Capital Fund for Workforce Housing

Why are we creating the Capital Fund for Workforce Housing?

Equity and working capital are essential for any housing development business. For-profit developers of higher-cost housing generate more equity and working capital from retained earnings because they make more money than nonprofit developers. They also raise equity and working capital more easily because they can offer higher returns to investors and their projects may be perceived as lower risk.

Nonprofit developers of affordable housing often earn lower fees, when they earn fees at all. Their development businesses are less well capitalized, which increases the perception of higher risk for project investors or lenders. Nonprofit developers spend large amounts of their time raising project-specific money to substitute for equity and working capital, or convincing lenders and investors that projects are good risks. That reduces their productivity and increases their costs.

In order to maximize the contribution nonprofit developers can make to producing affordable workforce housing, we need to invest in their businesses. Nonprofit developers need capital they can “recycle” from one project to the next instead of doing project-specific fund raising every time. Investing in nonprofit development businesses rather than only in individual projects increases impact and makes nonprofits more productive.

The Capital Fund is designed to expand nonprofit development business, not provide capital to meet current operating expenses. Investments or loans from the fund will require a business plan that demonstrates how the nonprofit developer will accomplish that goal.

The Wisconsin Partnership is an experienced developer of affordable workforce housing, and we would use the Capital Fund to expand our development business. We do joint ventures with other nonprofit and for-profit developers to achieve greater impact on the need for affordable housing. Other nonprofit developers doing projects as joint venture partners or sole developers will also be customers of the Capital Fund.

Why are nonprofit developers key partners in producing more affordable workforce housing?

The business of nonprofit housing developers is producing more affordable housing. That mission allows them to receive public and private grants and low-cost loans, and enables them to reinvest their tax-exempt earnings. The best nonprofit developers combine a social mission with entrepreneurial skill and creativity.

Many workers who need and want more affordable housing closer to their jobs are people for whom nonprofit developers have been producing housing for decades. Government funds that help produce affordable housing are often available only or on a preferred basis to nonprofit developers because their social mission helps assure that the funds will accomplish a public purpose. When for-profit developers want to use land use and design concepts that lower housing costs, a nonprofit partner can help convince local governments and neighbors that reducing development costs will result in more affordable homes instead of simply higher profits for the developer. Nonprofit developers often can get access to better sites and financing as part of joint ventures with for-profit developers. The result can be mixed-income housing that uses land more efficiently and works better for consumers and the community as a whole.

How is the Capital Fund different from employer-assisted down payment assistance programs?

Down payment assistance of $5,000 or even $10,000—the amount most “employer assisted housing” programs provide—helps some employees buy homes. Such programs are attractive to employers because they can be “targeted” to specific employees. However, even with down payment assistance, the cost of housing is out of reach for many working people in communities across Wisconsin. Some working people can’t afford to buy homes at all, but need good quality rental housing. We need to develop sale and rental homes near jobs for working families at more affordable prices.

How would the money in the Capital Fund be used?

Eligible Costs

• Financing the cost of staff time and out-of-pocket expenses to find project opportunities and decide whether to explore them further
• Financing the expenses incurred after a nonprofit developer has decided a project is a good opportunity but before a construction loan closing
• Providing net worth to reassure lenders and investors that a nonprofit developer is a good credit risk, when a project is ready for construction and permanent financingFinancing project expenses that exceed the lender’s loan-to-value ratio but can’t be financed with other project financing sources
• Financing the cost of a nonprofit developer’s project-related expenses that exceed the amount of cash a project generates, until project cash flow catches up with expenses
• Financing over-budget development costs to keep a project moving on schedule while a nonprofit developer figures out how to finance the costs over the longer term
• Capitalizing reserve funds, if the amount needed exceeds the amount that can be included in project financing

Financial Terms

Working capital will be provided in the form of a line of credit to the nonprofit developer for a fixed term of up to five years. The line of credit will be secured by the best collateral the developer can provide. Individual development projects will be underwritten before advances on the line of credit are made.

What are possible sources of capital?

• Public or philanthropic funds could provide “core” or “first risk” capital.
• Lending institutions could provide capital at their cost of funds or lower.
• Utility companies could help finance affordable housing because it increases their customer base and uses energy more efficiently.
• Most employers probably would want to invest in specific projects that could provide
  housing for their employees; such employers could co-invest with the Capital Fund.

What’s our target for the amount to be raised?

We want to raise $5 to $10 million in loans or investments with a minimum term of five years. We estimate that such a funding level could help finance the development of 300 or more affordable homes for working families each year.

Have lenders and employers provided equity and working capital for development of affordable housing in other communities?

• First Business Bank in Madison has made a predevelopment loan and provided a development working capital line of credit to the Wisconsin Partnership. Lenders in many other cities have also provided lines of credit for predevelopment expenses and working capital to nonprofit developers.
• In the Village of Butternut in Ashland County, Butternut Veneer, the major local employer, committed $650,000 to a housing development fund for the construction of affordable workforce housing.
• In Pewaukee in Waukesha County, Quad Graphics developed an affordable rental housing project because of its concern about affordable housing for its employees, although the housing is open to all income-qualified residents of the community.
• In Marshall, Minn., Schwan’s Foods provided construction loans to the Southwest Minnesota Housing Partnership for development of 128 homes affordable to their employees, with a second stage of the project now being planned.
• In Rochester, Minn., Mayo Clinic and other local employers have committed $11 million as part of an effort to develop 875 sale and rental homes affordable to local employees.
• In Chicago, the University of Chicago invested $1 million in the nonprofit Community Investment Corporation to finance the purchase and rehabilitation of older multifamily buildings to provide affordable rental housing in the neighborhoods near the university.
• In Pennsylvania, National City Bank’s Community Development Corporation is the lead lender for three bank consortia that have provided almost $6 million as equity partners with nonprofit development corporations that rehabilitate or build new homes for sale.
• In Santa Clara, Calif., 60% of the capital in an affordable housing trust fund comes from local businesses concerned about the high cost of housing for public and private employees. The Santa Clara School District committed $6 million to assist the development of housing affordable to its teachers.

How will we structure the Capital Fund?

The Capital Fund will be structured as a limited liability company because of the flexibility an LLC offers to accommodate the individual business interests of different participants. The Partnership will act as Managing Member of the LLC.

How will operating expenses be paid?

The Capital Fund is intended to be financially self-supporting through an interest rate surcharge or “spread” on the loans and investments provided to nonprofit developers. The Partnership needs $100,000 in start-up funding, since expenses will be incurred before the first loans and investments begin to generate operating income. We can provide $25,000 of the start-up funding ourselves, but we need to raise the balance from other sources.