Pre-development funds offer financing to cover a variety of development expenses—sometimes referred to as soft costs—incurred while determining the feasibility of a particular project, such as the costs of preliminary financial applications, legal fees, architectural and engineering fees and other exploratory work. Obtaining financing for these costs is difficult in good economic times, especially for small nonprofits; challenging economic times make it even more so. A number of state and local governments have developed loan programs to cover these expenses, thereby facilitating and expanding development of affordable homes. Some of these programs were curtailed during the economic downturn, when state and local budgets shrank, but many remain.
Some communities will forgive pre-development loans if permanent financing cannot be obtained, an important feature that allows affordable housing developers to investigate alternative sites and pick only those most likely to succeed. Financing is typically provided through a revolving loan fund, administered by a local jurisdiction, that recycles the assistance to support many affordable housing developments over time. Funds for the loan programs come from various sources, including housing trust funds, appropriations and allocation of federal HOME dollars.
Communities that do not currently have a pre-development program may wish to consider starting one to expand the capacity of nonprofits and small for-profits to produce affordable homes. Communities that already have a program may consider expanding its funding and/or the outreach needed to ensure a steady stream of applications. Since the ability to use these funds successfully requires affordable housing developers with high capacity, communities with an undersupply of developers may wish to consider supplementing a loan fund with technical assistance and other efforts to build the necessary capacity. One promising approach to building capacity among smaller organizations is to provide a steady stream of operating revenue tied to developmental milestones.
Communities can also facilitate access to funds for pre-development expenses in ways other than providing direct financing. Loan guarantees or credit enhancements, for example, can help reduce the interest rate on private financing.