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5. The Case for the Community Partner in Economic Development

Anna Steiger, Tessa Hebb, and Lisa A. Hagerman

Large institutional investors are increasingly placing capital in community investments,[1] seeking high financial returns while spurring economic growth in underserved areas. They look to invest large amounts of capital into easily replicable financial instruments that generate risk-adjusted market-rate returns. In contrast, investments in underserved communities are small, illiquid, and specialized to meet community needs. The challenge has been to find ways to funnel large amounts of institutional capital to community investments that have both high financial returns and meaningful benefits for communities.[2]

Hagerman, Clark, and Hebb (2007) set forth the role of intermediaries in community-based investing, noting that investment intermediaries or “investment vehicles" and community intermediaries or “community partners" are needed to link the institutional investor to the economic development area. Investment vehicles intervene between the investor and the community by pooling investments, spreading risk across investors, and pricing the transaction up to the associated risk. They also link with community partners, who draw on their specialized local knowledge to structure deals that ensure social benefits for low- and moderate-income residents. As such, the partnership between the investment vehicle and community partner act to unlock value for institutional investors and communities alike.

In this chapter, we argue for the necessity of the partnership between the investment vehicle and the community partner. There are various arrangements that establish the relationship between the two. We discuss the strengths and weaknesses of different business models of partnerships. We find two scenarios are particularly successful at yielding tangible benefits for the community. In the first scenario, a not-for-profit community partner owns or contracts with the for-profit investment vehicle. In the second, the for-profit investment vehicle affiliates with a not-for- profit community partner. We argue that investments made in partnership with a community development corporation (CDC) or community development financial institution (CDFI) provide some of the strongest community benefits.[3]

Using two case studies, we illustrate how investment vehicles and community partners work with each other. The first case study interrogates the model of a for-profit investment vehicle, The Urban Strategies America (USA) Fund, and its partnerships with two not-for-profit CDCs in the Boston area. The second case study examines Coastal Enterprises, Inc. (CEI) of Wiscasset, Maine, a not-for-profit CDC and CDFI, which owns several for-profit subsidiaries that create investments in low-income areas using the New Market Tax Credit (NMTC) program.`[4]

Public pension funds in California, New York, and Massachusetts were early adopters of economic development policies that place capital with an investment vehicle. Lessons learned from these cases demonstrate that these investments yield both high financial returns and social returns (Hagerman and Hebb 2005). To date, public pension funds have committed $11 billion of their capital to urban or economic development investments (Hagerman, Clark and Hebb 2007).[5] Investments from other types of institutional investors, such as foundations, are increasing as well. Market-rate, mission-related investments from foundations grew at a 19.5 percent compound annual rate since 2000 and are funded from both program funds as well as endowment funds (Cooch and Kramer 2007).

While in some cases it is still too early to report on the financial returns of these investments, they are already yielding tangible social returns to communities. Opportunities exist to increase the flow of institutional capital into underserved communities. This chapter illustrates how the investment vehicle and community partner work together to create investments that meet the needs of both investors and coimnunities, for the purpose of promoting models that successfully leverage institutional capital to promote economic development.

  • [1] These are investments targeting geographic areas and businesses that have traditionally had difficulty attracting private sector capital. Most of these investments are in lower- income urban areas, but some are targeted to rural areas as well. Other terms to describe these investments include emerging domestic markets, urban revitalization, and investments in underserved areas.
  • [2] Community benefits comprise (1) economic returns: creation of jobs, affordable housing, and other real estate developments; (2) social returns: creation of community facilities, open spaces, and services for local residents; (3) environmental returns: promoting mixed-use, transit-oriented, and “green” developments as well as sustainable practices in local industries. Collectively, all these are social returns.
  • [3] CDC is a resident-owned and resident-controlled organization engaged in affordable housing, business and commercial development, and providing community services in low- and moderate-income areas. Most are nonprofit, tax-exempt 501 (c) 3 organizations. A CDFI is a financial institution whose primary mission is to promote community development in low- and moderate-income areas. CDFIs provide comprehensive credit, investment, banking, and development services. Some are chartered banks, others are credit unions, and many operate as self-regulating, nonprofit institutions that gather private capital from a range of investors for community development or lending.
  • [4] NMTC, established by Congress in 2000 and administered by the CDFI Fund at the Department of the Treasury, gives individual and corporate taxpayers the opportunity to earn credits against income taxes by investing in qualified community development entities (CDEs). Investors can earn attractive rates of return while meeting a community need, qualified businesses gain access to development funds at reasonable rates, and CDEs fulfill their mission by helping stimulate economic growth and job creation.
  • [5] The figure includes programs to stimulate economic activity in underserved markets but does not include broad in-state targeted investments.
 
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