Partners, Volume 14, Number 1, 2004
Partners, Volume 14, Number 1, 2004
|Sixth District CRCs Adapt to a Changing Environment|
Community development deals have become so complex in recent years that it is common practice to involve several funding sources and numerous public and private partners in a project.
It is difficult to recall the time when Low Income Housing Tax credits were considered “creative and innovative.” Then many banks were reluctant to finance affordable-housing deals on a go-alone basis. Multi-bank community development organizations or consortia emerged just 15 years ago as a new financing vehicle to attract bank participation in these deals by offering a mechanism that allowed banks to pool their funds and share risk.
One such consortium is the community reinvest-ment corporation (CRC) model pioneered by The Development Fund, a nonprofit organization based in San Francisco. CRCs have significantly benefited the financial industry by providing a greater understanding of these projects, so that over time this business has become second nature for most banks. Given banks’ growing familiarity with community development lending, what is the role for CRCs in today’s financial environment?
A look at the conception of CRCs
Since 1989, The Development Fund has partnered with financial institutions throughout the country to create CRCs to meet long-term community development debt financing needs. Restricted by technical limitations, lending limits, or both, financial institutions often cannot fund community development projects independently. These nonprofit mortgage banking consortia allow banks to lend through a pool of funds, and thus reduce their individual exposure to risk. Well-managed CRCs also allow banks to realize a reasonable rate of return and provide access to a staff with a high level of technical expertise.
Florida CRCs account for two of the ten created by The Development Fund: the Central Florida Community Reinvestment Corporation established in 1990 in Orlando, Florida, and The Tampa Bay Community Reinvestment Corporation created in 1993 in Tampa, Florida. Both organizations are finding ways to respond to the changing funding environment. During the last five years both decided to extend their market area to the entire state of Florida as well as broaden their mission to include economic development. To reflect this change in geography and mission, they changed their names to Florida Community Partners and Neighborhood Lending Partners, Inc., respectively.
Meeting the credit needs of large projects
The original purpose of the CRCs was to address the specific need for permanent financing of large community development projects. Initially, while banks were willing to finance the construction of affordable multifamily developments, permanent financing was more difficult to obtain at competitive terms and rates. This was especially true for development projects that incorporated Low Income Housing Tax Credits and other layers of funding necessary to make rents affordable for lower income households.
In addition to structuring financing, CRCs package loans for sale in the secondary market. This serves to create a stable source of liquidity and income, allowing them to further leverage the loan pool to support the continued production of affordable housing units.
The success of CRCs has provided participating banks with valuable experience about how to undertake safe, sound community development deals. Their steady progress along the community development learning curve and the appeal of a profitable new market prompted many larger institutions to establish in-house programs to finance affordable multifamily projects.
Development projects in the Florida market grew large enough to accommodate the entry of new lenders and eventually a richly competitive environment took shape in which all participants—developers and lenders alike—improved their performance and capacity to maintain an edge. This success suggests that the CRC structure could prove effective in supporting New Market Tax Credit projects that target economic development. Their history will provide a sound reference on best practices in private-public partnerships that promote healthy development financing.
Sixth District CRCs respond to new dynamics
In addition to other changes, Sixth District CRCs have experienced a shift in the composition of their bank partners. While some large regional institutions continue to invest in the organizations, many of today’s investors are small community banks. Their participation is bringing new dynamics to the community development arena.
Historically, small banks have long been filling the credit gap for 5 to 50-unit multifamily properties. These loans must often be kept in their portfolios because secondary markets are slow to absorb smaller multifamily loans. Many of these smaller institutions are now negotiating lending limits to facilitate inclusion in larger community development deals through a loan participation arrangement. The loan pool allows them to take part in much larger and more complex affordable housing projects that require technical assistance and monitoring beyond the reach of small institutions acting independently.
A. “Buster” Castiglia, president and COO of Continental National Bank of Miami, a designated CDFI, points out that by creating a loan pool and partnering with an experienced lender like Neighborhood Lending Partners, Inc., small banks are able to compete with the handful of large financial institutions that have cornered the market for financing large complex affordable housing projects.
Florida CRC creates a new niche
CRCs have themselves evolved in the changing environment, and many have developed a diversified line of products and services to meet emerging community development credit needs. In addition to expanding its partner list, Neighborhood Lending Partners, Inc. (NLP), for example, has also broadened its service territory and product lines to maximize its market potential and growing borrower base. This year the organization will open its third regional Florida office. NLP West Florida, South Florida, and North Florida, combined, will manage loan pools totaling over $189 million. The organization is also a designated CDFI and leverages federal funds through a separate $17 million CDFI loan pool.
NLP president Debra Reyes says,“Our customers are looking for a one-stop shop when it comes to financing and service.” NLP has created new products to finance single-family construction and economic development while retaining the organizational focus on leveraging private and public funds to maximize development. Reyes says that NLP’s edge is still in the technical service and assistance that they provide. The organization offers personal assistance and counseling for clients in addition to mentoring financial institutions throughout a complex financing structure. These kinds of services increase the value of the relationship with NLP beyond the mere loan product.
CRCs still make a difference
When discussing NLP’s strategic planning process, Reyes says that all CRCs “had to evaluate what they’re doing and develop new products.” This reassessment has helped them stay competitive and responsive to emerging community development finance needs, and thus they remain a valuable vehicle enabling financial institutions to participate and stay engaged in quality development activities.
Furthermore, says Miriam Lopez, chair and chief executive officer of TransAtlantic Bank in Miami, “The CRC vehicle allows my bank to support lending that makes a difference in the community.” As community development projects grow in size and complexity, so the role of CRCs evolves to continue meeting credit needs and to widen the network of committed partners for the benefit of our communities.
For more information, contact:
Neighborhood Lending Partners, Inc.
By Ana Cruz-Taura, regional community development director in the Atlanta Fed’s Miami Branch.