Last month we defined transformative redevelopment projects, gave several examples, cited key players involved in each, and mentioned some of the funding sources and incentives used to create these new growth nodes. We described today’s mixed-use, walk-able, transit-oriented areas where start-up’s can congregate and workers share ideas in balanced communities – areas where the whole is worth more than the sum of its parts. In the examples we gave, challenging and costly processes changed areas with rough edges into areas of inspiration and delight.
In each such case, the initiating efforts fell upon financially challenged localities. Uncle Sam is simply no longer there in the manner of earlier urban renewal programs. As we emerge from the Great Recession, states and localities face strained budgets and credit limitations. They must avoid past experiences when they have made sacrifices to ready an area for redevelopment, even entering redevelopment agreements with developers, only to find proponents can’t (because of lack of financing) or won’t perform. With today’s recessions coming ever more closely spaced, it is too easy to “miss a cycle” even where areas are heavily invested in according to excellent plans. Redevelopment sites may then be prematurely liquidated to recoup needed funds. Elements of the plan can be compromised for inferior development either as a permanent outcome or to yield “interim” or “taxpayer” uses. Investors in quality development may be stranded, unable to market their properties as intended. Public amenities may be delayed until required metrics like ridership increases at transit stops are reached. Last month we noted how “technology centers” intended for vacated industrial compounds sometimes fail to reach their goals because of uncertainty over what tenant mix, services, amenities and standards will actually materialize.
Uncertainty over the availability of funding for key proponents or users creates an unknown quantity, regardless of how well-conceived a project may be in terms of the underlying market, how well-planned the facilities and how valuable the benefits for prospective tenants. It’s so often about money – not the amount of money that may be invested over time, but the money designated and available to be invested now as a redevelopment area is turning the corner. Available money can prompt a production-scale approach to high-quality physical transformation – one that will give credibility to a schedule under which a project is to be accomplished to its complete, intended state. It can push along the pace of ground-breakings and tenant leasing announcements. It can make it easier for a company to construct its own building, for developers to build speculative or partly speculative buildings, and for tenants to lease and equip space. This activity going on around a site can provide “comparables”, change the surroundings and provide customers – all to be noticed by investors and lenders.
A strong lead lender already committed to the project area, with designated funds available, can influence other lenders or team up with them as a participation lender. It can provide an early option for funding when others might consider it premature to commit to pioneering in the redevelopment area. But then again, with not too many projects given the green light to proceed…and that can happen within a few months… the other lenders may quickly change their thinking. When that happens, a lead lender can sell off or assign its loan interests to less aggressive and perhaps more local institutions. This is not an unknown subject. There are several models under which it has been regularly done. In economic development circles, it is spoken of as an “early in, early out” approach. What types of organizations can function as such patrones - seed money lenders, ever-present prospective lenders, back-up lenders or lenders of last resort, with a special interest in pioneering the redevelopment of a selected area using saturation lending as may needed while other lenders seek to keep geographically diversified? In addition to a very healthy capitalization, are there characteristics of business models that work? In terms of long-term institutional sustainability, is there a strategy for creating overwhelming probabilities that money invested or lent will be returned within a time frame satisfactory to the categories of capital raised? To start with, how much money is required…and when…and for how long… and with what security?
The easiest starting point is that last question, of how much money will be required and under what circum-stances. Here the story is not all bad news. The reality of funding a complex and therefore time-consuming process…that of funding an A-to-Z redevelopment process…does not require payment of a very large part of the redevelopment costs all at once nor for the duration of the redevelopment project. The goal can be accomplished with much less than that. We can also put quotation marks around the word “funding”, because what we are really talking about is implementing steps in a value creation process in which increments in value can be brought about that are far out of proportion to the costs expended. A great example is up-zoning.
Let’s take a quick look at a model that, within a few sentences, we will greatly simplify. Our initial model is a form of spreadsheet many of us have used called a Sources and Uses of Funds Schedule. For a redevelopment project, the “sources” may include partner cash contributions, acquisition loans, interim project loans, construction loans, interim rents, syndication proceeds, sales proceeds, the commencement of permanent operating revenues and permanent financing. What is a source at one point may be replaced by another source at another time or may be reduced in the amount outstanding by operating income, fees earned, etc. Amounts drawn from each source can be projected to go up and down, over a period of months or years, according to a schedule of activities, milestones and transactions involved in the project. In the same way, “uses” can be projected to vary in amount as scheduled activities, milestones and transactions occur. Sometimes a “use” will be a pay-off or a reduction of funs drawn from a “source.” Among “sources”, often the earliest are the most costly to procure because the collateral is least and the uncertainties are greatest. As the particulars of a project are “firmed up”, lower-cost financing may become obtainable. Late in the value creation process, construction or convertible loans may be fairly readily obtained for the bulk of the cost of constructing buildings and placing them into operation. But, stepping back to see the forest rather than such individual trees, the major take-away is this: In the redevelop-ment of an area that may consist of many city blocks, not all of the steps in value creation need be paid for at one time…nor procured with funds from entities that invest or lend. How so?
Our Sources and Uses of Funds Schedule for a redevelopment project can be reduced to a simpler model, dealing only with those dispersed points across a period of time when “funding” - or, as we think it is more accurate to say, steps in value creation - are required. Let’s imagine a hand-held square with a simple grid of holes drilled into it – not even as fancy as a Cribbage board – where each hole can accept a peg. The holes running along the up-and-down axis can represent the different project activities, while those running along the left-to-right axis can represent activity-blocks along a time sequence. Activities like the one mentioned above - a development company arranging its own financing and developing its own building – do represent a step in value creation but do not necessarily require input from the lead redevelopment lender. So we need not red-mark the hole or holes representing that developer’s activities as needing to be filled by enhanced redevelopment funding/value-creation. Other holes will require a value creation step that does need such a “plug”. We can red-mark those holes. Surveying our entire grid, we will see we have wound up with only but so many of such red-marked holes. Some of those holes will require a plug representing a “goodly amount” of money…but the happier circumstance will be that some of the red-marked holes will not!
Here, indeed, is a paradox. There is an old yarn about how by the time a town can afford a planner, it’s too late. It may, indeed, be too late to avoid a planning mess. But it can also be too late to access some wonderful opportunities to create value out of all proportion to the cost. Planners, economic development officials, redevelopment agency officials and others cooperatively involved in devising area plans for cities can do a great deal to create value through their efforts and a few studies. As for area plans describing zoning and benefits available in those areas (Urban Enterprise Zones, etc.): Cities need to have zoning, anyway. They need to have policies concerning available benefits. They make a plethora of decisions about property and environmental standards, infrastructure, transportation systems, parking provisions to coordinate with transit use and many other matters that relate to zoning and planning. They need to provide appropriate infrastructure to correspond with planned land uses and densities. Perhaps no other investment outweighs the effect upon value creation of coordinating those decisions and concentrating the city’s combined efforts and budgets to provide for all these things in an area planned for transformative redevelopment. That kind of redevelopment will provide for a good return on the city’s investments, substantial increases in the city’s tax base and reductions in its social costs, and its efforts in that direction can be counted as “pegs” in our grid of needed value-creation steps. But in order to ensure a timely return on its investments, the city would do best to double-team with an entity that will ensure readily-available funding for “pioneers” pursuing quality development activities in keeping with the market-researched and broadly-appealing plan.
We will only quickly pass over ways in which cities acquire interests in redevelopment areas, recoup their investments and create value, as we must soon turn to the “other half of the apple” as we turn to new and non-municipal methods of redevelopment area finance.
Removal of blighting influences and the assemblage of building sites suitable for efficient buildings are key issues. Redevelopment areas often contain properties that are in violation of various codes and regulations. Environmental liabilities may motivate an owner to dispose of a property, and cities often have more efficient means of dealing with these problems than individual owners do (e.g. investigating and delimiting cleanup plans, limiting liabilities, use of superfund and other monies, deeding over land cleared of tax liabilities or ceding liens to specialized brownfield investment firms, coordinating permitted uses with cleanup standards, modifying nearby public works plans accordingly, etc.) Cities can deal with tax arrearages, overdue fines, code violations, etc., in ways that may result in their obtaining properties at little or no cost and letting owners off the hook. Where owners are unable to restore properties after fires or other damages, where titles are clouded or by action of escheat, cities can also acquire properties at little or no cost. In one case we are familiar with, a city became an equity partner in a major real estate development project (now doing quite nicely) in a settlement of back taxes.
Cities, typically acting through their redevelopment agencies, can exercise eminent domain to assemble sites large enough and with the right frontages to accommodate large buildings planned in redevelopment areas. (Recent litigation has challenged the willy-nilly abuse of this practice). The city must pay only fair market value for the lot(s) as in their existing configuration, and the city can gain a value (called plottage) when a more useable assemblage is created.
Cities can also offer to relocate businesses and other property owners. Public housing projects, often accounting for large land parcels, can be replaced by new housing in alternate locations and often the result, these days, is better housing interspersed with market-rate housing in much better-kept and more pleasing communities.
These are some of the ways cities can gain a beneficial stake in redevelopment areas even before the higher real estate taxes, payroll taxes, sales taxes and other benefits ultimately expected materialize. (the word “ultimately” is operative, here, as cities sometimes give away some of their future taxes through abatements used as develop-ment incentives or hypothecate them to raise tax increment financing employed in facilitating project finance). New Market tax credits, historic tax credits and low and moderate housing tax credits (often used in combination with a number of affordable housing finance programs) often play a role in redevelopment area financing, although we think the greater need is for jobs that enable people to pay market rents and purchase prices.
So these are some of the things a city can do to earn its slice of the pie, and we have noted last month some of the many other players involved – abutting universities, coalitions of banks and investment firms, area businesses, governments contracting for facilities, foundations and wealthy individual contributors. Time and talent can bring together wonders of collaboration. But, apart from the city itself, where is our 800 pound benign gorilla patrone?
Going back into the annals of Policy Winners, we recall that in our Dec. 2012 and April, 2013 issues we proposed a National Economic Development Bank capitalized by re-introduced United States Notes that have been issued in the past and can again be issued in sane amounts by the US Treasury with no debt burden to the federal government and scant if any effect upon the Federal Reserve and our current monetary system. Of all the ideas we can suggest, none is as risk-free a source of funding for worthwhile projects. As in other countries like Brazil, India and China, a national economic development bank in the US would be an ideal partner in financing transformative redevelopment projects.
Our April 2013 issue mentioned a somewhat different approach with reference to the historic first Bank of the United States, and in the May, 2013 issue Mr. Michael Kirsch provided a fuller recounting of the history of both the first Bank of the United States and the second Bank of the United States. These were both public banks, storehouses for government revenues until needed and instrumentalities for transforming monetary debt into a credit-based monetary system. Investors were attracted to co-investing with the government, giving the bank a second basis of capitalization in the form of subscriptions purchased; interest on lending operations also generated profit. A bank along these lines could also be a good partner in financing transformative development projects. Many of the founding fathers were keen on the government being actively involved in financing economic development projects.
In our June, 2013 issue, we described state and municipal public banks in the US and many countries abroad, notably Germany. States, counties, cities and publicly-related entities have large-scale banking needs that often result in considerable outflows of money to Wall Street…not the dirtiest word in our book, as some of our clients, too, are Wall Street banks and investment houses. But public entities in other parts of the country have figured out that they can save more money by doing their own banking, and channel more of it into their own areas. The Bank of North Dakota – a venerable granddaddy of such organizations, makes a regular practice of doing participation loans with North Dakota banks, enabling the latter to compete in larger-scale lending opportunities and resulting in a very healthy local bank lending system. A bank that has modeled sound lending practices with community benefit in mind for nearly a century and mastered the art of participation lending is in an ideal position to take a leading role in transformative redevelopment finance.
Capital and investment funds have been raised on Wall Street for just about anything and everything. One of the largest investment houses, Goldman Sachs, points with rightful pride to its work in funding the transformative redevelopment of the Brooklyn Navy Yard.
The opportunity to co-invest with governments or large investment firms holds an attraction to many investors. It can be a thing that institutional investors like municipal and union pension funds and life insurance companies can “believe in” as they look to the long-term futures of their areas as well as sound long-term investment opportunities. Even the Social Security Trust Fund, if we stop raiding it for other purposes, could find transformative redevelopment projects a suitable “lock box” such as Al Gore kept mentioning.
As we think of long-term investment horizons, let’s remember the old Navy hero John Paul Jones. The one thing he kept asking for was a fast ship, because, he said, “It is my intention to get in harm’s way.” We’re all for that philosophy, with one modification. It would be our intention to get in growth’s way. Find a city that is contracting, and we will show you a long series of warning signs. With an ample supply of “patient money”, all you really have to do is find a city that is growing and observe in which direction it is growing. That is not the case for a developer who risks all his wealth on one building. There are a lot of things that can go wrong in developing one building that can deplete a developer who is counting on everything happening on cue. A tenant can hit a glitch, be unable to pay its rent, and then the developer is not able to make the mortgage payments and loses the
property. That’s not to say that that property will never again have value. Eventually a new tenant or a new type of tenant will move in who can pay the rent and the building can become viable again – under new ownership. With deep pockets and a planning horizon of more than a decade, there are a lot of things you can do wrong and still not lose your long-term investment.
So it is that a lead lender in a transformative redevelopment area that has controlled its total level of exposure might even consider guaranteeing a return of and some return on investments that may not need to be recouped until beneficiaries retire. This might be unusual for a private business, but what about a business that involves government participation? If, in the worst case, you can just create some more money – as the Federal government can – this may not be an unacceptable risk if most of your lending and investment pays off well. Along these lines, a “kicker” in the form of a small long-term special assessment or utility fee or lien on the property payable upon reversion or even the use of long-term ground leases would all be methods of helping to ensure long-term investments where that is an institution’s goal…most private companies and developers are focused on short-term finance-ability and sharply discounted present values to the extent these long-term benefits barely show up on the radar screen.
Have we arrived at “the answer”? No, but there will be more to come as we address the subject of bank regulation based on performance objectives and re-raise the issue of the need for a more meaningful, functional bank reserve system as addressed in the September, 2013 issue of Policy Winners. A certain part of our savings should be employed in renewing and restoring economical vitality to our cities. We know it can be done – it is being done. Our task is to make it be done in a more expeditious manner, according to plans in which the accomplished whole is worth more than the sum of haphazardly accomplished parts.
In each such case, the initiating efforts fell upon financially challenged localities. Uncle Sam is simply no longer there in the manner of earlier urban renewal programs. As we emerge from the Great Recession, states and localities face strained budgets and credit limitations. They must avoid past experiences when they have made sacrifices to ready an area for redevelopment, even entering redevelopment agreements with developers, only to find proponents can’t (because of lack of financing) or won’t perform. With today’s recessions coming ever more closely spaced, it is too easy to “miss a cycle” even where areas are heavily invested in according to excellent plans. Redevelopment sites may then be prematurely liquidated to recoup needed funds. Elements of the plan can be compromised for inferior development either as a permanent outcome or to yield “interim” or “taxpayer” uses. Investors in quality development may be stranded, unable to market their properties as intended. Public amenities may be delayed until required metrics like ridership increases at transit stops are reached. Last month we noted how “technology centers” intended for vacated industrial compounds sometimes fail to reach their goals because of uncertainty over what tenant mix, services, amenities and standards will actually materialize.
Uncertainty over the availability of funding for key proponents or users creates an unknown quantity, regardless of how well-conceived a project may be in terms of the underlying market, how well-planned the facilities and how valuable the benefits for prospective tenants. It’s so often about money – not the amount of money that may be invested over time, but the money designated and available to be invested now as a redevelopment area is turning the corner. Available money can prompt a production-scale approach to high-quality physical transformation – one that will give credibility to a schedule under which a project is to be accomplished to its complete, intended state. It can push along the pace of ground-breakings and tenant leasing announcements. It can make it easier for a company to construct its own building, for developers to build speculative or partly speculative buildings, and for tenants to lease and equip space. This activity going on around a site can provide “comparables”, change the surroundings and provide customers – all to be noticed by investors and lenders.
A strong lead lender already committed to the project area, with designated funds available, can influence other lenders or team up with them as a participation lender. It can provide an early option for funding when others might consider it premature to commit to pioneering in the redevelopment area. But then again, with not too many projects given the green light to proceed…and that can happen within a few months… the other lenders may quickly change their thinking. When that happens, a lead lender can sell off or assign its loan interests to less aggressive and perhaps more local institutions. This is not an unknown subject. There are several models under which it has been regularly done. In economic development circles, it is spoken of as an “early in, early out” approach. What types of organizations can function as such patrones - seed money lenders, ever-present prospective lenders, back-up lenders or lenders of last resort, with a special interest in pioneering the redevelopment of a selected area using saturation lending as may needed while other lenders seek to keep geographically diversified? In addition to a very healthy capitalization, are there characteristics of business models that work? In terms of long-term institutional sustainability, is there a strategy for creating overwhelming probabilities that money invested or lent will be returned within a time frame satisfactory to the categories of capital raised? To start with, how much money is required…and when…and for how long… and with what security?
The easiest starting point is that last question, of how much money will be required and under what circum-stances. Here the story is not all bad news. The reality of funding a complex and therefore time-consuming process…that of funding an A-to-Z redevelopment process…does not require payment of a very large part of the redevelopment costs all at once nor for the duration of the redevelopment project. The goal can be accomplished with much less than that. We can also put quotation marks around the word “funding”, because what we are really talking about is implementing steps in a value creation process in which increments in value can be brought about that are far out of proportion to the costs expended. A great example is up-zoning.
Let’s take a quick look at a model that, within a few sentences, we will greatly simplify. Our initial model is a form of spreadsheet many of us have used called a Sources and Uses of Funds Schedule. For a redevelopment project, the “sources” may include partner cash contributions, acquisition loans, interim project loans, construction loans, interim rents, syndication proceeds, sales proceeds, the commencement of permanent operating revenues and permanent financing. What is a source at one point may be replaced by another source at another time or may be reduced in the amount outstanding by operating income, fees earned, etc. Amounts drawn from each source can be projected to go up and down, over a period of months or years, according to a schedule of activities, milestones and transactions involved in the project. In the same way, “uses” can be projected to vary in amount as scheduled activities, milestones and transactions occur. Sometimes a “use” will be a pay-off or a reduction of funs drawn from a “source.” Among “sources”, often the earliest are the most costly to procure because the collateral is least and the uncertainties are greatest. As the particulars of a project are “firmed up”, lower-cost financing may become obtainable. Late in the value creation process, construction or convertible loans may be fairly readily obtained for the bulk of the cost of constructing buildings and placing them into operation. But, stepping back to see the forest rather than such individual trees, the major take-away is this: In the redevelop-ment of an area that may consist of many city blocks, not all of the steps in value creation need be paid for at one time…nor procured with funds from entities that invest or lend. How so?
Our Sources and Uses of Funds Schedule for a redevelopment project can be reduced to a simpler model, dealing only with those dispersed points across a period of time when “funding” - or, as we think it is more accurate to say, steps in value creation - are required. Let’s imagine a hand-held square with a simple grid of holes drilled into it – not even as fancy as a Cribbage board – where each hole can accept a peg. The holes running along the up-and-down axis can represent the different project activities, while those running along the left-to-right axis can represent activity-blocks along a time sequence. Activities like the one mentioned above - a development company arranging its own financing and developing its own building – do represent a step in value creation but do not necessarily require input from the lead redevelopment lender. So we need not red-mark the hole or holes representing that developer’s activities as needing to be filled by enhanced redevelopment funding/value-creation. Other holes will require a value creation step that does need such a “plug”. We can red-mark those holes. Surveying our entire grid, we will see we have wound up with only but so many of such red-marked holes. Some of those holes will require a plug representing a “goodly amount” of money…but the happier circumstance will be that some of the red-marked holes will not!
Here, indeed, is a paradox. There is an old yarn about how by the time a town can afford a planner, it’s too late. It may, indeed, be too late to avoid a planning mess. But it can also be too late to access some wonderful opportunities to create value out of all proportion to the cost. Planners, economic development officials, redevelopment agency officials and others cooperatively involved in devising area plans for cities can do a great deal to create value through their efforts and a few studies. As for area plans describing zoning and benefits available in those areas (Urban Enterprise Zones, etc.): Cities need to have zoning, anyway. They need to have policies concerning available benefits. They make a plethora of decisions about property and environmental standards, infrastructure, transportation systems, parking provisions to coordinate with transit use and many other matters that relate to zoning and planning. They need to provide appropriate infrastructure to correspond with planned land uses and densities. Perhaps no other investment outweighs the effect upon value creation of coordinating those decisions and concentrating the city’s combined efforts and budgets to provide for all these things in an area planned for transformative redevelopment. That kind of redevelopment will provide for a good return on the city’s investments, substantial increases in the city’s tax base and reductions in its social costs, and its efforts in that direction can be counted as “pegs” in our grid of needed value-creation steps. But in order to ensure a timely return on its investments, the city would do best to double-team with an entity that will ensure readily-available funding for “pioneers” pursuing quality development activities in keeping with the market-researched and broadly-appealing plan.
We will only quickly pass over ways in which cities acquire interests in redevelopment areas, recoup their investments and create value, as we must soon turn to the “other half of the apple” as we turn to new and non-municipal methods of redevelopment area finance.
Removal of blighting influences and the assemblage of building sites suitable for efficient buildings are key issues. Redevelopment areas often contain properties that are in violation of various codes and regulations. Environmental liabilities may motivate an owner to dispose of a property, and cities often have more efficient means of dealing with these problems than individual owners do (e.g. investigating and delimiting cleanup plans, limiting liabilities, use of superfund and other monies, deeding over land cleared of tax liabilities or ceding liens to specialized brownfield investment firms, coordinating permitted uses with cleanup standards, modifying nearby public works plans accordingly, etc.) Cities can deal with tax arrearages, overdue fines, code violations, etc., in ways that may result in their obtaining properties at little or no cost and letting owners off the hook. Where owners are unable to restore properties after fires or other damages, where titles are clouded or by action of escheat, cities can also acquire properties at little or no cost. In one case we are familiar with, a city became an equity partner in a major real estate development project (now doing quite nicely) in a settlement of back taxes.
Cities, typically acting through their redevelopment agencies, can exercise eminent domain to assemble sites large enough and with the right frontages to accommodate large buildings planned in redevelopment areas. (Recent litigation has challenged the willy-nilly abuse of this practice). The city must pay only fair market value for the lot(s) as in their existing configuration, and the city can gain a value (called plottage) when a more useable assemblage is created.
Cities can also offer to relocate businesses and other property owners. Public housing projects, often accounting for large land parcels, can be replaced by new housing in alternate locations and often the result, these days, is better housing interspersed with market-rate housing in much better-kept and more pleasing communities.
These are some of the ways cities can gain a beneficial stake in redevelopment areas even before the higher real estate taxes, payroll taxes, sales taxes and other benefits ultimately expected materialize. (the word “ultimately” is operative, here, as cities sometimes give away some of their future taxes through abatements used as develop-ment incentives or hypothecate them to raise tax increment financing employed in facilitating project finance). New Market tax credits, historic tax credits and low and moderate housing tax credits (often used in combination with a number of affordable housing finance programs) often play a role in redevelopment area financing, although we think the greater need is for jobs that enable people to pay market rents and purchase prices.
So these are some of the things a city can do to earn its slice of the pie, and we have noted last month some of the many other players involved – abutting universities, coalitions of banks and investment firms, area businesses, governments contracting for facilities, foundations and wealthy individual contributors. Time and talent can bring together wonders of collaboration. But, apart from the city itself, where is our 800 pound benign gorilla patrone?
Going back into the annals of Policy Winners, we recall that in our Dec. 2012 and April, 2013 issues we proposed a National Economic Development Bank capitalized by re-introduced United States Notes that have been issued in the past and can again be issued in sane amounts by the US Treasury with no debt burden to the federal government and scant if any effect upon the Federal Reserve and our current monetary system. Of all the ideas we can suggest, none is as risk-free a source of funding for worthwhile projects. As in other countries like Brazil, India and China, a national economic development bank in the US would be an ideal partner in financing transformative redevelopment projects.
Our April 2013 issue mentioned a somewhat different approach with reference to the historic first Bank of the United States, and in the May, 2013 issue Mr. Michael Kirsch provided a fuller recounting of the history of both the first Bank of the United States and the second Bank of the United States. These were both public banks, storehouses for government revenues until needed and instrumentalities for transforming monetary debt into a credit-based monetary system. Investors were attracted to co-investing with the government, giving the bank a second basis of capitalization in the form of subscriptions purchased; interest on lending operations also generated profit. A bank along these lines could also be a good partner in financing transformative development projects. Many of the founding fathers were keen on the government being actively involved in financing economic development projects.
In our June, 2013 issue, we described state and municipal public banks in the US and many countries abroad, notably Germany. States, counties, cities and publicly-related entities have large-scale banking needs that often result in considerable outflows of money to Wall Street…not the dirtiest word in our book, as some of our clients, too, are Wall Street banks and investment houses. But public entities in other parts of the country have figured out that they can save more money by doing their own banking, and channel more of it into their own areas. The Bank of North Dakota – a venerable granddaddy of such organizations, makes a regular practice of doing participation loans with North Dakota banks, enabling the latter to compete in larger-scale lending opportunities and resulting in a very healthy local bank lending system. A bank that has modeled sound lending practices with community benefit in mind for nearly a century and mastered the art of participation lending is in an ideal position to take a leading role in transformative redevelopment finance.
Capital and investment funds have been raised on Wall Street for just about anything and everything. One of the largest investment houses, Goldman Sachs, points with rightful pride to its work in funding the transformative redevelopment of the Brooklyn Navy Yard.
The opportunity to co-invest with governments or large investment firms holds an attraction to many investors. It can be a thing that institutional investors like municipal and union pension funds and life insurance companies can “believe in” as they look to the long-term futures of their areas as well as sound long-term investment opportunities. Even the Social Security Trust Fund, if we stop raiding it for other purposes, could find transformative redevelopment projects a suitable “lock box” such as Al Gore kept mentioning.
As we think of long-term investment horizons, let’s remember the old Navy hero John Paul Jones. The one thing he kept asking for was a fast ship, because, he said, “It is my intention to get in harm’s way.” We’re all for that philosophy, with one modification. It would be our intention to get in growth’s way. Find a city that is contracting, and we will show you a long series of warning signs. With an ample supply of “patient money”, all you really have to do is find a city that is growing and observe in which direction it is growing. That is not the case for a developer who risks all his wealth on one building. There are a lot of things that can go wrong in developing one building that can deplete a developer who is counting on everything happening on cue. A tenant can hit a glitch, be unable to pay its rent, and then the developer is not able to make the mortgage payments and loses the
property. That’s not to say that that property will never again have value. Eventually a new tenant or a new type of tenant will move in who can pay the rent and the building can become viable again – under new ownership. With deep pockets and a planning horizon of more than a decade, there are a lot of things you can do wrong and still not lose your long-term investment.
So it is that a lead lender in a transformative redevelopment area that has controlled its total level of exposure might even consider guaranteeing a return of and some return on investments that may not need to be recouped until beneficiaries retire. This might be unusual for a private business, but what about a business that involves government participation? If, in the worst case, you can just create some more money – as the Federal government can – this may not be an unacceptable risk if most of your lending and investment pays off well. Along these lines, a “kicker” in the form of a small long-term special assessment or utility fee or lien on the property payable upon reversion or even the use of long-term ground leases would all be methods of helping to ensure long-term investments where that is an institution’s goal…most private companies and developers are focused on short-term finance-ability and sharply discounted present values to the extent these long-term benefits barely show up on the radar screen.
Have we arrived at “the answer”? No, but there will be more to come as we address the subject of bank regulation based on performance objectives and re-raise the issue of the need for a more meaningful, functional bank reserve system as addressed in the September, 2013 issue of Policy Winners. A certain part of our savings should be employed in renewing and restoring economical vitality to our cities. We know it can be done – it is being done. Our task is to make it be done in a more expeditious manner, according to plans in which the accomplished whole is worth more than the sum of haphazardly accomplished parts.
