What is pre-development and acquisition financing?

Pre-development and acquisition financing is essential for paying the many housing development expenses that are incurred before breaking ground. Obtaining financing for these expenses is difficult in good economic times -- especially for small non-profits. Challenging economic times, of course, make it even more so. A number of state and local governments have developed loan programs to cover these costs, thereby facilitating and expanding development activity for affordable homes. Some of these programs have been curtailed in the economic downturn, but many remain. 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. These costs are sometimes referred to as soft costs. 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 and some 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 larger non-profits and for-profits interested in building affordable homes may have difficulty marshalling the funds for acquisition in a timely and cost-competitive manner. By offering loans for pre-development and acquisition expenses, state and local governments can make it easier for affordable housing developers to

Solutions in Action

Photo courtesy of Trinity Housing, Via Roble, in Escondido, California, is a mixed-income rental and homeowner community, which received pre-development and acquisition financing through California's Housing Enabled by Local Partnerships (HELP) Program. Although the program has been temporarily suspended, a HELP award of $1.85 million to the city of Escondido assisted with the site acquisition of Via Roble, as well as its development and rehabilitation. Click here to view more examples of programs at the state level. Visit the Gallery to learn more about Via Roble.

compete for land and meet local affordable housing needs.  For example,
cohousing communities provide many advantages for older adults who wish to age in place, but start-up costs can be prohibitive.  Greater access to predevelopment funding could help prospective cohousing communities advance beyond the planning stages.  (Learn more about cohousing.)

Role of the Neighborhood Stabilization Program In the wake of the mortgage foreclosure crisis, many communities have a surplus of foreclosed and abandoned properties that, when inadequately secured and maintained, can destabilize entire neighborhoods and adversely impact nearby property values. The Neighborhood Stabilization Program (NSP), which was authorized in 2008 as part of the Housing and Economic Recovery Act, helps to address these issues by making available $3.92 billion in formula grants to state and local governments. The Act specifies five eligible uses for NSP funds, including the establishment of financing tools for the purchase and redevelopment of foreclosed homes. Click here to visit our sister site, Foreclosure-Response.org and learn more about the acquisition and redevelopment of foreclosed properties.

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