LOS ANGELES—There are many challenges to developing affordable housing, but even discounting all of the construction costs, time and subsidy information to get through, many projects don't get off the ground because of preconstruction costs that need funding before construction financing kicks in. The New Generation Fund, a financing platform from the City of Los Angeles, aims to change that by providing financing specifically for these early costs.

The New Generation Fund is an amalgam of public and private money from the City of L.A. and several affordable lenders and developers. The fund currently has $50 million in invested proceeds, including $10 million in public funds, and offers capital advances of 120% LTV for non-profit sponsors and 95% LTV for for-profit sponsors, with interest rates from 4.9% to 5.2% on three-year term loans. “The City of Los Angeles basically went out to the affordable housing lender and investor community and said, 'we are willing to subsidize projects that you guys are investing in,” Ofer Elitzur a partner at Cox, Castle & Nicholson, tells GlobeSt.com. “If you guys want to have more product to invest in, why don't you kick in money to this fund and we'll collectively get more affordable housing across the finish line.' That is good for L.A. and it is good for those lenders and investors too. It is kind of a win-win.”

While Elitzur notes the general challenges of developing affordable housing, he says that a huge number of potentially successful projects never get off the ground because of preconstruction costs. “The New Generation Fund helps finance these predevelopment expenses that the developer has to go through to develop a building. Developers have to apply for subsidies; they have to go through CEQA review; they have to get design approval. These are all upfront costs that a developer has to incur before they ever get their construction financing or equity investors' money,” says Elitzur. “Before there is money, there are a bunch of costs. The New Generation Fund looks at building that are financeable and that they are confident are going to get across the finish line and the fund gives money for those predevelopment costs. That is a huge help. There are plenty of projects that never get built because the developer can't afford those up-front costs.”

These aren't large loans. A borrower will typically get a $1 million to $5 million loan through the fund, which will keep the project in motion until construction financing kicks in. Then, the fund will be paid back with a rate of return at closing of the construction financing. “This is a really intelligent way to do things in today's world. The New Generation Fund doesn't bring down the cost of building an affordable building, but it finances that cost in a very intelligent way,” “It is a model for more finance subsidies.”