Partners, Volume 13, Number 2, 2003

The Private Sector Is a Cornerstone in Community Development

Juan C. Sanchez
Community Affairs Officer

Lately I’ve been thinking about the evolution of community development, especially about how affordable housing has changed. Over time affordable housing has become a significant line of business for many financial institutions. While deep subsidies and other effective products have been huge factors in the success of affordable housing, community development could not have advanced to its current level of accomplishment without the confidence and commitment of financial institutions.

Not long ago most bankers looked at affordable housing loans with great skepticism. Conventional wisdom told bankers that these deals were unsafe, unsound and unprofitable. Developers building in low-income areas couldn’t expect to attract sufficient demand to charge market rates. They were typically plagued by cash flow shortages and upside-down property values.

Even though products such as HUD Section 8 vouchers became a primary subsidy for low-income developments, traditional bank loan underwriting usually discounted rent supplements when calculating cash flows. This action limited loan amounts, and developers were forced to use starkly utilitarian construction to control costs. Developments tended to be plain brick or concrete block buildings with no amenities.

Today we have many powerful tools that did not exist years ago, including low income housing tax credits, mortgage revenue bonds, special needs programs, Federal Home Loan Bank awards, philanthropic grants, subsidized second mortgages and plenty of local government housing assistance products. We all know that funding from sources such as these is directly related to the successful transformation of affordable housing.

Now additional funds are often available to provide pools, community centers, childcare facilities, exercise rooms, additional parking, attractive landscaping and bonus green space — amenities that weren’t possible before. It is now difficult to distinguish a market-rate complex from those designated to include low- and moderate-income families.

Most will agree that innovative programs have radically changed affordable housing. But what’s still often overlooked or under-appreciated is the importance of the private sector in this transformation. It is the commitment and support of the private sector that have ultimately smoothed the way to success through product enhancement, flexible underwriting and relationship building. Without the help of the private sector, affordable housing facilities might not be as well-made and safe as they are today.

Looking at the rapid rate of change over the last couple of decades, I can only imagine what community development will be like in the years to come. As we explore opportunities to develop new products and more efficient programs, one thing is clear to me: bankers will always be an integral part of a successful community development plan.


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