How Mission Lenders Fueled Motor City’s Comeback

By Alexandra Pacurar

Brett Theodos, Senior Research Associate at Urban Institute

When Detroit’s downturn made it almost impossible for developers, business owners or investors to obtain financing from traditional institutions, mission lenders stepped in to provide support for projects that had a positive impact on the community. Loan funds, community development banks, credit unions, philanthropies, and local, state, federal and quasi-government agencies were willing to accept lower rates of return, less or different collateral or higher debt-to-income ratios in order to support communities and stimulate markets that would normally have little access to credit.

Mission lenders were responsible for directly providing or leveraging 42 percent of investments in commercial, industrial, multifamily and institutional real estate in Detroit from 2013-2015, according to the Urban Institute’s recent companion briefs. The reports describe in detail the role of mission lenders, which also seek social return in addition, in Detroit’s resurgence. This form of lending and leveraged funding increased from $13 million in 2003 to an annual average of $147 million from 2007-2015.

Senior Research Associate Brett Theodos, author of the Urban Institute briefs, revealed how mission lenders could help other neighborhoods outside Downtown Detroit.

MHN: What effect does the work of mission lenders have in Detroit?

Theodos: Mission-oriented lenders provide capital that seeks a double bottom line of financial and social return. They can make many type of loans, including to consumers, small businesses and developers. We focused on lending for commercial, multifamily and industrial properties. Mission loans of these types allow the purchase, clean-up and/or rehabbing of properties that become grocery stores, affordable apartments, arts centers, offices and more.

MHN: One of the briefs indicates that the mission finance ecosystem needs continued support. What does this entail?

Brett Theodos: The public, philanthropic and corporate sectors are all important in supporting the mission finance ecosystem. Mission lenders and developers need new and expanded forms of patient, low-cost and subsidized capital. Specific supports include creating flexible subordinate debt and equity financing sources for smaller projects, investing in capacity building and technical assistance for local developers, improving the local regulatory environment, allocating subsidies strategically and supporting efforts to improve collaboration and visibility for the community development industry in Detroit.

MHN: What is the main reason for the discrepancy between downtown Detroit and the outer neighborhoods?

Theodos: Investment in other neighborhoods face several challenges, including greater subsidy needs for projects in weaker markets where lower rents are able to cover a smaller share of debt financing. In addition, many types of subsidies that can be employed on larger projects in Downtown and Midtown have high transaction costs and are not viable for smaller projects that neighborhoods need. Beyond this, many neighborhoods do not have experienced developers working in them.

MHN: What are the effects of this gap and how could it be closed? How could the activity of mission lenders could be expanded outside the city’s core?

Theodos: There are several supports needed. Mission lenders would benefit from more flexible subsidized financing to support projects with the greatest potential to jump-start the market, not just projects that conform to the rules of existing financing programs. They need patient equity capital that can sit in a transaction for five to 10 years. They need for a pool of subordinate debt to work in neighborhoods outside of the core and with smaller developers who have a limited balance sheet or track record.

Moving beyond financing vehicles, operational funding is needed for community development corporations to support them in community-based work, as is more technical-assistance funding for community development financial institutions to help developers identify and structure projects that respond to community market opportunities.

MHN: What could local authorities do to support mission lending?

Theodos: The City needs to do a better job of providing a consistent and predictable regulatory environment that is aggressive about facilitating development transactions. We encourage local government to select targeted areas for a period of intensive investment to stimulate particular neighborhood markets, after which new target areas could be selected. This need not mean that certain neighborhoods are left to fend for themselves, but it does mean providing enough resources in communities where an infusion of development finance could stimulate market demand and create a virtuous cycle of investment

MHN: How do you see this form of alternative lending going forward?

Theodos: Mission lenders have played an outsized role in the redevelopment of Detroit. Going forward, they will need support to expand to other neighborhoods in the city. And mainstream lenders will continue to need to re-enter the market.

Image courtesy of Urban Institute