For Some Chicago Projects, Building A Capital Stack Is Like Cooking Lasagna

In a high-rate environment, developers on the South and West sides of Chicago innovated and used a piecemeal approach to nab project financing, playing a game where the rules favor the house. 

But now that rates have finally come down, not much will change.

While cuts may ease the overall capital environment and increase access to financing for many, developers that want to build projects in traditionally underinvested areas of the city still face additional challenges. Those include barriers to securing capital, longer development timelines and blanket rejections from traditional institutions, panelists said at Bisnow’s South of Roosevelt event last week. 

Building a capital stack for South and West Side development takes a coalition of carefully assembled private and public funding sources, said A.J. Patton, founder and CEO at 548 Enterprise. A particular project might include state tax credits, city tax increment financing or bonds, and funding from community or faith-based organizations and community development financial institutions, he said at The Penthouse Hyde Park event. 

“That is a very delicate, delicate, delicate process, disproportionately, because projects that are west of Western [Avenue] and south of Roosevelt [Road] have a significant amount of public resources that have to go into those capital stacks,” Patton said. “Every time there’s this kind of a lasagna capital stack, [that] there's all these different kinds of folks and players in the field, that’s a different constituent.”  

All the moving parts make the process of building that capital stack complex, Patton said. And there’s a big difference between proposing a development in West Garfield Park and doing a project in Englewood because of their unique politics. Getting them over the finish line is a “delicate dance,” he said. 

On top of all of that, the deal still has to pencil.

“It’s an art that developers, many of them in the room, have had to work through,” he said.

548 Enterprise has worked through some of the challenges and has six projects in the works on the South Side, including an expansive mixed-use development in Lawndale and lofts powered by solar energy in the South Loop. 

For Christyn Freemon, founder of Project Forward, a major bank isn't the first target in sourcing funding for many projects south of Roosevelt because the expectation is that it will say no. Before approaching a bank, Freemon said her company has to establish proof of concept through initial community engagement and substantiate what a traditional market research analysis wouldn’t show to address bank concerns.

Freemon’s first partners were CDFIs, which have different processes than traditional banks, including factoring in longer timelines to work with public-private partnerships and faith-based institutions, she said.

Those lengthier timelines can lead to a cycle of continuously having to secure more money as the cost of a project increases over time, said Ja’Net Defell, president and CEO at Community Desk Chicago. To develop projects on the South Side, it isn't as simple as calling up an equity partner and easily getting more capital, she said.

Ultimately, it can stop projects short because developers have to repeatedly go back to funding sources, Defell said. 

“You have the challenges of chasing the money, on top of escalating costs,” Defell said. “By the time you get through chasing the money, the project cost has gone up. You have to go back and chase the money [again]. So it literally is this ongoing cycle.” 

CDFIs can also mean more expensive capital, Patton said. Compared to developers able to use more traditional funding sources, projects that use a CDFI for funding may have to triple the cost of financing and wait months instead of days for a term sheet, he said. 

“We’re playing the game totally different,” Patton said. 

Many of the communities Patton is investing in haven’t seen multimillion-dollar infusions in generations, he said. Being the first developer to go into certain communities at scale, he knew he was going to be on “a bit of an island.” 

But that comes with an opportunity to build a development team that is sourced from the community and to show residents what it looks like when its own people build the neighborhood and invest in themselves, Patton said.

“The thing that matters most as developers is I'm picking all players in this game,” Patton said. “By design, what I just decided was I'm just going to pick everyone that's from the neighborhood.”

Rejection when gathering a capital stack is also part of the process, Freemon said.

“‘No’ is a part of the journey,” Freemon said. “No is not a forever no — it’s a no right now. It's a no until they understand your mission, vision, values and impact, and go over somebody's head if you need to.”