5 Guiding Principles to Build Capacity and Attract Capital

In the community development and investment fields, we have traditionally looked first to local organizations to address local needs.  Want to develop more affordable housing?  First call is often to a Community Development Corporation. Want to finance a new project?  Pick up the phone to a local Community Development Financial Institution (CDFI).

As we at Living Cities have learned through our experience with the Integration Initiative and our other work in low-income communities, the default to a local solution is not always the best choice. Many places do not have local organizations with all the capacities required to achieve the desired results. Whether the gap is financing facilities for non-profits, developing large, mixed use projects near transit, or lending to microenterprises, sometimes the best answer is to import capacity from outside the local market.

We have seen encouraging examples of how national organizations can operate successfully and sensitively in new markets.  As a result of the Integration Initiative, NCB Capital Impact has become a valued intermediary in the Detroit market, while TRF and NDC have expanded their presence in Baltimore and Cleveland respectively.  Wachovia NeXT award winner IFF has entered a number of new geographic areas successfully, expanding their service area from Illinois to multiple Midwestern states. Capable developers also get invited to bring their strengths to new places.  

Five considerations should guide local leaders as they think about how to achieve important public purposes, especially when they are seeking to build the capacity to attract and deploy capital:

  • Legitimacy:  Being “of a place” confers legitimacy.  Making one’s home in a particular location implies commitment to that location, a stake in the outcome of big decisions that affect the place.  Local actors are usually seen as being legitimate; “outsiders” have to prove their commitment to gain the legitimacy conferred more automatically to locals.
  • Local knowledge:  Investing in low-income communities is facilitated by a high degree of local knowledge.  Local knowledge yields a more accurate and nuanced assessment of risks and potential than simply looking at “the numbers.” Knowledge of local priorities, practices, sources of subsidy and other such factors can help organizations spot opportunities, build support and move investments in the most effective way.  Advantage:  local players.
  • Relationships: Executing community investments tends to require a network of relationships with community groups, business leaders, public sector officials, foundations, developers and investors, among others. Such relationships can help overcome the inevitable challenges that arise when assembling complex deals. This consideration cuts both ways: local players may have a richer set of local relationships in a place, while national players may bring access to their own networks (such as large foundations, national financial institutions, or the federal government) that would not otherwise be readily available to locals.
  • Expertise: Sometimes the specialized knowledge required to accomplish a complex task is simply absent from the local scene. Local leaders eager to make sure they have access to best practices may wish to tap regional or national organizations that have encountered—and solved—problems elsewhere in the country.  This consideration tends to point in the direction of importing capacity.
  • Scale: As economists will tell us, some activities offer economies of scale. For example, sharing the costs of a sophisticated back office operation across a large number of loan officers can make loan servicing cheaper and more efficient. Like hospitals that need to perform a critical threshold of operations to maintain their edge, developers and underwriters may need to do a minimum number of deals to achieve optimal performance. National intermediaries can offer the scale that enables them to tap large national investors, who sometimes have a harder time placing smaller sums of capital. Where scale is an advantage, this consideration also tips in the direction of regional or national actors.

So where does this all come out? The reality is that we should shoot for the best of both worlds. When expertise, scale and national relationships are important considerations, local leaders should think hard about importing intermediaries from outside their place rather than building capacity locally. However, they should take steps to make these intermediaries successful by helping them “get local.” 

For example, leaders can introduce the new player to the network of relationships they will need. This is best accomplished by inviting the new player to participate on an ongoing basis in the civic leadership of the place, rather than by arranging a “one and done” meeting. For their part, national players should think hard about what it means to enter a new place sensitively, demonstrating commitment and willingness to learn local context and partnering with local organizations.

Producing the best outcomes for low-income communities requires that national and local organizations work together to marry their respective strengths. By being willing to consider “importing” capacity and thinking about the best incentives and structures to foster local/national partnerships, local leaders can achieve better results than by relying on local organizations alone. It can be done.

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Robin Hacke is the former Director of Capital Innovation at Living Cities (www.livingcities.org), a partnership among 22 major foundations and financial institutions that invests in revitalizing America’s cities. Ms. Hacke lead an effort to increase the capacity of underinvested domestic markets to absorb capital for the benefit of low-income communities .

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