1. Structured Funds Analysis Living Cities TOD Working Group May 23, 2011

2. 2 2 Can Structured Funds Finance Equitable TOD at Scale? The field needs mechanisms for financing equitable TOD at scale Structured funds have been evolving in directions that could prove useful This analysis aims to describe the pros and cons of structured funds as vehicles for financing TOD

3. 3 3 Background for the study Two funds, in Denver and the Bay Area, have been established specifically to finance TOD The $50 million Bay Area Transit Oriented Affordable Housing Fund (TOAH) seems to represent the best-evolved example of how structured funds can be used to foster equitable TOD Living Cities invested in TOAH to gain experience with the mechanism and deepen our understanding of how such a fund can address the needs of equitable TOD finance This short review considers the strengths and limitations of 6 structured funds and points the way for future efforts

4. 4 4 Why is Financing Equitable TOD Challenging? $ $ $ $ $$ TIMING SCALE SUBSIDY

5. 5 5 Why is financing Equitable TOD a challenge? Timing: Land speculation often begins years before construction, making land assembly difficult and expensive. Acquiring sites near transit that can be developed or preserved for affordable housing becomes costly, and holding periods until transit materializes can be long Scale: The existing community development finance system is project oriented. Equitable TOD is best planned and implemented at a greater scale, i.e. a station area or ideally an entire corridor. TOD lending tends to involve bigger loans, which generally requires coordination of multiple financing sources Cost: Developing mixed income, mixed use TOD projects is more complicated and expensive than traditional real estate development, with higher upfront costs for planning, community engagement, infrastructure and building materials and greater need for interdisciplinary expertise Subsidy: Resisting the pressures of gentrification, maintaining affordability and creating attractive mixed income communities near transit requires subsidy, which is increasingly scarce in this economic environment Lack of coordination: Transit and land use decisions are generally not well- integrated; similarly, zoning and infrastructure investment may involve different stakeholders and timelines

6. 6 6 How does finance for community development typically work? Non-for-profit and mission-oriented developers seek financing from banks or community development financial institutions (CDFIs) to acquire land or property and develop or preserve it for community purposes Financial institutions extend loans according to their underwriting criteria and risk tolerance; they may limit their exposure to a particular borrower or geographic area so as to manage their risk Loans larger than one financial institution can provide may be offered to a group (“syndicate”) of banks who act together; the originating bank may also sell parts of the loan (“participations”) to other financial institutions in order to share risk Large or complex transactions can take time to arrange, putting not-for-profit and mission-oriented developers at a disadvantage in competing with private sector developers for strategic properties

7. 7 7 Current Community Development Finance Tools Inadequate $ $ CDFI Developer Project

8. 8 Current Community Development Finance Tools Inadequate $ $ CDFI Developer Project $ $ $ $ $ $ $ Banks Local Govt $

9. 9 How a Structured Fund Addresses Barriers Scale Aggregates a large pool of capital to fund multiple projects Subsidy Subsidy “built-in” to the fund with defined uses to mitigate risk, reduce rates, and support equitable outcomes Timing Planned vs. reactive. A fund requires negotiations upfront, while “one-off” deals are more reactive, and subsequently slower

10. 10 Growing Use of Structured Funds LA County HIF $60MM (2007) NGF $114MM (2008) TOAH $50MM (2011) NYAF $233MM (2006) Louisiana Loan Fund $47MM (2007) Denver TOD Fund $15MM (2009)

11. 11 What is a structured fund? A structured fund is an investment vehicle that combines different types of capital into a single pool, allowing investors with different goals and risk tolerances to act together Structured funds differ in how they protect different types of investors from risk. They establish rules for what types of loans they will make (e.g. acquisition loans, construction loans, etc.), how they will be governed (manager, Credit Committee), what rules they will use when underwriting loans (e.g. maximum loan to value ratios), what funds must be set aside as reserves, and how the flow of funds from repayment of underlying loans will be used to repay investors – In a structured fund, “senior investors” receive first priority for payment of interest and principal, while “junior” or “subordinated” investors take more risk and receive lower priority. The order of payments is sometimes called the “waterfall” – Structured funds often include “first loss” capital from government or philanthropic investors who agree to cover shortfalls up to a certain level in order to induce private investors to participate – Structured funds generally include loss reserves (such as 5%) which are funds that are held in cash to protect investors against the risk of default

12. 12 Features of Structured Funds Capitalization – How much, from whom, what terms? Product types – What kinds of loans will be offered? Governance structure – Credit committee, advisory board, servicing, management Underwriting rules Repayment waterfall – How are repayments distributed? Who bears how much risk? Reserves – How much is set aside to protect against loss or delinquency?

13. 13 What is a Structured Fund? Structured Capital: Aggregates Capital – Large capital pool formed from multiple funding sources in an “off balance sheet” entity Blends Capital – Each capital source charges a different rate, producing a blended rate for the fund Mitigates Risk – Attracts private capital by prioritizing repayment to senior tranche Govt PRI CDFI Sr Lender Variable 7.25% Fixed 2.5 - 3% 0% 4.05% All-in cost of funds Interest Rate – Up to $10MM – 17% Loss – 13% Loss – 20% Loss $50MM TOAH

14. 14 What is a Structured Fund? New York Acquisition Fund Promotes Collaboration Multiple cross-sector stakeholders working together Targets Activity Establishment of a fund focuses strategy and facilitates investor participation

15. 15 Structured Funds: Benefits Aggregates more capital and allows bigger loans than a single balance sheet might accommodate Enables investors to direct their investments to a targeted activity Facilitates blending of different types of capital, mitigating risk and reducing interest rates Attracts private capital Harmonizes the activities of multiple stakeholders (developers, CDFIs, government, private capital) by articulating an agreed-upon set of goals and underwriting standards Brings together multiple originators with different areas of expertise and focus Creates an entity that is independent of political pressure

16. 16 Structured Funds: Challenges Credit Enhancement – Significant credit enhancement is required to attract private capital Expense – Funds are expensive to start and to run “Too many cooks” – With multiple investors, accommodating everyone’s goals and sensibilities takes time and narrows the “underwriting box” Demand – Funds that take too long to close have tended to miss their market opportunities and not be useful once they finally close Flexibility – Complex funds with multiple participants find it hard to adapt quickly to market changes Dependence on local ecosystem – Deal flow depends on the strength of ecosystem of developers, lending partners, and government

17. 17 Fund Features

18. 18 Fund Summary

19. 19 Fund Structure – NYAF

20. 20 Fund Structure - TOAH

21. 21 Risk Structure - NYAF

22. 22 Risk Structure - TOAH

23. 23 TOAH: An Evolving Structured Funds Model Credit Enhancement – $10MM (20% of fund) from government as a pooled loss reserve; $6.5MM in subordinated capital from LC and 2 foundations; capital can be fully deployed Expense – TOAH managed upfront expense by negotiating the business plan rather than the legal documents. Using a non-profit fund manager meant lower operating costs “Too many cooks” – Two senior lenders (versus 13 in the original NYAF) Demand – Too soon to assess fund utilization. Fund closed within 8 months. Conducted detailed market analysis to ensure deal flow Flexibility – Broad applicability: Suite of 5 products; 6 originating lenders with different geographic and product strengths; 9 county region Dependence on local ecosystem – The Bay Area has a vibrant CDFI ecosystem, complemented by an engaged, strong and thoughtful local government

24. 24 TOAH Model Outside the Bay Area? Credit Enhancement – MTC contribution of $10MM was significant and may be difficult to raise in other regions Expense – Requires careful planning and strong non-profit manager to help control costs “Too many cooks” – Fewer investors achievable. Helped by lenders interested in a particular geography Demand – Assessing borrower demand and building an offering that is responsive should be possible Flexibility – Depends on region’s specific risks and characteristics Dependence on local ecosystem – Difficult to replicate. The Bay Area has one of the strongest LMI lending ecosystems made up of excellent CDFIs, developers, CDCs, and thoughtful local government

25. 25 Key Success Factors For fund-raising: Strong, experienced fund manager Sufficient funding to provide “top loss” Fund structure that appropriately mitigates key risks Initial grants to develop business model For deployment: Capable local developers Fund products responsive to market demand and appropriately priced Response to applications from potential borrowers is predictable and fast Fund is flexible enough to respond to changing market conditions Local government support Availability of take-out finance Strong communication and coordination among funding partners and projects

26. 26 TOD Funds: The Next Generation How could fund design target uses other than housing? What fund structure would work best for a weak market city? What types of government funding (subsidy, guarantee, etc.) could be used to reduce investor risk? Are there other policies or actions government could take to attract investors? Are there ways besides PRIs that foundations can contribute to funding equitable TOD?

27. 27 TOD WG Investment Parameters Tied to a regional sustainable development plan Multi-purpose (e.g. not just for acquisition) Demand-driven Managed by a capable fund manager Backed by a public agency commitment that includes financial investment Governed by a group with a mission focus Structured so that originating CDFI(s) share risk with investors Constructed with enough flexibility so that the fund manager and originating lenders can respond appropriately to opportunities in the marketplace

28. 28 Interview List Dudley Benoit, JP Morgan Chase (New York Acquisition Fund) Allison Clark, MacArthur Foundation (Denver TOD Fund) Amy Chung, Living Cities (TOAH) Brigitt Jandreu-Smith, Corporation for Supportive Housing (LA County Housing Innovation Fund) Chuck Laven, Forsyth Street Advisors (New York Acquisition Fund) Christine Looney, Ford Foundation (Louisiana Loan Fund) Patrick Maher, LISC (Louisiana Loan Fund, TOAH) Melinda Pollack, Enterprise Community Loan Fund (New Generations Fund, Denver TOD Fund) Brian Prater, LIIF (TOAH, LA County Housing Innovation Fund) My Trinh, Enterprise Community Loan Fund (New Generations Fund, New York Acquisition Fund)

29. 29 List of Reviewed Papers Center for Transit-Oriented Development with Living Cities, “Fostering Equitable and Sustainable Transit-Oriented Development: Briefing Papers For a Convening on Transit-Oriented Development” February24, 2009. Center for Transit-Oriented Development, “TOD Land Acquisition Case Studies: National TOD Convening,” February 24, 2009. Center for Transit-Oriented Development, “San Francisco Bay Area Property Acquisition Fund for Equitable Transit-Oriented Development, Feasibility Assessment Report,” June 14, 2010. Federal Reserve Bank of San Francisco, “CDFIs and Transit-Oriented Development,” October, 2010. Federal Transit Administration, “Mixed-Income Housing Near Transit,” 2009. Fogarty, Nadine, “Rails to Real Estate: Development Patterns along Three New Transit Lines,” Center for Transit-Oriented Development, March, 2011. Forsyth Street Advisors, “New City Acquisition Fund LLC, Senior Lenders Meeting,” June 16, 2010. Haughey, Ryan, “Challenges and Policy Options for Creating and Preserving Affordable Housing near Transit and in Other Location-Efficient Areas,” December, 2010. Kennedy School of Government Case Study, “Buying Property in a Hot Market: NYC Creates a Fund to Keep Affordable Housing Developers in Play,” 2009. LIIF, “Bay Area Transit Oriented Affordable Housing Fund (TOAH) Business Plan,” March 28, 2011. LISC, “Acquisition Funds at LISC,” July, 2006. Stern, Julie, “Promoting Cross-Sector Partnerships for Equitable Transit-Oriented Development,” Urban Land Institute, April, 2011. Tomer, Adie, “Missed Opportunity: Transit and Jobs in Metropolitan America,” Brookings Institution, May, 2011. Trinh, My, “Innovation in Capital Markets: A New Generation of Community Development Funds from Enterprise,” Enterprise Community Partners, 2009.