Detroit — For two years, Brinda Devine pursued her vision to open a marketplace in Detroit with healthy food options for the community. The biggest hurdle: cobbling together nearly $600,000 to redevelop a century-old, two-story building on 16th Street.
Devine has worked in commercial real estate for 30 years. After being unable to obtain a suitable bank loan, she used personal equity, the Small Change real-estate crowdfunding platform, grants and loans to fund the upcoming market to be called the Kornr Store.
“I didn’t get any commitments for complete funding until last year,” Devine said. “If I had not gotten that grant money, I would not be doing the project because I could not get a lender to loan me the rest of the money.”
She’s one of many Detroit entrepreneurs who say getting affordable capital is an obstacle to seeing business plans through, especially for people of color. According to a survey of 1,235 small business owners in Wayne, Oakland and Macomb counties released this year by Detroit Future City, accessing and navigating the cost of capital was their primary challenge, and it was the second-highest-ranked goal for businesses over the next one to two years.
Rieanna Stewart, Detroit training manager for Capital Impact Partners, says small-scale real estate developers in the market face several challenges. Those include having projects that are too small to qualify for funding through community development financial institutions, which provide loans and support to underserved communities.
Developers can also lack sufficient equity on their personal balance sheets to secure financing, she said. Small business owners have similar challenges as developers with accessing affordable capital, experts say. However, there are funding options for developers and small business owners through entities including Capital Impact Partners, CDC Small Business Finance and Chase Bank.
Chase Cantrell is executive director of Building Community Value, a nonprofit that teaches people how to purchase and develop small commercial and residential properties. He has been in real estate for the past 16 years.
Cantrell recently developed a 20,000-square-foot commercial property at West McNichols and Prairie Street that will be a restaurant and retail space. He says he expects the retail space to open this year and that he’s looking for a restaurant tenant. The $3 million project took five loans, a grant and a tax abatement to develop.
“It’s very difficult to make these projects work,” Cantrell said. None of his commercial projects have had bank assistance, instead relying on capital from community development financial institutions or tax abatements.
“In any other city, if I had purchased the same properties, you would anticipate being able to go to a bank … you put in 20 (percent), you get 80 (percent) from a bank.
“Most banks will not lend for real estate development … so if somebody wants to buy a small building on a corridor, they can’t go to their bank to get a loan,” he said, adding that Detroit’s small commercial real estate market relies on community development financial institutions that “step in the gap when banks don’t lend.”
“Essentially, the banks are saying there’s too much risk … of negative things … so there’s systemic reasons why it’s just difficult to get loans in a city like Detroit, and even if you get a loan, it’s not going to be the right value,” Cantrell said. The reason: Detroit’s properties tend to be undervalued by appraisers.
That leads prospective developers to use “hard-money lenders” who charge higher interest rates, Cantrell said.
‘Not designed for you’
When Devine was looking for loans, she was offered onerous terms that would have set her up to fail: “If I didn’t have the background I have, I would have signed it like, ‘OK, great. I can make this happen.'”
She feels that as a Black woman, it’s harder to obtain a mortgage to become a homeowner and get commercial loans because of discrimination in the underwriting process.
“I’ve talked to other women who have backgrounds better than mine, and it’s the same narrative over and over because you have the same system that basically is not designed for you,” Devine said. “Who are the underwriting processes typically made for?
“People who have the income to support borrowing money, and typically in a population where Blacks typically make less money and less education … underwriting processes need to be adjusted for different areas and different economic makeup of people.”
Devine, who has spent years managing portfolios with commercial assets, said the project has given her a new perspective.
“I have typically in my career been on the table where there was already designated funding for my employer’s project, so that was never a concern,” she said. “But when you’re on the opposite side of the table, being a developer and trying to access capital, it’s a lot harder.”
Getting an initial commitment for a project is often the hardest part of the process, Devine said: “I got the first $43,000 from investors, and that gave me some credibility in Detroit … and that was helpful because no one really wants to be the first one to give you your first (lump sum).”
Options for developers
Stewart said there are options for real estate developers through Capital Impact Partners, which is part of the Momentus Capital branded family of organizations.
“We’re working to both expand the credit box and look at borrowers’ whole stories versus just that snapshot ‘What are your financials?’ without really reading into their entire story,” Stewart said. “But also providing resources like the Equitable Development Initiative Program, which provides training, technical assistance and access to capital, which is expanding the knowledge capital and the social capital of the market.”
Capital Impact Partners has conducted six annual Equitable Development Initiative programs in Detroit, creating a network of 117 developers in Detroit, Highland Park and Hamtramck who have received training, mentoring and financing.
These developers work on their own projects or assist others in real estate development. Nationally, more than 250 developers have completed the program across five regions. Chase Cantrell is among the graduates.
To date, the program has completed five grant rounds, and, as of grant round four, deployed almost $500,000 in pre-development grants to more than 15 projects in the Detroit market.
A lack of capital makes it hard for developers to make quick decisions on whether they will proceed with a project, Stewart said: “We do provide Equitable Development Initiative alumni grants. It allows them to make those faster go or no-go decisions so they’re not necessarily sitting on a deal and kind of spinning their wheels and also spending extra money that could go into a deal that’s more feasible.”
For developers who are not in the Equitable Development Initiative program, Stewart often recommends connecting with networks like the Real Estate Association of Developers and the Building Community Value program. The former organization grew out of the Equitable Development Initiative and aims “to empower minority developers in Detroit,” while the latter is a nonprofit whose mission is “facilitating real estate development projects in underserved Detroit neighborhoods.”
Aid for entrepreneurs
Small business owners have similar challenges as developers when it comes to accessing affordable capital, experts say.
It can be especially difficult in Detroit and Metro Detroit, said Jennifer Moon, a Michigan loan officer for CDC Small Business Finance, which is also affiliated with Momentus Capital.
“This stems from a few reasons,” Moon said. “The business may be struggling cash flow-wise. It may be a startup business, a high-risk industry or they may lack the owner’s injectory capital to assist the project.”
To bridge the gap, Moon said CDC Small Business Finance’s credit requirements are a lot more lenient than those of banks.
“Where traditional lenders may have a rigid cash flow requirement, we have a little more flexibility in regards to assessing a deal,” Moon said. “Assess not only the financial perspective of the deal, but we also hear the mission. We are mission-based. We want to hear the story. We want to understand your vision. So we do a lot of hands-on.”
Another common hurdle is personal credit and financial literacy, Moon said. To address this, the organization taps into the state’s ecosystem of alternative lenders and technical assistance providers to get business owners application-ready.
In the fiscal year ending Sept. 30, 2023, CDC Small Business Finance made 16 Community Advantage loans totaling $1.29 million in Michigan. Four of those projects were in Detroit. CDC Small Business Finance also made 49 loans totaling $2.85 million for business owners who were not eligible for financing from the federal Small Business Administration.
JPMorganChase & Co. also provides funding solutions for small business owners and developers in Metro Detroit.
Bre Mills, executive director and Midwest region area manager at JPMorgan Chase, said business owners who express problems getting access to capital need to increase their financial skills. Mills, who leads JPMorgan’s team of business consultants in Detroit, said they meet one-on-one with each business owner to understand their specific needs and improve their financial acumen.
“So a lot of times it’s just a matter of us unlocking pieces to credit, to their cash flow, making sure they understand what the bank is actually looking for in order to lend to them so that they’re successful and no longer discouraged,” she said.
Business owners can be approved, receive a counteroffer for a lesser loan, or be refused, Mills said: “Even in the event of a declination, what we do is, we take a look at the reasons for the decline. We then work with the client and give them homework so that we can find solutions for those reasons. Then later on, six months, nine months, a year down the road, we do another application. We’ve had plenty of success stories where we couldn’t initially get someone approved.”
In Detroit, JPMorgan Chase committed $7 million in 2014 to nonprofits supporting small businesses, including the Detroit Development Fund to support its Entrepreneurs of Color Fund, a lending program that helps underserved entrepreneurs grow their businesses. The EOCF closed 190 loans to BIPOC (Black, Indigenous and other people of color) entrepreneurs in Detroit from 2015 to 2023, with 47% of those going to Black women-owned businesses, bank officials said. EOCF has provided more than $18 million in loans to entrepreneurs in Detroit.
Other obstacles
Experts and entrepreneurs say would-be developers and business owners face other challenges, some of which they can address themselves.
According to a report by the Detroit-based New Economy Initiative, it’s critical for small business owners to have up-to-date financial statements when seeking loans or assistance from government programs. However, the report shows that only half of the 1,235 Michigan businesses surveyed reported regularly having up-to-date financial statements on hand.
Another frequent obstacle is debt.
Fed Small Business released a study in May 2023 of firms with under 500 employees about their debt loads. Nearly 75% of 165 Michigan firms reported outstanding debt, with 52% saying they owed more than $100,000. More than a quarter of the Michigan firms surveyed said their debt came from nonbank institutions.
Despite challenges acquiring the capital and her budget increasing 100% due to rising construction costs over the past two years, Devine said she’s on track to open her convenience store by October, bringing one more building back to life in an area where residents are rebuilding from blight.
“It’s about reactivating this space, this business corridor,” Devine said. “It’s about reactivating it and putting back things within the neighborhood that are gone (and) providing essentials to the neighborhood.”
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