Community development corporations seeking financing for economic development initiatives are increasingly turning to nontraditional federal funds, tax credits and private sector collaborations. Historically, CDCs relied on Department of Health and Human Services (HHS) or Department of Housing and Urban Development (HUD) grants that matched bank loans, and local philanthropic or intermediary support for commercial real estate projects or business ventures. However, recent shifts in key funding approaches have opened new pathways for CDC financial support.
The HHS Office of Community Services (OCS) sparked a reconsideration of grantsmanship approaches in the past year by urging increased private sector collaborations. In addition, OCS Director Clarence Carter has encouraged CDCs to complement economic development with human capacity building as part of a strategy for serving low-income residents. Carter explains this approach by suggesting that success is often a factor of “how many dots we can connect.”
“Building the capacity of a community from a community economic development perspective [requires focus on] education and labor force as well as economic development,” says Carter.
Depending on upcoming congressional action, changes in direction at HUD may result in the “zeroing out” of budget appropriations for the Economic Development Initiatives program. The Bush Administration has repeatedly called for the elimination of hundreds of millions of dollars of Congressional “earmarks” for projects annually attached to HUD’s budget. Resourceful CDCs around the nation have learned to ask their representatives to add funds for their projects in other federal agency appropriations rather than rely on surviving the increased competition with cities for specific grants in the HUD budget.
Other CDCs are learning to take advantage of new HUD programs such as zero capital gains treatment available for developments in federally designated Renewal Communities. CDCs and intermediary entities have facilitated CDC access to New Markets Tax Credits from the U.S. Treasury Department’s community development financial institution (CDFI) fund. (See Shelterforce #110.) In several states, CDC associations such as the Housing and Community Development Network of New Jersey have also worked to pass legislation for state tax credits for community redevelopment. For example, corporations in New Jersey can now obtain a 50 percent tax credit for investments provided through nonprofit entities developing comprehensive neighborhood revitalization projects and strategies.
Local tax increment financing at the municipal level has been another key tool in generating project financing for complex retail endeavors. The CDC known as Impact Services, Inc. formed a special Tax Increment Finance District in the city of Amery, WI, as it partnered in a mall development venture with a bank holding company, an anchor tenant and two private investment groups. Bond financing, city revolving loan funds and bank loans were added to federal HHS/OCS grants and Small Business Administration (SBA) resources to nurture a model approach linking retail, manufacturing and affordable housing for job creation in a rural area. One tenant alone, Cardinal Glass, increased its workforce to nearly 200 workers in an expanded plant with approximately 300,000 square feet of manufacturing space. In addition to acquiring the land, the CDC developed the property and serves as the managing partner.
Tax increment financing is also being used to develop the Midtown Center in Milwaukee where the Northwest Side CDC is collaborating with a Milwaukee-based national real estate firm, Boulder Venture, Inc., and a major investor, the Canyon-Johnson Urban Fund. The fund was created by the Johnson Development Corp. (established by former basketball star Earvin “Magic” Johnson) and Canyon Capital Realty Advisors. The Canyon-Johnson Urban Fund is a Los Angeles-based fund with nearly $300 million of committed equity capital that focuses on the “overlooked segment” of urban real estate markets. The collaboration established a new town center on the site of an abandoned shopping mall and features restaurants and community meeting venues such as a Magic Johnson-owned Starbucks.
New Markets Tax Credits have also inspired creative collaborations between community developers and private sector investors. The formation of community development entities (CDEs) is a prerequisite to obtaining tax credit allocations ($3.5 billion this year) from the Treasury Department. The CDEs receive investments from taxpaying entities seeking to take advantage of the federal tax credits and subsequent project revenues.
Last year, the Minneapolis-based Community Reinvestment Fund (CRF) received $162.5 million from the program, the largest award to a national group. CRF partners with cities (like St. Paul, MN, and Portland, OR), financial institutions (over 50 lenders nationwide) and other entities to finance community development projects. Frequently, financing supported by these tax credits can have a net effect of reducing the costs of project funds by 150 basis points, or 1.5 percent. For example, the cost of a loan could be reduced to 5.5 percent from 7.0 percent. The formation of CDEs represents a unique opportunity for CDCs to partner with private investors, cities, financial institutions and developers for specific projects.
Federal Home Loan Banks (FHLBs) are providing additional creative incentives for developers to collaborate with CDEs through special economic development programs. At last year’s annual CDC gathering, the FHLB of Atlanta announced a special initiative to provide interest-free loans to developers participating in NMTC investments. Another FHLB (Dallas) provided $64 million in financing last year for 66 programs in its five-state district.
CDCs are also looking more closely at public markets to spur commercial revitalization and asset accumulation. Full time markets in permanent structures in Philadelphia and Minneapolis have attracted the attention of foundation leaders, federal agency heads and industry leaders. Community development advocates ponder the myriad of funding sources that were used to mobilize these economic development “engines” for immigrant food and craft vendors.
El Mercado (“the market”) in Philadelphia was developed by the Norris Square Civic Association at the crossroads of a number of diverse communities that include Latinos, African-Americans, Eastern Europeans, Vietnamese and Palestinians. The CDC takes particular pride in the generation of civic energy stimulated by the social integration of these communities. However, the CDC had to pursue over a dozen funding sources to get the marketplace up and running in a renovated warehouse. Financing came from foundations, financial institutions, city programs, the Catholic Campaign for Human Development and the U.S. Department of Agriculture. The project even attracted $675,000 in federal transportation dollars from the Transportation Equity Act for the 21st Century to facilitate links via walking paths and landscaping between El Mercado, the nearby transit station and an adjacent neighborhood.
In Minneapolis, three CDCs and the merchants’ cooperative drew from over a dozen funding sources to nurture more than 47 businesses in Mercado Centrale, a building with annual tenant grosses in excess of $5 million. Grants and loans from sources such as the McKnight Foundation, the HHS/OCS and General Mills have been critical in providing “patient” capital to allow the venture to reach profitability. Nevertheless, a key aspect in the project’s success has been the venture funding and managerial training provided by the three collaborating CDCs – the Neighborhood Development Center (NDC), the Whittier CDC and Project for Pride and Living. SBA resources facilitated training classes for merchants prior to the opening of the market.
Comparable resources have allowed the NDC to continue assisting vendors who want to expand to larger spaces on the abutting Lake Street retail corridor. This location is also part of the Living Cities Initiative sponsored by multiple federal agencies and foundations. NDC director Mike Temali notes that the McKnight Foundation continues to play a multi-faceted role for the Mercado Centrale by providing a grant that will allow tenant merchants to transfer ownership of the building from the CDCs to their own cooperative, “Cooperativa Mercado Centrale.” [Read a review of Temali’s new book on community economic development.]
CDCs have learned to be creative in identifying new resources to fund projects and the community development industry has matured in its approach to connecting to capital markets and packaging attractive development tax credits. By becoming adept at leveraging financial incentives, CDCs and CDFIs can continue to increase the momentum for improved private sector investment in neighborhood commercial revitalization.