Unit 2 – Plan: Using Evaluation and Data to Develop Your Community Development Finance Plan

You are probably intimately aware of your community’s strengths and weaknesses and how your particular community development project can be an asset to your neighborhood. But to secure funding, you will need to document your specific issue and the projected outcomes of your initiative. In addition, there are critical pieces of data your lenders and/or investors will want to evaluate to help them determine whether to finance your project. All of this information will be part of your community development finance PLAN. This unit will focus on the fourth key principle of successful community development finance—evaluation. We will introduce the types of data you will use for the evaluation process and the data you will need to provide to your lenders and/or investors that will provide the basis for their investment decisions. The data generally falls into three categories: environmental context, business plan and financial information.

Environmental Context

The environmental context documents the external factors outside your organization that might affect your project and should be identified and evaluated to understand the context in which you are working. For example, if property values are low in the area where you are planning a development, the appraised value of your project will be impacted. This may make it more difficult to finance the development. The environmental context will include both macro and micro environmental factors.

Macro Environmental Factors

Macro environmental factors are those conditions impacting your community over which you or your organization have little, if any, control. Nonetheless, you still must pay attention to them in deciding how to proceed. General categories of macro factors to evaluate include:

Economy — Effects of inflation, business cycles, employment trends, retail and commercial activity, construction activity and availability of capital. Questions to consider:

What is the general economic condition in the labor and housing markets?
Is there a skilled labor shortage?
What activity is there in the retail construction sectors?
Are there areas of the economy that are lagging behind?
What is the availability of capital, credit and financial services?
What types of financial institutions serve the area?

Demographics — Effects or trends in family size, age distribution, education, diversity, income and geographic distribution of the population. Questions to consider:

What are the typical educational attainment levels of the area?
How do age and social class affect the community?
Does the number of low-income households suggest a need for specific community services?
Does the number of non-English-speaking people suggest a need for specific community services?

Social and Cultural Factors — Changes in consumer values and lifestyles affecting purchasing behavior. Questions to consider:

How does being a homeowner vs. a renter affect community attitudes?
What value is placed on tourism, the arts and historic preservation?
Are lifestyle patterns changing?

Politics — Effects of regulation and legislation. Questions to consider:

Has there been a shift of programs from the federal to the state level that has altered the availability of money?
What is the legal status of development organizations that have an impact on the project?
What influences and pressures are at work in the community?

Technology — Changes in technology affecting products and services and their delivery. Questions to consider:

How accessible are computers and mobile devices with internet access in the area?
Are there resources that provide access to technology in your community?
How is technology impacting lifestyle, work and commuting patterns?

Natural Environment — Ecological or other natural concerns (e.g., flooding, earthquakes, tornadoes, pollution, etc.) that may affect your organization’s markets or operations. Questions to consider:

Are there ecological concerns with industry, farming or economic development?
Is the area likely to be affected by natural disasters?
What is the quality of air and water?

Micro Environmental Factors

These are smaller considerations in the immediate area that you may have some control over yet still affect your organization’s ability to make community development finance decisions. Sometimes, the micros may make a project possible that the macros would seem to rule out. For example, after looking at macro factors, a housing developer might think that, based on the population decline in the area, there is no market for additional housing. But after considering micro factors, 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 for senior citizens. General categories of micro factors to evaluate include:

Markets — Profile those user markets that you plan to target in your project. Pay close attention to the size, growth and geographic distribution of the market, the profitability of current markets and what segments of the market are available. In addition, be aware of other entities that are also developing projects for this same user group. Will your project meet a unique need? Will it have competition in the marketplace?

Questions to consider about your end users, including their needs, buying behavior and attitudes toward the project and your organization:

Who are they?
Is there a user demand to support the project?
Will your users change or remain the same?
Do you have profiles of buying behavior?

Questions to consider about other entities that share the marketplace for your project:

What are their strengths and weaknesses, along with the sizes of and trends in their market share?
Are scarce resources or funding already allocated to similar entities? Are there any competitors for resources or financing?
Are there opportunities for collaboration?
How can you differentiate yourself from those offering similar services?

Public Perceptions — You should be aware of both the environment for community development finance and your own 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. Questions to consider:

How does the community plan and pursue its community development objectives?
What public concerns have an impact on community development finance?
How many nonprofit organizations work in community development in your area?
What is your organization’s track record?
Is the community pleased with the impact you have made?
Are you looked upon favorably by your area’s philanthropic, financial and governmental sectors?

Business Plan

Now that you have surveyed and documented the environmental context in which you are operating, you can begin to build a business plan for your community development project. The plan will help your partners evaluate the merits of the project and provide lenders and investors with information they need to decide whether to provide funding. The plan will serve as a road map for the beginning years of the community development project. Business plans generally project three to five years ahead and outline the route to take to reach yearly milestones, including revenue projections. Keep in mind that it is a living document that you will need to constantly review and evaluate. Business plans are important because they:

Build commitment
Clarify why people are working together
Uncover expectations, aspirations and potential pitfalls
Assign responsibilities to each partner involved in the project
Outline goals and benchmarks
Serve as a road map for the early years of the community development project
Inform decision-making on a regular basis

Finance planning includes making a business case for your project. Key elements of a business case for a community development finance plan are:

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? What evidence do you have to document the need?
Problems or opportunities. What aspect of the current situation calls for action? What is the market demand for the project? What assets are either available within the community or to the community?
Implications of ignoring. What are the consequences of not addressing the problem or opportunity?
Desired outcomes. What are the desired outcomes of the community development project?
Benefits. What are the specific advantages or gains that will result from achieving the desired outcomes?

As an example, consider a community that is operating in a business context where the number of adults aged 25-44 has been declining every year. The problem could be that the trend toward fewer young adults has led to weakening job growth. Creating an environment that will retain and attract educated and skilled young adults is an opportunity for the community. Ignoring the problem could result in current businesses moving to an area where they can find young adults in the labor force, as well as businesses that require educated and skilled employees not opening, expanding or moving to the community. Ignoring the problem could lead to a decline in the housing market, school enrollment and retail business. The desired outcome is a strong labor pool of young adults for current and new businesses. This will benefit the community by boosting the housing market, retail businesses, job creation, etc. Rising household income levels, tax base and bank deposits may be additional benefits.

The U.S. Small Business Administration’s business plan tool provides step-by-step guidance to develop your business plan. Although not specifically designed for community development projects, the tool provides the core elements of any business plan. The SBA’s Small Business Development Center provide technical assistance to small-business owners and entrepreneurs throughout the country, as well as provide sample business plans.

Financial Information

In addition to the business plan, a lender or investor will request more information about the project and your organization to determine whether to finance your community development project and to evaluate its sustainability.

Your ability to supply the requested information makes a statement about your organization’s capacity. A lender or investor typically may request:

Basics about applicant

Structure of your organization (nonprofit or for-profit corporation, limited liability corporation, sole proprietorship, etc.)
History/experience
Financial statement
Self-analysis—information about your current situation and performance (e.g., an annual report, the board of directors’ strategic assessment and plans, 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 prepared up-front
Substantiating amounts—actual estimates from contractors, suppliers, etc.
Amount of investment/equity from the developer for the project

Management

Capacity and credibility of the management of your organization and the manager of the proposed project (e.g., adequate staff, experience/credentials of staff, history with similar projects)
Experience of property manager overseeing the ongoing operations when the project is finished (e.g., for rental properties)

Financial capacity

Ability to cover cost overruns
Ability to pay loans if there are cash flow problems
Ability to make interest payments if sales are not brisk
Secondary sources of funds
Cash flow projections and other financial indicators
Ongoing operating expenses of the organization and funding sources designated to cover them
For rental housing:
- Vacancy rate consistent with the current market or at least 10 percent
- Projected rental income consistent with the current market conditions
- Operating and replacement reserves

Appraisal

An appraised value of land, buildings or equipment that supports the lender’s investment in the project

Quality of design

Adequate security and parking, as well as logical and efficient floor plans (for building projects)
Elements of good design—Builders design a blueprint before constructing a house and athletic teams draw up a game plan before going out on the field. For the same reasons, community development players also need to create a design to finance their projects. This pre-development work is often the key to a successful project. Some of the elements that you should keep in mind when designing a financial package include:
- Collaboration and community involvement. Public and private partnerships increase the probability that the project will reach its intended goal.
- Mitigation. Subsidies and enhancements may be available to diminish risk.
- Customization. Services and products are customized to take into account the community’s characteristics, such as predominant lifestyle, income range, amenities and housing.
- Flexibility. The community development finance plan must be elastic so that it can be changed to accommodate growth and/or changing conditions.
- Recognition and use of cycles. Timing is critical to community development, as every community development project is a small part of a larger cycle. Entering a market with a project at the wrong time can spell disaster.

Additional or less information may be requested depending on whether your community development initiative is a brick-and-mortar project.

Show Me the Data

While much of the groundwork for bringing a community development project together involves people—community engagement, leadership and collaboration (the core principles discussed in Unit 1)—the financial decisions will be very much driven, measured and evaluated by data. Where can you locate this data?

To help complete your environmental context, business plan and financial information, look to resources in your own neighborhood and local sources. Local libraries, chambers of commerce, local colleges and universities all have resources that can help you complete this task. In addition, you can seek information from property assessor offices, local planning and development agencies, state housing finance agencies, state and local community and economic development agencies and the SBA’s Small Business Development Center. Finally, there are a host of web-based resources that can aid in your quest for data. Some of those include:

Of course, this is not an exhaustive list. A focused internet search specific to your community and project will likely help you identify numerous sources of information and data for your business planning needs.

Summing it Up

You Must Have a Plan

Woman leading small-group discussion In this unit, we discussed numerous types and sources of data that investors are looking for as they evaluate the funding potential of your community development initiative. As you understand the role and importance of the evaluation principle in these initiatives, you will gain confidence in shaping a solid project plan that includes such data as the environmental context, business plan and financial information that articulate your project’s intended outcomes. Today, supportive data for such financial decisions can be found in numerous sources—from local community resources down the street to the vast number of web-based resources.

With the people in place to work on your community development initiative and the elements of your finance plan coming together, we are ready to move on to Unit 3, which will explore the process and tools for coming up with the money for your project.

BACK: People: Building the Right Team and Relationships

NEXT: Process: Sourcing Financial Resources for Community Development Initiatives