Hello again, all you leaders, stakeholders, and development professionals! Today, we're taking a deep dive into the powerful financing tool known as "capital stacking." As we touched on in our previous post, capital stacking can play a pivotal role in funding housing initiatives and jumpstarting your local housing market. Let's explore how.
Understanding Capital Stacking
First, let's establish what we mean by capital stacking. In the context of housing initiatives, capital stacking is a financing strategy that layers various types of capital—such as equity, debt, grants, tax credits, and public funds—to fully fund a project. Each 'layer' or 'stack' of capital has different costs, different levels of risk, and different potential returns, and they all fit together to make a project financially feasible.
The Role of Capital Stacking in Housing Initiatives
So, how can this strategy be used effectively to finance housing initiatives? Here are some key ways:
1. Leveraging Public Funds to Attract Private Investment
Public funds can be an important base layer in the capital stack. By using these funds—whether federal, state, or local—as a significant portion of a project's financing, developers can reduce the risk for private investors and lenders. This, in turn, can attract more private capital to a project, which is often crucial for filling the funding gap in affordable housing projects.
2. Utilizing Tax Credits
Tax credits are a crucial component of the capital stack for many affordable housing projects. Programs like the Low-Income Housing Tax Credit (LIHTC) provide tax incentives for private entities to invest in affordable housing, making such projects more financially feasible. By selling these credits to investors, developers can secure a significant portion of a project's needed capital.
3. Layering Debt
Different types of debt—such as conventional bank loans, subordinate loans, or bonds—can be layered to fully fund a project. Each type of debt carries different interest rates and terms, and understanding how to effectively stack this debt is key to a project's financial structure.
4. Engaging Foundations and Non-Profits
Grants or low-interest loans from foundations and non-profit organizations can be another layer in the capital stack. These entities often have a mission-driven interest in supporting affordable housing, and their funding can help reduce a project's overall cost of capital.
5. Incorporating Equity
Finally, equity investment, whether from the developer or private investors, forms a vital part of the capital stack. Equity investors assume the most risk, but also stand to gain the most if the project is successful. Their investment further diversifies the capital stack and underscores confidence in the project.
To conclude, capital stacking is a sophisticated, effective strategy that can make the financing of housing initiatives feasible. By understanding and leveraging the different layers of capital, we can fund projects that otherwise might not get off the ground—projects that provide much-needed housing and drive economic development in our communities.
Remember, capital stacking is not a one-size-fits-all approach. It requires careful planning, negotiation, and management. But when done right, it can unlock incredible potential and jumpstart your local housing market. So, let's stack that capital and build stronger, thriving communities together!
Join me on Wednesday, September 6, 2023, for a workshop on leveraging public funds to attract investment: "Unleash the Power of Public Funds: Attracting Private Investment for Your Housing Initiatives". Click here to register for this FREE workshop!