Access to Capital

This page will address how capital (i.e. financing) works to support more affordable commercial space. It is outlined according to the following topics:

Why is Capital Important?
Capital Access for Land Development Entities
Small Business Needs for Capital
Sources, Resources, and Examples

Why is Capital Important?

CBRE, an international property management firm, issued a press release in May 2015 to announce Seattle’s emergence as one of the “top ten global cities for commercial real estate investment.” As a result of the area’s booming economic growth, the cost of land is rapidly rising. This is evidenced in the King County Property Assessor reports for 2015. The report on commercial land in Downtown Seattle, including Pioneer Square, Pike Place Market, and the International District affirms: “The sales of the last three years have been well in excess of the prices during the last commercial real estate peak.” As stated in the “About” page of this website, Southeast Seattle’s retail space rental rates in the past year increased threefold over rental increases in Downtown Seattle. Industrial space in Rainier/Beacon Hill is trending similarly, with rents increasing much faster than in the greater metro area.

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Source: King County Property Assessor’s Office 2015 Area Report

Capital Access for Land Development Entities

As explained in the section on New Market Tax Credits, competition for public funding is extremely high. Developers must put navigate a complex process in their quest to keep commercial land affordable. From problem identification to site selection to creating and sustaining the funding needed to keep projects alive, nonprofits are asked to complete a terrifically complex set of tasks. For project finance alone,  structures. for a mix of tax credits, bridge loans, state- or federally-backed financing, as well as private capital, typically for- and non-profit lending institutions.

One revenue tool that other states use frequently to support commercial property development is banned under Washington State’s “lending of credit” prohibition. The State’s Constitution bans tax increment financing, a mainstream public financing tool for economic development. Given increasing competition in the private sector, a booming economy, and stringent lending requirements in the banking sector, there is a significant role for nontraditional, community-based financial institutions to serve mission-driven development entities and small businesses across Washington State.

Land ownership entities like CDCs, CLTs, and PDAs  face resource constraints just like any other organization. Access to capital is just as relevant for community organizations as it is for the beneficiaries they are hoping to serve. This is particularly true when it comes to commercial land acquisition. With exceptional competition in the private sector and no access to common tools like TIF, nonprofits and development agencies must patch together unsecured and secured financing to acquire and/or develop increasingly expensive land.

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Photo of The Claremont by SEED

Another source of capital, specifically relevant to entities pursuing renovation of environmentally-degraded land, is the Washington State Brownfields Revolving Loan Fund. This Fund has been used to finance development projects like The Claremont in the Mt. Baker neighborhood.

Combined with over $14 million of other funding, $215,000 from the State’s revolving loan fund was leveraged to clean up and develop a mixed-use building with 68 units of affordable housing and 5400 sq. ft of commercial space.

 

Capital Needs of Small Businesses

While not a permanent solution, increasing the pool of available financing for small businesses in low-income, gentrifying neighborhoods helps communities retain local commercial entities, preserve jobs, and anchor a sense of “place” for residents.  

As part of the double-edged sword of gentrification, new, higher-income residents move into a community and subsequently push up market rents. However, they also bring in higher spending power. Taking that into account, existing businesses in gentrifying neighborhoods will need to make dozens of decisions. Several of the most common questions that owners must address include whether a business should:

  • Stay in the current location, hoping or expecting that commercial property prices don’t push rents too high, too fast?
  • Move to a new, more affordable location, perhaps renting space in a CDC or PDA-controlled building?
  • Expand the business to achieve economies of scale in an effort to lower other costs and offset higher land values?
  • Buy property directly? Enter into a long-term lease?
  • Keep the business’ products or services as is, even if the business no longer matches the cultural demography of the neighborhood?
  • Adapt the business’ product or service to match incoming customers?
  • Increase or modify current marketing and promotion efforts to acquire new customers from incoming residents?

For small, local businesses who stay in the neighborhood, capital project financing helps firms grow and adapt to the changing community. Short-term or real estate loans support small businesses renovate, relocate to a new space, or purchase land on their own. Firms may also need funding to increase or create marketing to non-identifying consumers. 

Business owners face several hurdles in their financing quest. First, it’s unlikely that the business has capacity to buy or create in-house a market analysis and revenue forecast, assess capital needs, and calculate break-evens. Even with savvy business skills, the business owner faces imperfect information on market growth, and natural long time horizons for affordable real estate development pushes options far into the future. Planning is exceptionally complex in this environment. 

Community development financial institutions, CDEs, credit unions, and development banks are well-suited to serve these purposes. These institutions provide a range of loan sizes and types, including SBA and LISC-backed funding. Most importantly, community financial institutions can match their capital with vital business planning and technical assistance.

That’s not to say that traditional lending institutions are ignoring community development. According to a report published by the industry group American Bankers Association, commercial banks provided over 21 million small business loans nationwide in 2013. The report also states that “Community banks with assets of less than $1 billion account for a little more than 10 percent of the banking assets in our country, but provide nearly 40 percent of all the small loans that insured financial institutions make to businesses and farms.”

The financial services technology company Fiserv has reported that, though typically just one-tenth of a bank’s portfolio, small businesses usually provide up to 35 percent of a bank’s revenue. Banks like Chase are paying attention, too. Since 2013, the bank has conducted a survey focused exclusively on small businesses. Chase’s 2015 Small Business Outlook provides a particularly relevant insight: “Notably, concerns about the availability of capital and/ or credit have eased significantly this year for small businesses on the whole, and significantly more for lower-revenue companies.” Whereas last year 48 percent of small businesses wanted policies increasing access to affordable capital, in 2015 that number dropped to 31%.

It should be noted that the Chase report categorizes small businesses as those reporting annual revenues between $100,000 and $20 million. Inter-bank lending is common, so CDFIs with revenues under $20 million would be counted as a small business. As such, micro-businesses, start-ups, and businesses in underserved communities are likely not proportionately represented. Still, the conclusion remains: commercial banks are vital agents in the economic development capital space.

 

 

Sources

 

SOURCE | American Bankers Association 2014 Report, “The Business of Banking: What Every Policy Maker Needs to Know
SOURCE | Fiserve blog, “Why Financial Institutions are Focused on Small Business Lending
SOURCE | Chase Bank survey, “Small Business: Business Leaders Outlook 2015
REPORT | Capital Markets, CDFIs, and Organizational Credit Risk
WEBSITE | Connecting Borrowers to SBA Lenders
WEBSITE | Washington State Commerce Department’s “StartUp Washington” initiative
WEBSITE | Washington State Department of Financial Institutions

State and Local Funding for Commercial Real Estate
WEBSITE | Washington State Housing Finance Commission
WEBSITE | Collateral Support Program for Small Businesses, a Washington State Department of Commerce initiative
WEBSITE | Brownfields Revolving Loan Fund, a Washington State Department of Commerce initiative
WEBSITE | National Development Council’s Grow Seattle Fund

CDFIs, Credit Unions, and Loan Funds (in order of typical loan size given)
CAPITAL PROVIDER | Ventures
CAPITAL PROVIDER | Community Sourced Capital
CAPITAL PROVIDER | Community Capital Development
CAPITAL PROVIDER | Impact Capital (LISC lender)
CAPITAL PROVIDER | Rainier Valley Community Development Loan Fund
CAPITAL PROVIDER | North Central Washington Business Loan Fund
CAPITAL PROVIDER | Mercy Corps NW
CAPITAL PROVIDER | Craft 3
CAPITAL PROVIDER | BECU

Banks
CAPITAL PROVIDER | Beneficial State Bank
CAPITAL PROVIDER | JP Morgan Chase Community Development Banking
CAPITAL PROVIDER | HomeStreet Bank
CAPITAL PROVIDER | Washington Trust Bank

 

 

 

 

 

 

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