Every Wednesday at 2 p.m., Julie Nigro has a phone call with First Commonwealth Bank to check in about her development pipeline. Nigro is director of real estate at City of Bridges Community Land Trust — named after one of the nicknames for Pittsburgh, which may or may not have more bridges than any other city in the world.

Since inception in 2019, City of Bridges Community Land Trust has sold 43 homes, a mix of new builds and rehabilitations. Another 22 homes are listed for sale and 10 more are under construction or soon to begin. First Commonwealth Bank provided acquisition or construction financing for 29 of those homes, with more financing and more homes on the way.

In some ways, it’s a very rare relationship. Community land trusts, or CLTs, have been around since the civil rights era as a tool for communities to fight back against disinvestment, displacement and real estate speculation. City of Bridges is relatively new to the scene. But even some of the most established community land trusts still face significant barriers to acquisition and construction or rehab financing.

In other ways, it’s a very typical relationship between a developer and a local or regional bank. While local and regional banks are dwindling in number and largely under-the-radar compared to much larger brand-name banks, the localized nature of construction lending means local and regional banks are still a much more significant source of construction loans than their much larger and more well-known peers.

“The initial hurdle is whether your lender is comfortable with what a CLT is, and if that answer is no, then there is a little bit of an education piece to the start of that relationship and getting them comfortable with the model,” Nigro says. “But that’s really the only difference. In the end, development and building houses is the same whether you’re a CLT or you’re a for-profit developer. A house costs what it costs to build, and you need a construction loan to build.”

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Who’s got takeout?

Construction lending is a risky business. Construction loans don’t get paid back until after a project finishes. To help ensure that happens, construction lenders maintain strong relationships with developers, contractors, permitting agencies, buildings departments, planning departments, utilities companies and whoever else might be necessary to help complete a construction or rehab project. As part of the process, construction lenders make frequent site visits to make sure the work is progressing.

“When we have construction in progress with First Commonwealth as the lender and we’re requesting funding to pay the contractor, they’re coming to the site and seeing the contractor’s requesting 50% of the cost for framing and they can see, yes, it’s 50% framed,” Nigro says. “They understand the construction world and they also a lot of times have a relationship with our contractor because Pittsburgh is such a small world. Especially affordable housing, everyone kind of knows each other, for better or for worse.”

The high-touch, relationship-intensive nature of construction lending is a big reason why it’s still mostly local and regional lenders who do it. Beyond a certain scale, a bank starts to lose interest in maintaining local relationships, especially with developers and contractors working on smaller projects.

Banks with $100 billion or less in assets account for just 29% of all assets in the banking system, yet they account for 73% of construction lending among banks. Banks with $50 billion or less account for 62% of construction lending among banks. First Commonwealth Bank, which operates in Pennsylvania and Ohio, has $12 billion in assets.

Construction lenders need to know how they’ll get repaid after completion of a project — also known as “taking out” the construction loan. In a typical scenario, a developer eventually repays a construction loan with the proceeds from selling homes to homeowners who take out their own mortgages to buy the homes. If it’s a rental property, the developer pays off a construction loan after obtaining a longer-term mortgage based on the rental income from the property after it’s all leased up — also known as stabilizing the property.

With a community land trust, the trust doesn’t sell the property to homeowners; instead, it sells them only the house that sits on the property using a long-term (typically 99-year) ground lease. If the homeowner wants to sell the house, they can only do so on specific terms set by the community land trust, terms that ensure the home will still be sold at an affordable price to the next buyer and so on in perpetuity.

Only a few lenders across the country have invested the time to understand how mortgages work under the community land trust model. With so few lenders willing to make mortgages to community land trust homeowners, it remains challenging for most community land trusts to find acquisition and construction financing.

Most construction lenders don’t see how they will eventually get taken out of projects involving community land trusts. Even when projects can show they’ve obtained significant public subsidy, there’s typically a significant chunk of debt that won’t get repaid until after the homes are sold.

Most community land trusts today are also still relatively new organizations that have little if any experience in the construction process. It’s another reason for a construction lender to say no. In the affordable housing world, there’s often public funding, maybe from state or local bonds or federal tax credits, that can help take out a construction loan — but those sources often involve competitive and complicated application processes that favor those with experience or resources to get through multiple application rounds before getting funded.

So far, most community land trusts have eked out limited acquisition or construction funding from philanthropy, community development financial institutions, or local governments — sources for which community land trusts are often still competing against more experienced affordable housing developers.

As of 2022, there were more than 300 community land trusts across the country, representing nearly 44,000 residential units, according to the Lincoln Institute of Land. These numbers represent a 30% increase in the number of community land trusts or similar entities, and a 120% increase in the number of residential units since 2011.

But their needs are greater than current community land trust funding sources can handle. As the primary construction lenders across the country, local and regional banks offer a means to reach the scale of construction funding needed — insofar as they can be convinced of the opportunity to do so.

Relationships and risk

City of Bridges Community Land Trust’s roots go back to 2015. Pittsburgh’s Lawrenceville neighborhood started feeling displacement pressures tied to the expansion of a children’s hospital in the area. The city had also spent years courting tech industry giants, and many neighborhoods were starting to see real estate speculation as tech employees moved in.

In response, a neighborhood-based nonprofit called the Lawrenceville Corporation launched a land trust pilot initiative, starting out with the goal of incubating a community land trust in the Lawrenceville neighborhood — a predominantly white neighborhood that has seen its median income go from $30,424 in 2010 to $71,565 in 2022. Over that same timeframe, the median home sale price in Lawrenceville went from $87,500 to more than $300,000.

Residents of other Pittsburgh neighborhoods started reaching out to the Lawrenceville Corporation to ask about the community land trust approach and whether they could bring it to other neighborhoods.

“It was pretty clear that this wasn’t just a neighborhood specific problem,” Nigro says. “This was an issue that was citywide and county-wide that needed a more regional approach.”

Around 2017, the Lawrenceville Corporation started reaching out to banks, credit unions and other lenders of all sizes in and around Pittsburgh, looking for lenders who would be interested in helping finance the ground lease mortgages for community land trust homeowners.

Although based in nearby Indiana, Pennsylvania, First Commonwealth Bank really grew up in Pittsburgh. The bank has 50 branches in the Pittsburgh metro area, and federal data shows that half of the $8 billion in deposits at First Commonwealth come from those 50 branches.

As a bank, First Commonwealth is subject to the Community Reinvestment Act, which says banks have an obligation to meet the credit needs of the communities where they take deposits, including low-income communities. It’s a big reason why First Commonwealth was already active in the Pittsburgh affordable housing scene, and why it already had a program offering first time homeowners mortgages with a down payment as low as 1%. The bank was also already deeply familiar with the various local, state and regional housing subsidy programs available in its footprint.

So it wasn’t surprising that First Commonwealth took a particular interest in the Lawrenceville Corporation’s outreach about its community land trust initiative. The relationship unfolded over a series of coffees, lunches, maybe a beer or two. It didn’t start from scratch: Names and faces were familiar on both sides as professionals in the affordable housing and community development landscape in Pittsburgh.

“We’d have a coffee, then I’d run back and start talking to our mortgage banking executive, to our senior credit officer, and they’d come up with this litany of questions, concerns. How does this work? What’s that about?” says Evan Zuverink, senior vice president at First Commonwealth Bank. “And I’d run back to [the Lawrenceville Corporation] and say, hey, help me understand this piece. I generally think it’s about putting pieces of the puzzle together. It was probably a good six months of that kind of back and forth.”

A lot of the questions revolved around what happens when things go wrong — when a community land trust homeowner starts missing payments and is at risk of foreclosure.

Typically in a foreclosure, the bank takes ownership of the property and sells it at auction back out onto the market. Since a community land trust retains the deed to the property, things aren’t that simple. But in cases of distress, the land trust staff are there to work with the homeowner and connect them with resources to get back on track. As a last resort, the land trust usually also has first rights to buy back the home from the homeowner, in the process repaying the bank for the balance of the ground lease mortgage instead of sending the property into foreclosure.

As a result of the unique structure and support provided from community land trusts, community land trust homeowners were able to maintain significantly lower delinquency and foreclosure rates than conventional homeowners during the subprime mortgage crisis more than a decade ago. Every foreclosure prevented is a headache avoided for the bank that made that mortgage. What might seem more risky at first — making loans to first-time homeowners with low-to-moderate incomes — actually ended up being less risky thanks to the community land trust model.

“It’s not as though there’s not risk, but there’s risk in everything,” Zuverink says. “There’s risk in getting out of bed in the morning. It’s saying, how do you manage the risk, and do you understand it?”

Regulators

More often than not, community land trust leaders reaching out to banks hear that, as regulated entities, there are just some things banks aren’t able to do.

Not long after connecting with Lawrenceville Corporation, First Commonwealth turned to its primary regulators at the Federal Deposit Insurance Corporation to find out their views on lending to community land trust homeowners.

Bank or credit union regulators don’t have the explicit authority to approve or deny new activities, like a bank making loans to community land trust homeowners. But it can become an issue later if the regulator’s examiners believe a new activity is too risky for a bank to continue. Regulators examine every bank or credit union every 12-18 months — reviewing loans, lending policies and financial performance to ensure each bank maintains “safe and sound” financial management. So when a regulated institution — meaning banks or credit unions that take deposits — wants to do something new, it’s helpful to first run it by their regulator.

When First Commonwealth first brought it up, the FDIC field office staff in the Pittsburgh suburbs weren’t familiar with banks lending to community land trust homeowners, Zuverink says. “We said, well, here’s some examples of where other banks in other parts of our country are working with community land trusts,” he says.

The few lenders around who are doing ground lease mortgages for community land trust homeowners are mostly community and regional banks or credit unions serving specific geographic areas. “Ultimately, they came back and said, yep, that’s a permissible activity.”

It helped that Fannie Mae and Freddie Mac — the government-sponsored entities that support a majority of the mortgage market across the country through secondary market purchasing — both offer to purchase mortgages made by private lenders using the standard community land trust ground lease model.

Neither agency purchases very many. Out of more than 2 million mortgages purchased by Fannie or Freddie last year, only a few hundred were ground lease mortgages made to community land trust homeowners. That’s because few private lenders who sell mortgages to Fannie or Freddie have taken the time to become familiar with the model. But Fannie and Freddie’s support for ground lease mortgages still helped smooth the way with the FDIC field office.

By 2018, the Lawrenceville Corporation and First Commonwealth Bank were ready to go. But Fannie and Freddie were not. The community land trust homeowner applications weren’t getting through the automated approval processes for Fannie or Freddie. For one reason or another, the applicants just weren’t qualifying under either agency’s internal algorithms.

Rather than saying no, the bank pivoted internally to keep the mortgages in its portfolio — just as it does with its low down payment first-time homeowner loans. In terms of borrower profile, the community land trust homeowners were similar enough to those coming through the low down payment program. There also weren’t a huge number projected for the first year, just five or six in the Lawrenceville neighborhood, so the bank was willing to take on those ground lease mortgages as a pilot initiative to see how things would go.

City of Bridges Community Land Trust spun off from Lawrenceville Corporation in 2019, taking with it the land trust pilot portfolio of around a dozen homes in the Lawrenceville neighborhood and beginning to pursue acquisitions elsewhere in Pittsburgh and the surrounding Allegheny County. City of Bridges can’t force its buyers to go with First Commonwealth Bank as their ground lease mortgage lender, but they frequently do.

“City of Bridges is still kind of building the momentum, they’re still kind of ramping up,” Zuverink says. “I think this year, we’ll probably write 20 or 30 loans to City of Bridges buyers — that would be my estimate.”

A new normal

Getting First Commonwealth to do the ground lease mortgages for community land trust homeowners was by far the harder part. As a regional bank, once First Commonwealth understood where the takeout would come from, it had all the local knowledge and relationships it needed to do the construction lending for community land trust projects. The bank made its first construction loan to City of Bridges Community Land Trust in 2020.

“I would say most banks don’t do construction lending to community land trusts because most banks don’t make mortgages to community land trust buyers,” Zuverink says. “Once you kind of get over that…the a-ha moment kind of occurs naturally, and then it just becomes an exercise of risk appetite.”

City of Bridges Community Land Trust is just about to break ground on a project that is about as typical as it gets in its atypical world. They’re building six single-family homes on six vacant lots in Garfield, a mostly-Black neighborhood of 4,000 residents. Four of the homes along one block will be sold for $185,000 to families earning up to 80% area median income; the other two homes along another block will sell for $155,000 to families earning up to 60% area median income. The total estimated development cost for the six homes is $3.1 million.

City of Bridges Community Land Trust paid just $40,000 for all six lots from the Pittsburgh Land Bank. So far, the land trust has typically acquired properties through the land bank, community development corporations, nonprofits or other sellers with a shared interest in community development and the flexibility to wait, as the land trust finds subsidies to keep the homes affordable.

In this case, the Urban Redevelopment Authority, Pittsburgh’s quasi-public development agency, is chipping in with a grant of $870,000 from an existing program to support affordable homeownership. This project required a special approval from the authority’s board to go slightly above the program’s usual cap of $130,000 per unit.

Another $900,000 grant for this project comes from the Federal Home Loan Bank of Pittsburgh’s Affordable Housing Program.

Established by Congress in 1932, the Federal Home Loan Bank system consists of 11 regional banks with a mission to support housing and community development. They’re government sponsored-entities, like Fannie Mae or Freddie Mac, but they’re set up and operate much differently. Each federal home loan bank is a co-op, owned and governed by member institutions, which include banks, credit unions, insurance companies and community development financial institutions headquartered within each region. The federal home loan banks mainly operate as banker’s banks, providing members quick and easy access to short and long-term borrowing as needed to support their business.

In 1989, Congress passed legislation mandating each federal home loan bank to set aside 10% of its previous year’s net earnings into an Affordable Housing Program. Each region’s program has different scoring criteria and subsidy amounts, subject to change based on discussions with members.

The Federal Home Loan Bank of Pittsburgh’s Affordable Housing Program currently provides grants of up to $150,000 per unit, with a limit of $1.5 million per project. It’s a competitive annual application process, and all applications must go through a member institution like First Commonwealth Bank.

But their joint application had an advantage. Pittsburgh has one of two federal home loan banks that awards specific points for including a community land trust on Affordable Housing Program applications. (Boston is the only other.)

City of Bridges has successfully applied with First Commonwealth Bank on Affordable Housing Program applications in 2020, 2021, 2022 and 2024; it didn’t apply in 2023 or this year.

On top of those subsidies, First Commonwealth Bank provided a $1.3 million construction loan for this project, which City of Bridges Community Land Trust will repay after ground leasing the six Garfield homes — which are being built using prefabricated units made offsite by a local manufacturer and transported to the lots for assembly. Each home will have three bedrooms and 1.5 bathrooms. To keep the mortgage costs affordable, City of Bridges Community Land Trust will also work with the buyers to obtain a deferred second mortgage through another existing Urban Redevelopment Authority program.

That’s just one of a handful of projects currently in the community land trust’s pipeline that Nigro discusses on her weekly call with First Commonwealth Bank.

“If you think about what we do as a conveyor belt, we put in money up front to put a house on a conveyor belt,” Zuverink says. “When it comes out on the other end and sells to a home buyer it comes off the conveyor belt. We support that conveyor belt getting a little bit faster every month …we want to continue to build the momentum, but not let it go too fast or too slow.”

If things do get off pace, he says, the bank is “in an open forum” with the land trust’s leaders to identify the problem and potential solutions.

Here, there, not (yet) everywhere

Building this kind of transparent, ongoing relationship with a financial institution doesn’t come naturally for anyone.

“A relationship with a lender doesn’t feel like the most comfortable thing for most people, especially if you’re not familiar with finances,” says Alex Cabral, senior principal of innovative finance at Grounded Solutions Network, a national network whose members include community land trusts and housing cooperative organizations across the country.

“It’s not even just a CLT thing,” Cabral says. “People aren’t buddies with their mortgage lenders. Sometimes people don’t even know who this mortgage lender is. It’s not common to have that kind of relationship with lenders and I don’t think it’s unique to this sector.”

Plus, most construction lending today still comes from smaller lenders who don’t have huge brand awareness or marketing budgets.

Ultimately, it’s up to each lender to put in the work of understanding the community land trust model and working things out with their regulators. But individual lenders can only go so far, given the highly localized, relationship-driven construction lending process.

Over the past decade or so, First Commonwealth Bank has acquired banks or bank branches as far as State College or Harrisburg in Central Pennsylvania, as well as Columbus and Cincinnati in Ohio. Since developing its model for working with City of Bridges Community Land Trust, First Commonwealth Bank has started working with community land trusts in all of these markets, both as ground lease mortgage providers to community land trust homeowners as well as providing construction and acquisition loans for the land trusts themselves.

Zuverink estimates the bank has done at least 300 ground lease mortgages for community land trust homeowners across its footprint so far, with 90% of those loans remaining on the bank’s books instead of selling them to Fannie or Freddie like most mortgage lenders.

“We’ll try to run it [through Fannie or Freddie’s system],” Zuverink says. “If somebody doesn’t fit their box but otherwise meets the credit standards that we’ve set for our portfolio, let’s extend them a loan, right? Let’s help these folks.”

According to Zuverink, First Commonwealth Bank has been through three safety and soundness examination cycles since 2019 and the FDIC has raised no issues with the bank’s mortgage lending to community land trust homeowners or construction lending to community land trusts. It’s not guaranteed that every bank examiner in every FDIC field office will feel the same way about banks working with community land trusts, but it’s one more precedent.

Out of 4,430 banks across the country, 2,808 have the FDIC as their primary regulator, while the rest have either the Federal Reserve or the Office of the Comptroller of the Currency. For the 4,800 credit unions across the country, it’s the National Credit Union Administration. Out of the 2,808 banks that have the FDIC as their primary regulator, 2,803 have less than $50 billion in assets — and they’re outsized construction lenders. Those 2,803 banks represent just 13% of banking system assets, but they represent 33% of all construction lending from banks.

The relationship between City of Bridges Community Land Trust and First Commonwealth Bank can be a model for others, Cabral says.

“I think it’s a testament to what’s possible. That’s what lenders and borrowers benefit from most. I would like to see it more.”

This post was originally published on Next City.