What is Development Finance?

Are you new to development finance? Perhaps looking to better understand the terms, players, partners and resources within the industry? Or, maybe you have been asked to find out about a complex financing tool for an important project in your community. You’ve come to the right place.

CDFA is the nation’s largest organization dedicated exclusively to development finance concerns and interests. Within our website, we have thousands of resources to help you master development finance. Admittedly, it can be a daunting task to navigate the landscape of dozens of financing tools. In fact, in a recent survey, CDFA asked development professionals why they don’t use many of the tools available. The number one answer was the complexity of the financing tools available.

At CDFA we take our mission seriously, and we are here to help you get started. Before we overwhelm you with too many acronyms, case studies and presentations, take a moment to familiarize yourself with the basics of development finance. Once you’ve covered the basics, we encourage you explore all of our resources, trainings, newsletters and publications. We also hope you’ll consider joining CDFA.

Understanding Development Finance

Development finance is the efforts of local communities to support, encourage and catalyze expansion through public and private investment in physical development, redevelopment and/or business and industry. It is the act of contributing to a project or deal that causes that project or deal to materialize in a manner that benefits the long-term health of the community.

Development finance requires programs and solutions to challenges that the local business, industry, real estate and environment creates. As examples, we need unique financing approaches to address environmentally contaminated land and specific solutions to unlocking capital access in underserved markets and industries. Each of the problems that we seek to solve in development require unique and targeted solutions.

There are dozens of terms within the development finance industry including debt, equity, loans, bonds, credits, liabilities, remediation, guarantees, collateral, credit enhancement, venture/seed capital, angels, short-term, long-term, incentives, and gap financing.

Ultimately, development finance aims to establish proactive approaches that leverage public resources to solve the needs of business, industry, developers and investors.

Breaking Down Development Finance

The easiest way to understand the depth and breadth of development finance is to compartmentalize tools into basic categories. We call this the “development finance spectrum.” The development finance spectrum is a simple way of understanding the role that specific tools play in our marketplace and is graphically depicted below:

What are we looking at in this graphic? The dark columns represent, generally speaking, the spectrum of projects that the development finance industry is seeking to finance. They are fairly self-explanatory but require a small amount of detail.

Government projects are exactly what they sound like – roads, bridges, sewers, water facilities, schools, airports, docks, parking garages, broadband, utilities, etc.

Established industry represents our industrial, office and retail sectors (depending on location). Examples such as industrial parks, manufacturing, tech/research hubs and commercial retail centers fall within this category.

Development and redevelopment consists of the projects that require major public resource commitments to catalyze new private sector development. We see this throughout the country with urban revitalization, rural rejuvenation, adaptive reuse, brownfield development and other transformative projects that require significant public capital.

Small Business and Micro-Enterprises are pretty self-explanatory as well. These projects represent our economic engine locally. Generally, a small business is defined as any company with less than 500 employees and a micro-enterprise is any company with fewer than five employees. There are approximately 30 million micro-enterprises in the U.S.

Entrepreneurs represents our future businesses. These are one-two person companies that are working through the early stages of the business life cycle. Typically, entrepreneurs are not ready for traditional financing and need a unique approach to help them find the working capital needed to expand and grow.

The lighter bars that span the five project areas represent the general categories of the tools available.

1. Bedrock Tools This is the large debt market generally known as bonds and makes up the foundation of all public finance in the U.S. Over 10,000 bonds are issued nationwide annually representing infrastructure, housing, education, development, non-profits, healthcare and manufacturing.
   
   
2. Targeted Tools These tools target geographic areas through the use of tax increment finance, special assessment districts, government assessment districts, project specific district tools and tax abatements.
   
   
3. Investment Tools These tools encourage private sector investment in projects and businesses through tools such as tax credits and the EB-5 investor program.
   
   
4. Access to Capital Lending Tools These tools, such as revolving loan funds, mezzanine funds, loan guarantees and microenterprise, seed & venture capital financing programs, etc. represent the resources for supporting small business access to capital on a broad scale.
   
   
5. Support Tools Finally, support tools represent our large federal funding resources provided by the federal government. There are over 175 federal programs to support economic development.

Maybe you’re scratching your head right now because you don’t know how many of those tools work. Don’t stress. We’re simply setting the stage here. The key to the development finance spectrum is that we have specific projects that require a specific type of financing. Nothing complex about that. When we break development finance down into its core components we can better articulate the best tool to use for each project.

In order for projects or businesses to use the tools outlined on the development finance spectrum, they first must identify a qualified development finance agency to provide the financing. There are many different types of development finance agencies depending on the parameters of the project. Keep reading to learn about how development finance agencies work and how you can find one.

What is a Development Finance Agency (DFA)?

Development finance agencies (DFAs) can be either public or quasi-public/private authorities that provide or otherwise support economic development through various direct and indirect financing programs. DFAs may issue tax-exempt and taxable bonds, provide credit enhancement programs, and offer direct lending, equity investments, or a broad range of access to capital financing mechanisms. DFAs can be formed at the state, county, township, borough or municipal level and often times have the authority to provide development finance programs across multi-jurisdictional boundaries.

Examples of development finance agencies include:

• Industrial development authorities, boards or corporations
  
• Economic development authorities, corporations or councils
  
• Special purpose authorities (port, transportation, parking, development, energy, air, water, infrastructure, cultural, arts, tourism, special assessment, education, parks, healthcare, facility, etc.)
  
• Local and community development authorities, corporations or institutions
  
• Departments of development or commerce and finance authorities, divisions, or departments within state and local government
  
• Business development corporations, centers or districts
  
• Development and redevelopment authorities, commissions or districts

Right now, you are probably wondering if your state has any DFAs or if your city or county has a DFA. Every state has authorizing language to allow for the creation of a DFA locally.

In Ohio, they are called “port” and/or “finance” authorities. In Tennessee, they are called “industrial development boards” while in Arizona and New York they are referred to as “industrial development authorities.” In some states, like Pennsylvania, there are numerous authorities under the command of one DFA. For instance, Allegheny County Economic Development manages six different authorities –industrial, hospital, higher education, municipalities, residential and redevelopment. In Georgia, there are over 1,800 finance authorities. Most counties manage numerous ones to maximize the abilities of all options.

The variations and types of agencies is overwhelming, and in many rural areas the local DFA is not active. Many times, the DFA is simply dormant or was never codified as an active agency. None the less, every single state has approved legislation that allows for the creation of a DFA locally.

What is a High Performing DFA?

DFAs that are able to manage and implement a variety of toolbox programs are considered “high performing.” Myriad examples exist at all levels of government including:

State

Alaska Industrial Development & Export Authority

Business Oregon
Colorado Housing and Finance Authority
New Jersey Economic Development Authority
Wisconsin Housing and Economic Development Authority


County/Regional

Chester County Economic Development Council, PA
Development Authority of Fulton County, GA
Development Finance Authority of Summit County, OH
Economic Development Growth Engine (EDGE) for Memphis and Shelby County, TN
Region 9 Economic Development District of Southwest Colorado, CO
Toledo-Lucas County Port Authority, OH

City

Berwyn Development Corporation, IL

City of Minneapolis Community Planning & Economic Development Department, MN
Invest Atlanta, GA
Louisville Forward, KY
Philadelphia Industrial Development Corporation, PA
Phoenix Industrial Development Authority, AZ
Redevelopment Authority of the City of Milwaukee, WI
St. Louis Economic Development Partnership, MO

For those communities that do not have the means or capacity to create a high performing DFA, partnerships are critical. Many DFAs have multijurisdictional authority, meaning they can span wide geographic areas like entire cities, counties or states. In addition, many DFAs provide services to underserved areas that lack the capacity to manage or launch their own agency.

Development Finance Tools

There are dozens of tools in the development finance toolbox and CDFA has thousands of resources available to unlock this potential. The CDFA website is designed to help you find information about how these tools work and the types of projects that have successfully utilized them. Check out all of our resources.

-Online Resource Database (ORD)

-Resource Centers

-Federal Financing Clearinghouse

-State Financing Program Directory

-News & Headlines

Next Steps

Now that you have a better grasp of the importance of development finance, it’s time to take the next step in your learning. A great place to start is with the highly-acclaimed Practitioner’s Guide to Economic Development Finance from CDFA. This short book provides an overview of two dozen development finance tools and is aimed at beginners who want to understand the basics of development finance. The Practitioner’s Guide is available in the CDFA Bookstore.

In addition, consider joining CDFA to unlock the thousands of development finance resources available on our website.