CDFIs And Transit-Oriented Development
In October 2010, the Center for Transit-Oriented Development published a report exploring the role community development finance institutions could play in promoting equitable transit-oriented development. This document is an initial effort to frame the context of TOD and equity, and to encourage a more robust discourse on the connection between the agendas of CDFIs and TOD.
Below is the Executive Summary from the report
Transit-oriented development (TOD) can provide households with more opportunities and choices. Ideal TOD communities are mixed-use neigh-borhoods with good-quality public transit that connect people of a variety of incomes to a wide range of economic, social, and educational opportunities. TODs incorporate access to human services such as child care facilities, fresh food stores, health care facilities, and cultural and educational institutions within a short walking distance of transit. Families living in transit areas can signifcantly reduce the time and cost spent on their daily commute to work, and the other trips required for their daily chores, allowing for more disposable income and leisure time. Compact and pedestrian-oriented environments also gen-erate demonstrated public health benefts by reducing obesity and preventing related health problems.
The benefts of living in pedestrian-friendly, mixed-use urban neighborhoods are growing increasingly evident, and the private real estate market has responded. Recent research by the Environmental Protection Agency (EPA) shows that an increasing share of new housing units has been built in central city locations, which generally have access to transit. Research by the CTOD indicates that a great deal of the recent new development has occurred in or near downtowns and major employment districts. Other types of urban and suburban neighborhoods along transit corridors have not benefted equally in terms of re-ceiving new investment.
The uneven nature of development in transit areas can partly be attributed to the fact that the implementation of TOD is often challenging and complex. TOD projects are generally costly and challenging to finance, especially in the current economic and financial environment. Dense mixed-use TOD projects generally have higher land costs, higher construction costs, and longer time frames for completion. All of these factors require sophisticated financing tools, and a high level of expertise on the part of the developer. The need to cobble together multiple permanent financing sources means that there is often a long holding period, in which the developer must pay for land acquisition, site assembly, and other predevelopment costs. Downtowns and other premium locations can generate higher returns, which can in some cases justify the longer term and higher cost of the investment. However, it is often impossible to find the patient capital that is required to bring a project to fruition, even in very desirable locations. Furthermore, many TOD neighborhoods do not have strong market appeal, and require substantive upfront investments in infrastructure, community facilities, and amenities in order to attract private development. While these investments are typically made by the public sector, many cities lack the revenues to fund these activities, leaving many neighborhoods with a defcit of facilities, amenities, and infrastructure to support TOD. Often, federal, regional, and state-level funding is absent or inadequate to fill the funding gap. The combination of these challenges has led to only a modest share of new housing and jobs occurring in transit and infill locations.
The challenge of bringing TOD to scale has important equity implications. Because of the strong market demand from affuent households, as well as the cost of building housing in high-value urban areas, new TOD housing is most often targeted to upper-income households. Low- and moderate-income households, for whom transit is often an essential service, are not as well served by the market. Furthermore, the introduction of new transit sometimes results in an increase in rental rates, making it diffcult for existing residents to remain in place as the neighborhood changes. In the few regions where the creation and preservation of affordable and mixed-income TOD has been effective, there has been proactive leadership and concerted efforts from a diverse set of actors, including the public sector, nonprofts, and philanthropy.
While community development finance institutions (CDFIs) have long provided financial services and other assistance to promote economic opportunities for low- and moderate-income individuals, and to support strong, healthy, and diverse communities. CDFI activity ranges from providing capital to nonproft housing developers, to investments in small businesses and community assets such as schools, health clinics, fresh food stores, and child care facilities. Some CDFIs are engaged in advocacy at the federal policy level, while others are working in part-nerships with community-based organizations, govern-ment, and foundations in community planning efforts. However, TOD has not been a focal point at the center of these activities. To date, most CDFIs have engaged in TOD in a somewhat limited and opportunistic way, providing capital and technical assistance to individual housing and mixed-use projects in neighborhoods served by transit. However, it is clear that CDFIs have a great deal to offer in advancing the TOD agenda in terms of technical expertise, creative financing tools, and advocacy.
As a first step towards identifying ways that CDFIs may deepen their involvement in promoting equitable TOD, the Center for Transit-Oriented Development (CTOD) has prepared this paper. Following a summary of findings, the paper contains the following elements:
- A clear description of the benefts of equitable TOD and how this relates to the broad goals of the CDFI industry;
- A discussion of challenges to the provision of equi-table TOD;
- A description of the range of strategies employed to overcome these challenges;
- A framework for understanding the potential role(s) of CDFIs in promoting equitable TOD.
This document is an initial effort to frame the context of TOD and equity, and to encourage a more robust dis-course on the connection between the agendas of CDFIs and TOD.
CDFIs and TOD: Principal Findings
To date, CDFI involvement in TOD has been primarily through the provision of financing and technical assistance to development projects in neighborhoods near transit. There are numerous examples of CDFIs partnering with community-based organizations to build and rehabilitate affordable housing and mixed-use developments. While there are many areas of convergence between CDFIs and TOD, there are also some areas of mismatch, identifed below:
- Scale of involvement - CDFIs are generally involved in individual TOD projects, which are financed separately. However, implementation of successful and equitable TOD requires neighborhood level investments of all kinds, including built assets such as parks, plazas, streets, basic infrastructure, and community facilities that are diffcult to finance through traditional means.
- Qualifying neighborhoods - CDFIs generally target their investments to low- and moderate-income places. However, there is also a role for investing in higher income TOD neighborhoods to ensure that they are equitable. For example, in many TODs, there is a need to introduce affordable and mixed-income housing so that all can beneft from the opportunities of living and working near transit.
- Financing challenges - As discussed above, TOD projects are complex and can take a very long time to realize. However, private investors are typically not able to wait 10 to 20 years to receive a return on their investment.
- Infrastructure and amenities - Neighborhood infrastructure and amenities such as sidewalks, plazas, parks, and sewer lines are not revenue generators, which makes them diffcult to finance through the lending tools available to CDFIs.
- Lack of capacity at the neighborhood level - In order to implement projects on the ground, CDFIs must partner with strong community based organizations (CBOs) and community development corporations (CDCs), but in many neighborhoods, there is a lack of organizational capacity.
The most important prerequisite for a signifcant expansion of CDFI involvement in TOD is the presence of public sector commitment to fund these activities. This includes federal, regional, and local resources to acquire and assemble properties, conduct station area planning, provide technical assistance, fund infrastructure improvements, finance low-income and mixed-income housing, and fund other types of community facilities and services.
There is also a need for Metropolitan Planning Organizations (MPOs) and regional transit agencies to provide leadership at the metropolitan level urging cities to create TOD-supportive land use policies. Foundations and CBOs can also play the critical role of the central convener that brings various stakeholders to the table. Foundations can also provide patient capital and potentially equity to proj-ects and regional TOD acquisition funds.
CTOD has identifed opportunities for CDFIs to expand their role in TOD to include the following areas:
- Provide short-term, unconventional financing for construction and rehabilitation/preservation of affordable housing projects - CDFIs have a proven track record of providing creative financing solutions that go beyond traditional sources for affordable and mixed-income housing.
- Formation of additional regional structured funds to finance TOD projects - TOD implementation requires early and low-cost sources of capital to acquire properties in high-value TOD areas. Recent experiences with structured funds for property acquisition provide instruction on the key factors to consider when pursuing this strategy to develop affordable and mixed-income housing in TOD neighborhoods.
- Inform federal policymaking - Based on CTOD's research, there is a potential role for CDFIs to provide a) Establishing a federal TOD requirement for LIHTC and NMTC allocations; b) Steering credit towards transit areas; c) Exploring new federal financing sources for child care facilities.
- Engagement with metropolitan planning organizations (MPOs) in regional TOD planning - CDFIs could assist MPOs to modify their station area planning processes to explicity include equitable development, going beyond affordable housing to reinforce the critical role that essential services (e.g., infrastructure, child care, health services, libraries, recreational facilities) play in building healthy communities.
In addition to the recommended areas of involvement above, CTOD also identifed other potential areas for CDFIs to explore for future engagement in TOD.
- Providing financing to revenue-generating neighbor-hood infrastructure projects such as public parking garages and energy infrastructure;
- Providing assistance to MPOs and/or local govern-ments in developing sound underwriting standards to evaluate grants and loans to finance TOD infrastruc-ture and projects;
- Advising MPOs in the formation of regional infra-structure banks and/or revolving loan funds for TOD infrastructure investments;
- Dissemination of best practices to educate public pol-icy-makers about ways to include the human services, like quality early care, education and health care, as components of equitable TOD into their plans.
Enhanced involvement in all of these areas would require a significant amount of "soft" funds from the public or philanthropic sectors.