September 27, 2022 | Main Spotlight: Beyond Passing the Plate, The Main Street Small Deal Initiative | By Patrice Frey, Senior Advisor, Main Street America |
During the nine years I've worked at Main Street America, I’ve observed one particularly persistent and seemingly intractable obstacle to revitalization in our downtowns and districts: a lack of capital to support small-scale development, whether it’s a rehab of a corner store, the creation of upper floor housing, or any number of other creative new uses. (For purposes of this project, I define small-scale development as those projects under $5 million in project costs.)
"The banks just aren't interested," I'd hear on site visits to Main Streets, as building owners or Main Street Directors would explain their vision for the renovating a cool building and express frustration at the difficulty of finding conventional capital. Crucial predevelopment funds – which typically take the form of grants – are scarce. Adding to the challenge, the most robust national incentive for historic preservation – Federal Historic Tax Credits – is often an ineffective tool for small deals. Specifically, the transactional costs associated with this incentive are often too high for small projects, and the conventional wisdom is that tax credits usually don’t pencil on projects under $5 million (though there are some exceptions.)
Many terrific, potentially transformative projects simply do not happen because building owners and small-scale developers lack needed resources. Consolidation in the banking industry in recent decades reduced the number of lending institutions through which small-scale developers can secure debt, as larger banks tend to favor larger-scale projects. Small-scale projects that do make it across the finish line are often self-financed by building owners, many of whom solicited loans from friends and family after being shut out by conventional sources. But self-financing isn’t a scalable solution.
Small-scale developers typically have limited personal funds to deploy and have a hard time accessing other sources of private equity. This issue affects building owners and developers of color the hardest as they continue to face systemic barriers in securing financing today. And with more than an estimated $850 billion in real estate capital available nationally Main Street communities deserve a lot better than “passing the plate” to friends and family to fund critical economic development projects.
Main Street America’s Small Deal Initiative
Without a scalable solution, the lack of capital will continue to suppress economic development, marginalize communities of color and rural places (where a lack of capital is particularly pronounced), and perpetuate our culture of waste and environmental destruction by leaving high quality existing buildings vacant or underutilized. It also jeopardizes the future of many of our country’s cool and irreplaceable historic resources – the very assets which help our communities establish a sense of place and powerfully connect us to the past.
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