Financing
By: Chris Allen
Financing is one of the biggest barriers to rebuilding a healthy ecosystem of small-scale development. Many communities have changed their zoning, adopted housing plans, or expressed support for missing middle housing, but the projects still do not happen at the pace people expect. One reason is simple: the capital system is not built for the kind of small, local, incremental projects that many neighborhoods need most.
IncDev’s position is that communities need a financing ecosystem that supports local people building small projects over time. The Incremental Development Alliance exists to help everyday people and local leaders strengthen their neighborhoods through small-scale real estate development, and its work is specifically focused on making missing middle housing legal and straightforward for local small developers. That means financing cannot be treated as a separate technical issue. It is part of the development culture. If the only projects that can get funded are large, standardized, institutionally backed deals, then the market will keep producing large projects, even when communities say they want gentle infill, ADUs, duplexes, cottage courts, small mixed-use buildings, and neighborhood-scale commercial space.
The core problem is that small projects often fall between categories. They are too complex to be treated like a simple home mortgage, but too small to attract the attention of conventional commercial real estate capital. A fourplex, mixed-use building, cottage court, or small infill apartment may have a sound business case, but still struggle because the borrower lacks a long track record, the project does not fit a standard lending box, the appraisal is difficult, the zoning risk is high, or the loan size is too small to justify the lender’s effort. Enterprise Community Partners has noted that low-density multifamily and missing middle projects are often developed by emerging small-scale developers, who face major barriers accessing lending, the scarcity of lending products tailored to these projects is one of the most significant challenges to production.
This is why zoning reform and financing reform have to move together. A project that is technically legal but still requires a discretionary hearing, a variance, unusual utility negotiations, excessive parking, or uncertain approvals will look risky to a lender. That risk becomes a higher interest rate, a larger equity requirement, a declined loan, or a project that never gets attempted. Local housing systems are blocked when small-scale developers, homeowners, and local builders face long, expensive, uncertain approval processes for anything other than conventional single-family housing. A predictable code is not just good planning; it is a credit enhancement.
Good financing policy should focus on closing the gaps that prevent small projects from moving forward. Those gaps often include predevelopment capital, personal equity, construction financing, appraisal support, takeout financing, and patient capital for early-stage developers. Public agencies, local banks, CDFIs, foundations, employers, and civic institutions can all play a role. That might mean revolving loan funds, loan guarantees, recoverable grants, subordinate debt, interest-rate buydowns, predevelopment funds, land write-downs, infrastructure support, or targeted gap financing. Below-market financing can help projects by offering capital at lower rates or fees, and that repaid funds can be recycled to support future borrowers.
But financing tools should be designed to build capacity, not dependency. The goal is not to subsidize every project forever. The goal is to help more local developers get through their first few projects, build balance sheets, establish lender relationships, and create a track record. Enterprise’s work on the capital gap for emerging small-scale BIPOC developers is useful here because it frames the challenge not only as project financing, but as helping developers grow their balance sheets, portfolios, and business operations. That is exactly the kind of ecosystem thinking communities need if they want more local people to become capable housing producers.
Cities should understand the financial productivity of their own development patterns. Our friends at Urban3 help communities analyze land value economics, property tax systems, revenue modeling, and the fiscal impact of development. This matters because small-scale infill is often not just good housing policy, it can be good municipal finance. When a community uses existing streets, pipes, schools, services, and public investments more productively, it can strengthen the local tax base without requiring endless outward expansion.
IncDev’s position is that financing reform should be local, practical, and aligned with implementation. Communities should not simply ask, “How do we attract more capital?” They should ask, “What would make a good small project financeable here?” That means looking at the whole path from idea to occupancy, zoning, site control, predevelopment, design, permitting, construction lending, appraisal, lease-up or sale, and long-term ownership. It also means training local developers and educating local lenders so both sides understand the real risks and opportunities of small-scale infill.
A strong financing ecosystem makes it possible for a local person with a good project, a reasonable site, and a credible plan to get to yes. It does not remove discipline from the market. It does not make bad deals good. But it does reduce unnecessary friction, uncertainty, and capital gaps that prevent useful small projects from happening. If communities want more incremental housing, they need incremental finance: capital tools that are appropriately scaled, locally informed, patient where needed, and connected to the people who are actually capable of building the next good building.
Best supporting links
Incremental Development Alliance — Our Work
IncDev’s own framing of making missing middle housing legal and straightforward for local small developers. (Incremental Development Alliance)Enterprise Community Partners — Missing Middle: 3 Ways to Scale Low-Density Multifamily Housing
A strong explanation of why emerging small-scale developers face financing barriers and why tailored lending products matter. (Enterprise Community Partners)Enterprise Community Partners — Closing the Capital Gap for Emerging Small-Scale BIPOC Developers
A useful capital-access frame focused on balance sheets, portfolios, business operations, and developer capacity. (Enterprise Community Partners)Local Housing Solutions — Below-Market Financing of Affordable Housing Development
A clear overview of below-market loans, recyclable capital, and local financing tools. (Local Housing Solutions)Urban3 — Home / Land Value Economics and Municipal Finance
A helpful resource for connecting development patterns, land value, public revenue, and long-term fiscal resilience. (Urban3)CNU — Great Idea: Incremental Development
A concise New Urbanist explanation of why great places are built in small increments by many people in their own communities. (cnu.org)