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Unit II--Go/No Go: The Process of
Community Development Finance 
Learning Objective
To introduce the factors that help determine whether a community
development project is a "go" or "no go."
These factors include the business plan, financial information
and environmental context.
Business Plan
Financial Information: What Exactly Is
a Lender or Investor Looking For?
New Sources of Money
Environmental Context: What Other
Factors Can Affect Your Project?
Applying What We've Learned in This Unit
The Easy Road
Summary
Business Plan
Once you understand the fundamentals of community development
finance that were discussed in Unit I, you can begin to build
a business plan for your community development project. A
business plan helps participants evaluate the merit of a project
and provides lenders and investors with information they need
to decide whether to fund the project.
Why Are Business Plans Important?
- They build commitment.
- They clarify why people are working together.
- They uncover expectations, aspirations and potential pitfalls.
- They assign responsibilities to each person involved in
the project.
- They outline goals and benchmarks.
Key Elements of a Business Plan
Finance planning includes the element of making a business
case for the development project you are attempting. Key elements
of a business case for a community development finance plan
are:
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Business context. What is happening, internally
and externally, to the community or organization that
merits attention and is driving the need for the community
development project and finance plan?
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An example might be that the number of adults ages
25-44 in your community has been declining every year.
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Problems or opportunities. What aspect of the
current situation calls for action? In considering problems
or opportunities, you should ask what the market demand
is for the project. Gather data and information that
describe the assets available either within the community
or are available to the community to use.
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The problem could be that the trend toward fewer
young adults has led to weakening job growth. The opportunity
could be the creation of an environment that will retain
and attract educated and skilled young adults.
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Implications of ignoring. What is the consequence
of not addressing the problem
or opportunity?
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Current businesses are likely to move to where they
can find young adults in the labor force; businesses
that require educated and skilled young adults in the
labor force will not open, expand or move to the community.
This could lead to a decline in the housing market,
school enrollment and retail business.
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Desired outcome. What is the desired outcome
of the project?
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The desired outcome is for a strong labor pool for
current and new businesses.
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Benefits. What are the specific advantages or
gains that will result from achieving the desired outcome?
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The benefits might be rising household income levels,
tax base and bank deposits.
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Back to the top
Financial Information:
What Exactly Is a Lender or Investor Looking for?
 A
lender or investor typically will request the following information
to determine whether to finance a community development project:
Basics about Applicant
- Structure of the organization (nonprofit or for-profit
corporation, limited liability corporation, sole proprietorship,
etc.).
- History/experience.
- Financial statements.
- Self-analysis. This information about your current situation
and performance could include an annual
report, the board of director's strategic assessments
and plans, and current operating statistics.
Budget
- Copy of proposed lease or purchase agreement for buildings,
land, etc.
- Estimated operating expenses for the proposed project.
- Plans and specifications. Very specific plans on each
phase of the project must be prepared up-front.
- Substantiating amounts--actual estimates from contractors,
suppliers, etc.
- Amount of investment from the developer for the project.
Management
- Do the management of your organization and the manager
of the proposed project have the capability and credibility
to get the job done?
- If a property manager will oversee the ongoing operations
when the project is finished (such as for rental properties),
what is his or her experience level?
Financial Capacity
- Are cost overruns covered?
- Can loans be paid if there are cash flow problems?
- Can interest payments be met if sales are not brisk?
- Is there a secondary source of funds?
- What are the projections for cash flow and other financial
indicators?
- What are the ongoing operating expenses of the organization,
and are funds designated to cover them?
- If you are proposing a housing project, are you factoring
in a vacancy rate of at least 10 percent?
- Will the proposed project lead to rental income consistent
with current market conditions?
- Is there a reserve and replacement fund to cover repairs?
Appraisal
- Does the appraised value of land, buildings or equipment
support the lender's investment in the project?
Quality of Design
- If you are proposing a building project, have you included
adequate security and parking, as well as logical and efficient
floor plans?
- Even if your project isn't a building, you must show
elements of good design--remember the mitigation, flexibility,
etc., that you learned about in Unit I?
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New Sources of
Money
Lenders and investors with capital looking for good projects
are growing in number and type. As you look for sources of
money, the business plan should consider a scan of the market
for finance partners who may find your project attractive
because it provides the outcomes they are seeking.
• Exercise: Who are some of the new
lenders or investors who may bring money to a community
development project?
(Examples: Pension funds, insurance companies, large
corporations, private developers, community development
corporations, revolving loan funds, housing trust funds,
social investment funds, community foundations or venture
capital funds.)
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Environmental
Context: What Other Factors Can Affect Your Project?
Let's look at the factors outside of your organization
that might play a role in whether your project will be successful.
You will be asked to list and evaluate these factors to come
up with the environmental context for your project. A fringe
benefit of going through this process is that you will then
have a foundation for a marketing plan.
Macroenvironmental Factors
Macroenvironmental factors are those conditions over which
you or your organization would have little, if any, control.
Nevertheless, these factors would have an impact on you or
your organization. Although you won't have control over
these "macros," you still must pay attention to
them in deciding how to proceed. Examples of such factors
include economic trends, the current state of technology and
the weather.
General categories of macroenvironmental factors include:
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Economy. Effects of inflation, business cycles,
employment trends, retail and commercial activity, construction
activity and availability of capital.
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A housing developer might list the following macro
factors: lifestyle choices that people make, the trend
toward smaller families and the aging of the population.
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Demographics. Effects of trends in size, age
distribution, education, diversity, income and geographic
distribution of the population.
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Social and cultural factors. Changes in consumer
values and lifestyles that affect the purchasing behavior
of the target market.
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Politics/law. Effects of regulation and legislation.
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Technology. Changes in technology affecting
not only products and services but their delivery.
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Natural environment. Ecological or other natural
concerns--flooding, earthquakes, pollution, etc.--that
may affect the organization's markets or operations.
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Microenvironmental Factors
These are smaller things in the immediate area that we may
have some control over yet still affect the organization's
ability to make community development finance decisions. Even
though these factors are "micro," they sometimes
are as important to consider as the "macro" factors.
The "micros" can also sometimes make possible projects
that the "macro" factors would seem to rule out.
Microenvironmental factors of which you need to keep abreast
include:
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Markets. You should profile consumer markets
that you plan to target in your project.
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The aforementioned housing developer, for example,
might think the future is bleak, given the macro factors.
But after considering the micros, the developer might
decide that there is a demand for homes with more bathrooms
and fewer bedrooms or might realize that there is not
much competition in building assisted living housing
for senior citizens.
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Customers. Be sure to profile your potential
customers or clients, along with their needs, buying
behavior and attitudes toward the project and your organization.
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Competition. You must know your major competitors'
strengths and weaknesses, along with the sizes and trends
in their market share.
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Public affairs. Be aware of your reputation
in the public arena. If the people you are trying to
serve have doubts about your organization or proposed
project, your objectives might be difficult to achieve.
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Back to the top
Applying What We've
Learned in This Unit
Let's put together a "situation analysis"
for the community development opportunity that you picked
at the end of Unit I. In real life, many people will hopefully
undertake this analysis; they will come from the ranks of
those working with you on your project. For example, the lawyers
will deal with the legal section, those with marketing experience
will deal with the market factors and so on.
Below are eight sets of factors that you would want to analyze
in real life. For this practice exercise, you have the option
of taking the easy road or a "challenging" road.
For those who pick the latter, write down on a separate piece
of paper the "unmet needs," "assets" and
"opportunities" for each set of factors. For those
who want just a taste of this process, a shorter exercise
has been provided at the end of this unit for you to lump
together all the "unmet needs," "assets"
and "opportunities" for your project. No matter
which road you take, read the exercise in its entirety before
writing down your answers. We've listed some questions
for each category of factors to help get you thinking in the
right vein.
In addition, we've given sample answers, based on a
hypothetical plan for building an addition to a public library.
In this scenario, we are pretending that proponents of the
project want to use a design, materials and craftsmanship
that match the original historic structure. Thorough answers
for this hypothetical example are given for the first group
of factors; shorter answers are given for the other factors.
No. 1–Economic Factors
You may want to ask yourself the following when considering
your answer:
A. What is the general economic condition in the labor
and housing markets?
B. Is there a skilled labor shortage?
C. What activity is there in the retail and construction
sectors?
D. Are there areas of the economy that are lagging behind?
E. What is the availability of capital, credit and financial
services?
F. How many financial institutions serve the area?
• Unmet Needs: Write your suggestions
on a separate piece of paper. (For the library addition,
the unmet needs might include an architect experienced in
historic preservation and design, more costly building materials,
and the sort of skilled labor and craftsmen who are not
easy to find. We also will need a construction loan at a
low interest rate and permanent financing with a monthly
payment that is reasonable. An experienced person to provide
oversight and supervision on the entire project is required,
too.)
• Assets: (For the library example:
A graduate of the local high school is now an architect
who lives in a nearby city and works for a design-build
firm that specializes in historic reproduction and preservation.
Building materials can often be replicated using modern
components and techniques that match and sometimes surpass
the original materials. Skilled labor from the local high
school industrial arts class may be trained by the architectural
staff to do some of the specialized work. Interest rates
are low at this time and, along with public funds and the
library's endowment, will guarantee favorable conditions
and terms of financing.)
• Opportunities: (For the library example:
Hire the town alumnus and his firm as the architect and
project manager. Use building materials that match or complement
the original materials. Enter into a training and work agreement
with the local high school to use labor from the industrial
arts class. Staff from the design/build firm will supply
on-site training. Take advantage of low interest rates and
use public funds and the library's endowment to guarantee
favorable conditions and terms of financing.)
No. 2–Demographic Factors
You may want to ask yourself the following when considering
your answer:
A. What are the educational attainment levels in the area?
B. How do age and social class affect the community?
C. Does the number of lower-income households suggest a
need for specific community services?
D. Does the community have a non-English speaking population?
• Unmet Needs: (For the library example:
programs for children and senior citizens, multilingual
services, Internet access and other services for low- and
middle-income population.)
• Assets: (For the library example:
growing numbers of children and youth in the area, increasing
ethnic diversity.)
• Opportunities: (For the library example:
Demand for all programs and services is high. In addition,
recent immigrants could help design and implement new multilingual
programs.)
No. 3–Social and Cultural Factors
You may want to ask yourself the following when considering
your answer:
A. How does being a homeowner vs. a renter affect community
attitudes?
B. What value is placed on tourism, the arts and historic
preservation?
C. Are lifestyle patterns changing?
• Unmet Needs: (For the library example:
new services such as those that target changing lifestyles.
Services might include Internet access and a latch-key program.)
• Assets: (For the library example:
strong historic preservation and Main Street development
programs.)
• Opportunities: (For the library example:
The addition would reinforce the importance of historic
preservation and create space for new services, such as
Internet access, a latch-key program and a multipurpose
room.)
No. 4–Political and Legal Factors
You may want to ask yourself the following when considering
your answer:
A. Has the shift of programs from the federal to the state
level altered the availability of money?
B. What is the legal status of development organizations
that have an impact on project formation?
C. What influences and pressures are at work in the community?
• Unmet Needs: (For the library example:
Legal work must be done. Endow-ment restrictions need to
be reviewed. Community support for addition must be drummed
up.)
• Assets: (For the library example:
Mayor and town council are supportive.)
• Opportunities: (For the library example:
new state legislation for innovative library services.)
No. 5–Technological Factors
You may want to ask yourself the following when considering
your answer:
A. How accessible are computers with Internet access in
the area?
B. Is there a community information network in your area?
C. How is technology impacting lifestyle, work and commuting
patterns?
• Unmet Needs: (For the library example:
more computer training and online access for the public
at large. Also, historically accurate and affordable stone
masonry is needed for the addition.)
• Assets: (For the library: Local nonprofit
receives grant to build computer training center and create
a community information network. Synthetic building materials
can replicate hand-cut stone for less money.)
• Opportunities: (For the library: Offer
wireless Internet service in partnership with nonprofit
training center and school district. Nearby company specializes
in replicating stone in historic applications using synthetic
materials.)
No. 6–Natural Environmental Factors
You may want to ask yourself the following when considering
your answer:
A. Are there ecological concerns with industry, farming
or economic development?
B. Is the area likely to be affected by natural disasters?
C. What is the quality of air and water?
• Unmet Needs: (For the library example:
Assessment of asbestos and ground water. Trees more than
100 years old will have to be cut down to make way for the
addition.)
• Assets: (For the library: Topography
allows natural drainage. Bedrock close enough to the surface
for foundation footings. Trees can be milled, and furniture
built by local craftsmen.)
• Opportunities: (For the library: Incorporate
lumber from trees into library furniture.)
No. 7–Market Factors
You may want to ask yourself the following when considering
your answer:
Customers (or Clients or Constituents)
A. Who are your customers?
B. Is there a customer base to support the project?
C. Will your customer base change or remain the same?
D. Do you have profiles of customer-buying behavior?
Markets
A. What are the size, growth and geographic distribution
of the market?
B. What is the profitability of current markets?
C. What parts of the market are available?
Competition
A. Are there any competitors for resources or financing?
B. What strengths or weaknesses can be found among the competitors?
C. Have comparisons been made?
Intermediaries
A. Are there entities to collaborate with that can deliver
products or services for you?
B. Are there plans to enhance their capabilities?
C. What are the cost, reliability and effectiveness of intermediaries?
• Unmet Needs: (For the library example:
Disenfranchised families don't have access to Internet
or to reading programs.)
• Assets: (For the library: large target
audience. Library is centrally located.)
• Opportunities: (For the library: There
isn't a competitor. Target audience already uses library
and has favorable attitude toward library. This support
could be leveraged to attract more users to the facility
and to expand future services.)
No. 8–Public Relations Factors
You may want to use the following when considering your answer:
A. How does the community plan and pursue its community
development objectives?
B. What public concerns have an impact on community development
finance?
C. How many nonprofit organizations work in community development?
• Unmet Needs: (For the library example:
Address people who want to preserve the 100-year-old trees.
Construction trades say the addition can't be built
as planned.)
• Assets: (For the library: State library
association supports addition.)
• Opportunities: (For the library: Enlist
schoolchildren and parents in support of the addition.)
Back to the top
The Easy Road
If you opted to take the easy approach to this exercise,
list together all of the "unmet needs," "assets"
and "opportunities" for your project.
Back to the top
Summary
Now that you have a good idea of the people needed to successfully
finance your project (Unit I) and the processes (Unit II),
we can move on to exploring different ways to come up with
the money.
Back to the top
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