Posts by Author: Oscar Perry Abello

Global Investors Find Value in a Small Bank in the Deep South

Little Rock's streetcar. (Photo by David Wilson/Flickr)

Little Rock, Arkansas-based Southern Bancorp has made a successful business model out of serving places where larger banks don’t have much, if any, presence. For most of its history, that’s meant serving smaller cities and rural areas in and around the Mississippi Delta. In Arkansas, that’s meant cities such as Arkadelphia, Hot Springs or Blytheville. In Mississippi, it’s Clarksdale, Indianola or Greenville.

Founded in 1986, with the involvement of then-governor of Arkansas, Bill Clinton, Southern Bancorp and its affiliates or subsidiaries have since made more than $4 billion in loans (and counting) in these smaller cities and rural areas. Now, as the bank looks to expand in larger markets such as Memphis, Tennessee, or Jackson, Mississippi, it’s getting support from some surprising sources.

Bill Wright leads Southern Bancorp’s western region. He rattles off borrowers as if they were superstar athletes, both men and women.

Take, for example, the auto-body shop owner who came in the day before, seeking a line of credit after buying out a competitor; he needs cash to keep his newly expanded business up and running. Or the auto detailer who started out ten, maybe fifteen years ago under just a canopy; the bank helped him repair his troubled credit history, then financed a proper brick-and-mortar location for his business. They later financed his new home, and he’s now financially supporting his daughter to get through college. There’s also the former beauty-salon employee who struck out on her own, and now employs five others in her salon, thanks to Southern Bancorp’s financing.

“These people become the leaders in these small communities,” says Wright. “Now, that’s not every loan. Heck, I also lend money to the richest man in town, but he has 370 employees in his business, and that affects all of us here, in these small communities we’re in.”

It’s no secret that smaller banks serving communities like these have struggled mightily to stick around. When Southern was founded in the mid-1980s, there were 14,000 banks in the United States; today there are barely 5,000. Southern has not quite been distinct from the trend. On the contrary, it has often saved smaller community banks by merging with them, consolidating back-office operations and finding ways to maintain a physical lending and banking presence in every community it’s touched. The branch where Wright works, in Arkadelphia, has been open since 1903; back then it was known as Elk Horn Bank & Trust until it later became the first branch of Southern Bancorp.

As consolidation in the banking sector continued, Southern started seeing gaps in the larger markets in its region — markets such as Memphis, Jackson, and even Little Rock, its home, where Southern only has its headquarters but no regular branches. The bank’s board of directors recently authorized executive leadership to reach deeper into these larger markets.

To help finance continued growth in those and other areas, the bank has raised capital from an assortment of investors, most of whom are intimately familiar with Southern Bancorp and its target communities; the assortment includes the board of directors and executive leadership, as well as and other local investors. But it also recently received $7.5 million from a cadre of global investors who are looking to make further investments in other banks such as Southern — banks that have an intentional social mission and also offer reasonable financial returns.

Those global investors are part of what’s known as the SFRE (pronounced ‘sapphire’) fund. SFRE stands for “Sustainability | Finance | Real Economies.” The fund consists of capital pooled from wealthy families and individuals, faith-based investors, philanthropic foundations and large financial institutions based around the world. They’re collectively looking to invest in financial institutions that exemplify the principles espoused by the Global Alliance for Banking on Values, an international network of banks and credit unions both large and small, founded in 2009 in response to the global financial crisis. Southern Bancorp has been a member of the alliance for four years and counting.

At its annual meeting in 2012, the Global Alliance for Banking on Values first published research that compared banks that exemplify its principles, which it calls “values-based banks,” to the largest banks in the world. Looking at financial results through 2010, the research found that values-based banks delivered better and more stable investor returns than those largest banks in the world. In an update of that research published last year, looking at financial performance through year-end 2016, the same results held.

This research sparked the creation of the SFRE fund, which launched in March 2015, in part to provide more capital to values-based banks today, and in part to serve as an example to potential investors of the safe, predictable, healthy financial returns from investing in values-based banks.

“[The original research] provides a base-case as to why values-based banks could be an interesting investment,” says David Korslund, senior advisor with the alliance.

SFRE fund investors aren’t required to be members of the alliance — less than half of the $44 million invested into the fund so far has come from alliance members. The rest of the investors, Korslund says, are interested in earning a financial return at the same time they can support the immediate social returns of creating jobs and access to capital in places like the Deep South. In the long-run, it makes a persuasive case to other investors that values-based banks like Southern Bancorp are a worthwhile investment.

What makes Southern Bancorp a values-based bank? Although it’s not the only way to measure it, one key metric the alliance cares about is the ratio of a bank’s loans to its total asset size. According to the alliance’s 2017 research, loans made up 74.7 percent of values-based banks’ assets, compared with just 41.5 percent of assets among the world’s largest banks. In other words, values-based banks spend the great majority of their time making loans like those to Wright’s superstar borrowers, while the world’s largest banks spend most of their time worrying about other activities — such as making the kind of sophisticated, exotic investments that ultimately led to the financial crisis.

For its part, Southern Bancorp, with $1.22 billion in assets, has a current loan portfolio of $859 million — a ratio of just under 70 percent. Of the remaining $360 million or so in assets, instead of making exotic investments for the sake of highest possible quarterly returns, Southern has mostly plain-vanilla investments in areas such as municipal or U.S. Treasury bonds.

“We’re invested in the municipal bonds of the cities we’re operating in, building schools, building roads, building bridges,” says Darrin Williams, Southern Bancorp’s CEO.

Other banks looking to access capital from the SFRE fund should expect a due diligence that includes a scrutiny of balance sheets over several months and tours of the bank’s service areas, which, taken together, Williams says, examines a bank’s focus “on the real economy, on money put to work to put people to work, on impacting the lives of people on the ground, day to day.”

Banks can also expect questions from the SFRE fund about how to scale up to effect more people and more communities. Southern Bancorp’s plan to reach deeper into Memphis, Jackson and Little Rock will be key to scaling up their work in years ahead.

“We don’t see much difference in access to capital and credit between rural and urban markets,” says Williams. “We believe some of the urban markets, because they’re more dense, will be important to our continued profitability. There [are] more people, more opportunities for business.”

Little Rock is a particular sticking point for Williams, who grew up in the city. He was adopted at two weeks old; his father was a minister who died when he was nine, and his mother was a teacher who started out under segregation and ended up teaching at some of the first racially integrated schools in the country.

“Like most folks in Little Rock, I was not aware of Southern Bancorp because we don’t have any branches here,” says Williams. He later got to know the bank as a state legislator and attorney who worked on class-action lawsuits against predatory financial institutions. While a three-term state legislator (the term limit at the time), his district included areas of Little Rock that were underserved by conventional financial institutions and flooded with predatory institutions, including some that victimized Williams’ mother.

“There’s a swath of Little Rock that is completely underserved,” says Williams. “I could drive you down the 12th Street Corridor, which is just five blocks from where my office sits today, and over the span of two miles I could show you where three or four banks used to be, but they’re no longer there. A largely minority community, banks used to be there, but they’ve exited. Homeownership has declined … we’re actively looking for a place to be in that community.”

 

Worker Cooperatives Are Finding Investors Who Share Their Values

Members of the roasting, production and QC teams at Equal Exchange's roasting facility in West Bridgewater, Massachusetts. (Credit: Equal Exchange via Facebook)

You may know Equal Exchange by the food company’s signature bright red logo on its coffee, tea, or chocolate bars. You may know they sell only certified fair-trade products, ensuring just compensation paid to farmers and their workers in countries all over the world. You may even know the company currently earns around $70 million a year in revenues, and has around 150 employees. But did you also know the company is a worker cooperative?

In the 1980s, Equal Exchange’s three co-founders were working in the food industry, but not enthusiastic about the conventional business models they found across the sector, which were based primarily on a “race to the bottom,” cutting costs wherever possible to increase shareholder profits. That usually meant companies paid the bare minimum to workers along the global supply chain — farmers, truck and forklift drivers, packaging machine operators, coffee roaster operators, warehouse staff and others. Equal Exchange’s co-founders came together to form the company in the late 1980s, setting out to prove a point: that you could be a successful, even a profitable company and not treat your workers, suppliers, and other stakeholders like cogs in the money-making machine. You could pay everyone fairly, even give workers ownership and control of the company, and have cash left over to repay investors.

Being a worker cooperative means every worker has an equal say and an equal ownership share in the company. It doesn’t mean every worker has to vote on every day-to-day decision within the business. But on major decisions, this structure helps to guard against making drastic changes such as sacrificing wages and benefits for the sake of profits or shutting down their existing roasting facility and moving it hundreds or thousands of miles away.

For those and other reasons, a growing number of cities from New York City to Cleveland to Rochester to Madison have been exploring worker cooperatives; the goal is to create jobs with better pay and benefits and to support companies that won’t threaten to shift those jobs to other countries or even other parts of the United States.

But access to capital remains a major barrier for most worker cooperatives to achieve their potential to grow and scale to the point where they can influence others in their cities and sectors to change practices and possibly incorporate as or convert to worker cooperative ownership structures. Equal Exchange is one of the few worker cooperatives that has raised a significant amount of capital from investors. They have moved beyond setting an example for how to court investors as a worker cooperative; they’ve directly supported other worker cooperatives to learn how to raise capital and have even connected others to their established network of around 600 investors.

At Equal Exchange’s headquarters, just outside the city of Brockton, Massachusetts — home to office supplier W.B. Mason, and boxers Rocky Marciano and “Marvelous” Marvin Hagler — you’ll find forklift drivers, packing machines and operators, coffee roasters, coffee tasters, and office staff. You may also find Daniel Fireside, who, as capital coordinator, manages the company’s investor relationships.

“I have to explain what my job is a lot, even inside the company,” says Fireside. “When I was hired, I was told different people who’ve had the job [before me] have had different titles, like director of investor relations. I decided to keep capital coordinator, because I think it’s more reflective of what the job is, and [the title is] unusual enough that it often starts a conversation.”

Since the company’s founding, Equal Exchange has raised more than $16 million in capital from outside investors, about half of that since hiring Fireside in 2010. Coming from the cooperative world, he had to learn the investment world. In some ways, managing and cultivating investor relationships for a worker cooperative is the same as doing so for a conventional business — for example, frequent travel to places where current or likely investors are likely to gather; it’s why Fireside spends so much of his working life out of the office.

While the company isn’t publicly traded on the stock market, it does utilize a legal framework under U.S. securities laws (known as the 506 exemption of Regulation D of the Securities and Exchange Act) to sell ownership shares to investors during occasional periods known as private offerings. Unlike standard ownership shares, however, these shares don’t come with any rights to vote or otherwise exert control over the business.

When Equal Exchange decides to have an offering, it’s Fireside’s role to make sure investors are in place, ready to sign checks as soon as possible. You can’t just call someone who expressed interest five years ago and hope they’re in position to make an investment.

“A lot of it is networking,” says Fireside. “I’m selling our stock even when we don’t have an offering. My job is to make sure the capital is available. Whatever plans management has, I don’t want access to affordable capital to be an obstacle.”

The last time Equal Exchange made an offering to investors was a one-year period from 2014 into 2015, and the company raised $4.1 million. It was Equal Exchange’s largest offering ever, and to date remains the largest private offering by any worker cooperative in the United States.

Fireside doesn’t do this all by himself. It’s not only logistically infeasible — investors hail from 36 states plus the District of Columbia — but the legal costs associated with a company marketing directly to most investors would be exorbitant. Instead, Fireside works with partners to raise the capital, partners such Andy Loving, a Louisville, Kentucky-based financial advisor with Natural Investments LLC. When Fireside has an offering for investors, he calls up Loving and a few other financial advisors at Natural Investments and other firms, and gives them each a target dollar amount to raise. Natural Investments doesn’t charge Equal Exchange a penny for the service it provides.

“I’ve been doing this for 25 years now,” says Loving. “I’m an old social activist mostly among more progressive church folk. I tell people when I was a little bit younger I tried to create social change by organizing people, and I decided I’d give a try to organize money.”

Loving’s clients are the people with money to invest. They come from a variety of backgrounds, he says, including folks who have worked in government for many years. Some have inherited money, some are fellow social activists, environmentalists, lawyers, even social workers. His clients aren’t the super-wealthy; most hover between $1 million and $2 million in net worth, and they come from 25 states and counting.

(Credit: Equal Exchange via Facebook)

A net-worth of $1 million is an important threshold under the Securities and Exchange Act. Unlike with the stock market, in a private offering, the law says companies can only sell shares to up to 35 investors who have a net-worth less than $1 million. But companies can sell shares to an unlimited number of investors with a net-worth of at least $1 million. It’s a measure meant to protect less wealthy investors from being scammed, although some — including Fireside — believe it’s worth exploring meaningful ways to expand that unlimited pool to include less wealthy investors.

What ties all of them together, what brings clients to Loving and financial advisory firms such as Natural Investments in the first place, is the desire to invest in ways that link some type of social returns — creating living wage jobs, advancing clean energy and investing in historically under-invested communities — to financial returns.

Twenty-five years ago, when Loving first got into financial advising, he worked with a few investors who only cared about maximizing financial return. (“Because I wanted to do things like eat,” he says.) Nowadays, he has more than enough clients to keep him busy (and fed) by investing only in opportunities such as Equal Exchange.

Instead of charging companies like Equal Exchange for raising capital, Loving’s clients pay Natural Investments an annual fee equal to one percent of the assets that fall under the firm’s management. The firm currently has around $500 million in assets under management. Of that, around $90 million comes from Loving’s clients. Loving says around 70 of those clients have invested in Equal Exchange. Other Natural Investments advisors also have clients invested in Equal Exchange.

“As a financial advisor, my fiduciary responsibility is first to my clients,” Loving explains. That means meeting his clients’ financial expectations, which includes not losing any money; but as with most investors, Loving’s clients want to at least beat inflation and grow the value of their assets over time, for the sake of retirement or passing along wealth to the next generation. Beyond that, Loving’s clients aren’t as interested in how fast their assets grow as they are in the social returns of those investments, a philosophy that makes sense from Equal Exchange’s perspective.

“One of the things Equal Exchange always wanted, and why they wanted to work with us, was they wanted values-aligned investors,” says Loving. “They were looking for folks who understood fair trade, who understood worker ownership.

To be as sure as he can about values-alignment with investors, Fireside has a conversation with each potential investor before taking their money. Besides alignment with fair-trade and worker cooperative ideals and philosophies, Fireside checks the investor’s long-term perspective. Equal Exchange’s outside investors must hold on to their shares for a minimum of five years, and can only sell shares back to the company.

“I tell people I can’t guarantee you’ll make a financial return, I can’t guarantee you won’t lose it, but I can guarantee you’ll feel good either way, because we’re doing the right thing,” says Fireside. “That message, after the financial crisis, suddenly meant a lot more to a growing number of people.”

Fireside may sound modest, but the reality is that Equal Exchange has paid an annual dividend to investors for 28 straight years and counting, even during the Great Recession. And during Loving’s tenure selling Equal Exchange shares to outside investors, he’s seen only a tiny handful cash out.

“I’ve spoken to some of our long-time investors who’ve said they thought Equal Exchange was their crazy pseudo-charity, but [then] the financial crisis hit and their 401k’s fell by half in value, while [Equal Exchange] kept paying positive returns, because the business was moving along and it was all based on reality,” Fireside says.

It helps that Equal Exchange shares, while not “tradeable” in the stock market sense, never go down in value. The share values don’t go up, either — each investors’ share price stays fixed at whatever their investment was during the offering. In lieu of going up in value, the company promises to pay an annual dividend between 1 and 8 percent of the value of each investor’s investment every year. So far, over the past 28 years, annual dividend payments have been between 3 and 8 percent, and the company sets 5 percent as an annual target dividend payment for each year.

Those returns don’t attract investors in droves. But in his time as capital coordinator, Fireside says he has had to turn away investors from multiple offerings, or in some cases he has capped the amount a single investor could purchase to make room for other, usually smaller investors. More recently, Fireside has referred other worker cooperatives to Loving and other financial advisors in order to raise capital, co-ops such as Boston’s CERO or Denver’s Namasté Solar (where Fireside is a board member). Namasté Solar, which provides residential and commercial solar installations in Colorado, California, and New York, raised $3.1 million in its second private offering, which concluded at the end of 2016.

“We think the way we do business is great, and we think more people should be doing it,” says Fireside. “We don’t want to be the cool outlier.”

One key limitation: while Fireside and Loving have yet to reach the limits of how much capital investors are willing to move to outfits like Equal Exchange or CERO or Namasté Solar, Loving says he doesn’t feel these investors are the best for startups. It’s too risky for investors who, although they have some flexibility with their wealth, aren’t in a position to invest at the earliest stage of a business, worker cooperative or not. Even in conventional investing, Loving points out, the vast majority of startups fail.

“We really feel like our folks can’t lose all their money in a deal,” Loving says. “Cities and governmental bodies are some of the people that need to help get [more worker cooperatives] off the ground and [give them] technical assistance to get them to work [so they can] establish a track record.”

 

Moving Community Foundation Dollars from Wall Street to Main Street

On an average day at Self-Help Federal Credit Union’s branch in Fresno, Calif., ten or so people come in to sign up as new members, and around 20 people submit applications for home mortgages, car loans, small business loans or personal emergency loans (for as little as $500). Since opening in August 2015, this one branch has made more than 1,000 loans and counting. But these aren’t just any borrowers. At this branch, 70 percent of borrowers come from low-income households, and 91 percent are people of color.

Branch Manager Rosa Pereirra has witnessed those borrowers reclaim power over their financial lives in ways that still surprise her, even after 28 years in banking.

“Some of the folks coming in making $12.50 an hour, they’ve got $15,000 in their savings account,” says Pereirra. “I make a good living, but I don’t have $15,000 in my savings account.”

These borrowers and this branch are the exceptions and not, unfortunately, the rule. In the state of California alone, payday lenders make billions of dollars in payday loans per year, earning hundreds of millions in interest and fees — all largely targeted at low-income households and communities of color.

California-licensed payday lenders earned $458.5 million in fees on payday loans in 2016, according to the latest annual report from the state’s Department of Business Oversight. Nearly 75 percent of those earnings, $343 million, came from customers who took out seven or more payday loans. Some 77 percent of payday loan borrowers in California earn less than $40,000 a year — and payday lenders are more likely to set up shop in predominantly black or Latino neighborhoods, according to a separate study from the same department.

Self-Help’s Fresno branch, in the overwhelmingly Latino southeast part of the city, was the Federal Credit Union’s first “de novo” (the banking term for new) branch in the state. (Self-Help, based in North Carolina, had earlier merged with several other struggling credit unions in California.) Pereirra leaped at the chance to take on a leadership role at Self-Help, a financial institution created in 1980 to serve the underserved. She had 28 years of experience in community banking and credit unions in Fresno, as well as ten years of experience serving on the board of directors of a local food bank.

“Not to put other banks down,” she says, “But for the first time in my career, I really feel like I’m helping people.”

Pereirra realizes that other banks are still an important part of her work today, at a credit union branch that’s not yet three years old. As nonprofit organizations, credit unions can’t raise capital from traditional investors, so one of the biggest early sources of cash for a new credit union branch are other, larger banks and credit unions. Central Valley Community Bank, Fresno First Bank, and Educational Employees Credit Union (where Pereirra used to work) all have deposits at Pereirra’s branch. “They understand we’re not in competition for the same people,” says Pereirra.

Those big early deposits provide a source of cash to begin making loans, a necessary step for the branch to generate income. It’s especially important to get deposits from outside of your core market when your core market consists of underserved, low-income households and entrepreneurs who don’t have large deposits to start with.

Self-Help Federal Credit Union Branch Manager Rosa Pereirra. (Credit: Self-Help Federal Credit Union)

So imagine Pereirra’s excitement last October, when, after a few months of conversations and standard financial due diligence, the Fresno-based Central Valley Community Foundation announced it was depositing $2.6 million into Self-Help Federal Credit Union’s Fresno branch, instantly making the community foundation the branch’s largest single depositor and growing the branch’s deposit base from $9.7 million to $12.3 million. Pereirra describes the $2.6 million as the equivalent to 20 home mortgages or 175 car loans. Since October, her branch has already made another $2.6 million in loans across its portfolio, she says.

Central Valley Community Foundation’s deposit is just one example of a growing trend, where community foundations venture beyond grantmaking to realize the difference they can make by moving the cash in their coffers out of Wall Street and into investments that support the same communities that give these foundations their names — and their dollars.

“This deposit, it’s not just going to help people now, it’s going to help people for years to come,” says Pereirra. “In families that I’ve touched, you have generations of non-homeownership, then all of a sudden you have one person buy a house, and it seems that the rest of the family starts to buy a home. It happens a lot in our low-income families. Once they buy a house, it makes a ripple effect with the rest of the family members.”

Keep Investment Dollars Close to Home

As of 2017, community foundations across the United States held more than $91 billion in assets, according to the latest available data from the Foundation Center, which surveys and monitors public, private and community foundations. That same year, community foundations took in another $9.7 billion, and gave out $8.3 billion in grants. It’s not uncommon for community foundation assets to grow every year.

Community foundations bring in money from a variety of different sources. Some of it comes from galas, celebrity golf outings or other fundraising events. Some comes from corporate giving programs, when companies match employee donations. Some gets bequeathed in a person’s last will and testament. And about a quarter of community foundation assets comes in the form of donor-advised funds.

Donor-advised funds are a financial instrument for people who want to take advantage of the charitable deduction on their federal income taxes, but don’t necessarily have the time to pick a specific charity to receive those funds. If you put the money you earmarked for donation in a DAF, you can take the charitable deduction on your federal income taxes for that year. Then at a later date, you can direct that donation to the charity or charities of your choice. Some people just give instructions to their donor-advised fund manager, such as “give my money away to arts and music education” or “give out grants to help beautify parks.” Some just let the fund manager decide what to do with it.

Donor-advised funds have become increasingly popular by themselves, and community foundations aren’t the only ones offering donor-advised funds as a service to those who can afford them. In 2016, the Chronicle of Philanthropy reported that Fidelity Charitable Gift Fund, a donor-advised fund managed by Fidelity Investments, knocked off United Way as the largest annual recipient of philanthropic donations.

As of 2016, donor-advised funds held $85.15 billion in assets, growing ten percent from the year before, according to the National Philanthropic Trust’s annual donor-advised fund market report. There were 284,965 donor-advised funds as of that year, up 6.9 percent from the year before. Also in 2016, $23.27 billion went into donor-advised funds, and $15.75 billion was granted out from donor-advised funds.

But where do the dollars go in between being gifted to a community foundation and being granted out later? The short answer is Wall Street, to big investment houses whose responsibility is to maximize the financial return on those assets, even though the owners of those assets can’t take them back without paying a penalty and taxes on those funds. In maximizing the financial return, donor-advised fund clients should later have more funds to give away. As Fidelity Charitable’s website reads: “Your donation is also invested based on your preferences, so it has the potential to grow, tax-free, while you’re deciding which charities to support.”

Some community foundation money does end up in community banks — in addition to the deposit it made into Self-Help Federal Credit Union, Central Valley Community Foundation also maintains its operating account at Central Valley Community Bank. But as with other community foundations, the bulk of Central Valley Community Foundation’s assets are managed by more traditional investment houses that invest those funds in stocks, bonds and other assets around the world.

All across the country, however, there’s been an uptick in the number of community foundations that are moving money out of big investment houses and into more local investment options.

As Next City reported previously, the Chicago Community Trust created the “Benefit Chicago” fund to pool its assets (including those from donor-advised funds) with assets from the MacArthur Foundation and invest that pool, totaling $100 million, into projects that benefit low- and moderate-income communities in and around Chicago.

In Grand Rapids, the city with the largest wealth inequality in Michigan, the Grand Rapids Community Foundation provided a $200,000 loan to a new loan fund that focuses on entrepreneurs who have been excluded from small business lending because of their income, net worth and other factors that often align with racial disparities.

In the Washington, D.C. metropolitan area, the Washington Regional Association of Grantmakers partnered with Enterprise Community Loan Fund to create the “Our Region, Your Investment” initiative, which provides loans to support tenants in purchasing their own affordable buildings in D.C., preventing those buildings from being sold to market-rate developers, most likely leading to displacement.

Credit: National Philanthropic Trust 2017 Donor-Advised Fund Report

In Philadelphia, earlier this year, The Philadelphia Foundation partnered with Reinvestment Fund to create the PhilaImpact Fund, a commitment to invest $30 million in community foundation assets into neighborhood development projects that support regional growth and local initiatives benefiting low- and moderate-income households throughout Greater Philadelphia.

“We have had donors come to us saying they wished there were more opportunities for this,” says Mark Froehlich, chief financial officer at The Philadelphia Foundation. “Foundations hold so many assets that have yet to be tapped for this type of work.”

Make the Laws Work for You, over Time

People often give money to and through community foundations because they love the places they call home, and community foundations have oriented their entire operations around that premise.

“As a community foundation, we’re inherently place-based in our mission,” says Froehlich. “We put so much effort into making sure we’re spending those grant dollars well, that we’re supporting the region, making strategic decisions, but we understand there is so much more we can do with [the rest] that’s invested.”

But as much sense as it makes for community foundations to invest more of their assets into the communities after which they’re named, it’s not so simple in practice. The laws, regulations and informal customs governing community foundations are similar to those found in private foundations established by wealthy families or university endowments. Those laws, regulations and customs all typically require that the entity managing the philanthropic assets invest those assets responsibly, with a focus on optimizing financial return. It’s a concept known in shorthand as “fiduciary responsibility;” the idea is that following these protocols maximizes the amount that can be disbursed in grants every year.

The board of directors at each foundation has the final say when it comes to fiduciary responsibility. “We still have a fiduciary responsibility, so it was a board conversation and a board decision to open the account [at Self-Help Federal Credit Union] and make it available for the purposes that it’s available for,” says Elliott Balch, chief operating officer at Central Valley Community Foundation.

Time has been a key factor in moving more community foundation assets into more place-based investments. Time to educate board members and encourage them to learn about the potential to use both the grantmaking and investment sides of the community foundation to make a difference. And, even more crucially, time for entities like Self-Help Federal Credit Union or Reinvestment Fund to reach a point in their own life cycles that they’re positioned to pass the “smell test” of a community foundation board looking to judge the safety of its investment.

If you went back to 1980, when Self-Help was founded in North Carolina, many fewer organizations had committed to the specific mission to invest in historically marginalized communities. Those that did were generally very tiny — a credit union here, a community bank there. Reinvestment Fund wasn’t even founded until 1985, originally known as the Delaware Valley Community Reinvestment Fund.

Organizations like Self-Help or Reinvestment Fund would start to make real headway in the mid-1990s, thanks to a few key policy changes. One was the 1994 creation of the Community Development Financial Institutions Fund, or CDFI Fund, an arm of the U.S. Treasury that provides grants and other financial support to federally-certified community development financial institutions (CDFIs). One of the requirements for federal CDFI certification is that the entity, whether a bank, credit union, loan fund or venture fund, must have 60 percent of its lending, investments and other business in low-to-moderate income census tracts. Self-Help and Reinvestment Fund became two of the first federally-certified CDFIs.

Another key policy tweak was the new rules under the Community Reinvestment Act, put in place in 1995. The new rules emphasized that banks could meet their obligations under the Act by investing in or lending to federally-certified CDFIs.

With the CDFI Fund and the new Community Reinvestment Rules in place, federally-certified CDFIs started gaining traction all around the country. There are more than a thousand of them today, in all fifty states plus Puerto Rico and American Samoa. More importantly, some CDFIs, like Self-Help and Reinvestment Fund, started to grow larger. Bigger balance sheets and long-term track records of success are key to securing an investment commitment from a community foundation board.

Today, Reinvestment Fund has around $465 million in assets, having loaned or invested over $2 billion cumulatively since 1985. While it’s now financing projects all over the country, Reinvestment Fund remains committed to its home city: out of $203 million in new loans made in 2017, $62 million went to projects in and around Philadelphia. On top of all that, Reinvestment Fund is one of six CDFIs with a rating from S&P — the same ratings agency that Wall Street investors use to assess the risk of investing in corporations or state and local bonds. With an “AA” rating, Reinvestment Fund is rated as a safer investment than bonds issued by the states of Illinois, West Virginia, Pennsylvania, Michigan, Kansas, Connecticut, California, New Jersey or Kentucky.

Reinvestment Fund became one of the first CDFIs to use that rating to raise money Wall-Street style, going through a successful $50-million bond issuance last year, raising capital from mutual funds and pension funds the way corporations do.

“I’ve spoken with other chief financial officers, who have said it can be difficult to get approval for an investment fund like this,” says Froehlich. “Reinvestment Fund made my job easy, being so good at what they do, having that rating, having done a public bond issuance.”

Self-Help Credit Union in North Carolina and Self-Help Federal Credit Union (which has branches in California, Illinois, Wisconsin and Florida) hold more than $2.5 billion in assets combined. Self-Help has never lost a single dollar of any depositor since it was founded in 1980. Being a credit union also means being a regulated financial institution — the National Credit Union Administration (NCUA) regulates credit unions across the United States. In the same way the Federal Deposit Insurance Corporation (FDIC) safeguards banks, the National Credit Union Administration insures credit union depositors up to $250,000. In order to protect itself from having to pay out too much in insurance claims, the NCUA closely watches credit union bottom lines, seeking to prevent failure; the FDIC follows a similar protocol.

Given this backdrop, it was relatively easy for Central Valley Community Foundation to move some assets into a money-market account at the Fresno branch of Self-Help Federal Credit Union. The first $2.6 million was the easiest — that money came from donors who aren’t as concerned with growing their philanthropic assets over time through investing. Now that the community foundation has an established Self-Help money-market account, they can offer new donors the opportunity to have funds deposited into that account before granting them out later, and they can approach existing donors to see if they’d be interested in transferring previously donated dollars into the account.

“It was not a difficult conversation with the board,” says Balch. “For us, this is part of a range of investment options we offer our donors. From that perspective as a board member it’s not difficult as long as we are disclosing information, being transparent about providing options.”

Pitch the Mission to Investors

Even with a track record of success over time, it’s not automatic that place-based foundations will suddenly start pouring money into mission-driven financial institutions with a focus on place-based investments. It has also taken resources — people, to be specific.

Every year, in places like San Francisco’s Fort Mason Center for Arts & Culture or big hotels in Chicago or New York, people with an interest in using finance and investing to address social issues — often calling themselves impact investors — gather to discuss their latest projects and pat each other on the back for a job well-done. Over the past two years, one of the regular faces at these conference halls and cocktail hours has been Annie McShiras, who also works at Self-Help Federal Credit Union.

The credit union hired McShiras to work the crowd at these conferences and cocktail parties, securing investments for their money market account or certificate of deposits. At times, it’s a frustrating job; most self-proclaimed impact investors gravitate to newer, sexier-sounding ventures such as a more efficient solar panel or an easier way to purify drinking water. But McShiras has found traction among a subset of those who come to these conferences and cocktail hours — community foundations.

“More and more we’re seeing community foundations pay attention to the ways that their investments are having an impact on the communities where they work,” says McShiras. “We’re seeing a shift in terms of those foundations wanting to align their investments with their values, and start making more impact investments or socially responsible investments with money that would normally be utilized for market-based investments.”

Just last year, in addition to the Central Valley Community Foundation’s $2.6-million deposit, McShiras scored an $8-million deposit for Self-Help from the Silicon Valley Community Foundation, the largest community foundation in the United States (which currently faces its own #MeToo revelations).

Generally, McShiras begins conversations with community foundations that may already support the credit union’s free tax-preparation services, or its financial coaching and financial empowerment programs. Foundation grants may also support zero-interest loans for renewing DACA work/education permits, which cost $495; or for subsidizing naturalization fees, which, according to Pereirra, currently run around $1,000. Community foundations may already support downpayment assistance for homes, directly or indirectly connected to the credit union.

McShiras describes her approach this way. “Often [we] say, ‘we’re so happy to be working with you on the grant side of things, I want to draw your attention as well to this program we have called Mission-Supportive Deposits, where you can support the work that we do and make a good return on your cash savings by investing in our credit union through one of our cash investment options.’”

For foundations in the same community as one of the branches they invest with, such as the Central Valley or Silicon Valley Community Foundations, it’s easy to become a member organization and open up a deposit account. For those not based in a community where there’s a branch, it’s a bit more complicated.

“Also, because we’re a credit union, a member-owned financial institution, and we’re not paying outside shareholders, we actually pay a pretty decent return on our savings products that often beat out what some of those same investors are getting from big banks on long-term certificates of deposit or money-market accounts,” McShiras adds.

For bigger deposits that go well beyond the $250,000 deposit insurance limit, one key learning experience has been to understand the questions that community foundation boards may have about the relative risk of making a deposit larger than the insured amount.

As McShiras notes, being a regulated financial institution means being a safer investment than almost any stock or bond — just because they focus on the most vulnerable populations doesn’t mean they’re taking irresponsible chances, like a subprime mortgage lender. For 38 years, Fresno’s Self-Help branch has focused on how to make responsible loans to low- and moderate-income borrowers. The credit union’s delinquency rate, or the percentage of loans that are late or behind on payments, is just 0.86 percent, McShiras says. Other impressive numbers include the $2.5 billion in assets and 130,000 members across five states on both coasts and the Midwest.

“All of these reasons have helped make the case for investors like Central Valley Community Foundation to feel assured they’re making a safe investment above our insurance limit,” says McShiras.

Her job, while still frustrating at times, is getting easier. “Initially it was a series of questions we were getting from investors about what our risk profile is,” says McShiras. “Now, I make a proactive case.”

Focus on What Matters

A while back, Balch tells me, a Fresno merchant left Central Valley Community Foundation a few hundred thousand dollars in cash after he died.

“He was a big parks advocate when he was alive,” Balch says.

That money has turned into dollars to rally voters around a local ballot measure, scheduled for later this year, to increase funding for parks in Fresno through a sales tax.

“It’s a few hundred thousand dollars we’re putting in, but we’re hoping over 30 years that it becomes a billion dollars of investment in the fabric of our community — parks, art, trails, after-school programs,” Balch says. “Where before we were making grants of five or ten thousand dollars for parks programs and music programs, we’re trying to turn that into a return thousands of times over.”

The foundation’s Self-Help investment fits right into that vision, according to Balch. The loans that Self-Help makes — for a family’s first home, or for a car that gets a parent to a better job to pay the mortgage — help to ensure that the people who will vote for that ballot initiative can actually benefit from the parks it would help build, as would subsequent generations of their families.

“What Self-Help is doing is providing maybe a family’s first access to decent credit for a reasonable home loan or car loan that’s not usurious,” Balch says. “And that home, when they’re not worried about having to move, that [becomes] a base of stability for that family’s kids, that’s going to take the parents’ minds off where are we going to live next week and put it on how do I read to my kid and make sure they’re getting their homework done. The kid can focus on getting some homework done. When we’re thinking about one generation to the next, those are the key moments.”

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our monthly Bottom Line newsletter. The Bottom Line is made possible with support from Citi Community Development.

Our features are made possible with generous support from The Ford Foundation.

 

Startups Founded by Black Women Gaining Momentum Among Investors

The headquarters of Uncharted Power, in Harlem, a few blocks from a former residence of the late Maya Angelou. (Photo by Oscar Perry Abello)

When Uncharted Power founder Jessica O. Matthews delivered a pitch to venture capital investors in the fall of 2015, she did it in costume — her company happened to be celebrating Halloween the day a friend brought by some venture capital investors, unannounced.

“I was not concerned, being dressed as Serena Williams, who is everything,” Matthews told Next City. “Can’t say the same for other members of the team.”

Whether or not the costume had anything to do with it, Matthews did end up raising $7 million in venture capital, putting her Harlem-based company on the path to developing products that generate power from being walked upon, driven upon, kicked or pushed around — so far.

A new report reveals that black women founders like Matthews are indeed on the rise when it comes to venture capital investment, though there is still very far to go for venture capital investment in the United States to reflect the country’s true diversity. Released yesterday, ProjectDiane 2018: The State of Black Women Founders is the second biennial report providing a snapshot of the state of black women founders and the startups they lead in the United States.

According to ProjectDiane 2018, the amount raised by black women founders increased 500 percent, from $50 million in 2016 to $250 million in 2017. Still, Black women raised only 0.0006 percent of all tech venture funding since 2009, the report found. Despite the number of startups founded by black women more than doubling since 2016, a majority of startups founded by black women still have not recieved any venture capital funding, according to the report.

To produce the ProjectDiane 2018 report, the research firm digitalundivided reviewed over 8,000 U.S.-based startups and companies located in the Crunchbase, Pitchbook and Mattermark databases as well as updated data from the ProjectDiane2016 database. The firm also reached out to organizations working with black and Latinx entrepreneurs and startups, and employed an online survey to collect additional data. Funding for the report came from JPMorgan Chase, the Case Foundation, and the Ewing Marion Kauffman Foundation.

Covering the years 2015-2017, the ProjectDiane 2018 report encompasses a period when more black-led venture capital firms have come into existence and into the headlines.

John Henry, who sold his on-demand laundry startup and founded Harlem tech accelerator Cofound Harlem, went on to co-found Harlem Capital Partners in 2015, which has promised to invest in 1,000 ventures led by people of color over 20 years.

Arlan Hamilton founded Backstage Capital also in 2015, raising $5 million in capital to invest in female, minority, and LGBTQ entrepreneurs. She made headlines again earlier this year, announcing a $36 million fund to invest exclusively in startups founded by other black women, TechCrunch reported.

Increasing diversity in tech and other popular venture-backed sectors (such as food) isn’t merely a charity case for investors. There’s an economic case to be made, as well.

“[Hamilton] gets access to entrepreneurs that your typical [Silicon] Valley investor might not,” says Lars Rasmussen, an angel investor and veteran of Google and Facebook who invested in Backstage Capital’s first $5 million fund, told Inc. Magazine. “It’s almost like using an unfair advantage by knowing Arlan and using her connections into an area that is overlooked, and wrongly overlooked.”

 

Chester Artists Revitalizing Corridor On Their Own Terms

In a maker space with hand tools and power tools neatly sorted and hanging on the walls, opposite a row of work tables covered in sawdust and dreams, Devon Walls tells me about growing up right here, in Chester, Pa.

“I come from an artist family,” says Walls. “I grew up with our living room being our theater, our stage, the place where we painted and built stuff, block parties where kids had to make the games, painting, building, and sculpting. Art was just a part of it, part of everything.”

Tiny Chester, population 34,000-ish, is technically the oldest city in Pennsylvania, established by Swedish colonizers on Lenape land in 1644. William Penn himself, namesake founder of Pennsylvania, wouldn’t arrive in the area until 1682, shortly afterward establishing the city of Philadelphia, a few miles upstream on the Delaware River.

Chester would peak in the 1950s, when the city served as a hub for shipbuilding and car manufacturing, home to some 66,000 residents. Then, as now, Chester has been between 75 and 80 percent black. While still small in the 1950s, it was enough to support a thriving arts community, led by William Dandridge, called “the Father of Arts and Culture in the City of Chester,” upon his passing in 2014. Walls remembers Dandridge as Uncle Bill.

“My uncle’s vision was to create a cultural arts corridor, right here,” says Walls. “He was an activist as well. He once got arrested right here on this block during the civil rights era, fighting for equality. The stuff that he wanted to get finished, he had other fights he had to fight first.”

Slowly, under-the-radar — like the city that he still calls home — Walls has spent the last decade or so bringing that vision to life on a stretch of Chester’s Avenue of the States, a once mostly vacant corridor, save for a few discount retail and drug stores (the kind that sold drugs that were 20 years old, Walls says).

Walls has been methodically acquiring ownership interests in a growing number of properties along the corridor, including the MJ Freed Performing Arts Theater with an attached dance studio, an art gallery, a coffee shop, and the maker space. And he’s been recruiting local entrepreneurs to fill storefronts in other buildings with tenants who reflect not only his uncle’s vision, but also the vision of a group of contemporary Chester artists who have stuck it out over years, remaining steadfast in their commitment to Chester and to working with each other as an informal collective.

“We don’t always agree right away on how to do things,” says Walls. “Some folks want to put in hookah lounges, but we’re not playing that. It’s a fight we’re willing to fight because having kids do workshops here, the last thing we want is kids looking across the street and people are smoking pipes. It kinda contradicts the healthy lifestyle we’re also trying to promote.”

The careful curation of those with whom they choose to do business goes beyond who the group has invited onto the corridor. With Walls at the helm, the group has also carefully curated the investors from whom they have accepted capital.

“Our thing, my thing will forever be local ownership,” Walls says. “So when you start putting too much out there and you get too many people in it, the ownership leaves from being local, from the artists. I wanted to make sure we kept local ownership at the forefront of what was going on.”

So far, the select few investors that have made it past Walls’ gatekeeping happen to all be small private foundations, all three so far with strong ties to the Philadelphia region. Their investments — equity or loans, not grants — have helped Walls and the artists secure and begin making improvements to some of the properties, including the MJ Freed theater as well as a formerly blighted 40,000 square-foot warehouse that will soon be renovated into studios, offices and convening space for 20 Chester artists.

“There’s been [other investors] that I turned down, I cursed out, I kicked out the door. It’s been a lot of people,” says Walls. “I like the group that we’ve worked with so far. They made me feel comfortable enough … We’re like family.”

The MJ Freed Performing Arts Theater. (Photo by Oscar Perry Abello)

Stepping into a vacuum

Foundations making loans or other investments for charitable purposes isn’t new. The Ford Foundation was the first to use loans and other types of investments for charitable purposes, making the first of what it called “program-related investments” in 1968. The following year, the Tax Reform Act of 1969 included a tweak to the U.S. Tax Code recognizing program-related investments as part of the five percent of the value of a foundation’s assets that each private foundation must disburse for charitable purposes every year in order to remain tax-exempt as a foundation.

Large, well-endowed foundations would eventually follow suit with program-related investments, including the W.K. Kellogg Foundation, the John D. and Catherine T. MacArthur Foundation, Bill & Melinda Gates Foundation, the Rockefeller Foundation, the Kresge Foundation, among others. (The Ford and Kresge Foundations provide grant funding to Next City.)

From their very beginning at Ford Foundation in 1968, program-related investments from foundations have helped finance affordable housing, small business lending for women- and minority-owned businesses, conservation or parks development, and other purposes under the various and shifting program areas of large foundations. For decades, only larger foundations could afford the lawyers, accountants and other professionals required to properly assess the financial soundness (not to mention potential impact) of potential program-related investments. Because of those constraints, by 2003, only 134 out of 66,000-plus foundations made any program-related investments in that year.

But something intriguing has happened in the foundation world. As the broader U.S. financial system has become more and more concentrated over time, foundations have become less concentrated, at least at the aggregate level of analysis. In 2003, there were just over 66,000 foundations existed in the U.S. holding nearly $477 billion in assets; in 2014, the most recent year available from The Foundation Center, there were more than 86,000 foundations, holding $865 billion in assets. By contrast, the U.S. had more than 14,000 banks in the mid-1980s, but has only around 5,000 banks today.

As Next City has previously reported, the smaller foundations are now getting into program-related investing. These are the kinds of small foundations that have historically been focused on grantmaking for after-school school programs, museums, higher education, medical research, or human services like food pantries or domestic violence survivor counseling. sSmaller foundations are getting into the lending and investing game, especially when it comes to place-based investments, like Chester’s arts corridor revitalization.

The story of Devon Walls and Chester’s artist-led revitalization illustrates how smaller foundations, both new and old, might be ideally positioned to step into the vacuum left behind by a financial system that has become ever more distant from people and places like Chester’s artist community. They might even be able to build a new bridge between the two.

Becoming the Wing Man

Chuck Lacy is president of the Barred Rock Fund, a small private foundation he co-founded in 2001, along with Judy Wicks and Ben Cohen (of Ben & Jerry’s fame — Lacy was formerly chief operating officer of the ice cream company under Cohen). Wicks, founder of the Business Alliance for Local Living Economies, is a local Philly-area icon, as the founder of White Dog Café, the restaurant that birthed the modern day local foods movement. Instead of making grants, Barred Rock Fund uses program-related investing to operate more like a venture capital fund, making investments in ventures intended to create jobs and opportunity in historically under-invested places.

In 2015, flush with cash after Lacy sold off some previous assets, Barred Rock Fund was looking to make its next investment. “Judy and I were out exploring and looking for something to do in the Philadelphia area,” Lacy says.

They cast a wide net, Lacy says. In the fall of 2015, Wicks and Lacy made a stop at Widener University, in Chester, where Walls was doing an artist residency, supported by the Pennsylvania Humanities Council. “We went to the Small Business Administration program at Widener, to see if they had any ideas, and when we showed up we discovered we were expected to give a talk,” says Lacy. “Devon was there, and he invited us to come downtown.”

Downtown they went, to the Avenue of the States corridor, where Walls had already spent years quietly setting up lease-to-purchase agreements with longtime property owners along the street. He’d been funding the agreements mostly out of his own earnings from selling artwork, doing set design and construction all over the country, and the small amount of overhead available from grants received to do arts programming and creative placemaking work like Chester Made — also funded by the Pennsylvania Humanities Council.

On that first trip to the Avenue of the States, Lacy noticed a poster on the MJ Freed Theater for a children’s Halloween party the following Saturday.

“I went back, without telling Devon I was coming,” says Lacy. “It was supposed to start at six o’clock. I got there at 5:30 and it seemed like nothing was going on. At six o’clock, the grate came up, and all of a sudden families started showing up and kids started going in. I went in and there was all this theater smoke, kids painting pumpkins, and Devon and his friends put on a children’s play. It was just fantastic. That’s when I got hooked. I wanted to see if it was for real, and it was.”

Walls and Barred Rock Fund created a new business partnership, New Day Chester Inc., to later buy the theater building and other buildings, including the future artists’ warehouse. They intentionally set up Walls as the two-thirds majority owner of the venture.

“The way I see it is, our involvement has brought things along quicker, but what happened was going to happen anyway,” Lacy says. “What we bring is a little bit of the resources and connections that would be commonplace in a wealthier community.”

A typical venture capital fund expects to push startup companies to grow fast and eventually “go public,” selling shares on the stock market and earning the fund ten times or a hundred times back what it invested. The Barred Rock Fund has worked out a different venture capital model.

“I’m really a wingman here,” says Lacy, who typically travels down from his Vermont base to spend one or two days a week in Chester. “My goal is to create the conditions under which Devon and other people from Chester can buy us out.”

The approach and the philosophy is what finally won over Walls. “This was a change, it was a conversation with Chuck and others about a faster way to get it done,” he says. “Sometimes doing it the slow way like I do, it still costs you in the long run. Having someone that was willing to loan that money to get stuff done at a faster pace, it was inviting and I opened up to the idea.”

New Day Chester, Inc., is Barred Rock Fund’s eighth investment. Out of the others, Lacy says there are two with whom the fund has been invested for 15 years and counting, and the founders of those ventures have been gradually buying out Barred Rock Fund’s ownership shares in their companies.

After Barred Rock Fund’s initial investment in New Day Chester, the Untours Foundation, based in nearby Media, Pa., and the Barra Foundation, based in Wayne, Pa., have also invested or made loans to the new business partnership.

“I’ve never had a credit card. Taking on loans like that was scary to me,” says Walls. “Even when I talked to other people from the community, it’s scary. We’re talking about a community where most people don’t have stuff, so when you start talking about taking out a $250,000 loan to build something, and you’re now indebted for that, it was different.”

It was different, too, for the Barra Foundation, founded in 1963. The $250,000 loan to build out the 40,000 square-foot warehouse was the foundation’s first program-related investment.

A Family Journey Begins

“We started this journey as an organization in 2015,” says Kristina “Tina” Wahl, president of the Barra Foundation, with a full time staff of three, herself included.

At the time, Wahl had participated in the Mission Investors Exchange, which, in addition to providing research on the subject, functions as a sort of support group for people and institutions with a lot of money and an interest in investing it intentionally to address social issues. The idea to do so came up at the next board meeting of the Barra Foundation.

“We’re dealing with very seasoned investment professionals on our board’s investment committee,” explains Wahl. “It takes time to socialize this idea, learn about it, understand it, and make sure it’s in line with your goals and your mission.”

The foundation held its following fall board meeting at the offices of Reinvestment Fund, a federally certified community development financial institution with a three-decade track record of making investments for community development purposes like affordable housing and job creation around Greater Philadelphia and all over the United States. At the Barra Foundation board meeting, staff members of Reinvestment Fund gave presentations about their work and lessons learned.

“Having the board hear directly from experts in the field, rather than translating through us, was a really important step,” says Wahl.

The foundation went on to start talking about program-related investments with current and previous grantees. The Barra Foundation had previously supported arts programming under Walls’ leadership, under the Boundaries & Bridges program. Many of the activities of that program took place right on Avenue of the States, in the spaces Walls and his fellow artists were quietly acquiring and building. When Barra came around talking about making some program-related investments, New Day Chester and its artist warehouse project provided the perfect opportunity.

“Devon owning two-thirds of the company was important for us,” says Wahl. “For us, that was a creative opportunity that was in line with our thinking around innovation, to model that behavior for other investors, even beyond foundations.”

The foundation said yes to the New Day Chester loan in September 2016. Wahl hopes that, in addition to building out the warehouse space and turning it into a source of revenue for New Day Chester, the loan will also help the entity establish a track record of timely payments over the five-year term of the loan, positioning them eventually to access conventional financing, if they so choose.

Walls has bigger plans ahead, including rehabbing the vacant, out-of-repair apartments above many of the storefronts along the Avenue of the States corridor, to provide affordable housing for artists and others from Chester.

“I think our vision is bigger than the capital that we had, says Walls. “We are in a community where banks don’t want to loan money, insurance companies didn’t even want to insure the properties, a redlined community where most of the wealth that was here moved out to the suburbs … I don’t think $250,000 would do it all, but I think it would get us to the point where we can gain more capital to do more, so definitely.”

The city is starting to pop up on the radar. DTLR, a national urban sneaker powerhouse, took over an existing sneaker store anchoring a corner location along the Avenue of the States corridor. Around the corner from the corridor, a new hotel is under construction — the owner of which Walls says came up to introduce himself and say thanks for the work he was doing to revitalize the area.

“Having that kind of attention and to see that other people are popping up businesses because of what you’re doing, it says a lot,” says Walls. “And it wouldn’t have been possible if we didn’t have those partnerships with the Judys and Chucks and Tinas.”

At the same time, more attention on Chester means even more than just the weight of history on Walls’ broad shoulders.

“I can’t make a lot of mistakes when we’re building something like this,” says Walls. “We’ve got one shot at it. We’ve got one shot and twenty developers waiting on the sidelines who might say well they tried but now let’s just go in there and snatch up everything.”

Our features are made possible with generous support from The Ford Foundation.

 

Small Business Optimism Is Good News for Equitable Development

Small businesses account for the majority of jobs in Detroit's low-income, high-poverty neighborhoods, shaded in green. (Credit: Institute for a Competitive Inner City)

Despite all the talk and headlines about the tens of thousands of jobs promised by big tech companies such as Amazon coming to a new city, residents of low-income, high-poverty neighborhoods know that it’s the small businesses that provide most of the jobs in their cities, and especially in their neighborhoods.

In Detroit, businesses with 250 or fewer employees accounted for 53 percent of all jobs within city limits and 64 percent of jobs in low-income, high-poverty neighborhoods, according to the Institute for a Competitive Inner City. In Chicago, businesses of that size accounted for 58 percent of all jobs and 70 percent of jobs in Chicago’s low-income, high-poverty neighborhoods. In D.C., 62 and 74 percent; in Los Angeles, 74 and 77 percent.

So it is with great interest every year that the Federal Reserve system puts out its Small Business Credit Survey, as it did yesterday.

Expectations for growth among small businesses are at their highest levels since 2015, according to the survey results, compiled over the last six months of 2017. Some 66 percent of firms anticipate revenue growth in 2018, while a 44 percent expect to hire new employees. Meanwhile, 40 percent of firms said they applied for financing in 2017, a drop from 45 percent in 2016. Of those who applied for financing, 59 percent applied for the purpose of expanding their business, while the rest applied to smooth out cash flows or refinance previous debt.

Small businesses most frequently sought financing at large banks (48 percent), small banks (47 percent) and online lenders (24 percent). A notable share (18 percent) turned to other lenders, including auto/equipment dealers, farm lending institutions, friends/family, nonprofits, private investors, and government entities. There was an uptick in successful applications receiving the full amount requested, 46 percent in 2017, compared with 40 percent in 2016.

A majority of businesses sought financing amounts between $25,000 and $250,000.

But only 46 percent of businesses that sought financing got all of the capital they needed — a figure on par with previous years.

Taking a slightly broader scope of small businesses than the Institute for a Competitive Inner City, the Federal Reserve study defines small businesses as those having up to 500 employees. The survey garnered 8,169 responses, grouping them into seven categories: professional services and real estate; non-manufacturing goods production and associated services; retail; healthcare and education; leisure and hospitality; and other.

While there was some variance across the different industry categories, expansion or new business opportunities was the top reason for businesses applying for finance across each group.

A large proportion of firms across all industry groups reported having enough cash on hand or an aversion to taking on debt as the reason for not seeking credit.

Small businesses reported the highest satisfaction with credit unions and small banks, followed by community development financial institutions (although some small banks and credit unions are also certified as community development financial institutions, they do not count as such in this study).

Over time, online lenders have been at the bottom of client satisfaction, but have also shown the most improvement since 2015.

The reasons for dissatisfaction varied, but for among online lenders, the big reason for dissatisfaction was high interest rates.

But in the grand scheme of things, the main source of funding for small business growth or expansion has been and continues to be the businesses themselves. And in instances where small businesses have needed external capital, personal finances remains a major source of funding — putting entrepreneurs of color at a constant, inherent disadvantage to white entrepreneurs owing to the racial wealth gap created by the long history of race-based discrimination in lending and housing policies in the United States.

 

The Stage Is Set for New Community Investment Program

A map of designated "opportunity zones." (Credit: U.S. Treasury)

With the nationwide map of designated “Opportunity Zones” nearly completed, community development lenders and analysts are gearing up to implement what has the potential to become the largest low-income community investment program in at least a generation.

Passed quietly as part of the tax reform bill at the end of 2017, the Opportunity Zones program offers capital gains tax breaks to investors in exchange for investing in designated low-income census tracts. The law gave governors of states and U.S. territories the power to designate up to 25 percent of census tracts with poverty rates of at least 20 percent or median family incomes no greater than 80 percent of the surrounding area. Under the program as passed, governors had until March 21 this year to submit their proposed opportunity zone designations or request a 30-day extension.

As of last week, only Utah, Florida, Nevada and Pennsylvania were still awaiting approval from the Department of the Treasury for their opportunity zone designations.

As Next City reported previously, the new program caught many by surprise, unleashing a scramble by state economic development agencies, community development organizations, community-based organizations and others to ensure that governors would make submissions and to provide input and feedback on proposed census tract designations. The lack of input and feedback on the program itself, coupled with the compressed timeline to determine opportunity zones, left some huge questions open with regard to accountability to communities and transparency across the entire program.

At least one city didn’t want any part of the program, fearing that a sudden massive influx of capital to low-income areas was more likely to cause displacement of low-income residents rather than coming to benefit them.

In a joint congressional hearing last week, community development lenders expressed clear concerns about the potential for displacement, even as they expressed overall support for the Opportunity Zones program.

“One could potentially see this program leading to displacement of lower income community residents, either because the neighborhoods themselves get ‘overheated’ with investment capital, or because the structure of the incentive rewards investors seeking the higher yields offered by market rate or even luxury housing,” said Maurice Jones, CEO of the Local Initiatives Support Corporation, a nationwide community development lender.

Terri Ludwig, CEO of Enterprise Community Partners, another major nationwide community development lender, noted in her testimony that some communities “have expressed concerns that additional private investment without an explicit commitment to benefiting local residents and businesses could unintentionally displace the very residents and businesses that Congress is seeking to support through this new tax benefit.”

In Oregon, Enterprise assisted members of Governor Kate Brown’s team in incorporating a measure of housing stability into their process, allowing them to focus on areas where residents were less likely to be displaced by increasing land values as a result of investments.

“The risk of not meeting the intended goal of inclusive economic growth that benefits existing residents and businesses also must be considered,” Ludwig said. “For this reason, we urge that optimism be balanced with a sense of caution.”

Analysts have also begun scrutinizing the choices made in selecting Opportunity Zones. An Urban Institute analysis published this week found that designated census tracts were overall lower income on average than non-designated but eligible census tracts, indicating some targeting of communities toward the lower end of the economic spectrum. Designated census tracts were also more black and more Hispanic than non-designated eligible census tracts.

And yet, the same Urban Institute analysis also found that designated census tracts generally had similar levels of access to capital as non-designated, eligible census tracts — measured by flows of lending for commercial development, multifamily housing, single-family housing, and small business.

 

A Yearly Snapshot of What’s Threatening NYC Tenants

Bronx tenants march to show their support of better policies to protect themselves and their neighborhoods from displacement. (Photo by Oscar Perry Abello)

The Bronx is burning, and no I’m not referring to structure fires, I’m referring to the borough’s real estate market. Out of the top ten NYC Community Districts experiencing the highest percentage rise in price per square foot in residential sales, nine were in the Bronx. There are only twelve NYC Community Districts in the borough.

That’s according to the newly released 2018 edition of “How is Affordable Housing Threatened in Your Neighborhood?,” an annual report measuring housing risk compiled by the Association for Neighborhood and Housing Development.

The Bronx is also home to seven of the top ten NYC community districts facing the most evictions performed by court marshals in 2017, according to the report.

That evictions and rising residential sales prices coincide is no surprise to local tenant organizers, who have been tracking the pattern of speculative landlords buying up rent-stabilized buildings, harrassing or evicting current tenants and taking advantage of state regulations to flip buildings into market-rate and selling the buildings for a much higher price to larger investors. Evidence of that pattern was strong enough for New York City Council to pass a bill last year establishing an early warning system to detect and hopefully prevent further displacement as a result of such practices.

The report also touches on more universal risks to affordable housing, such as the upcoming expiration dates for many affordable housing units built using low-income housing tax credits. Between 2020 and 2024, nearly 5,000 units of affordable housing built using low-income housing tax credits in New York City will reach their expiration dates, typically 15 or 30 years after they’re built. At that point, owners may choose to cash out and sell them on the open market, converting them most likely to market-rate housing.

Last year, a new collaborative effort called the Joint-Ownership Entity for Community-Based Housing in NYC began acquiring expiring low-income housing tax credit units and preserving them as affordable.

There are also thousands of federally-subsidized units scattered across NYC that are at risk of losing their federal subsidies between 2018 and 2022, according to the report.

“What we are seeing in HUD-subsidized housing in gentrifying neighborhoods is that landlords are avoiding entering into long-term contracts or extensions of their contracts, which leaves residents wondering how long their housing will remain affordable,” said Gloria Villatoro, Vista Organizer at the Urban Homesteading Assistance Board, in a statement on the release of the report. “The tenants who suffer the most are the elderly, people with disabilities, or formerly homeless families. Stable housing is particularly important for these residents, and living with insecurity takes a serious toll on them.”

 

Taking Steps Toward Public Options for Banking

In San Francisco, residents want the city to establish a municipal-owned bank as an alternative to taxpayers doing business with banks that also finance fossil fuels, going against residents' values. (Credit: AP)

It’s been an interesting few weeks for the idea of public banking — establishing banks owned by government entities as a values-based alternative to ‘Wall Street’ banks.

In San Francisco, where the city has charged a task force with exploring how to set up a city-owned bank, that task force is now looking into how the cannabis industry might provide a key source of deposits and clients that could help get a public bank off to a running start. California’s legal cannabis industry is forecast to grow from $2.8 billion in 2017 to $5.6 billion in 2020, but banks are loathe to deal with the industry for fear of violating federal rules that classify marijuana the same category as heroin — the result being a cannabis industry run mostly on cash.

San Francisco’s Municipal Bank Feasibility Task Force thinks a municipal bank might provide the industry an option for banking services.

“If San Francisco is also willing to take on the challenge, it could overcome the exorbitant cost of establishing a public bank and bring the city closer to divesting from institutions that fund fossil fuel corporations and abuse consumers,” reports the San Francisco Examiner’s Robyn Purchia.

It’s a big challenge to start a bank, even for a wealthy city home to major finanical industry giants. As Purchia reports, a public bank could require a minimum of $10 million in capital, approximately $1 million in startup costs and about $2 million for staff salaries, as well as additional funds for offices, branches, data processing, IT systems and security.

San Francisco Treasurer Jose Cisneros remains optimistic. “A public bank in San Francisco is feasible,” Cisneros told Purchia. “The more challenging question: Is it a good policy decision given the complexity, expense and risks?”

The answers to the same questions are trending differently Santa Fe, where a similar task force released its final report on April 17. The task force recommended against starting a city-owned bank. As the Santa Fe task force final report reads, “If limited to the City of Santa Fe’s financial assets, the possible benefits that a Public Bank might generate are at best marginal and at worst would carry risk of non-viability because of the relatively small scale of the City’s financial means, especially when weighed against the considerable costs of creating the bank.”

For comparision, the municipal government of Santa Fe had $52 million in assets according to its most recent annual financial report, compared with $4.2 billion in assets held by the municipal government of San Francisco.

Instead, as an alternative to big banks, the Santa Fe task force recommended working with state legislators to create a state-owned bank in which the city could participate. That would be similar to the Bank of North Dakota, a bank owned by that state’s government, in which all state and local government bodies in North Dakota participate. Established in 1919, the Bank of North Dakota has served as a major inspiration to those advocating for municipal and state-owned banks across the country. That includes New Jersey, where a new report from an economics professor at Stockton University touts huge potential benefits to New Jersey from a state-owned bank.

According to the report from Stockton University’s Deborah M. Figart, PhD., “Every $10 million in new lending by the State Bank of New Jersey would yield an additional $16 million to $21 million in state output (Gross State Product), raise state earnings by $3.8 million to $5.2 million, add 60 to 93 new state jobs, and increase state value-added by roughly $9 million to $12 million.”

A bill to establish the State Bank of New Jersey has been introduced in that state’s legislature. As one of new Governor Phil Murphy’s key economic policy points on the campaign trail, a State Bank of New Jersey would play a key role in his economic plan for New Jersey, which he described last week at a regional planning convening as “growing from the cities, out.”

And finally, Senator Kirsten Gillibrand (D-NY) last week introduced legislation in the U.S. Senate to create a “public option” for banking through the U.S. Postal Service. The legislation would establish a retail bank in all of the U.S. Postal Service’s 30,000 locations, many of them in banking deserts, as a competitor to predatory lenders and check cashier chains. In addition to basic checking and savings accounts, the postal bank established by the bill would also provide small-dollar loans, transactional services including debit cards and online banking, and remittance services. While it might sound revolutionary, it’s not exactly new — from 1910 to 1966, the postal service provided basic banking services to all Americans, as author and financial reform advocate Mehrsa Baradaran has often noted.

Some aren’t so supportive of a postal banking, saying its focus on lending to “high-risk” borrowers is too much of a risk for a federal agency to take on. But the financial industry knows that data tells a different story. The financially “underserved” — those who face barriers to mainstream financial institutions because of low-income or income volatility or other barriers — are a $173 billion market for financial services and growing, according to the Center for Financial Services Innovation.

 

Charlotte Debate Highlights Tensions in Affordable Housing

(Credit: AP)

In what was a contentious session, Charlotte City Council yesterday approved financing for 11 affordable housing projects, The Charlotte Observer reports. The debate, largely between the mayor and newer city council members, highlighted multiple tensions in affordable housing development.

On one dimension, there’s affordability. As the Observer reports, some newly elected members said the city isn’t doing enough for its poorest residents. That “drew a sharp rebuke” from Mayor Vi Lyles, who campaigned on affordable housing — Lyles believes the city should also build housing for people earning 60 percent of the area median income, which would be a salary of about $43,000 for a family of four. “I am beginning to wonder if we believe in upward mobility,” the Observer quoted Lyles saying.

That tension reflects debates going on in other parts of the country, where cities like NYC are getting headlines for top-line numbers of affordable housing units produced, but heavy criticism that the units produced aren’t affordable for those who need them most. One study clearly shows that the “affordable” units produced through city-subsidized financing under Mayor Bill De Blasio’s housing plan do not match up with the income levels of those who are “rent burdened” — spending more than 30 percent of their income on rent. While housing industry veterans rightly point out that affordable housing is in need across a variety of income levels, tenant advocates maintain that public dollars should be spent on those most in need.

On another dimension, there’s the location of affordable housing units, and the desire to break the historic pattern of concentrating them in existing low-income neighborhoods — a pattern the U.S. Supreme Court has declared at odds with the Fair Housing Act. In Dallas, the Department of Housing and Neighborhood Revitalization used a data-driven process to identify locations where the city should be building new affordable housing versus preserving existing affordable housing. But when it unveiled a housing plan based on that process, the city’s established network of neighborhood-based affordable housing developers felt left behind.

“The idea of the Fair Housing Act is to give people access to more upwardly mobile communities,” Raquel Favela, chief of economic development and neighborhood services for Dallas, told Next City’s Jared Brey. “And that’s exactly what this plan seeks to do.”

Back in Charlotte, the Observer reports that five of the eleven approved projects needed waivers from the city’s housing locational policy, which was designed to ensure subsidized housing was not clustered in poor areas. According to the Observer, council members in recent years have been usually willing to approve those waivers. None of the approved projects are in south Charlotte’s affluent “wedge,” where there is little subsidized housing — Council Member James Mitchell, a Democrat, said the city needs to revisit the waiver policy, the Observer reports.

 



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