In my 13+ years at the Overseas Private Investment Corporation (OPIC), I have vetted hundreds of housing construction projects for possible debt financing. They cover the full range of housing sector specialities, including land development, construction (single family and high rise), mortgage finance, multifamily/rental properties, mortgage insurance, securitisation, manufactured housing systems and land title systems.
Many prospective project developers come to the process unprepared despite a wide array of public information available on financing real estate projects. However, there are special factors that come into play when requesting financing from a DFI (development finance institution). This is the first in a blog series that will discuss specific pointers based on my experience to improve your financing submissions and enhance your probability of success with private sector-focused DFIs (as opposed to state-owned or other sovereign or sub-sovereign entities).
As a rule, DFIs have two priorities: (1) to finance financially viable projects so that loans are repaid and equity investments generate desired return and (2) to produce measurable developmental impact for the country in which the project is located. It isn’t enough for your project to make commercial sense. It must also offer clear economic or social value. Specifically focused on housing, this impact is usually measured in the following ways:
Find the gap – DFIs are generally financiers of last resort. Their mandate is to fill gaps in the market. These gaps exist because local institutions and investors cannot or will not provide the needed funding on terms that allow the project to achieve its objectives. The primary objective, in this case, is increased access to affordable, safe and secure housing for sale or for rent. This seems simple, but I will discuss many barriers and challenges to achieving this in future posts. For now, you must explain why DFI funding is needed for your project vs. other private or public sources.
Jobs created – Permanent jobs are preferred. Temporary construction jobs may be counted if they lead to future opportunities. Direct jobs always count whereas indirect jobs only do in certain circumstances. Regardless, you should back up your assumptions with clear analysis; the DFI will verify this during due diligence. Job quality is also important: skilled and technical jobs produce the largest long-term economic value for the country.
Expansion of infrastructure – DFIs need to see increased access to, and reduced cost for, safe drinking water, properly treated sewage management, solid waste disposal, new power generation capacity, roads. Illustrating that the infrastructure could benefit the surrounding community is another plus.
Minimize environmental impact, maximise sustainability – DFIs require a complete environmental impact study. Your development plan must provide for managing water run-off, tree retention, no impact to local wildlife and remediation of hazards on site from previous uses. Your project has to meet specific standards for water quality and waste facility output, even if your plans exceed local requirements.
On the opportunity side, large housing projects (for example, 1,000 units intended to house 5,000 people) should address the demand side of the energy and climate change equation by integrating renewable energy and energy and water efficiency. Even better, projects should include recycling of waste and grey water. Although sustainability measures may increase upfront construction design and materials costs, some DFIs have prioritised sustainability and so will work with you to offset those costs within the financing structure.
Transfer of skills or technology – Will your project introduce new techniques and technologies that will have a demonstration effect in the country and generally improve efficiency, cost, quality of housing and housing project management? This might include training and mentoring programs, community outreach programs that may include home maintenance, budget management for homeowners and specific technical skills in the construction trades.
Social responsibility – DFIs know that social and community outreach and services may not be cost efficient for your project. Still, by doing so from the beginning, your project will benefit from stronger relationships in the local market which can accrue benefits over time, sometimes in unforeseen ways. A housing project offers opportunities, like sports fields and programs, a community centre, a small clinic, a worship facility, schools and small retail areas with technical support for small businesses. I have seen all of these in various projects. DFIs are looking for “impact investors” as partners increasingly, so these are opportunities to differentiate.
Another requirement of DFI financing is ensuring that your project does not displace people, interfere with their livelihoods or create safety or health hazards for surrounding populations. You may need to show evidence of negotiations with the community, copies of agreements and evidence of compliance. You should have a clear dispute presentation and resolution process in place.
Labour practices – Certain labour standards (no child labour, fair working hours, non-discrimination, safe working conditions, etc.) are required for all primary construction contracts and, in some cases, in sub-contracts. I recommend that you research these requirements thoroughly before making an approach (add IFC link for these policies). Include them in contracts from the beginning.
Your contractors may need to adapt their management practices to meet these requirements, which the DFI will monitor. You will score higher development impact points for your project by including other benefits, such as healthcare, meals and childcare.
Debra L. Erb, Managing Director of Housing Programs, OPIC, Washington D.C. will be writing a multi-part series for DevelopingSmartCities.org to pass on practical advice to aspiring and established housing business leaders on undergoing due diligence by development finance institutions or DFIs.