Capital Bank

A New Model for Creating Home Ownership
For Low and Moderate Income Families

Objective
Stimulate the development of new affordable housing by creating a predevelopment capital bank.

The Capital Bank is used to acquire properties to build or rehabilitate as affordable housing for low and moderate income families eligible for government guaranteed or subsidized mortgage financing. As sales are completed, the Bank would be replenished and the process repeated.

The Problem
The lack of affordable housing in Bergen County has been identified as the highest priority human service need in countless studies over the past twenty years. Building affordable housing is difficult because of high property values and the difficulty of interpreting and coordinating the eligibility and technical requirements of a multitude of federal, state and county funding agencies with the competitive environment in the private real estate market.

Although government financing is available to rehabilitate properties and subsidize home ownership for low and moderate income families, it is not available until a property is purchased, usually long after acquisition. Government financing frequently requires sign off by local units of government before being approved -- a difficult process compounded by negative attitudes toward the development of low cost housing.

Non-profit developers rarely have access to upfront financing and cannot afford prevailing interest rates for capital needed during the acquisition process. As a result, the development of affordable housing in Bergen County is not responsive to the need.

A Solution
Over the past two years, Bergen County's United Way has piloted the following approach to generating increased affordable housing starts:

• Provided pre-development financing for acquisition being the first dollar.
  
• Supported the development of a home ownership rather than rental model, thus providing an opportunity to develop equity and produce a new municipal taxpayer.
  
• Partnered with not for profits experienced in developing affordable housing and with demonstrated ability to provide education regarding money management and property maintenance for the new homeowners.

Project Results
In 2003, Bergen County's United Way extended a $73,000 bridge loan to the DACKKs Group for the development of a single condominium unit in Englewood.

In 2004, a second bridge loan for $317,000 was awarded to preserve a two family residence in Bergenfield.

Also in 2004, the Martin Luther King, Jr. Senior Center received a bridge loan from Bergen County's United Way for $50,000 to be repaid at the completion of construction. The Martin Luther King, Jr. Senior Center has purchased property in Hackensack and is building a senior activity center that includes 4 affordable housing units.

In 2005, the Alliance Against Homelessness of Bergen County received a $10,000 challenge grant, which has enabled the organization to leverage $75,000 in additional investments from several banking institutions to match a $539,000 grant award from the U.S. Department of Housing and Urban Development. As a result, five persistently mentally ill and formerly homeless individuals have secured permanent housing.

In 2005, $500,000 in bridge financing was provided to the Madeline Corporation to build 9 units of affordable townhouse condominiums (including one barrier free home) on Walker Street in Cliffside Park. There are nine new first time home buyers in residence. Currently, BCUW is working with the Borough of Allendale to develop 10 units of special needs housing for individuals with disabilities.

In all the examples above, BCUW capital was provided at no cost to our partners, and interest was charged at the lowest rate permitted by regulation and subsequently gifted in full to our partner after loan repayment.

Next Steps
Our ability to create more affordable housing is limited only by the amount available for pre-development financing in our Capital Bank.

We are seeking individual investors willing to loan capital on a flexible basis for property acquisition. The loan to the Capital Bank would be fully secured by BCUW and the investor would be repaid in a pre-agreed time period. The only contribution would be the time value of the investor's funds.

A New Model for Home Ownership
Frequently Asked Questions

Who benefits from providing a capital bank investment?
Everyone benefits. The prospective buyer receives an opportunity to purchase a home and develop equity in it. The community benefits by the creation of another homeowner and taxpayer with a stake in civic stability and improvement. Local businesses benefit through the addition of another homeowner- customer with an interest in maintaining property values. Investors benefit because secure, permanent housing for the working poor helps ensure that communities will remain a good place to live and do business.

Can a participating homeowner reap a windfall by selling or renting the home?
No. The properties are deed restricted as affordable housing for at least 30 years. A homeowner can sell the property and retain any accumulated equity, but the selling price is restricted and indexed to prevailing affordable housing prices at the time of sale. The prospective buyer must qualify on the basis of low income in order to purchase. The properties are also deed restricted as owner occupied and cannot be rented.

How much is needed to establish the capital bank?
Approximately $10 million is needed to secure properties as they become available in our competitive environment.

How long would my capital investment be needed for a particular project?
The time period varies, but in most cases less than one year.

Is there a tax benefit for participation in the capital bank?
The contribution you are making is the opportunity cost of the capital for the period of time it is being used, not the capital itself. This opportunity cost is not tax-deductible for IRS purposes.

How secure is my investment?
All capital bank investments are collateralized by short-term mortgages.

Can I determine the length of time for my investment?
Yes. Investors can invest based on the availability of their capital at a particular time, or their desire to be involved in a particular project. Our hope, however, is that investors will continue to participate, thus providing a revolving fund of capital for this important community effort.