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By Anna Steiger, Senior Research Associate, FederalReserve Bank of Boston;Tessa Hebb, Senior Research

Associate, Labor and WorklifeProgram, Harvard Law School;and Lisa Hagerman, DoctoralCandidate, University of Oxford

This article is a summary o thein ormation presented during theExpanding Deal Flow o Com-munity Investments session at theExploring Innovation in Com-munity Development Finance con erence.

Community-basedorganizations promoteeconomic development

by assembling investments ina ordable housing, mixed-use real estate, community

acilities and small businessin speci c geographies. Thereare calls or the communitydevelopment sector to have anincreased impact on communi-ties by tapping large sources o

institutional capital as a newsource o unding or theseactivities. However, these com-munity-based organizations aregenerally small and limited intheir capacity to put togethercommunity investments thatattract large institutional inves-tors such as national banks,

public-sector pension unds,insurance companies and oun-dation endowments.

Some community-basedorganizations have ound a way

to tap institutional investors ordeals by partnering with invest-ment intermediaries who man-age the risk o the transactionsby pooling assets, spreadingrisk across investors and pricingthe transaction up to the associ-ated risk.

Communities are by de ni-tion embedded in location-speci c geography. As a result,community investments tendto be small as well as hybridand individual in nature. In

contrast, institutional investorsseek opportunities to investlarge sums o money in easilyreplicable nancial instrumentsthat generate market-basedreturns with minimum risk.

While institutional inves-tors have signi cant assets that

i deployed in communitieswould have substantial impact,given the inherent mismatchbetween these investors andthe investment opportunitieso ered by communities, suchinvestment is unlikely to occurwithout bridging mechanismsthat overcome these problems.

Our research suggests thatinvestment intermediaries withexpertise in working with com-munity-based organizations arerequired to unlock value or

institutional investors and com-munities alike.

Such partnerships allowinvestment intermediaries orinvestment vehicles to usetheir expertise to structure adeal that delivers high nancialreturns to institutional investorswhile ensuring that the invest-ment provides a communitybene t. The investment vehicleactively manages investor unds,allocating them to communityprojects and creating a capital

structure or the deal. Thecommunity partner, usuallya community developmentcorporation, draws on its localknowledge o the communityto identi y potential deals andwork with the investment inter-mediary to structure the deal so

that it has bene ts or neighbor-hood residents. Such bene tsinclude job creation, a ordablehousing and environmental sus-tainability through, or example,brown eld redevelopmentand investments in clean-techcompanies.

Investor bene ts are measured

rst and oremost in market-based nancial rates o returnand secondarily in the ancillarybene ts generated by revitalizedcommunities. Several or-pro t

and nonpro t organizationshave begun to track thesebene ts or the purposes o quanti ying the communityimpact o these projects.

Models o Investment Vehicleand Community Partnership

Our research examines sev-eral models such partnershipscan take. Two o these modelshold the greatest promise orunlocking value or investorsand communities because theyrecognize the role and capacityo the community partner.

The rst is the contractualmodel, where a not- or-pro tcommunity partner or undsponsor organization (e.g., theBay Area Council in the Bay

Area Family o Funds) a li-ates with a proven or-pro t

und manager in delivery o thecommunity development. Thesecond is the ownership model,where a not- or-pro t commu-nity organization embeds a or-pro t development arm within

its own structure.These two models ensure the

diversi cation, scale and rateso return necessary to attractlarge institutional investmentdollars while simultaneouslyensuring the revitalization goalso the existing community.

A good example o a not- or-

pro t community developmentnancial institution with anembedded or-pro t develop-ment arm is Coastal EnterpriseInc. (CEI) in Wiscasset, Maine.

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CEI owns several or-pro t sub-sidiaries, including CEI CapitalManagement LLC (CCML),which manages CEIs $249million New Market Tax Credit(NMTC) allocation. CCML isthe investment vehicle interme-diating between institutionalinvestors and communities.

In 2003, the Nature Conser-vancy, a nonpro t conserva-tion organization, approachedCCML to be a working partnerin an NMTC deal that wouldtap private-sector capital tohelp conserve the environmentwhile promoting economicdevelopment in a rural regiono Maine near Millinocket.

The partnership ultimatelyattracted equity investment

rom GE Commercial andIndustrial Finance in exchange

or the ederal tax credits. Thisequity allowed two recentlyshuttered paper mills belongingto the Great Northern Paper Co.to reopen, retaining jobs or 650people. The deal also provided

or the Nature Conservancyto purchase 41,000 acres o land rom Great Northern andcalled or a perpetual conserva-

tion easement on an additional200,000 acres o land owned bythe paper company.

In this deal, the NatureConservancy was the commu-nity partner, connecting CCMLto the investment opportunityand ensuring that the dealprovided social returns to the

area. CCML was the invest-ment vehicle, connecting theinstitutional investors to a com-munity-based investment whileensuring that the deal provided

the nancial returns requiredby investors.

Building Strong PartnershipsThe cases examined in our

research provide insight intohow investment and com-munity intermediaries partnerin a community developmenttransaction. A working rela-tionship between an investmentvehicle and community partnerbecomes a ormalized one,and the best partnerships haveclearly de ned roles. Thesepartnerships can be initiated byeither entity. Both investmentvehicles and community groupslook or partners that have alevel o nancial sophisticationand proven experience withsuccess ul community-driveneconomic revitalization.

Community partners areorganizations and businessesrooted in the community with anexplicit mission to promote com-

munity bene ts and work withthe investment vehicle to identi yand structure community invest-ments. They bring with themvarious tools that help themunlock community bene ts.

Financial ToolsFinancial tools allow com-

munity partners to work withinvestment intermediaries tostructure deals that providethe nancial returns requiredby institutional investors.

These tools include philan-thropic grants, below-market-rate unding, and tax creditallocations sponsored by the

ederal government, such asNMTCs, the SBAs program

or Small Business Invest-ment Companies, and the LowIncome Housing Tax Credit.

Social/Political ToolsSocial/political tools include

a community partners deepknowledge o local conditionsand history, ties to key com-munity stakeholders, missionto bene t the community, andtrack record o contributing tolocal economic development.These tools engender trustwith the community, whichcan help to get a developmentproject approved, structurethe development to meet localmarket demand that yields high

nancial and social returns, andleverage additional resources or

these community investments.

Material ToolsMaterial tools include land

or a community acility ownedor managed by the communitypartner.

Our research examines sev-eral types o community part-

ners, including not- or-pro tund sponsors; not- or-pro torganizations such as CDCs andCDFIs; mission-driven lending

endnotes

1 Flynn et al. 2006. The Double Bot-tom Line Handbook: A PractitionersGuide to Regional Double Bottom LineInvestment Initiatives & Funds.

2 Hagerman et al. 2007. Investment

Intermediaries in Economic Develop-ment: Linking Pension Funds to UrbanRevitalization.Labor and Workli eProgram at Harvard Law School.http://urban.ouce.ox.ac.uk/ wpg07-09.pd

3 This gure is based on a study o 92 U.S. oundations and representsa 19.5 percent compound annualgrowth rate since 2000.

4 Sarah Cooch and Mark Kramer.

2007. Compounding Interest:Mission Investing by U.S. Foundations. Social Impact Advisors.www. sg-impact.org/images/upload/ Compounding%20Impact(3).pd

5 Hagerman et al. 2005. PensionFunds and Urban Revitalization:Competitive Returns and a RevitalizedNew York.Ox ord University Centre

or Environment, WP 05-13. http:// urban.ouce.ox.ac.uk/wpg05-13.pd Tessa Hebb, 2005. Cali ornia CaseStudy: A Private Equity CalPERSCali ornia Initiative.Ox ord Uni-versity Centre or Environment,

WP 05-15. http://urban.ouce.ox.ac.uk/wpg05-15.pd

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By Valerie HeibyDirector of DevelopmentFinance Fund

This article is a summary o thein ormation presented during theInnovation in Product Develop-ment: Creating Value rom ValueCreated session at theExplor-ing Innovation in CommunityDevelopment Finance con erence.

Depressed propertyvalues, stressed in ra-structure and invest-ment fight are just some o the economic issues acedby distressed communities.Potential small business ownersor community organizationsseeking unding or projectsin these areas may have a hardtime securing nancing throughconventional means. And evenwhen nancing is available,

interest rates may be prohibi-tively high or borrowers. TheOhio Community DevelopmentFinance Fund (Finance Fund)is helping organizations inOhios distressed markets accesscapital more easily through itsLinked Deposit Fund.

Who We AreFinance Fund is a private,nonpro t, 501(c)(3) corporationthat supports community part-nerships working to revitalize

disadvantaged communities inOhio. Our partners collaborateto trans orm emerging ruraland urban communities intovibrant, diverse, economicallyhealthy neighborhoods. Thesepublic/private partnershipsare a combination o nancialinstitutions, oundations, com-munity-based organizations,and ederal, state and localgovernments.

Finance Fund creates part-nerships that provide nancingresources to locally controlledcommunity-based nonpro torganizations serving low-income communities as wellas those or-pro t businesseswithin the communities express-ing an interest in revitalizationand bene cial development.

What It IsThe Linked Deposit Fund

is a nancial product usedto reduce the interest rate onpermanent and construction

nancing. It provides commu-nity-based, nonpro t develop-ers with access to a ordable

nancing rom local lenders orhousing and economic develop-ment projects.

A variety o linked depositprograms exist throughout thecountry or needs ranging romagricultural waste managementto water- and energy-related

projects. The Finance FundsLinked Deposit Fund ocuseson a ordable housing and com-munity development rom amission-driven standpoint.

How It WorksThrough the Linked Deposit

Fund, Finance Fund placesreduced-rate certi cates o deposit at local banks partici-pating in speci c projects. Thelower interest rates paid to theFinance Fund on these depositsallow the banks to provide com-munity-based nonpro ts withgreatly reduced interest rates

or permanent or constructionnancing. The rates are xedor these clients or the li e o the

loan, even though the averagelinked deposit is seven years.

The Linked Deposit Funditsel is unded through acombination o public mon-

ies and benevolent investors.Though there has been stronginvestment support or thisprogram, liquidity is limited.

A lack o liquidity could meanno money or urther linkeddeposits, and thus, no money

or vital community develop-ment. Finance Fund is able to

solve this problem through aunique recapitalization modelthat o ers aggregated port olioso CDs as collateral or a loan tothe Finance Fund reeing up

cash fow or additional linkeddeposit projects.

What Makes It Unique?The linked deposit model

is sustainable. Linked depositsper orm a programmatic unc-tion in that they lower interestrates on mortgages but do notserve as collateral or security

or the mortgage. There ore,the risk o loss is minimal and,upon maturity, capital may berecycled.

The linked deposit model isscalable. This model works

or small projects and largeprojects equally well. TheFinance Funds Linked DepositFund has impacted projects o $25,000 and projects o $13million. The biggest limitationto the model is on the availabil-ity o capital or depositing.

The linked deposit model is

fexible. The characteristics o a deposit can be adjusted toachieve speci c rate objectivesby varying the amount, termand rate.

The linked deposit model lever-ages. Because a lenders objec-tive is to achieve a yield on aloan over a set term, the linked

deposits unction is to enablea revenue stream that pays orshort alls incurred when loanrates are lowered. Any short allwill be unded once the linked

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deposit maturesusually manyyears prior to the loan amortiza-tion. Because the lender hasreceived compensation or thereduced loan rate, the loan cancontinue even a ter the deposithas matured.

The linked deposit model is atrue public/private partnership. Though capital resources or theLinked Deposit Fund initiallycame rom the public sector,substantive private investmentalso has been attracted. The

und provides a per ect oppor-tunity or many private inves-tors to ul ll socially responsibleinvesting requirements.

The linked deposit model is avaluable tool in distressed markets. Economically distressed marketsneed varied subsidies to tacklea wide range o developmenthurdles. Linked deposits are

one o the tools adding valueto these economies througha hidden subsidy strategy.

When borrowers are able tomake smaller loan paymentsbecause o lowered interest rates,many parties bene t. Moneysaved by a housing developer,

or instance, can translate tolower purchase prices or thosehomes, making home ownershipaccessible to more people withinthe community.

The Programs SuccessSince 1989, the Finance

Funds Linked Deposit Fund hasprovided lower interest rates toclients, leveraging over $291million. Investments totaling$24 million have been madein 125 projects, creating 940

ull-time jobs and 3,841 unitso new or rehabilitated housing.Two recent success stories areexamples o these projects.

The St. Paul AME Wellness

Center in Columbus, Ohio,brings needed health-careservices back to a blighted

urban community and lls avoid le t by the departure o acommunity hospital a decadeago. The wellness center isprojected to create 25 ull-time

jobs and 33 construction jobsand will support the develop-ment o 16,075 square eet o commercial space. A linkeddeposit provided a signi cantinterest rate reduction, rom6.9 percent to 3.94 percent.

The New Straitsville Down-town Revitalization project pro-motes the historic Main Streetdistricts in two o the LittleCities o Black Diamondswithin Southern Ohios Hocking

Valley Coal Region. The projectis re nancing and rehabilitat-ing ve properties in ruraldowntown areas. The projectwill lead to the creation o 10

ull-time jobs, 13 construction

jobs and 10,000 square eet o commercial space. The linkeddeposit greatly reduced the

interest rate rom 7.75 percentto 5.25 percent.

For more in ormation onthe Linked Deposit Fund

and other programs, visitwww. nance und.org.

One o the buildings that is part o theNew Straitsville Downtown Revitalization

project in southern Ohios Hocking Valley Coal Region.

a collaboration o people takinga great idea and improving it. A per ect example is Bill

Gates. The ounder o Micro-So t didnt invent anything,Hargadon said. Instead, heand his partners took computerproducts that already existedand made them practical and

marketable to the general pub-lic. He was innovative.Hargadon emphasized that

innovation alone is not enough.Success depends on your ability

to mobilize your network aroundan idea, he said. The morepeople you know and connect

with, the more likely you are tobe success ul.How does one take all this

in ormation on innovationand apply it to communitydevelopment?

The industry is well-positionedto innovate at this point in time,said Sandra Braunstein, director

o the Division o Consumerand Community A airs or theFederal Reserve System.

Although nonpro t lendinggroups have become innovative

in their approaches to lending,the majority o unding stillcomes rom the ederal govern-

ment. Are there ways to getbetter at this while remainingtrue to the mission? she asked.

Improving the sustainabilityo initiatives could open upopportunities or innovation,she said. Processes, rom nan-cial counseling to loan servic-ing, could be improved.

In new marketplaces, com-panies get the opportunityto test and veri y and pilot.The community development

eld needs to develop unding

sources or this type o researchand development.

The private sector connects

the dots through consortiumsand product developmentgroups. We could create thattype o institution and shareour knowledge with oneanother, she said.

These are just some o theideas presented at the con-

erence. For more, read the

articles in this special issue o Bridgesand the proceedingsrom the con erence, which can

be ound at www.stlouis ed.org/community/innovation.

continued rom Page 1expl i va



Mike Downing, with theMissouri Departmento Economic Develop-

ment, suggested that the publicsector objective or redevelop-ment is removal o blight tostimulate private investmentand to reduce crime and disin-vestments. Likewise, local andstate government agencies wantto increase economic activity bycreating jobs, reducing unem-ployment and increasing the taxbase. Redevelopment also mayslow urban sprawl.

The public sector may be o assistance with a redevelopmentproject, but there are consider-ations, including:

1. Does it con orm to anarea plan?

2. What is the impact onsurrounding property?

3. How many jobs are createdand what type?

4. What is the e ect on com-petition (displacement)?

5. How much are publiccosts or the project?

6. What is the risk i itdoesnt work?

7. How much are net newtax revenues?

8. Will the project besuccess ul?

9. Is the developer quali ed? 10. Will the project stir up

controversy?

Downing said additionalconsiderations come into playwhen the public sector consid-ers redevelopment incentives.For example, will the existingtax base and property declinecontinue i the area is notredeveloped? Will there be anynet new taxes (new tax revenues

rom the project less incentivesand displaced taxes) rom thedevelopment? Will the devel-oper get involved in the projectwithout public sector incentives?

Public incentives are appro-priate when the project passesthe but or test, Downingsaid. For example, the projectwould not get done but or the

How Much Subsidy Is Needed or Redevelopment?

Lender/Investor Educates Others on Tax Credits

Walker Ga ney with US Bankindicated that most lenders do not understand the complexities and costso rehabs or census-tract-eligiblesubsidy deals involving New Market Tax

Credits (NMTCs). They tend to thinko them, perhaps understandably, interms o the market-rate deals theysee day in and day out.

For example, the typical lender hasa problem with 20 percent developer

ees. Many lenders believe rehab-bers are involved in a subsidy grab;and the second they are paid anydeveloper ee, they will run or the

hills, Ga ney said.As US Banks commercial real

estate NMTC program manager nationally, Ga neys role is to edu-

cate the banks conventional lenders,introducing them to new marketsand encouraging them to lend toprojects located in subsidy nichesavailable to real estate developers

in various arenas.Lenders who take the time to

understand the disproportionatelyhigh up ront and ongoing costs o doing historic rehabs or deals withNMTCs quickly come to understandthe importance o layering multiplesubsidies. The synergies between theHistoric Tax Credit (HTC) and NMTCprograms make them very compat-

ible. The recapture periods or thecredits are similar ve and sevenyears or HTCs and NMTCs, respec-tively. Also, 70 percent to 75 percent

o NMTC deals have been realestate deals.

However, while historic rehab creditsare virtually unlimited, there are not enough NMTCs available each year.

For developers interested in using NMTCs, Ga ney advises, Have your deal teed up and ready to go when thenext round o tax credits is available.

For the lender or investor, what are some o the considerations whenlooking at a redevelopment deal?

1. Whats the developers trackrecord and reputation?

a. Projects completed on timeand on budget

b. Subsidy-promised developer is truly committed

2. Is the entire team experiencedand dependable?a. Accountantsb. Legal representationc. Other consultants

(HTC, NMTC)

3. Do the projections make sensefor this product in this market?a. Basic underwriting should

not get lost in the subsidyshu fe.

b. Getting it built and taking tax credits is only hal the story.

c. Success ul operation over

many years is required toavoid recapture.

Why do developers, lenders,investors and government

agencies choose to par-

ticipate in redevelopment

projects? How important

are public subsidies? Do

redevelopers depend onthem to get the job done?

On these two pages, a

state government o fcial,

a banker and a developer

share their points o view.



incentives, perhaps because:the area has not attractedinvestment because its blightedor there are extraordinary proj-ect costs associated with thingslike hazardous waste.

Finally, a big actor in thebut or test is whether thedeveloper has a gap in project

unding.The method o unding will

depend on the type o gap. Thegap may be in the developersreturn on investment (ROI).For example, the market rate

or the ROI on the project is12 percent and the projectedreturn without incentives is 7percent, so the gap is 5 percent.

Be ore deciding on whetherthe unding mechanism willinclude grants, tax credits, ortax abatement or diversionsuch as tax increment nanc-ing (TIF), several issues needto be addressed. Can costs bereduced? How accurate is themarket ROI? How accurate is

the developers projected ROI?On the other hand, i the gapis due to a lack o unds to coverproject costs, the unding methodmay be a subordinated directloan, a guarantee o a portion o abank loan, grants or tax credits.

The best use or divertedtaxes, such as TIF, is to ll anROI gap. There is little risk i theproject ails, and up ront cash isnot required. However, othertaxing entities do not like theirtaxes diverted, Downing said.

Although tax credits can beused or either an ROI or alack-o - unds gap, there is norepayment, and tax credits arenot as e cient as cash, he said.Formula tax credits do not takeinto consideration whethertheres a gap and, i so, howmuch the gap is. However, bothtax credits and grants have thebene t o being administeredmore easily than tax abatementsand with more consistency.

Direct loans are best used toll a gap caused by a lack o unds, Downing said. Although

there are disadvantages to usingloanshigh risk o de ault,

unding must be available and

less consistency in amountsprovidedthere are alsoadvantages. Repaid unds canbe used or other projects,

unds can be de erred in timeso inadequate cash fow, andthe loan can be repaid a ter theproject is sold.

Downing suggests that

government agencies haveto decide whether it is moreimportant to und only the gapor to be more consistent. I they choose to und only thegap, the public sector must beprepared to develop a consis-tent process or analysis andmonitoring. His nal recom-mendation is or priority proj-ects: Consider providing unds

or a portion o the developerspre-development costs.

Steve Trampe with Owen Develop-ment said jokingly that he does develop-ments in St. Louis County so he cana ord to do deals in the City o St. Louis.

Even though two-thirds o his projects inthe city end up close to break-even or lose money, he is committed to historicredevelopment. Why?

Because it creates a legacy, hesaid. Im thinking more about howgood buildings will last. I a building lasts 100 years, theres a good chanceit will last another 100. That is not truewith most new buildings.

Developers ace challenges that run

the gamut rom time delays and unknowncosts to the perception o crime indepreciating areas, the lack o adequateparking and typically higher taxes. Onthe plus side, redevelopment projectsusually have lower acquisition prices, acentral location, unique buildings andaccess to public sector incentives.

Trampe said he does not mess withsubsidies i it can be avoided. Everytime another component is added, the

di culty o the project goes up expo-nentially, he said. His advice: Keep it simple! The more subsidy sources, theless chance the project will get done.For example, i New Markets Tax Creditsare used, that means the developer isprohibited rom selling the property or seven years.

A developer may not get involved i hehas to spend too much o his own money

or a easibility study on property he does

not own. The level o architectural plansrequired by the public sector, in manycases be ore anybody else is even com-mitted to the project, is time-intensiveand costly. He indicated that, or someprojects, a developer may have to incur $1 million in due diligence costs be orethe municipality or other local agenciescommit to the deal.

Its di cult to nail down construc-tion costs on a complex historic rehab,

he said. Its much easier to build aWalgreens You know the constructioncosts because you do the same build-ing over and over. But every di erent

redevelopment project is unique andpresents di erent challenges.

In the city, there is no such thing asvirgin land or vacant propertytheres

always something underground, eveni above ground the building burned or was demolished. Forget about sampling.Get an excavator and see whats there.

In a city rehab deal, the developer worries about cash fow, equity, comple-tion, personal guarantees and what cango wrong. Fees are needed to cover time, nancial risk, lossesmost cover a20 percent fux. The developer may get a $1 million ee, but most o its gener-

ally not pro t. It needs to cover a lot o o ce overhead, in many cases romthree to seven years o it.

Its all about risk and reward. Rede-veloping historic properties is a hugelyrisky business. So how does a rede-veloper judge success? In addition toan above-market-rate ROI that includescash fow, appreciation at sale and tax bene ts, the ewer hassles the better.I the project was done in a decent

time period and on budget, i he didnt lose too much sleep worrying about the unknowns and i he didnt lose any

riends (lenders, investors, public agen-cies), thats a success, Trampe said.

d v l p Av P bl c H lp

The Owen Development Corp. led therehabilitation o the Continental Building in St. Louis. The fnancial package or the $28 million project was extremely complex, with a number o public and

private sources.

These articles are a summary of the information presented during the How Much Subsidy Is Enough(or Too Much)? session at the Exploring Innovation in Community Development Financeconference.Presentations were given by Steve Trampe, president, Owen Development; Walker Gaffney, vice presi-dent, US Bank; and Mike Downing, co-director, division of business and community services, Missouri Department of Economic Development.



This article is a summary of informa-tion presented by Lyn Knox, program

manager for Portland, Ore., during theNew Approaches to Reduce UrbanPoverty session at the Exploring Innovation in Community Development Finance conference.

In 2004, Portland, took a bold stepto reduce poverty in its urban neighbor-hoods. A ter years o unding commu-nity-based organizations to help a lot o people a little bit, the citys Bureauo Housing and Community Develop-ment (BHCD) believed it could be moree ective by pursuing a ocused strategy

ounded on best practices.From that belie , Portland launched

its Economic Opportunity Initiative in2004, ocusing community development block grant (CDBG) unds on increasing the income o low-income individualsand amilies. The initiative is a citywide

poverty reduction program with a goalo increasing the incomes and assets o low-income residents by a minimum o 25 percent within three years.

Two actors led BHCD to transitionrom revitalization to income generation

as a poverty-reduction strategychanges in the community and in thecitys strategic planning process.

In the late 1990s, Portland experi-enced a boom. Portlands urban corewas revitalized. However, as revital-ization and gentri cation occurred,low-income peopleonce concentratedin the inner citydispersed. Despite theboom, Portlands poverty rate remainedconstant. Fi ty thousand householdswere living in poverty.

As the Portland landscape changed,BHCD undertook a strategic planning process that included conducting

ocus groups and meeting with keystakeholders. BHCD responded to thestrong messages it received:

Portland, Ore., Working to Free Residents rom

Workforce Goal: To increase participant incomes

by at least 25% in three years.

Revenue Increasedby at Least 25%

Percentage of businesses that haveincreased their revenues by at least

25%. Measured at first and secondyear of participation.

Real change takes time.

Percentage of participants meeting Workforce Goal by time enrolled inthe Initiative.

The first participants will reach their third year in the program in fall 2007.

0%

20%

40%

60%

80%

100%

2 Year 1 Year

58%63%

0%

20%

40%

60%

80%

100%

2 Year 1 Year

75%71%

0%

20%

40%

60%

80%

100%

25+ Mo.19-24Mo.13-18Mo.7-12 Mo.0-6 Mo.

47%

59% 59% 62%66%

Startup Businesses

Existing Businesses

Focus on those most in need: concen-trate resources or real impact rather

than spreading the money too thinly.Move rom a geographic to a popula-tion ocus, and shi t the ocus romthose below 80 percent o the median

amily income to those at or below50 percent.

Concentrate on three initiatives:work orce development or adults;a work orce development program

or youth; and microenterprise or entrepreneurship projects that helpparticipants start or expand smallbusinesses.

Other economic development e ortshad a trickle-down approach or years(tax incentives, physical revitalization,tax re orm, regional assistance to lurecompanies), and it hadnt worked or low-income residents. BHCD madethe decision to change to a bottom-upapproach.

BHCD identi ed best practices romsmaller projects throughout the countryand implemented them on a citywidescale. Now it invests in a coordinatedport olio o more than 30 projectsincorporating these best practices as a

oundation:

Projects serve groups o people unitedby some common characteristic such

as ethnicity, race or entrepreneurialambition. For example, a project or immigrant Eastern European metalworkers builds on their technicalexperience and trains them to useAmerican equipment.

Projects provide extensive multi ac-eted support. Standard componentsinclude peer support and help witha range o issues, such as child care,tuition and transportation.

Real change takes time. The initiativeworks with participants or three years

to nd a permanent way out o poverty.

Portland moved swi tly to changethe way scarce nancial resources wereinvested in the citys people. By creating a pool o ederal, regional and local

unds, including matching grants romthe United Way, BHCD provides nancialresources to organizations trying toexpand success ul projects that reducepoverty. BHCD used the scale o theinitiative to get additional resources and

to develop leverage. The results? Year 1: 19 projects with $2.1 million inCDBG and $650,000 in city general unds;

Year 2: 30 projects with $2.5 million inCDBG and $650,000 in city general unds;

Year 3: 34 projects with $2.3 million inCDBG and $1.26 million in city general

unds. The Economic Opportunity Initiative

has developed an array o leveragedresources or participants:

Pro bono legal aid: Small businessesreceive legal services, including helpincorporating and reviewing contracts.

Health care: Formerly homeless partici-pants receive ree health care through apartnership with Kaiser Permanente.

Free market research: Microenterprisescan obtain ree customized reports.

Matched savings accounts: Savings

toward education, home ownershipor a small business investment arematched $3 or every $1 contributedby clients.

Low-interest business loans: Small-business entrepreneurs are givenaccess to microcredit lenders who canprovide low-interest loans.

Extended Temporary Assistance or Needy Families (TANF) bene ts:

Oregon has extended TANF bene tsor recipients who participate in initia-

tive projects.



In-depth credit repair: The initiativehelps clients repair credit records.

Clean slate: Participants receive helpwith cleaning up minor issues withthe courts that are barriers to work.

Initial ResultsAt the end o 2006, there were

1,865 participants in the variousprojects (389 microenterprises and1,476 workers on the job or in train-ing). As places become available,new participants are enrolled. By July2007, the number was expected toexceed 2,000. Seventy- ve percent o participants had household incomesat or below 30 percent o the median

amily income at enrollment. The oth-ers were at or below 50 percent.

Return on Investment The cost per par ticipant ranges

anywhere rom $1,000 to $10,000 per year. The average cost per participant is $5,500 in Year 1; $1,000 in Year 2;and $1,000 in Year 3.

In comparison, the average annual-ized income gain o work orce partici-pants at six months a ter placement is$15,059, ar exceeding the cost o theprogram. In addition, our times thenumber o workers now have employer-paid health insurance as a result o being placed in jobs.

For existing businesses, revenueshave increased an average o 267percent over two years o participa-tion. Start-up business revenue at twoyears is 30 percent above the nationalaverage o $34,301 or comparablethree-year businesses.

As Portland continues to trans ormthe way it does business, there aremany cities nationwide that can learn

rom their experiences.

Povertys Gripintermediarieseither not-

or-pro t, or-pro t or publicintermediaries; local govern-ments and o cials, such asmayors; and underserved busi-nesses, including minority-and women-owned businesses.Not- or-pro t und sponsorsand not- or-pro t a liateshelp ensure robust communitybene ts because o their strongcommunity development mis-sion and role in identi yinginvestments. They also bringwith them power ul tools thatcan make the deal work rom a

nancial point o view.

Community ImpactsThere are many social ben-

e ts that can be derived romcommunity-based investing.

The social metrics are slowlybeing measured; and, whilethere is not yet any standard-ization, various unds arebeginning to de ne and reporton the non nancial returns. 1 Some o the social returnsbeing tracked include:

Economic developmentbene ts, such as thecreation o livable-wage

jobs, a ordable rentaland ownership housing,and mixed-use real estatedevelopments. Thesebene ts can result inother returns or localareas that are more di -

cult to measure butare important, such asincreases in the tax basedue to the growth o

continued rom Page 3r v al za businesses and an increase

in property values.

Community impacts,including the creationo community acilities,

such as day care centers;open spaces; job trainingprograms; and techni-cal assistance services orentrepreneurs.

Environmental sustain-ability, such as promotingmixed-use and transitorientation; green buildingconstruction and operation;energy conservation andwaste reduction; and alter-native energy utilization.

In addition to these directbene ts, our research demon-strates that community-basedorganizations that partner

with investment vehicles todevelop large-scale projects canalso bene t organizationally.For many, the experience hasbeen trans ormative in nature,bolstering the capacity o thecommunity partner, spurringthem on to greater innovationand strengthening their overall

sustainability.Conclusion

Challenges remain to con-necting institutional capital tocommunity-based investments.They include increasing dealfow, overcoming market preju-dice and creating models thatcan deliver smaller amounts o capital to investment opportuni-ties. Notwithstanding, institu-tional investors have placed largeamounts o capital in economic

development investments, andthe numbers are growing.

To date, public pension undshave committed $11 billion o their capital to targeted invest-ment in underserved capitalmarkets (or emerging domesticmarkets, as they are sometimescalled).2 And market-rate,mission-related investments

rom oundations now standat $2.3 billion. 3 Increasingly,

oundations are using boththeir program unds and theirendowment unds or theseinvestments. 4

Moreover, lessons learnedrom public pension unds in

Cali ornia, New York and Mas-sachusetts demonstrate thatthese investments yield bothhigh nancial returns and socialreturns. 5 While more researchis needed to examine the nan-

cial and social returns o theseinvestments, it is clear that thisis a growing sector or commu-nity development nance.


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By Robert Weissbourd RW Ventures, LLC

This article is a summary of information presented during the Into the EconomicMainstream: Bipartisan Strategies for Inclusive Economic Growth session at theExploring Innovation in Community Develop-ment Finance conference.

While public debate about economicdevelopment seems stuck in an unpro-ductive confict between supply-side anddemand-side economics, private discus-sions among practitioners and policymak-ers reveal considerable common ground. It turns out that the poverty alleviation goalso economic developmentto move peopleinto the economic mainstreamareconverging with broader economic growthgoals. As a result, more opportunities arearising to align business and development interests toward an emerging common goalo inclusive prosperity.

Ends: Inclusive Economic GrowthI millions o poor people become more

economically productive and enter themiddle class, net economic growth occurs.

This expansion o the economy results ingrowing markets and production o newgoods and services. Economic growth cre-ates a bigger pie with broad bene ts. One

undamental goal o economic development must be to create the most productive,e cient, high-growth economy possible.

Two ways to improve the economy par-ticularly deserve attention: growth throughincreasing productivity and growth throughinclusion o underutilized assets.

Economic growth primarily occurs byincreasing the productivity o individuals,businesses and institutions. Productivitygrowth, particularly in the knowledge econ-omy, fows rom investment in research anddevelopment, technological in rastructure,knowledge institutions and networks, and

human capital. Human capital is especiallyimportant, as it is the knowledge and skillsembedded in the labor orce that combinewith new technologies to enable growth.Increasing the productivity o individualsand institutions (including government) is acritical point o alignment o business anddevelopment goals.

Economic growth can also occur by increasing the resources input intothe economythrough inclusiveness o underutilized people, assets and places.Currently, we have wasted assets and eco-

nomic opportunities: underemployed labor,underdeveloped land and underservedmarkets. Increasing participation andproductivity o people in economic activityentails education and skills development,as well as increasing the e ciency o labor markets through addressing ine cienciessuch as market bias or higher measure-ment and other transaction costs, and other transaction costs in lower-income com-munities. In addition to improving overallproductivity, a skilled work orce contributesto the tax base and reduces social andeconomic costs o poverty.

A growing body o research similarly sug-gests that reincorporating distressed centralcities and communities o concentratedpoverty into the economy is not just good

or the communities, but good or theeconomy overall. Generally, places withless inequity prosper more. Inclusionar ypolicies with respect to place seem toincrease regional economic e ciencies,leverage market linkages and avoid thecosts o concentrated poverty.

Recapturing these assets into theeconomy is good or business. The experi-

ences o companies reinvesting in emerging urban markets, o developers recapturing real estate near older downtowns, o Com-munity Development Financial Institutionslending to rehabbers and small businesses,all con rm that there are economic growthopportunities on the margins o the econ-omy. We seek inclusive growth not becauseit is air or meets public wel are objectivesor is the moral thing to do (though all arealso good reasons); we seek it because it causes overall economic growth.

So ar, we are primarily address-ing deployment o market-ready assets

(ones that lay dormant largely becausemarket imper ections have prevented their deployment). However, many people andplaces are not yet employable or attractiveeven to e cient markets. It turns out that developing these assets is also good or overall economic growth. Economic argu-ments on addressing poverty and inequalityo ten presume a trade-o between equityand e ciencythat moving people tothe mainstream will require redistributivepolicies, which arguably reduce e ciencyor hinder economic growth. In act, at least in urban economic development, it appearsthat inclusiveness and growth tend to gotogether. Taking steps to move more peopleand places into the economy, even thoserequiring some specialized help, makesgood economic sense.

Rather than policies that trans er wealthwithout leading to economic growth,this approach means ocusing on asset development and markets whenever pos-sible. Not coincidentally, the economicdevelopment eld has made great stridesin understanding the importance o asset development and ways to achieve it. Wehave expanded home ownership markets,created new savings products such asIndividual Development Accounts, anddeveloped incentives like the EarnedIncome Tax Credit. We have more targetedprograms, particularly with respect to labor

orce assets, that try to maximize thisconvergence o asset development and eco-nomic growth goals, such as business-led

job training programs or regional a ordablehousing programs to alleviate the jobs/housing mismatch.

In short, to move people into theeconomic mainstream, we can move thestream by growing it overall through increas-ing productivity; we can move or grow thestream in targeted places through inclu-sionary growth strategies; or we can movethe people to the stream by getting assetsready to participate in the economy.

i cl v g w hs a f m v P pl h ec c ma a


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O N T h e i N T e R N e T a T w w w . S T l O u i S f e D . O R G

Means: Market-Based DevelopmentMarkets are the primary vehicle or

wealth creation in our economy. Undevel-oped land, unemployed labor and moneyin a mattress all become valuable only tothe extent they are deployed into markets.Also, markets determine what assets get included or not. I our goal is to expandthe economy to be more inclusive, we aretalking about enhancing markets.

Markets are shaped by an environ-mentan institutional context o enabling laws (e.g., property rights), regulations(e.g., Community Reinvestment Act) andextra market incentives (e.g., New Markets

Tax Credit). Internal market operationsthen determine market unctioning: who isemployed, what real estate is developed,what businesses get nancing and what is produced or whom. Internal market operations can be broken into threecomponentsproduction, consumptionand exchangeeach with its own levers o change. Growing or moving markets entailschanging the conditions o production,exchange or consumption in ways that allow market activity to include new people,assets or places.

The production or supply side o themarket is infuenced by actors that a ect costs and productivity. I we want toexpand housing markets toward producing more a ordable housing, or example,production can be increased i the costso materials go down (e.g., manu acturedhousing), i we can make the land assemblyprocess more e cient or i we reduceregulations limiting productivity.

The consumption component o themarket can be infuenced through the leverso taste and income. Home ownershipcounseling or nancial literacy programs,

or example, a ect the markets demand or housing and savings accounts, respectively.Increased employment income increasesdemand and so a ects what goods andservices the market produces.

For practical economic development purposes, it is use ul to break out a thirdmarket component, the exchange unction.In basic microeconomic theory, there areno in ormation or transaction costs, so thetrading or exchangewhere producers meet consumers and demand matches supplyhappen automatically. In real li e, econo-mists and others are increasingly ocusedon the ways that in ormation imper ections,measurement and transaction costs heavilyinfuence and o ten distort market opera-tions. The costs o nding, evaluating and

closing a transaction heavily infuence whois hired, where investment occurs, what is produced or whom and myriad other economic activities. Moodys rating system,or a credit bureau, improve the exchange

unction, and so signi cantly expand market activity. Improving in ormation unctionsand reducing these costs are among themost power ul ways to expand markets toinclude more people and places.

Policy Implications: The Roles o Government

What is the proper role and best means

or government to enhance market opera-tions toward inclusive economic growth?Examining the power and limitations o markets suggests our distinct roles or government with respect to markets.

First, government creates the environ-ment that enables markets.

Second, because markets sometimes donot maximize utility, having imper ections,externalities and other ailures, government has a role in improving markets.

Third, markets are not designed toachieve some goals, either because o other

kinds o limitations (e.g., public goods) or because they are non-economic goals (e.g.,equity). Our recognition o the power o market mechanisms, however, does implythat government o ten should be using markets to achieve these goals rather than

just doing these things itsel .Fourth, in some instances, the non-

market goals cannot be achieved by using markets, but we still want to approach themin ways that recognize the importance o markets by getting assets market-ready.

The role o enabling markets isparticularly relevant to the goal o growth

through increasing productivity. Improving markets relates to the goal o deploying market-ready assets that have been le t out due to internal imper ections. Using markets relates to expanding markets ontheir margins to include assets urther romthe mainstream. The last role correspondsto moving assets to market, rather thanthe other way around. Generally, we arelooking or government policies that enable,improve and use market operations, making them more inclusive in ways that increaseoverall economic growth, as well as policiesthat develop assets or markets.

Further Exploration These general principles provide a

ramework or exploring new approachesto policy and revealing areas where urther investigation might be particularly ruit ul.

That work entails better understanding o how to align inclusiveness with productiv-ity growth in particular industries, marketsand places, and with respect to particular assets. It entails exploration o how spe-ci c markets are operating and identi ca-tion o imper ections and opportunities or enhancement. Finally, it entails designing new government programs to enhanceproductivity and expand markets, address-ing imper ections, using markets wisely andmoving the most distressed people andplaces toward the economic mainstream.

This information arises from a project todevelop bipartisan economic development

policies, sponsored by Opportunity F inanceNetwork and CFED. Special thanks are dueto Mark Pinsky and Sandra Kerr of OFNand Andrea Levere and Carol Wayman of CFED, and a diverse group of policymakers,advocates, scholars and practitioners, for making the project possible and for contrib-uting to the ideas summarized here.

A full-length paper providing detailed discussion and extensive examples and citations is available at rw-ventures.com.


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Bridges - Summer 2007

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