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Q&A: How IFF navigated layering partners, capital to build a new early childhood center

Detroit, Social Investment Practice

IFF is developing the McClellan Early Childhood Education Center in the Gratiot Woods neighborhood of Detroit, backed by multiple capital sources, including a Kresge program-related investment.

Matrix Human Services will provide services once the center comes online in 2024, with eight classrooms for 96 students. Kresge Communications Manager Krista Jahnke interviewed IFF’s Kirby Burkholder and Rick Raleigh to learn more about the creative financing and community development principles that went into building the new high-quality center.

Kirby Burkholder, IFF president, Core Business Solutions
Kresge: Sourcing $9 million for any project is a big task. What kind of creative challenges came in putting that capital together for the McClellan Early Childhood Education Center?

IFF: The creative challenge stemmed from the lack of an obvious path from A to Z. Each component, such as community development block grants, the PRI partnership with Kresge, and equity contributions, required proactive and patient work to bring together. The interdependence of each part demanded a vision to weave them together effectively. There is a world of options, but how do those pieces fit together at the right time? In the right ways? That is a difficult needle to thread.

Rick Raleigh, senior project manager
Kresge: Take us from point A through the zigzag moves you had to make to get to Z.

IFF: Initially, the project started with IFF’s equity and land. We bought a piece of property in 2019 with a vision of responding to ECE needs in Detroit. We had a partner we were working with, a provider to run the center, and we’d spent quite a bit of money on design. But then, the COVID pandemic forced the provider to walk away.  Luckily, we’d focused on best practices in the design process, which spared us from having to go through a long redesign, but there were still sunk costs and delays.

Kresge: How did community development block grants (grants from the federal Department of Housing and Urban Development) come into play?

IFF: From the beginning, we had a commitment of IFF equity as part of IFF’s long-term commitment to Detroit. We also had confidence that Kresge would invest through a PRI to bring the project to life as part of its comprehensive commitment. We then went after the CDBG dollars and asked for $2 million and ultimately got $860,000. When you get a CDGB grant that small for a project this large, there are some cost-benefit considerations. We can only use it for certain purposes, and there are compliance and procurement requirements that could, ultimately, bring a net loss to the project. We had to be purposeful and coordinated on the project layering and leverage.

Kresge: Were there other big challenges?

IFF: We had to be patient. You’re working through all the issues of buying a property in Detroit. The building had historical issues related to property ownership. That takes time. Then there was myth-busting. There was confusion at the City Council about who IFF is: why were we, a “Chicago-based” developer, doing this? We had to make our case that we’ve been in Detroit a long time. With the machinations of acquiring the CDBG, our provider stepping away, the myth-busting we had to do, and the delays — most developers would walk away. It was a roller coaster.

We then applied for highly competitive New Market Tax Credits, but with the timing and layering limitations of the CDBG, that was also a big hurdle. We made it to closing, locking in all sources by the skin of our teeth. We barely made it through that process and the conflicting requirements and time constraints.

Kresge: With all of these challenges, many might have given up. What kept you going?

IFF: We have a fundamental commitment to this work. We love Detroit. Detroit has adopted us, and we’ve adopted Detroit. Our primary work is trying to make the case for alignment between programmatic and facilities quality. We know we’re never going to build our way out of, or grant our way out of, the early childhood facilities challenges in Detroit. So, there’s a deep commitment from the IFF board to the staff about how much we have to stand in the gap. We have to stitch different disparate and complex resources, resources that are sometimes in conflict with one another, together in a way that demonstrates ownership. Putting our money where our mouth is means we’re going to buy land in Detroit and own real estate in Detroit. And we’re going to show folks what’s possible. The intent is to be able to share what we’ve learned.

Kresge: How did you fold community input into your process?

IFF: People are usually really excited about early childhood development. We partnered with a trusted and established community anchor, MACC Development. What we learned is how hard it can be to get engagement in this kind of process. Residents have seen developers come in and ask for participation and input on projects that never come to fruition. People get burnt out and frustrated and lose interest in participating. One of MACC Development’s marquee projects is a community-focused laundromat and coffee shop. We used that location and talked to people there. We learned that people are passionate about education and kids and their connection to the project. To that end, they were positive about the development in their neighborhood.

Kresge: Did you have to navigate any pushback?

IFF: We did have some pushback around the fact that this neighborhood does not have the highest need (as found in IFF’s study of early childhood needs across Detroit). What we always try to remind people is that there is a strategy for every neighborhood. Based on the level of need, different responses are appropriate. We are big believers in early childhood and K12 as strong anchors in every neighborhood. We want to model that. We had conversations with Detroit Prep about how we can matriculate “ready learners” into programs and how we think about investing in anchors. In this case, we also did outreach to existing providers to ensure we are not displacing anyone. The benefit of having Matrix involved is that they’re a known entity in the ecosystem, and the vision strongly aligns with existing providers, MACC, Detroit Prep, and other community anchors.

Kresge: One innovative part of this arrangement is that, eventually, Matrix will own the center outright. Can you explain why that was central to your development plan?

IFF: Before the partnership, Matrix invested a lot of money into a building they were leasing and faced the prospect of displacement. Owning a property would give them long-term control, where things like that can’t happen. This early childhood center will be a high-quality property. We designed this so all of the grants and subsidies we were able to put together will get passed through to them when the building is sold to them at the end of their seven-year lease. This will set them up for long-term sustainability and growth. The mortgage debt they will pay at that point will be less than what a commercial lease rate escalating annually would have been, so we know they will be ready for success in a permanent home they own.

Kresge: What was your takeaway from this process?

IFF: Providers are terribly busy doing the work of caring for kids every day. The thought that they are going to buy a piece of property, not knowing how it will bear out, taking on that financial risk and the time needed to put all of these forms of capital together – they just don’t have the time to do that.  We all want them to focus on the best possible early childhood education for kids. Having someone like IFF take on that responsibility on behalf of the organization and then bend down the cost of ownership — that’s the goal here. We see this as a model we can use throughout Michigan and future Detroit centers. The idea is: how do we ensure that money stays invested in anchors of community to support the revitalization of Detroit neighborhoods so kids have safe and nurturing places to go and learn and a pathway to matriculate up to other quality schools nearby? That’s what this model can do in partnership.

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Download a case study about this development, produced by IFF.