Closing the Racial Capital Gap

Enterprise Community Partners, Columbia, Md., said access to capital remains the biggest hurdle facing small-scale Black, Indigenous and other people of color real estate developers–and it suggests some solutions.

In a policy brief, Closing the Racial Capital Gap, Enterprise Senior Research Analyst Ahmad Abu-Khalaf noted many of the current challenges BIPOC developers face are rooted in the legacies of systemic racism. “Those who have taken on smaller-scale multifamily developments (either new construction or acquisition-rehabilitation projects) experience systemic challenges in accessing capital necessary to work on larger-scale multifamily developments, as well as scale up their business operations,” the report said.

Emerging BIPOC developers face a catch-22, the report said: “They need to work on larger-scale residential developments to grow their real estate portfolio and build their balance sheets to meet prominent investor or lender requirements, but it is nearly impossible to accomplish that without accessing sufficient capital in the first place.”

One significant problem is accessing early-stage capital, Enterprise said. Larger developers often can access equity or debt capital necessary to cover planning and other pre-development costs, but small developers often lack an asset that will serve as collateral, largely due to generational wealth disparities.

“Since those preliminary analyses might ultimately lead to a ‘no go’ decision, [early-stage] predevelopment capital is very much at risk and therefore hard to come by,” Abu-Khalaf said. “Community development financial institutions, or CDFIs, have been playing a significant role in providing capital that could be used by emerging small-scale BIPOC developers to finance planning and predevelopment processes.”

Abu-Khalaf also cited several private-sector tools to help emerging small-scale BIPOC developers overcome size, capacity and balance sheet constraints that can make it difficult for them to access CDFI capital. “These tools include credit enhancements, including unsecured lines of credit, as well as early-stage capital, which could be in the form of short-term predevelopment loans,” he said. 

Another barrier small-scale BIPOC developers often face is capacity-related requirements. “Usually lenders and investors look at a developer’s balance sheet, often requiring them to have a minimum of $1 million in liquidity and $5 million in net worth,” Abu-Khalaf said. “These thresholds serve as systemic barriers to accessing capital, which inhibit emerging small-scale BIPOC developers from accessing the debt and equity capital required to undertake larger-scale real estate deals, grow their business operations and expand their real estate portfolios.”

Some private-sector efforts are designed to move away from examining a developer’s personal wealth and focus instead on their experience, the report said. This includes re-thinking minimum developer liquidity and net worth thresholds to increase small-scale BIPOC developers’ access to capital.

Equity represents another challenge, the report said. Debt financing typically covers 80 to 85 percent of development costs, but developers need equity capital to cover the remaining 15 to 20 percent, and emerging small-scale BIPOC developers sometimes lack access to equity capital of their own or from individuals in their networks due to systemic racial wealth disparities.

“Decades-old racist policies and practices have created multi-generational racial disparities in homeownership and the wealth that serves as seed capital for many small businesses, including developers,” Enterprise said. “Housing developers and experts agree that disparities in access to equity capital from individuals in a developer’s family, friends and business networks is a prominent and persistent systemic challenge for emerging small-scale BIPOC-led development companies…Mission-driven housing and community development stakeholders have been exploring opportunities to provide emerging small-scale BIPOC-led developers with access to higher levels of equity capital.” 

Finally, both government lending reforms and public-private partnerships are necessary to close systemic racial capital gaps, Enterprise said. “There are a number of innovative efforts designed to help address barriers to financing among emerging small-scale BIPOC developers,” the report said. “For example, Enterprise’s Equitable Path Forward initiative offers access to credit enhancements, including unsecured lines of credit to help these developers secure funding to engage in larger-scale developments and grow their operations.”

And larger-scale government lending reforms and public-private partnerships can also help close these systemic capital gaps among emerging small-scale BIPOC developers, the report said.

“To systemically address capital gaps among emerging small-scale BIPOC developers, federal finance agencies could explore launching federally backed lending products that would provide emerging small-scale BIPOC developers with access to predevelopment line of credits and higher levels of debt capital,” Enterprise suggested. “Additionally, private financial institutions (in partnership with their regulators) and the real estate industry could explore revising debt and equity capital requirements and standards that tend to have a disparate impact on these developers. Such efforts could include minimum thresholds for developer liquidity and net worth to increase emerging small-scale BIPOC developers’ access to capital.”