The Federal Office for Building and Regional Planning

Publication Urban Development Funds in Germany

BMVBS-Online-Publikation 14/11, Ed.: BMVBS, August 2011

Series: BMVBS-Online-Publikationen Published: August 2011

Editing
Forschungs- und Informations-Gesellschaft für Fach- und Rechtsfragen der Raum- und Umweltplanung (FIRU) mbH, Kaiserslautern
Andreas Jacob
TU Dortmund University, Lehrstuhl Immobilienentwicklung
Prof. Dr. Michael Nadler, Christian Plöhn
RWTH Aachen University, Lehrstuhl Betriebswirtschaftslehre - Unternehmensrechnung und Finanzierung
Dr. Claudia Kreuz

Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR), Bonn
Dr. Peter Jakubowski peter.jakubowski@bbr.bund.de

Summary

In 2007, the European Union made it possible to also use EU structural funds for integrated urban development projects in order to provide revolving financial instruments in addition to the funding through grants (JESSICA Initiative). Since then, structural funds can also be spent to provide guarantees, loans and equity. The financial returns can subsequently be reinvested in further urban development projects.

The selection of suitable projects and the management of the financing are realized through urban development funds. The projects have to be capable of generating sufficient financial returns, they need to have positive external effects and they must not be projects whose commercial success is guaranteed and which therefore do not require state funding. The main field of intervention will be projects that are (partially) profitable to a certain extent, but that are not carried out by market players, since the returns would be too low and/or the project risks too high (e.g. the development and, if applicable, the construction of buildings on inner-city brownfield sites with subsequent sale and measures to upgrade deprived neighbourhoods).

In 2008, the Federal Ministry of Transport, Building and Urban Development, in co-operation with the Federal Institute for Research on Building, Urban Affairs and Spatial Development, set up a research field on the subject of "Urban Development Funds in Germany" within the Experimental Housing and Urban Development programme. Within its framework, four model projects in North Rhine-Westphalia, Hamburg, Brandenburg and Rhineland-Palatinate as well as one by the "Kreditanstalt für Wiederaufbau" (KfW) were accompanied in the course of the preparation, implementation and the further development of an urban development fund. The results were evaluated and are summarized in this report.

Central players in the establishment and management process of urban development funds are the administrative authorities responsible for ERDF of the federal states, the public promotional banks, the local authorities and local authority companies as well as, if applicable, private investors.

Sources of capital of an urban development fund can, for instance, be the ERDF funds assigned to the federal states. The associated co-financing can be realized with funds from the state budget, low-interest loans from promotional banks or capital provided by private investors. It is, however, also possible to set up an urban development fund without ERDF funds. The advantage of this is that the fund is not bound by EU requirements.

The decision regarding the financial instruments provided by the urban development fund depends, among other things, on the projects that are funded. Loans are especially suitable to fund investments during the period of use, since the regular returns allow for continuous interest payments and capital repayments. As there are hardly any alternatives, providing equity is the best way of helping to fill funding gaps and is thus considered the instrument that would offer the greatest added value from the perspective of urban development policy.

There are basically two organizational structures (governance models) for the realization of urban development funds: In the promotional bank solution, the urban development fund is managed as separate assets of a (promotional) bank. This model can be implemented with comparatively little effort and allows for the provision of all three financial instruments. In the venture capital fund solution, the urban development fund is an independent company. However, due to the lack of a banking licence, the provision of loans is not possible in this model.

The analysis of the five model projects shows that the establishment process faced difficulties due to numerous factors. This was connected to political changes and unresolved legal issues at EU level, but to a considerable extent also to the fact that the establishment of a fund requires a decision on a variety of partially complex key data. Only the State of Brandenburg established an urban development fund based on the promotional bank model that provides low-interest loans to local authorities and local authority companies. Since the fund was limited to public projects due to the partially tight budgetary situation of the municipalities in Brandenburg and since it had to compete with funding programmes established in the course of the economic crisis, the fund, however, merely provided funding for two projects within two years of being in business.

The following fundamental advantages of urban development funds can be deduced from the analysis of the theoretical preparatory work and the implementation steps taken in the model projects:

  • The returns of the fund allow for a continuous funding of investment. This applies, in particular, to equity which, if the project is carried out successfully, is repaid including interest whereas non-repayable grants remain with the investor.
  • Unlike with grants, the repayment obligation increases the pressure on the project developers to perform efficiently.
  • In close public-private cooperation, private sector expertise is made available to public authorities.
  • By way of equity participation, public authorities can exert influence on the planning and the execution of a project and ensure that private investors act sustainably.
  • Equity funding from an urban development fund can improve the creditworthiness of the developer, in particular vis-à-vis further third-party investors.

Based on the implementation process in the model projects, it was also possible to identify barriers to the implementation. Against this background, the following recommendations are made for a successful introduction of urban development funds:

  • Clear determination of the fund’s volume as well as identification and securing of the capital sources at the time the fund is started;
  • Willingness of the public authorities to surrender competences and to let the fund management take all financing decisions;
  • Supervision and accompanying of the fund management primarily through public players (e.g. investment advisory boards and supervisory boards);
  • Obligation to report regularly;
  • Limitation of the administrative effort at the time the fund is started; provision of a minimum volume of state fund capital that can be made available at interest rates below the market level;
  • Federal Government support for the KfW approach which consists in establishing a nationwide equity capital fund;
  • Opening the Urban Development Assistance Administrative Arrangement with a view to introducing funds for urban development assistance into an urban development fund;
  • Assessment as to whether the introduction of public land into an urban development fund would be useful;
  • Establishment of a national information and competence centre to promote the dissemination of the fund concept to those enquiring about fund-based financing and to support the acquisition of capital.

The implementation of these recommendations for action could improve the acceptance of urban development funds and simplify their introduction.


The abstract is part of the German publication "Stadtentwicklungsfonds in Deutschland" - BMVBS-Online-Publikation 14/11, Hrsg.: BMVBS, August 2011, Berlin
urn:nbn:de:101:1-201109087080
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