surrounding neighborhood characteristics.
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2] For example, in largely built-out communities near proposed or existing transit stations slated for redevelopment, local leaders may use an acquisition fund to purchase individual lots for small-scale
infill development, or may focus on the purchase and preservation of existing affordable rental homes that are at risk of being sold or redeveloped as higher-income housing as property values increase. In areas with abundant developable land, acquisition funds may be used to gain control of large lots or to assemble contiguous sites with different owners to support large-scale development, such as a mixed-use, mixed-income town center. As mentioned above, acquisition funds often cover not only the direct costs associated with the purchase of the land, but also a variety of fees incurred while determining the feasibility of a particular project, such as the costs of preliminary financial applications, legal fees, architectural and engineering fees, and other exploratory work.
However they are used, acquisition funds work best when applied in a policy and regulatory environment that supports the development and preservation of well-located affordable homes through other, complementary policies, such as an
inclusionary housing ordinance or ongoing
comprehensive planning process. Conditions built in to the framework of the fund can direct acquisitions to targeted areas along a transit corridor, such as neighborhoods that have an active neighborhood association or complementary planning initiatives or redevelopment projects underway.
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When does development occur?
The time frame for development on sites secured with acquisition funds varies depending on the goals of fund administrators. Communities that acquire sites through
Minnesota's Land Acquisition for Affordable New Development initiative, for example, must hold the land for at least one year—a stipulation designed to ensure that the fund supports new development, rather than projects already in progress—but development must begin within five years.
Denver's TOD Fund also allows property to be held for up to five years before development commences. In a slow market, communities may need to hold land for as long as ten years before development becomes viable.
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4] During this predevelopment period, allowing the site to be used for temporary purposes, such as a seasonal farmer’s market or parking lot, might help to generate revenue.
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Learn more about land banks, which provide a mechanism for holding property over the long term.) In some cases, acquisition funds may also support development on a much shorter timeframe, including scenarios where the groundwork for new development has already been laid.
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How are acquisition funds capitalized?
The size and structure of an acquisition fund will be determined, in part, by the scale of development to be targeted by the fund, which is in turn influenced by the reach of the existing or proposed transit line, the size of the community to be served, and the availability of resources. Initiatives focused on smaller transit systems or targeting a specific station area or neighborhood, such as the Lower San Antonio Community Development Fund in Oakland, California, may be able to capitalize a modest acquisition fund with investments from only a few sources. Initiatives that operate on a much larger scale, such as Denver, Colorado's Transit Oriented Development Fund, will need to secure support from multiple public and private partners.
Potential investors and sources of capitalization include: - Public sector contributions from a local and/or state sponsor (e.g., bond proceeds, CDBG allocation, budget appropriations)
- Metropolitan Planning Organizations (MPOs) and regional transit agencies
- Philanthropic organizations, through a grant or program-related investment (PRI)
- Private sector financial institutions
Especially at inception, acquisition funds carry a relatively high level of risk: Will the real estate market suffer a downturn? Will the proposed projects be able to secure permanent financing? As a result, public sources generally provide the initial capitalization and sit in the top loss position, meaning that in the event of a failed project or market reversal all other investors are repaid first. [ 6] Additional investors tend to be socially motivated, as they must be willing to accept the relatively low rates of return needed to support affordable housing and to wait years before they begin to receive a return on their investment. Investors in existing acquisition funds include philanthropic organizations (in the form of grants and program-related investments), CDFIs, and banks looking to earn Community Reinvestment Act credit.
| Solutions in Action |
Minnesota's Land Acquisition for Affordable New Development (LAAND) initiative provides loans to help defray high land costs and enable the development of new affordable homes. The program is administered by Minnesota Housing, the state housing finance agency, in partnership with the Metropolitan Council, the Twin Cities regional planning agency, and the nonprofit Family Housing Fund, each of which contributes program funding. Eligibility is determined by each of the funders, but in general the program is open to local governments and their agencies, nonprofit organizations, and private developers, all of which submit an application specifying the details of the proposed development to Minnesota Housing.
Funding decisions are based on several criteria, which vary somewhat depending on whether the proposal targets a site within or outside of the Twin Cities metropolitan area. In all areas, however, applicants who demonstrate the ability to leverage LAAND funds with financial or in-kind support from local entities, and whose projects will be located in high-income neighborhoods receive greater consideration, as do those whose projects target sites near job centers and public transit (or otherwise minimize transportation costs). All sites must be located in areas consistent with the locality’s strategic growth goals.
Beneficiaries of the program must bank the land for at least one year and development must begin within five years of the loan agreement. (Loans are repaid at the time of sale of the land.) At least 20 percent of residential units developed on sites acquired through LAAND must be affordable to households at 60 percent of the area median income (AMI) in the Twin Cities metro and 80 percent of AMI in the rest of the state. Homeownership units must remain affordable for at least seven years and rental units for at least 15 years, although projects that build in longer terms of affordability receive higher priority for funding.
Click here to see more examples of acquisition funds. |
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The creation of acquisition funds for affordable housing near transit and in other location-efficient areas is a relatively new phenomenon, and many communities are still in the process of determining how these funds should be structured, capitalized, and administered to support sustainable and equitable development. The following resources provide additional information and insights into best practices for creating and administering an acquisition fund:
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[1] Note that the term "acquisition fund" can be used to describe a variety of activities; in the context of this policy guide, we refer only to acquisition funds created to enable the development or preservation of affordable or mixed-income residential and mixed-use projects. [2] Some communities might choose to direct revenues from existing local or state housing trust funds toward strategic site acquisition rather than creating a new fund. This approach should be especially promising in areas with a strong commitments to planning and transit-oriented growth, as these communities tend to have in place an existing policy framework that prioritizes location-efficient projects. 
Make publicly-owned land available for development of affordable homes
