Essays on People, Place & Purpose

Investing in What Works for America's Communities

Crossing Over to an Improved Era of Community Development

by Eric Belsky and Jennifer Fauth

Linking impact and outcomes measurement to social investing has the potential to dramatically transform the landscape of funding for community development. If successful in attracting endowment investment, this could produce a substantial amount of new capital.16

But it will take a coordinated effort, facilitated by policy and organizational infrastructure, to build an enduring and scaled social impact investing marketplace. Hopeful signs that this infrastructure is beginning to emerge include the formation and growth of organizations such as the U.S. Social Investment Fund, the Global Impact Investing Network, and Impact Reporting and Investment Standards.

Building on Strong Institutional Capacity

The community development field is strong and well positioned to build on knowledge of what works and to prove the social, economic, and financial value of integrated programs.17 Years of capacity building have paid off. There are now many financially strong community developers and CDFIs with track records of success. Several have succeeded in taking their operations to the regional and even national levels. Among community developers, these include Community Builders in the Northeast, BRIDGE in the Bay Area, and Mercy Housing and National Church Residences in states across the country. Among CDFIs, these include FAHE in the Appalachian region, the Low Income Investment Fund headquartered in the Bay Area, The Reinvestment Fund in the Mid-Atlantic region, IFF (formerly known as the Illinois Facilities Fund) in the Midwest, and LISC and Enterprise in states across the country. Although in some cities capacity is still weak, more and more places boast strong, local, community-based organizations or have strong regional or national players operating in their area.

Community developers and CDFIs are also bolstered by strong national intermediaries such as Enterprise Community Partners, the Housing Partnership Network, Living Cities, LISC, NeighborWorks, the Opportunity Finance Network, and Stewards of Affordable Housing (SAHF). These intermediaries are helping to capitalize the members in their networks, providing them with technical assistance, developing policy, and lobbying on their behalf. They also are working together in a number of field-building activities (such as Strength Matters, a consortium of NeighborWorks, the Housing Partnership Network, and the Stewards of Affordable Housing) that aim to improve the financial viability and standardize the financial reporting of affordable housing community developers.18 National intermediaries are also banding together to solve common challenges such as the foreclosure crisis.19

These intermediaries are promoting more integrated community development as examples discussed below demonstrate. In addition, groups are devoted to promoting integrated community development specifically, such as Integrated Community Development International and the Institute for Comprehensive Community Development.

The maturation of the CDFI industry is an especially noteworthy and important development. The movement began with credit unions early in the twentieth century and expanded in the 1970s to include community banks and loan funds that sprang up in communities across the country in the 1970s to address unfulfilled capital needs in low-income and other disadvantaged areas. Working in all states and both rural and urban areas, there were 999 certified CDFIs as of June 2012, and additional opportunity finance institutions including community development loan funds, private equity funds, community development credit unions, and community development banks that may not have sought certification.20

CDFIs have succeeded in attracting financing from large banks lacking the on-the-ground contacts or underwriting capabilities to identify bankable opportunities. They are able to aggregate capital from larger banks, individual donors, and foundations and can effectively channel it to multiple activities in pursuit of an integrated agenda. They have developed the expertise necessary to prudently lend to different types of activities—commercial development, residential development, small business, health provision, charter schools, and others. This enables other organizations, such as community developers, to concentrate on real estate development, property operation, and services they are best suited to provide.

Many CDFIs offer a full spectrum of lending to support community building. IFF, Low Income Investment Fund, Hope Enterprise Corporation, and The Reinvestment Fund are just a few examples. Among them, they lend to small businesses, charter school developers and operators, health clinic developers and operators, affordable housing developers and operators, and consumer financial products. In fact, many CDFIs now provide all or most of these lending services, and it is common for them also to provide technical assistance and to coordinate community building strategies that civic and city leaders are striving to launch. This capacity lends itself to driving and successfully supporting integrative community development.

Broadening Partnerships and Expanding Federal Supports

Although public-private partnerships have long been pursued as a way to leverage private capital and expertise, the partnerships that will drive social impact investing and integrated community development will extend these partnerships and engage more stakeholders both directly in funding and indirectly through the coordination of activities.21

Many partnerships are emerging that stretch beyond the familiar public-private model. There are a growing number of tripartite structures at the funding level, involving philanthropy, public funds, and private lenders. A good example of this is the New York Acquisition Fund (NYAF).22 This initiative brings together multiple partners and the city to address housing preservation needs in New York City. NYAF provides low-cost loans to developers so that they can act quickly to acquire properties to prevent them from becoming unaffordable. Foundations and the city take the riskiest positions, covering the first-loss risks, while for-profit lenders supply the bulk of the capital and are in senior position. As a result, the initiative was able to attract more than $190 million in private bank capital that likely would not have been committed to housing preservation. Thus, the funding stream involved philanthropy, city, and private lenders and was coordinated and deployed through multiple nonprofits.

Another example is the work of the Atlanta Housing Authority and other housing authorities around HOPE VI public housing redevelopments. These local housing agencies worked with community developers and for-profit developers to create mixed-income communities, often supported by charter schools and other community facilities.23

Innovations such as these have ushered in new thinking around partnerships. They focus investors on understanding the “capital stack” needed to launch new approaches: how to best use the scarce foundation and government funds to leverage private capital. The highly structured nature of such partnerships brings foundations into new relations with government and private pools of capital. In addition, in the case of the NYAF, by taking a first-loss position, the fund also has the potential to demonstrate that lending for housing preservation can be profitable and to measure the risk of such lending.

Other sources of support for community development activities have come online during the last two decades that help facilitate more meaningful and integrated solutions to community development. In 1994, the CDFI Fund and in 2000 the New Markets Tax Credit (NMTC) program were added to the arsenal of tools available to spark community development. The CDFI Fund’s mission is “to expand the capacity of financial institutions to provide credit, capital, and financial services to underserved populations and communities in the United States.” By cultivating a network of CDFIs, the Fund has leveraged private investment and channeled it to organizations that can deploy capital across a wide range of investment types that spur community development. In so doing, it has also promoted and supported the diversification of CDFIs and positioned many to be able to press for and fund more integrated community development. The NMTC is allocated by the Treasury Department through a competitive process. Of a number of criteria used to rate applicants, one is community impact. These credits have been used to develop charter schools, health care centers, public markets, commercial space, industrial space, and a range of other community facilities. The program has been a major catalyst for more integrated community development. CDFIs and national intermediaries that have received NMTC allocations have used them to fund community facilities and business development, adding these activities to the housing activities many of them already funded.

Investing in What Works

To the extent that more integrative, impact-based approaches are now favored, several current initiatives show how these are being structured and how they can achieve impact. These include LISC’s Building Sustainable Communities Initiative, Living Cities’ Integration Initiative, NEXT award program, Harlem Children’s Zone, and Purpose Built Communities. All five examples demonstrate a movement toward integrated approaches and results-oriented interventions, as well as the potential of strong lead organizations to drive change and work closely with residents and cooperatively with multiple organizations.

Building Sustainable Communities

Launched in 2007, LISC’s Building Sustainable Communities (BSC) project pursues more comprehensive community development. LISC is deploying capital, providing technical assistance, and evaluating results of efforts to invest in housing and other real estate. It is also promoting access to quality education, stimulating economic development, building incomes and wealth, and supporting healthy lifestyles.

LISC has established five goals for its BSC initiative: (1) expanding investment in housing and other real estate; (2) increasing family income and wealth; (3) stimulating economic development; (4) improving access to quality education; and (5) supporting healthy environments and lifestyles.24

Clearly, these goals express a commitment to integrated community development. Drawing on 25 years of experience, LISC has discovered ways to support all of these goals using what it views as time-tested approaches.

The approach “starts with a continued commitment to capital investment in a wide variety of new and renovated homes, community facilities, commercial and industrial property, and the public spaces that link all these elements together.”25 This is an area that LISC and other intermediaries have long focused on—leveraging private capital and public support through incentives and subsidies like the Low Income Housing Tax Credit, community development block grants, and NMTCs. To increase family income and wealth, LISC aspires to three other offerings: financial opportunity centers (pioneered by the Annie E. Casey Foundation and which have an established track record of success); individual development accounts, which studies show are effective in getting people to save; and job training and micro-enterprise development.

To stimulate economic development, LISC intends to augment its real estate investments (in commercial, retail, industrial, and residential development at qualities and densities intended to spur local demand) with marketing to attract local businesses. It also intends to work with anchor institutions to train and employ local residents, and press for government policies that promote business development.

To support access to education, in addition to aggregating capital to fund school facilities, LISC aims to use these schools to provide other after-school community services and programs supportive of education, children, and parents. They can also help to organize parents into groups and support outside school programs. This is an approach that the two final examples below, Harlem Children’s Zone and Purpose Built Communities, demonstrate can be highly effective in closing educational achievement gaps.

Finally, in addition to capitalizing health facilities like clinics and healthy food markets, LISC intends to support a range of other programs and facilities, such as partnerships with law enforcement, athletic fields and facilities, and better transportation options. Again, these are programs with proven track records of success when done properly.

Quad Communities in Chicago is the most advanced attempt to put the BSC approach into practice. LISC’s efforts to build a sustainable community began with creating the Quad Communities Development Corporation to represent residents and bring multiple stakeholders together to develop a plan for the community’s future. Plan in hand and with LISC and local government, civic, and business leaders’ backing, the community has succeeded in redeveloping 3,000 public housing units, developing a charter elementary school, revitalizing the commercial core, developing an arts center, and establishing a financial opportunity center. The investments in facilities and services have been intentionally located in close proximity and in an area that had lacked investment of any sort for years. Quad Communities Development Corporation played a lead role in conceiving the plan. But it coordinated many other groups that have invested in and operate many of the newly developed facilities and services rather than doing so itself. Supported by LISC acting in the role of CDFI and capital aggregator, the Quad Communities initiative has laid the foundation for transformative change in the neighborhood.

Integration Initiative

The recently launched Living Cities Integration Initiative also aims to take a more integrative approach to community development and intends to bring a range of actors to the table (government, business, philanthropy, and community-based organizations). It uses an “ecosystem” approach to support policy and capacity, and is in the process of considering cultivating an investment-ready pipeline to ensure the range of functions is in place for sustainable and systemic community development.

Five cities will receive $80 million of investment from the initiative in the form of grants, loans, and program-related investments with the aim of leveraging significant amounts of private debt and venture capital. In all five, the initiative aims to overcome the fragmented nature of programs and interventions. Several of the strategies are centered on building on the capacities of anchor institutions like hospitals and universities to spur economic development and provide jobs to residents. Several also emphasize devising and testing ways to make adult education, job training, and job placement programs more responsive to local needs and opportunities. Along with service-based interventions aimed at supporting employment and economic development, most address affordable housing needs, infrastructure needs, and/ or abandoned properties. All designate a single lead coordinator and a single lead CDFI to work with local nonprofits, lenders, anchor institutions, and philanthropies.

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