Mission, Money & Markets: Community Development Finance in America – A Glass Half Full
By Kimberlee Cornett
It’s well known that low-income people and communities face an inordinate amount of challenges. But let’s focus on one area where the U.S. has excelled at supporting these people and places – financing community development. Compared to many places around the world, our country has developed an enviable community development finance system that productively uses public resources to leverage private investment, incentivizes banks to invest in under-resourced communities, and fosters a sophisticated network of organizations and practitioners who excel at revitalizing places where others deem investment too risky.
Many of these programs, which receive some federal funding, have earned strong bipartisan support because their effectiveness is clearly visible – people can see the new businesses in their neighborhoods, they can live in the new, affordable housing units, and they benefit from additional jobs in the local job market. These projects also help identify where flexible capital can be used to achieve a social purpose without relying on the social safety net.
The Kresge Foundation is a proud partner and investor alongside many organizations that do this work, offering us a birds’-eye view of the impact of this fine-tuned community development finance system.
One of the distinguishing characteristics of this system is the interaction between public sector resources and private investment. Public resources – tax credits, loans and grants – lay the necessary groundwork for private capital to follow. Often, these public resources flow to and through Community Development Financial Institutions (CDFIs), which pool funding and investment from public, private, and nonprofit sources. The federal CDFI Fund in the U.S. Department of Treasury has been a consistently important source of growth capital. CDFIs enable markets and market investors to reach America’s inner cities and rural areas. In terms of federal spending, the CDFI Fund costs each tax payer 79 cents annually and in turn leverages $12 for every $1 of public investment made.
Kresge’s portfolio is rich with examples of ways private foundations, impact investors, banks and others partner with and double-down on these public resources. Here are just a few:
Strong Families Fund:
Background: The federal government offers a tax credit to banks and corporations that make investments in building or rehabilitating affordable housing. This results in thousands of quality homes made available each year to low-income families, seniors, veterans and people with disabilities.
This project: Working alongside two major banks and the Robert Wood Johnson Foundation, Kresge helped finance six Strong Families Fund affordable housing properties using low-income housing tax credits, including one in our backyard, Deborah Strong Housing in Ypsilanti, Michigan.
Healthy Futures Fund:
Background: New Markets Tax Credits (NMTC) is a federal program that leverages billions of dollars to invest in businesses and community facilities in low-income neighborhoods.
Project: The Healthy Futures Fund used NMTCs to provide financing to several Federally Qualified Health Centers (FQHC), including one in Brockton, Mass., which provides vital health services to individuals with low-incomes. Brockton’s clinic is co-located with a healthy grocery store that offers programming to Brockton patients on health and nutrition. In addition to providing health services, each FQHC is estimated to provide 200 jobs in its local community.
Michigan Good Food Fund:
Background: In 2015, the W.K. Kellogg Foundation and the Kresge Foundation invested in a CDFI to create a fund that will strengthen food systems across the foundations’ home state of Michigan – including healthy food production, distribution, processing, and retail – for the benefit of low-income communities.
Project: The Fund provides flexible financing to healthy food enterprises often overlooked by traditional financial institutions and supports food entrepreneurs seeking to grow their businesses.
Partners receiving public financing: This effort was made possible through $3 million in a Healthy Food Financing Initiative grant that CDFI partner Capital Impact received from the CDFI Fund.
Detroit Home Mortgage:
Background: Detroit has long struggled with a dysfunctional single-family home mortgage finance system. After the great recession, that system was fundamentally broken. Borrowers who could easily qualify for a mortgage in a nearby suburb without credit counseling or down payment assistance couldn’t buy a home in Detroit because of appraisal gaps.
Project: Detroit Home Mortgage was designed to reboot the single-family home finance system in Detroit by combining public, private, and philanthropic capital. It was built on the participating banks’ lending platforms to share appraisal risk and create a new way to finance home purchases in Detroit. In its first year, the program generated 10 percent of the mortgages generated in the city and is on track to exceed 30 percent of the market in 2017.
Partners receiving public funding: The Community Reinvestment Fund, a CDFI, is the perfect partner, blending public and private capital, rooted in local knowledge, for social impact.
Background: NeighborWorks America is a nationwide nonprofit network of more than 240 community-based affordable housing developers. NeighborWorks Capital, a CDFI, is an affiliate arm of NeighborWorks America and provides financing to member organizations.
Project: Kresge made a $5 million investment in NeighborWorks Capital in 2014 for the Strategic Growth Fund, which in turn led to $8 million of investment in low-income communities. One example: a $1.5 million loan to Atlanta Neighborhood Development Partners has been used to acquire and rehab single-family homes in blighted Atlanta-area neighborhoods with very high foreclosure rates and negative equity.
Partners receiving public funding: NeighborWorks America, chartered and funded by Congress as an independent agency formally known as the Neighborhood Reinvestment Corporation, is a national nonprofit intermediary.
In America today, the glass is half full when it comes to resources needed for low-income children and communities to grow, thrive and succeed. Still, a 2013 study by economists at Harvard and the University of California Berkley found that in a typical Midwestern community, low-income children had just a 5 percent chance of reaching the top fifth of household income by age 30. Those are unfair and unacceptable odds. For all their positive impact, these strong, productive programs still can’t meet the real need of our low-income neighborhoods, friends and families. The fate of low-income communities – and those already unacceptable odds for people in those communities – would be much bleaker without them.
Kimberlee Cornett is the managing director for the foundation's Social Investment Practice. Follow her on Twitter @kr_cornett.