“Smart growth” — redirecting development to inner cities and building denser, more transit- and pedestrian-friendly neighborhoods — is generating lending opportunities where banks have been slow to lend, bankers and public officials say.

Executives at the Mortgage Bankers Association, which opens its annual conference today in San Francisco, are stepping up efforts to get lenders interested in smart growth, but it may not be an easy sell.

Few if any bankers are familiar with the concept, and only a handful are actually working with it. Most lenders assume that smart growth is simply a euphemism for investing in poor and marginal neighborhoods, but champions of the concept say it is far more comprehensive and valuable.

Smart growth is a catchall term to describe the highly orchestrated, long-term revitalization of a downtown area or neighborhood that has become dilapidated through suburban flight or job loss. Often, there is a heavy transportation component, aimed at making the area a transit hub.

Neighborhoods with shuttered storefronts and abandoned buildings may exist cheek-by-jowl with vibrant urban areas — as they do in New York City, where a smart growth project in Harlem is under way — or they may exist independently, surrounded by thriving suburbs. Industrial cities that have failed to adapt to new economic conditions frequently are candidates for smart growth.

City officials and urban renewal groups give several reasons why these needy areas are good prospects for lenders.

There are demographic considerations — many suburbanites are fed up with long commutes and would like to move back into the central city. There are economic incentives on the federal, state, and local levels. There are architects eager to create more livable communities, which in turn spark demand for city living.

From a banker’s perspective, opportunities exist to fulfill Community Reinvestment Act requirements, improve public relations, and get in early on what could one day become a highly profitable market. Moreover, the market for home lending is highly mature, and the industry could sorely use some new ways to expand its business.

“How many times are you going to refinance houses in the suburbs?” asked Shekar Narasimhan, a commercial mortgage banker at Prudential Mortgage Capital Co. Mr. Narasimhan, who works in the Vienna, Va., office of the Newark, N.J.-based lender, pointed to the success of student and senior-citizen housing as niche markets in the mid-1990s and said that smart growth could become the next surprise hit in mortgage lending.

But many valid doubts have supported lenders’ reluctance to take this path. For one, it is risky — there are no guarantees that funded projects will achieve their goals or that the injection of capital will prompt the targeted neighborhoods to flourish.

Second, smart growth projects, without exception, require a long-term commitment on the lender’s part. Most bankers are looking for a quick turnaround so that they can book profits within a few years, not a few decades.

Another problem is that the projects, which often consist of mixed-use developments comprising retail shops, offices, and residential units, are tough to underwrite.

The models that lenders typically use in their underwriting decisions are for single-use projects; many lenders lack any model for mixed-use development. Essentially, lenders are forced to make underwriting decisions on markets that do not exist, projecting the value of housing, office, and retail space in places that have not had viable rental markets for years.

Despite these obstacles, the MBA and the U.S. Conference of Mayors have teamed up to try to stimulate dialogues between lenders and public officials. The organizations are holding roundtable discussions nationwide in cities where smart growth is needed in the hope that lenders, as they learn more, will grow enthusiastic.

“For the first time, we are bringing the leaders in real estate finance, members of the MBA in the commercial and residential sectors, to a seat at the table with mayors across the country to explore creative financial opportunities to rebuild America’s cities,” said Todd Howe, the MBA’s vice president for member services. He organized the roundtables, one of which will be held in San Francisco in connection with the association’s conference. MBA officials said they expect to make an announcement during the conference regarding smart growth.

“With the urban renaissance going on, smart growth is the key to unlocking housing opportunities,” said Christopher Sumner, exiting president of the MBA and president and chief executive officer of Salt Lake City-based Crossland Mortgage Corp. “The various financing tools available and the options that can be created by the financial community to assist with smart growth are certainly some of the tools that we bring to the table.”

Forging partnerships between city officials and real estate lenders will require some give-and-take on both sides, officials said. Bankers will have to swallow some additional risk in order to reap the potential returns, and cities may have to offer incentives — such as tax breaks or relaxed zoning regulations — to draw in developers and mortgage bankers.

James Murphy, a vice president at the MBA, suggested that urban officials could offer grants to companies willing to repair old and damaged infrastructure. Cities could also help by making available demographic information on the urban core, which might help lenders make underwriting decisions, he said.

Two banking companies that have taken a particularly active interest in smart growth are Bank of America Corp. and First Union Corp., which have played pivotal roles in the revitalization of their headquarters city, Charlotte, N.C.

Recognizing that a barren urban center would stifle the kind of job growth and employee retention that they wanted, the two lenders worked closely with the city to orchestrate the revival of the downtown area.

Karl Zavitkovsky, a managing director of Bank of America’s southwestern real estate group, said the Charlotte example has taught the company a broader lesson about the value of restoring “underserved” inner-city markets. “Inner-city revitalization is good for our core business,” he said.

With more than 1,000 workers in 16 of the 25 biggest metropolitan areas, Bank of America is “right in the center of sprawl,” so it makes sense to foster livable communities that are close to employees’ workplaces, Mr. Zavitkovsky said. “If the long-term development of a regional economy is not healthy,” he said, “or if it is strangling itself because of bad planning or poor infrastructure strategy, ultimately you will have businesses leaving the area, and that’s not good for our business.”

Despite these incentives, some lenders have encountered pitfalls that may explain why smart growth is not yet a household word at banks.

For example, high start-up costs create hurdles for lenders that want to earn quick returns, forcing them to take a longer-term investment approach that is not popular in a country where business models often focus on short-term gains.

“I don’t think you can point to short-term investment gains because that’s not the nature of the beast,” Mr. Zavitkovsky said. “But by investing more in projects that are smart-growth-oriented in the inner city, you are tapping into a market that has not reached near its potential for banking institutions in general.” He has approved more than 10 loans in the last year for smart growth projects.

Rochester, N.Y., is an example of a city trying to solicit interest from lenders and developers. A thriving mill town in the 19th century, Rochester evolved into a center for machine tool production. But in the 1950s, the city’s population dipped as residents moved to bigger homes in the suburbs. More and more homes were abandoned and boarded up.

The city tried aggressively to draw back people and developers in the 1980s, but it never recovered. Now, the city hopes to cash in on what it perceives as a desire among some couples to move back, to experience the cultural life that the suburbs do not offer.

Relationships with lenders, however, have not been very strong. Most local banks have been bought by large national banks, which do not take great interest in Rochester. Larry Stid, Rochester’s planning director, said the city has offered various enticements — clearing land, giving breaks for putting in utilities — and lenders are starting to bite.

Sometimes local opposition can stymie smart growth efforts. Mr. Zavitkovsky gave the example of a developer trying to put a high-density project near a transit center in a suburban area.

“That would make a lot of sense from a smart growth standpoint, but it may bother the hell out of single-family owners in the neighborhood, so there might be issues relative to getting permits,” he said.

Lenders and developers often must persuade regulators and local residents that mixed-use developments work, Mr. Zavitkovsky said. “The whole package becomes more economically difficult because it’s a change in mindset. People don’t normally change voluntarily unless they see some social and economic benefit.”

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