There has been an uptick in economic activity over the past six years since the Great Recession. However, unlike the recoveries of yesteryear, gains have not been universally dispersed. The gap between the “haves” and the “have-nots” continues to grow, with low-income communities increasingly cut off from economic opportunity. Even in some of the nation’s strongest growth markets like San Francisco, New York, and Boston, there are growing pockets of poverty that suffer from disinvestment. Given the market shakeup in 2008, traditional lenders remain wary of investing in sub-prime markets.
This creates a chicken and the egg problem in that if traditional lenders will not invest in economically distressed communities, then these areas will not improve. If these neighborhoods do not improve, then traditional lenders will not invest.
This dynamic creates an important role for Community Development Finance Institutions (CDFIs). CDFIs are specialized financial institutions that lend in markets that are under reserved by traditional financial institutions. CDFIs offer a range of financial products and services in inner cities, including low-cost mortgages for low-income homebuyers and non-profit housing developers, flexible underwriting for community development projects (e.g. neighborhood schools, community centers), loans, and technical assistance for small businesses located in low-income areas (CDFI Certification, 2015).
CDFIs can come in all shapes and sizes with many including banks, loans, venture capital funds, and even non-profit agencies; however, all must be certified as a CDFI by the U.S. Department of Treasury’s CDFI Fund. In order to qualify for CDFI certification, the institution must have a primary mission of promoting community development, and at least 60% of its activities and 50% of its assets must be invested in designated low-income target markets (CDFI Certification Application Training, 2007).
Eligible CDFIs receive important support from the CDFI Fund, including capital grants, equity investments and technical assistance. CDFIs can then use CDFI Fund investments to leverage private capital for projects in distressed communities. While CDFIs are not new, the CDFI Fund was established in 1994, they are growing in importance. Credit markets have tightened since the downturn, making CDFIs more critical for getting projects off the ground in what are considered “riskier” locations. A handful of CDFIs are proving that much of this “risk” is unfounded. Case in point: Clearinghouse Community Development Finance Institution (Clearinghouse CDFI). The California-based Clearinghouse CDFI just became the first bond recipient to draw down $50 million from the CDFI Fund’s bond program.
Douglas Bystry, Clearinghouse CDFI President & CEO explains that the bond program “has been an essential tool for community development and a lifeline for many distressed parts of California and Nevada. We are proud to be the first CDFI to utilize this level of financing. These dollars are essential to bringing real change to the communities we serve” (Clearinghouse CDFI…, 2015). Clearinghouse CDFI recently expanded its lending portfolio into Arizona, as well. These projects include low-cost loans for affordable housing, education facilities and other community development real estate projects.
SHEILDS Housing Corporation is one of these grateful loan recipients. When the nonprofit sought out to purchase a new building in inner-city Lynwood, California, they were routinely turned down by traditional lenders. Clearinghouse CDFI then stepped up, providing $1.26 million to SHEILDS Housing Corporation. This financing allowed the nonprofit to open a center that provides services to 7,000 at-risk pregnant mothers and families with young children annually. “I don’t know what we would have done without [Clearinghouse CDFI’s] support,” says Kathryn Icenhower, CEO of SHEILDS for Families (SHIELDS Housing Corporation, 2015).
Sometimes the projects have been in otherwise affluent areas, but serving a low-income demographic. In Thousand Oaks, California, median household income is in the six-figures and housing prices are correlated; the average home in Thousand Oaks clocks is $600,000. For disadvantaged families, finding affordable real estate is near impossible. Through a $1,860,920 loan from Clearinghouse CDFI, West Bay Housing Corporation has been able to acquire, build or rehab five single-family homes that are now being used as affordable rental housing for people with developmental disabilities (West Bay Housing Corporation, 2015).
Clearinghouse CDFI has also been able to leverage millions of dollars in New Market Tax Credits (NMTCs) to help a number of large-scale projects move forward. In 2014, Clearinghouse CDFI contributed $10 million in NMTC investments to help fund the $47.5 million La Kretz Innovation Campus in downtown Los Angeles. The La Kretz project includes the renovation of a 61,000 square foot. warehouse that will be transformed into offices, classrooms, a wet lab, and light-manufacturing facility. The Los Angeles Cleantech Incubator, one of the largest of its kind in the United States, will make La Kretz its home. A workforce development agency will co-locate in the building, thereby creating a pipeline of workers for the small businesses and entrepreneurs in the space (Garcia, 2014). The goal is to strengthen the city’s innovation ecosystem and create opportunities for people across socioeconomic status.
Clearinghouse CDFI joined US Bancorp CDC, KOR Realty Group and San Francisco Community Investment Fund to fund the $19.5 million restoration of the landmark Renoir Hotel in downtown San Francisco using NMTCs (Just Funded, 2014). Despite San Francisco’s image as an over-inflated market driven by tech entrepreneurs, there are still pockets of highly-concentrated poverty; the Renoir Hotel is in one of those pockets. The renovation of the 64,000 square foot building will create nearly two hundred new jobs in a neighborhood ripe for redevelopment.
While the CDFI Fund is certainly not a silver bullet for transforming low-income communities, institutions like Clearinghouse CDFI prove that it is incredibly valuable for directing resources and investment into underserved communities. Traditional investors and real estate developers today are more mobile than ever, allowing them to cherry-pick projects in the nation’s hottest markets. As such, low-income neighborhoods will continue to rely on CDFIs for help in creating new jobs, affordable housing and building other community assets in the areas that need it most.
Eric Lawrence Frazier MBA
President and CEO
CDFI Certification, U.S. Treasury, CDFI Fund (2015). Retrieved August 26, 2015 from https://www.cdfifund.gov/what_we_do/programs_id.asp?programID=9.
CDFI Certification Application Training, U.S. Treasury, CDFI Fund (10 August 2007). Retrieved August 26, 2015 from https://www.cdfifund.gov/how_to_apply/docs/TrainingPresentation08102007.pdf.
Clearinghouse CDFI Finances $50 Million in Community Development Projects through United States Treasury Bond Guarantee Program, PRWeb (11 August 2015). Retrieved August 26, 2015 from https://www.prweb.com/releases/2015/08/prweb12897729.htm.
SHIELDS Housing Corporation, Clearinghouse CDFI (2015). Retrieved August 26, 2015 from https://www.clearinghousecdfi.com/impact_story/shields-housing-corporation/.
Garcia, Teresa (March 2014). NMTCs Fund Cleantech Innovation Campus. Novogradac Journal of Tax Credits, Volume V, Issue III pp. 1-2.
Just Funded: Renoir Hotel, Clearinghouse CDFI (2014). Retrieved August 26, 2015 from https://www.clearinghousecdfi.com/wp-content/uploads/2014/06/Just-Funded-Renoir-FINAL2.pdf.
West Bay Housing Corporation, Clearinghouse CDFI (2015). Retrieved August 26 from https://www.clearinghousecdfi.com/impact_story/west-bay-housing-corporation/.