Written by Amanda Maher
During last week’s Inner City Economic Summit, participants had the chance to tour some of the new developments taking place in downtown Detroit. Yet despite this incredible investment, other parts of the city continue to stagnate economically. This problem is not unique to Detroit – even in some of the nation’s strongest growth markets, inner city poverty remains a stubborn issue. Given the market shakeup in 2008, traditional lenders remain wary of investing in sub-prime markets.
It creates a stubborn problem: if traditional lenders won’t invest in economically distressed communities, these areas won’t improve. If these neighborhoods don’t improve, traditional lenders won’t invest.
This dynamic creates an important role for Community Development Finance Institutions (CDFIs). CDFIs are specialized financial institutions that lend in markets that are underserved 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 (such as neighborhood schools or community centers) and loans and technical assistance for small businesses located in low-income areas.
CDFIs may include banks, loan or venture capital funds, and even nonprofit agencies, but each institution 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 percent of its activities and 50 percent of its assets must be invested in designated low-income target markets.
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.
But a handful of CDFIs are showing that these investments are not always a financial risk. One of the most prominent is the Clearinghouse Community Development Finance Institution. 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 explained in a press release 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 recently expanded its lending portfolio into Arizona, as well.
Projects include low-cost loans for affordable housing, education facilities and other community development real estate projects.
SHEILDS Housing Corporation is one of these loan recipients. When the nonprofit sought out to purchase a new building in inner city Lynwood, California, they were repeatedly 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.
Some of the projects have served a low-income demographic in otherwise-affluent areas. In Thousand Oaks, California, median household income and housing prices are much higher than the national average; the average home in Thousand Oaks clocks in around $600,000. For disadvantaged families, finding affordable real estate is near impossible. Through a $1.86 million 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.
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 (which ICIC profiled last year), 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. The goal is to strengthen the city’s innovation ecosystem and create opportunities for people across socioeconomic status.
Institutions like Clearinghouse CDFI show that the CDFI system can be an incredibly valuable tool 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.