What is pre-development and acquisition financing?
Pre-development and acquisition financing is essential for paying the many expenses of developing housing that occur before breaking ground. Obtaining financing for these expenses can be difficult — especially for small non-profits. Accordingly, a number of state and local governments have developed loan programs to cover these costs, thereby facilitating and expanding development activity for affordable homes.
Pre-development expenses include a variety of costs related to determining the feasibility of a particular project, such as the costs of preliminary financial applications, legal fees, architectural fees, and engineering fees. Acquisition expenses refer to any costs associated with obtaining control of the site.
Since these costs are incurred before construction begins, traditional lenders often consider pre-development and acquisition loans to be high-risk and set the interest rates at levels that make it infeasible for smaller organizations to get projects off the ground. Many states, non-profit housing organizations, and local lending programs provide low-cost financing for pre-development and acquisition expenses to help increase the availability of affordable homes.
How does pre-development and acquisition financing increase the availability of affordable homes?
While larger non-profit and for-profit organizations may be able to use reserves or lines of credit to pay for pre-development and acquisition expenses, these costs can be a major obstacle for smaller, community-based non-profit organizations. Indeed, when competing for larger properties in
desirable locations, even some of the larger non-profits and for-profits interested in building affordable homes may have difficulty marshaling the funds for acquisition in a timely and cost-competitive manner. By offering loans for pre-development and acquisition expenses, states, non-profit housing organizations, and local governments can make it easier for affordable housing developers to compete for land and meet local affordable housing needs.
Related Case Studies
Greater Metropolitan Housing Corporation (GMHC) provides high-risk pre-development loans to organizations which assist in the development of quality affordable housing.