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Univ.-Prof. Dr. Michael Nadler
Technical University (TU) Dortmund
Chair of Real Estate Development
August-Schmidt-Str. 6
44227 Dortmund

Phone: +49 (0)231 755-7986
Fax: +49 (0)231 755-2415

Univ.-Prof. Dr. Wolfgang Breuer
RWTH Aachen University
Chair of Corporate Finance
Templergraben 64
52056 Aachen

Phone: +49 (0)241 80-93539
Fax: +49 (0)241 80-92163


Gianni Carbonaro
European Investment Bank
Economic Adviser
100 Boulevard Konrad Adenauer
2950 Luxembourg

Phone: +352-4379-83056

Main content

Urban Development Funds


In order to characterise and systemise different fund models throughout the Member States and regions, three key categorisation criteria for urban development funds can be applied: the quality of Urban Development Funds (UDF) business strategy, the nature of financial products to be provided along with the envisaged final recipients, and finally the quality of the governance structure of the UDF. These three key dimensions should not be viewed separately, as they are interlinked.


The first key dimension, the business strategy of the UDF, contains as its core element the possible types of urban investment projects to be financed. In general, the range of possible projects can be categorized according to the life cycle of urban assets to be funded, starting with the land development phase, followed by the project development phase, the utilisation phase and the redevelopment phase. The stage of the life cycle of an urban development project is important, because it generally reflects the cash flow structure of the project: for example, projects to be financed in the development phase are characterised by high cash outflows in the early years and later on by a single cash inflow deriving from the sale proceeds. In contrast to that, projects in the utilisation phase (e.g. investments in energy efficient renewal) generate periodic cash inflows from the beginning and only need smaller investment sums to get started. As well as the stage of a project in the urban asset life cycle, a further factor influencing the business strategy of a UDF is its intended geographic and thematic scope . Since every fund represents a portfolio of different projects, the portfolio can either diversify or specialise in a certain region or the utilisation of certain assets. The latter may lead to "specialised theme funds" in contrast to general funds.

The business strategy of the UDF, as the first key dimension, determines the choice and configuration of financial products that are to be provided in order to support urban investment projects. This is largely due to the fact that the cash flow structures of the projects have a strong influence on this second key dimension . In general, the legal framework of the JESSICA initiative enables all participating fund vehicles to make use of the following four different financial products: guarantees, loans, mezzanine capital and equity capital . However, in order to provide for efficient financing, the cash flow of the urban investment project should match the repayment characteristics of the financial instrument chosen: since a loan, for example, requires periodic servicing of interest and repayment, it may therefore be most suitable for projects that generate periodic cash inflows such as energy efficiency investments on buildings. Although a UDF basically can offer all financial products, the fund management should aim to keep to the general guiding principle of risk sharing. In other words, UDFs should not seek to finance the entire project investment requirements, but should share risks with project investors and/or (commercial) lenders external to the UDF. Therefore, alongside the financial support provided by the UDF, all project promoters being applicants for fund financing should also be taking investment risks. The four financial products allowed for under the JESSICA initiative each result in a variety of different risks for the UDF. At the same time, the impact of providing financial support to urban projects through each of the four product types also varies considerably. For instance, guarantees and loans only constitute a moderate risk compared to equity capital investment. However, compared to other financial products, equity capital probably has the maximum impact per euro invested into the projects. This latter conclusion is drawn on the grounds that equity capital usually plays a key role in financing in that, if a project has sufficient equity capital, it will also be able to attract other types of finance.

Unlike all other financing instruments, the UDF in taking an equity stake can play an active role in project management. This links the second key dimension to the third one: the governance structure of the UDF. Depending on the parties involved, and on their number, type (public or private), expectations and legal status, the UDF can either have a corporate governance structure or a purely public administration governance structure. The number, type and expectations of the parties involved determine not only the legal personality of the UDF but also the possible exit strategies (predefined investment duration or "open-ended investments") of key partners. This aspect is closely related to the role of the future capital providers for each UDF type and therefore to the refinancing of the UDF: every party to a UDF who supplies it with capital resources has a strong interest in co-determination and involvement in all management decisions concerning the UDF. By combining these three key dimensions presented above, potential UDF prototypes emerge. In the study, five possible UDF prototypes are described and evaluated in more detail: energy efficiency funds, infrastructure funds, environment funds, "smart city" investment funds and brownfield funds. Depending on the complexity of the UDF structure, some prototypes represent a " First Generation " UDF, which is characterised by a lower complexity in the fund's key dimensions, so that the common fund concept and innovative character of the instrument can become known as quickly as possible in the Member States. The " Second Generation " fund concepts may then include more complex, advanced fund types with higher institutional flexibility.

A good example of a "First Generation" UDF is the energy efficiency fund that focuses on financing the renovation of existing urban assets in order to generate savings on future energy costs. Due to the stable cash flows expected from the projects and derived from energy savings, this type of UDF could be well suited to the granting of loans (e.g. with a reduced interest rate compared to commercial loan products) to public or private owners of real estate or infrastructure. The UDF could be established as a separate block of finance in an existing financial institution with only public actors contributing public funds. In such a form, this UDF type should exhibit low establishment and operating costs. UDF-prototypes of the "Second Generation" would, conversely, be more complex and cost-intensive to set up: for example, an area-based brownfield fund would usually call for high-volume equity capital investments in projects. Due to the high risks involved, it is probably most appropriate that the UDF is set up as a separate legal entity, in turn resulting in higher operating costs and longer time-to-market. Finally, potential organisational structures for three selected urban development fund types can be developed.


These organisational structures discuss in detail the relationships between the UDF and the Managing Authority, decision making bodies, management control mechanisms, as well as reporting and monitoring mechanisms for the allocation of funds to both projects and final recipients. In order to suggest possible solutions for Managing Authorities on how they may efficiently set up an UDF, three possible (though not exhaustive) paths can be detected . The first path, "the Holding Fund and retail banks path" , might be an efficient way to set up, for instance, an energy efficiency fund: a Holding Fund would be established first (e.g. with the EIB), which then allocates the given funds in a second step to the private sector through commercial banks that establish the UDF as a separate block of finance in their books. In contrast, due to the inherently high investment costs in the case of financing infrastructure investment, in this case it seems advisable to directly distribute large-scale investment loans through a designated single financial institution, which represents the second path, the "promotional bank path". The third path, "the independent investment fund path" , involves the establishment of a separate investment company with a legal personality. As regards the management of the fund and its investments, independent fund management could be sought by a call for tenders. The chosen fund and investment managers would then be expected to allocate the fund capital to sustainable urban investment projects in line with the investment strategy defined by the MA and/or HF.