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How Lenders Can Support Inclusive Development

Dec 19, 2024
Posted by: Stearns Bank

The commercial real estate industry touches countless aspects of society and the economy, shaping places where people live, work, shop and socialize. Increasingly, real estate developers and lenders see they can wield that position to affect positive change, such as advancing equity.

As more developers support community investment, there is growing recognition that equitable development will require inclusive financing strategies that support minority-owned businesses and underserved communities. Lenders can play a pivotal role in advancing equity through the projects they choose to finance. Prioritizing equity in financing decisions can lead to more inclusive and sustainable development, benefiting both the communities served and the lenders involved.

This blog explores what it means to advance equity in real estate development. It spotlights two lending strategies that can make an impact — supporting minority-owned businesses and targeting historically marginalized communities.

 

Too much to read right now? Here's a summary:

  • Financing projects that promote equity for underserved communities is a strong way to support inclusive development.
  • Fund minority-owned businesses (M/WBEs) and projects in vulnerable communities.
  • Offer flexible terms, prioritize community needs, and support cultural preservation.
  • Track affordable housing units, jobs created, and M/WBE funding.
  • Inclusive development builds trust and drives social impact.

Understanding the Role of Lenders in Advancing Equity

In a recent report, the Urban Land Institute (ULI) defined equity as “the process of ensuring a fair opportunity for individuals and their families to thrive socially and economically.” An equity lens assumes that everyone starts from a different place. Therefore, overcoming inequities entails “addressing structural disparities that exist between people of different backgrounds,” as ULI states.

What does this look like in the context of real estate development? Equity strategies can include investing in projects that seek to positively impact historically marginalized communities, such as a high-quality affordable housing development in a low-income neighborhood. Developers concerned with equity may also seek to proactively mitigate the impacts of gentrification or contract with minority-owned businesses.

In this context, lenders can be powerful catalysts for change by choosing to finance equitable development initiatives. Considering equity criteria in lending decisions pushes developers to consider how each project impacts marginalized groups and design strategies to help level the playing field.

The Ripple Effects of Inclusive Financing

Inclusive financing can have vast impacts beyond the project being financed. As the nation grows increasingly diverse and more polarized, many experts believe intentional strategies are needed to shape a more inclusive and equitable society.

Inclusive development and financing reduce disparities and promote economic empowerment in marginalized communities, strengthening the economy and nation. Everyone benefits from bridging divisions of class, race, gender and other identities.

Evidence indicates that the real estate industry increasingly understands these benefits. A ULI survey found that 40% of real estate practitioners who have adopted social equity practices are motivated by a desire to improve social outcomes. Notably, 35% also cited “strengthening an organization’s reputation” as a motivator, indicating that real estate companies may experience a boost to their brands from embracing equitable development.

Real estate professionals are reacting as the general public becomes more concerned with racial and social equity. Looking ahead, this could lead to more organizations adopting equity strategies.

 

Championing Minority-Owned Businesses in Financing Decisions 

One way that lenders can support equity is to finance projects involving minority and women-owned business enterprises (M/WBEs). Setting aside specific funds for these projects, partnering with community organizations or creating tailored loan products are all ways to help champion businesses owned and led by people of color, women and other underrepresented groups.

Understanding racial and gender disparities in real estate

While the real estate industry is becoming more diverse, certain racial groups and women are still underrepresented due to a history of discrimination and a wealth gap.

Only one-third of real estate developers are women, according to the organization CREW Network. The numbers are even starker for people of color. A 2023 Grove Impact report uncovered that Black and Hispanic developers represent less than 1% of real estate developers in the U.S.

Despite this disparity, small Black and Hispanic developers generate more revenue than similarly sized white developers on average, according to the Grove Impact report. They see similar success at the top end of the market — the best available data shows Black and Hispanic developers are involved in larger deals than white developers.

Closing the Capital Gap

Access to capital is one significant barrier for many members of underrepresented groups. Real estate investors often get their start by raising money from family and friends, putting individuals with limited networks at an inherent disadvantage. Of the $82 trillion invested in venture capital and private equity in 2023, less than 1.3% was invested in firms run, owned or founded by women and people of color, according to The New York Times.

This is one area where equitable financing strategies can make a significant impact. By setting aside specific funds for projects led by minority groups, lenders can help close the gap.

Supporting diversity throughout the development value chain

Many parties come together to bring a real estate project to life. In addition to considering the diversity of a developer’s ownership and leadership team, lenders can consider how the project will provide opportunities for other M/WBEs. For example, will the development team engage a minority-owned construction company, engineering firm or other service providers? Also, do all contractors provide prevailing wages to workers and offer workforce development?

Asking such questions during underwriting can help lenders understand all the players involved in a project and better assess the equity impact.

 

Targeting Historically Marginalized Communities

Another way for lenders to embrace equitable financing strategies is to identify and prioritize projects that directly benefit historically marginalized communities. This can include developments in areas with a significant shortage of affordable housing or economic opportunities.

Impactful Financing Strategies for Equitable Development

Advancing equity goals requires intentional efforts. Lenders can maximize impact by structuring financing processes and decisions around equity, such as offering favorable terms or offering more flexible qualification requirements for projects with an equity component. 

The following questions can be helpful in assessing a project’s potential to influence equitable economic development:

  • Is the site located in an underserved community with limited economic opportunity and affordable housing?
  • How will the development benefit the community? Will it fill a need for affordable housing, healthcare, healthy food or public amenities?
  • Will the project create jobs for the local community?
  • Has the developer engaged stakeholders in the community to discuss their needs and then addressed those needs in the project’s design?
  • Does the project respect the cultural identity and history of the community?
  • Will the development provide wealth-building opportunities for community members or residents?
  • Is the developer pursuing LEED Social Equity Credits or other certifications to recognize efforts to incorporate equity into the project?
  • Does the building’s design address the needs of people of different abilities?
  • Does the project help mitigate the adverse effects of gentrification in a low-income community?


This list is far from exhaustive, as there are many ways for the real estate industry to advance equity through community investment strategies. Lenders must thoroughly discuss the specific equity impact they aim to make and design financing strategies around those goals. 

Measuring Success

Assessing the impact of inclusive financing is essential to demonstrate how strategies benefit marginalized communities. Measuring success instills accountability and supports continuous improvement. 

Metrics and indicators to consider may include the following, although each lender may have unique numbers to track based on its specific strategies:

  • Number of affordable housing units created/preserved
  • Number of jobs created
  • Title VI compliance
  • Percent of financing allocated to minority-owned businesses
As lenders track the numbers, they must do more than store data in a spreadsheet. Reviewing and discussing metrics internally enables a lender to refine its community investment program as needed. Some lenders may also spotlight successes in a public-facing community impact report or case studies to demonstrate industry leadership and help push the industry toward a more equitable future. 

 

Positioning for the Future: Lenders as Leaders in Equity

Equity is no longer a peripheral issue for financial institutions. Although much work remains to dismantle structural disparities, companies increasingly consider it central to their role as responsible corporate citizens. 

Building a Reputation for Equity

Lenders have a unique opportunity to position themselves as champions of equity by embedding inclusive financing strategies into their business models. By offering loans and resources to underrepresented communities and businesses that have historically been underserved, lenders can not only create positive change but also foster long-term relationships that benefit everyone involved.

A lender’s reputation is built on trust and integrity, and prioritizing equity is a powerful way to strengthen both. Building a reputation for equity requires consistently implementing practices that ensure fair access to capital for all and developing products and services to support equitable economic development. In doing so, an institution can strengthen its brand by demonstrating that it genuinely cares about the prosperity of every community.

mother-and-child-affordable-housing

Looking Ahead

Forward-thinking lenders are already laying the groundwork to lead the industry into a more inclusive and equitable future. As regulatory and societal pressures to address systemic inequalities continue to grow, lenders can stay ahead of the curve by adopting inclusive practices now.

The future will demand more transparency, innovation and collaboration to create financial systems that are accessible to all. Lenders who invest in solutions and cultivate strategic relationships to address inequities in lending practices today will be well-positioned as leaders in the future.

At the forefront of this shift are lenders who not only adopt equitable strategies but also share their insights and experiences with others. Thought leadership plays a key role in shaping the conversation around equitable development. By contributing ideas, research and case studies, lenders can position themselves as knowledgeable and proactive players in the drive toward a more inclusive financial future.

 

Advancing Equity Through Collaboration

Championing equity in real estate development requires intentional action and commitment from both lenders and developers. Lenders can be pivotal drivers of change by prioritizing inclusive financing strategies — such as supporting minority-owned businesses and targeting historically marginalized communities. These efforts not only promote social justice but also create more resilient, thriving communities that benefit everyone involved.

As you consider your own financing decisions, think about how they can contribute to a more equitable future. By collaborating with developers and stakeholders on projects promoting equity, you can help bridge the gaps in opportunity and resources that continue to impact underserved communities.

At Stearns Bank, we believe in the power of partnerships to advance equitable development and enjoy working with developers to support inclusive and impactful projects that shape a more just and prosperous future for all.

Contact us to discuss equitable financing opportunities.