Linking Vision With Capital: Challenges and Opportunities in Financing Smart Growth

Title: Linking Vision With Capital: Challenges and Opportunities in Financing Smart Growth

Date: 9/1/2001

Author(s): Robert W. Burchell and David Listokin

Executive Summary:

In 2000, the Research Institute for Housing America (RIHA) supported a groundbreaking partnership between the Mortgage Bankers Association (MBA) and the U.S. Conference of Mayors (USCM). RIHA was asked to frame the challenge of linking vision with capital, as mayors and mortgage bankers searched for solutions to the challenges of financing smart growth and urban revitalization. RIHA immediately partnered with Robert W. Burchell and David Listokin of Rutgers University's Center for Urban Policy Research, asking them to bring a national perspective to the deliberations and, ultimately, to author this report. The partnership convened four urban forums (in Charlotte, Rochester, Minneapolis, and San Francisco) to address issues on sprawl and growth pressures. 

Two common themes emerged: 1) the need for market innovation and new products to finance new growth patterns and redevelopment, and 2) the continuing need for tools and subsidies for affordable housing. Thus, the central question arising out of all the deliberations is how the real estate finance community can lend and invest in ways that support local leadership's vision for building and/or rebuilding their communities.

In comprehensively addressing this question, this report fills an important void in urban research. Researchers and policy experts have produced a popular and professional literature that decries sprawl and prescribes how development should look. However, only recently has a literature emerged that grapples with the practical aspects of how to make "smart lending" a viable business proposition. This report is the first comprehensive look at obstacles facing smart growth projects and what the two essential parties- local government and the real estate finance community-can do to make smart growth work.

At its core, smart growth is a set of policy initiatives designed to change the way the market allocates economic activity over space within metropolitan areas. Smart growth prescriptions are not radically new ideas; they typically represent a group of ideas now put into a coherent policy framework. Despite charges to the contrary, smart growth done right is not growth control, nor is it imposition of a government regulatory regime on a purely private market. Rather, smart growth seeks to change the way the public and private sectors interact in the course of development. Many argue for smart growth as a means to promote important public policy goals, such as rectifying regional disparities in growth, rationalizing public investment, and preserving open space. Burchell and Listokin add another important dimension by benchmarking the potential savings over the next quarter of a century from implementing smart growth policies- collectively as much as $250 billion in public and private costs.

Unfortunately, good public policy, backed by solid arguments, has often foundered on apathy, inertia, prejudice, and preferences. What gives smart growth political legs, however, is that it responds to a very deep-seated reaction among voting suburbanites to a loss in their quality of life. With sprawl, commute times increase; schools and roads become overburdened; open space disappears; housing choice diminishes. Middle-class suburbanites see their quality of life threatened and are increasingly demanding their local leadership do business in a different way.

So why should lenders care? Many of the challenges to increased lending for smart growth are attributable to the success of the current development and real estate finance models. Despite its imperfections, the overall American real estate finance model works well in attracting Wall Street capital to Main Street homes and businesses. Why change a model based on current patterns of metropolitan development that will continue to dominate the American scene?

Because smart growth is not simply a passing fad. While conceding that sprawl will continue to dominate, the authors make a compelling case that smart growth policies will increasingly frame a significant and growing number of local real estate markets. The authors point to numerous examples of smart growth policies already in place across the country, from former New Jersey Governor Christine Todd Whitman's program to acquire one million acres of open space to twelve states that have adopted comprehensive planning and growth management legislation. Projected population increases in the next twenty-five years will only increase the growth pressures leading localities to adopt smart growth measures.

Burchell and Listokin outline a series of challenges that face "smart lending," generally identifying differing (and often unknown) risks associated with this style of development. They show that lending and government practice and procedures designed for traditional development patterns need retooling to do business in a smart growth environment. They thoughtfully lay out a very practical agenda to promote new lending business, combining experimentation, risk-sharing, procedural reform, and product innovation. One of Burchell and Listokin's most insightful contributions is to show that the growth of the surrounding region dictates the priorities and types of smart growth policies most appropriate for cities.

The growing demand for smart lending presents lenders with an unparalleled chance to chart their future business growth. Smart growth represents a significant and growing market segment in which local leadership will increasingly ask lenders to do business. The real estate finance industry has an opportunity to work in partnership with local leadership to en-sure the continued, competitive flow of lending and investment. The lender's challenge is to anticipate the future market now, expand the capital market paradigm to embrace the new urban form, and become a true local partner to link vision with capital.