How LISC, Enterprise Hope to Bring More Capital to Developers of Color

Two large community development intermediaries have announced major racial equity initiatives that emphasize how affordable housing gets built—and who builds it.

Aequo developer Dean Harrison surveys properties in Baltimore. Photo courtesy of the Aequo Fund

Aequo developer Dean Harrison surveys properties in Baltimore. Photo courtesy of the Aequo Fund

Racial Equity Initiatives

Companies like Netflix, Twitter, and others have pledged millions in new financing for affordable housing, small businesses, and other community development projects to advance racial equity. Much of that money is flowing to LISC (Local Initiatives Support Corp.) and Enterprise Community Partners. In this piece, we look at how they are using those and other funds to try to improve the racial equity outcomes of affordable housing investment.

Next up: We’ll take a closer look at how financial institutions—longtime supporters of community development that have their own longstanding history with racial inequity in the United States—are stepping up with their own racial equity initiatives. Stay tuned.

When Leonard Adams started his journey to build Quest Communities, a nonprofit developer of transitional and permanent supportive housing in Atlanta, he had no connections to the world of community development. He just knew that he wanted to use the properties he owned “for something a little bit better than just being Mr. Landlord,” he says. There was a clear need for housing for people who were trying to exit homelessness and were waiting for open spots in various treatment programs, as well as for those graduating from those very programs, and that’s where Adams started. Quest became a nonprofit in 2001 after a few years on the for-profit side.

Over the last two decades Quest has served about 10,000 households. In 2019 alone it had $38 million worth of construction under way. And still, Adams says when he approaches some lenders, he is still made to jump through hoops that don’t match with his experience. For example, he’s been asked for personal guarantees in recent memory, which isn’t appropriate given his organization’s track record.

Adams is a Black man, and he benefited somewhat from Atlanta being a region with a number of other Black developers, more than in most parts of the country. Although those developers weren’t trying to house the population he was trying to house, Adams still found it difficult to convince traditional lenders to take him seriously. After Quest became a nonprofit, Adams made connections to community development lenders and built a thriving organization, but he did so despite multiple instances of discrimination from lenders, repeatedly needing to prove himself despite his organization’s track record, and steep learning curves as he discovered things he didn’t know his staff needed to know, such as Low Income Housing Tax Credit compliance details.

When Adams first connected to his local office of Enterprise Community Partners, a national community development intermediary, over a decade ago, it was a great relief to find a lender that understood his mission. “There wasn’t a bank in town that was gung-ho about what I was pitching,” he recalls, but Enterprise “immediately understood what we were about. I didn’t have to prove to them why [my mission] was important, we just had to figure out how to make the numbers work.” He has worked with the group ever since, availing himself of all the programs it offers, from lending to leadership training.

But he also noticed that many of those programs were overwhelmingly white—both in speakers and participating developers. And he noticed that the terms on the loans he was getting weren’t much better than those being offered by traditional banks. These are the kinds of things that Enterprise—and its counterpart LISC—are hoping to change with their recently announced racial equity initiatives.

Racial Equity’s Moment?

The murders of George Floyd, Breonna Taylor, and other people of color by police, and the disparate impact of COVID-19 on communities of color prompted moments of racial reckoning in 2020 for many individuals and institutions across the United States, and the community development field was not exempt.

What do the Intermediaries do?

It can be difficult to get one’s arms around what Local Initiatives Support Corp. (LISC) and Enterprise Community Partners do, because the organizations are large and their goals are ever evolving. As their names suggest, they function as intermediaries—particularly between Low-Income Housing Tax Credit (LIHTC) investors and developers, making sure the financing gets to the places that need it and where the investors want it to be. They also function as CDFIs, do policy work on the state and federal level, help convene various local projects at a range of regional offices (11 cities or regions for Enterprise, 37 cities for LISC, plus a whole department focused on rural work), and do programmatic work ranging from Enterprise’s green building criteria to LISC’s safety and justice partnership with the U.S. Department of Justice. Enterprise also owns and manages 13,000 units of affordable housing.

Community development has had an interesting relationship with questions of racial equity. The field emerged from a combination of civil rights and grassroots organizing energy, determined to bring investment to neighborhoods that had been redlined, subjected to urban renewal, or otherwise disinvested from. However, over time the field became more technocratic, more involved in complex financing for affordable housing, and whiter. As in many parts of the nonprofit and social justice world, well-intentioned practitioners often assumed that doing affordable housing and community development work in ways that focused on income and ignored race would improve racial equity simply because the issues being addressed fall more heavily on communities and households of color.

Those assumptions were already starting to shift pre-2020, but that shift has accelerated. Recently Shelterforce looked at how the focus on racial equity had brought in millions of funds and financing to community development from new corporate investors. Much of that is flowing to two of the largest players in the field—the intermediaries LISC (Local Initiatives Support Corp.) and Enterprise Community Partners. How are they using those and other funds to try to improve the racial equity outcomes of affordable housing investment?

The Equitable Path Forward

In early 2019, when Priscilla Almodovar, who is Puerto Rican, was interviewing to be the president and CEO of Enterprise, she said she had some conditions before taking the job. One of them was, “I need to talk about race.”

It was a sign of the times that Almodovar’s stipulation was not a problem for Enterprise. She’d been out of the community development field for about five years when she took the position, and when she returned, she was amazed at the increase in the willingness to talk about race. “The change in our industry has been dramatic,” she says. “The industry was acknowledging that we maybe had missed some of these issues,” from lack of representation in leadership positions to ongoing disparities in outcomes despite good intentions. “Sixteen percent of our industry is people of color. I think all of us should call ourselves out on that.” (Almodovar was referring to a 2016 study from Texas Tech which assessed the demographics of executive directors of nonprofits in the housing and community development space. The demographics of other staff were not covered.)

A five-year strategic plan released in March 2020 identified advancing racial equity as one of Enterprise’s three main goals, along with increasing housing supply and advancing upward mobility. Equitable Path Forward (EPF), a $3.5 billion organization-wide racial equity initiative, launched in December 2020. Its focus is “to help dismantle the legacy of racism in housing by channeling more capital to people of color–or BIPOC[-led] developers.”

It’s an interesting shift from focusing on just the residents of affordable housing to the businesses that the industry supports as well. “We want to change our industry by changing who builds the housing, who decides what gets built, where they’re built, and honestly, where the wealth gets built,” says Almodovar. “Black Americans make up nearly 50 percent of the people living in the housing that’s subsidized by HUD, yet only 2 percent of development companies are Black-led.” (The 2 percent figure comes from various different studies of Black-owned businesses, and diversity in commercial real estate leadership. It is not specific to companies working in affordable housing or LIHTC, though anecdotally Black-owned businesses are still significantly underrepresented there as well.)

Changing the Face of the Industry

There are historical and systemic reasons why it’s harder for developers led by people of color to access financing and develop affordable housing. A legacy of being shut out from loans, connections, and support means that many developers led by people of color have smaller balance sheets and less of the sorts of experience affordable lenders look for. Getting beyond that means doing some lending that specifically targets the folks who have experienced these obstacles, and changing some of the usual assumptions about who is “safe” to lend to.

Equitable Path Forward intends to support those underrepresented businesses and nonprofits in three ways—getting more capital to developers led by people of color, providing training and technical assistance to those developers, and starting a fellowship program to help individuals of color advance in the field. While the training and fellowship programs are still under development, Enterprise has raised $285 million of its $350 million goal for its Equitable Path Forward Growth Fund, which will offer both entity-level and project-specific lending through Enterprise Community Loan Fund, Enterprise’s CDFI; project-level equity through a range of existing platforms (tax credits, Opportunity Zones); and some grants. The fund’s first investment—$1 million to the Aequo Fund—was made earlier this year.

Aequo is itself a recently launched fund, founded by Ernst Valery, a successful Black developer who has been outspoken about discrimination from financial institutions. Aequo intends to invest $5 million into real estate development projects led by Black, Brown, women, and immigrant developers in five cities—Baltimore; Richmond, Virginia; Philadelphia; Buffalo; and Portland, Maine. Aequo will use the R3 credit score to assess its applications; R3 was specifically developed to give a more accurate picture of current risk for those who have had interactions with the criminal justice system.

This doesn’t mean just anyone will get financing. The goal is to find borrowers who, “absent the systemic denial of certain capital,” are “more than capable and poised to truly launch” their businesses to a bigger level, explains Lori Chatman, president of Enterprise Community Loan Fund. Chatman says Enterprise will be recruiting developers from places where they have a local presence and know the players, though anyone can apply.

Entities that receive financing and other support under EPF must have greater than 50 percent of their board members be self-identified people of color, or their CEO/executive director/managing partner must be a self-identified person of color. Enterprise is also tracking the racial composition of its borrowers’ boards and staffs over time, presumably to confirm that the fact that they are led by people of color is not symbolic or temporary.

Enterprise hopes that by getting a couple dozen developers over the initial hump of access to capital at a larger scale—whatever that means for their particular businesses—the experience and access gap will close. “Our ultimate North Star is not to need programs like this,” says Enterprise’s vice president and Detroit market leader Melinda Clemons, who is helping to coordinate the national rollout of Equitable Path Forward. “We want to build the capacity of developers now so they can go to a traditional lending institution and be able to receive financing.” To that end, Enterprise is also putting some of the money raised for the growth fund toward a Standby Guaranty Facility that will allow developers they work with to also leverage financing from other sources that might have otherwise considered them too risky.

Almodovar notes that, for example, housing finance agencies often require smaller developers to partner with a higher-capacity for-profit developer to get access to tax credits, limiting the smaller company’s upside in the deal, as they are expected to share the developer fee with the partner. Instead, she says, “We’re saying to the [housing finance agency that] Enterprise will put our guaranty behind them, or if they get into trouble, we’ll come in and develop for them.”

Changing Standards

But Almodovar isn’t content to talk about the issue just in terms of catch-up. She wants the banking industry—investors and lenders—to reconsider all its underwriting standards and definitions of risk. “Did we create artificial underwriting standards? Hurdles that don’t look racist, but in fact, the impact is?” she asks. She notes that given the historical and structural disadvantages groups led by people of color have faced and continue to face, even common and seemingly neutral terms such as “higher capacity” and “lower capacity” now seem problematic to her, as they imply those differences in capacity are all attributable to merit.

“They’re out there saying ‘We want to advance racial equity in our industry,’” says Almodovar. “OK, so if you really mean it, let’s talk about how we underwrite deals.”

In a letter to the New York Times in March, Almodovar suggested that investors “re-examine the loss history and performance of our investments to inform a refresh of underwriting standards that are more commensurate with reality instead of outdated, dusty views” and “broaden our view of the experience we’ve traditionally required for those who are ‘new’ to development but who have experience in construction and related fields.”

A spokesperson for Enterprise says that part of Equitable Path Forward will be generating some of that data. “For example, we know most institutional investors require developers to have $1 million of liquidity and $5 million of net worth for consideration. We also know based on many years of experience that developers with less liquidity don’t necessarily perform worse than developers with more liquidity. So we’re going to test that out more systematically than we have in the past and tell that story over time, revising our own standards and encouraging our investment partners to consider revising theirs as we learn.”

The changes won’t be instantly spread throughout the organization. When asked about whether the different approaches in the Equitable Path Forward lending will extend to the tax credit syndication done through Enterprise Housing Credit Investments (EHCI), for example, Chatman said that was the eventual goal, but that first they had to use the guaranty facility to “prove that these are good investments.”

“Remember,” she added, “EHCI is a syndicator, representing institutional investors. It’s the institutional investor processes/industry standards that we are up against.”

The first financial institution to make a major investment in Equitable Path Forward is Bank of America, which on April 28 announced an investment of $60 million—$30 million in loans and $30 million in equity financing—to create a fund managed by Enterprise that is dedicated to BIPOC-led LIHTC developers. The investment is part of the bank’s $1.25 billion, five-year commitment to help advance racial equality and economic opportunity. Almodovar says the fund will be a place where Bank of America is “going to do their business differently.”

But it remains to be seen exactly how, and whether that will lead to systemic changes in lending practices. When asked about specific underwriting or structural differences, a spokesperson for Enterprise said that “for the Bank of America partnership, each developer/investment will be evaluated on a case-by-case basis to determine the best way to provide support. One example of that could be expanding traditional underwriting criteria to create new opportunities for emerging BIPOC developers.”

Stepping up the Intensity

“What’s happened over the past year has caused the community development sector some self examination as to whether we are doing enough and whether we’re effective,” says Annie Donovan, chief operating officer at LISC. “You can’t look at what has happened, and the trends in our society in terms of income inequality and racial inequality, and be satisfied with what we’re doing.”

Photo courtesy of LISC

Project 10X, LISC’s racial equity initiative, officially launched in November 2020. It is named for the racial wealth gap between white and Black households, which in at least some areas is about a 10-to-1 gap.

10X has four focus areas: increasing ownership of both homes and businesses (including developers of color and employee-owned business models), financial well-being in terms of credit and savings for both households and financial institutions led by people of color, supporting quality jobs, and investing in a range of other community-strengthening activities: “community wellness, digital access, education, arts, and justice reform.” The goal is to direct or leverage $1 billion toward these various programs.

The new initiatives associated with Project10X are LISC’s Black Economic Development Fund (BEDF) and LISC-affiliate and tax credit syndicator National Equity Fund’s Emerging Minority Developer Fund. Together they account for most of the $400 million in investments raised for Project 10X as of May 24. There are also some local projects, such as a $30 million property acquisition fund to help the Twin Cities’ Black communities recover from both COVID-19 and the aftermath of the 2020 uprisings. EMDF functions much like Enterprise’s guaranty, allowing smaller developers to work with LIHTC without having to pass on much of their developer fee to a larger partner.

[RELATED: Getting Beyond the Developer Fee]

Launched in summer 2020, BEDF sports big name investors such as PayPal, HubSpot, Netflix, Costco, Square, Dick’s Sporting Goods, Aflac, and McKinsey. The fund’s target borrowers are Black-led financial institutions, businesses, real estate developers, and anchor institutions. On May 26, LISC announced that BEDF had hit its goal of $250 million and announced the fund’s first five investments—three real estate investments and two large long-term deposits to Black-owned banks.

Donovan says BEDF is an example of the step up in intentionality that is required to make progress on racial equity. “We’ve never had something called the Black anything, right?” she says. “Because we haven’t targeted that specifically.” But the time was right to be able to do so—funders, especially new corporate investors, wanted to support “Black-owned businesses, Black-owned financial institutions, HBCUs . . . things that really lead to or directly create Black wealth,” she says, which meant there was great interest in this kind of fund.

BEDF, like Enterprise, is experimenting with changing the details of its underwriting to be more inclusive, but George Ashton, managing director of strategic investments for LISC, says that’s only sometimes necessary. He’s found there are a lot of Black-led companies that don’t need any accommodations to standard underwriting, but still aren’t getting investments as easily or at the terms and size they should be. “We’re scratching our heads as to why [these investments] aren’t being done by someone else,” he says. Ashton figures the answer is largely a lack of connections or “network wealth,” and one of his goals for BEDF is to try to build more of those connections.

Focusing on only the smallest and newest companies is not one his goals. Ashton says there are precious few Black business leaders of any size who do not still face disparate access to capital. BEDF’s theory of change is different from what Ashton calls “the traditional community development thesis—only help those at the lowest part of the economic ladder.” Instead, he says, BEDF is interested in “helping the community as a whole” through increased jobs and economic development, and that means helping businesses “in the middle,” who have the ability to then hire more people and more subcontractors.

BEDF defines Black-led as “(i) 50.1% or more Black-owned, (ii) having a majority of Black board members or persons exercising similar functions, or (iii) predominantly serving the Black community by having a majority of Black customers or having a majority of its operations in Black neighborhoods.” Given the number of white-led community developers and businesses operating in majority Black neighborhoods, it seems possible that the third criterion could serve to weaken the targeting. Ashton expressed skepticism that there are enough groups that fit that description to be a problem (despite the overwhelming majority of white-led nonprofits in the field), but says in any case it has not yet come up, and such borrowers are definitely not the focus of the fund. That provision is there, he says, to allow flexibility in case they come upon an investment that would have a substantial benefit for a Black community but doesn’t quite fit the other definitions.

Targeting funding by race is not only a departure from the past but from how things would be in an ideal future. But given current inequalities, Donovan sees it as necessary to get where we need to be given how we got here. “It’s sort of like civil disobedience in a way,” she says, noting that lending without acknowledging history is also targeting by race—but in a way that reinforces existing disparities instead of fighting them.

Donovan says she feels optimistic that the moment will lead to things like functional alternatives to credit scores. “The banks have come up with a lot of money pledged behind racial equity,” says Donovan. “Now we have to hold them to account for that, in ways that we know are meaningful.”

Same Programs, New Approaches

Most of the other examples LISC offers for what 10X will do to advance its four focus areas are existing projects and programs that have now been filed under 10X, from its safety and justice program to its financial opportunity centers. The stated intention is to leverage $1 billion to scale up these initiatives, seeded with $20 million of the organization’s own equity ($10 million of which came from a MacKenzie Scott donation), and add more explicit racial equity strategies to those programs.

[RELATED: Community-Police Partnerships After George Floyd]

“We have done strategies here and experiments there and innovation here,” says Donovan, “and we’re trying to pull that together to say, ‘OK, this really is what’s needed more intensively. How do we double down on putting an equity lens on that work?’ There’s a lot of things that are maybe similar to what LISC has done before, but have a slightly a different emphasis or a different approach.”

For example, there’s a new spin in the works for Bay Area LISC’s Housing Development Training Institute, which helps staff of community-based organizations acquire real estate development skills. “As it turns out, the housing development world is largely run by white people,” says Donovan wryly, and the training program was reflecting that rather than changing it. But they knew that doing better would involve not just trying to reach a new audience, but examining what’s offered. “What do people of color need? And have we designed that into the curriculum?” Donovan says they asked. The answer? “Well, not really, because we’ve centered the white experience. It’s harder for developers of color to crack into markets; their pockets aren’t as deep; the friends and family networks, the angel networks that support early development, aren’t there; their experience in front of funders is different than white-owned, white-run organizations. . . .” And so the curriculum is being revamped.

“Really what we want to do with programs that are highly successful like that, that aren’t targeted, is we want to raise money to be able to target them,” says Donovan.

Proof of the Pudding

One of the things Enterprise is doing differently under EPF is offering unsecured lines of credit for predevelopment and acquisition work—some of the hardest financing to find—in larger amounts and for longer terms (four years instead of one) than it had before and than is typical in the field. This, even more than flexible underwriting, makes Leonard Adams at Quest very happy. The new terms “really align better with how affordable housing is developed,” he says. Which of course raises a question about whether they should be considered just temporary measures to help fix a disparity, or more permanent changes.

The Quest campus in Atlanta, which includes the Quest Westside Impact Center, workforce training development facilities, an affordable apartment building expected to be completed next year, and existing affordable and supportive housing. Photo courtesy of Quest Community Development Corporation

Adams has a caution for the field at large regarding training to support leaders of color though: make sure it reaches those who need it, and make sure it doesn’t become a burden for those who don’t. It’s a must, he says, for those building newer organizations. But Adams sees required or expected leadership programs for people of color now being attached to so many funding and financing sources that it feels like overkill. “I can’t be going through a leadership program every time I get $200,000,” he says. “I’ve been to seven leadership programs, and now philanthropy [is] starting to do the same thing. How much leadership training do I need in 24 months?”

That kind of concentrated attention could be a concern in other ways. Adams, echoed by others in the field, worries that programs designed to support Black-led businesses and organizations, seeking quick success and big leverage numbers, could pour resources into already-successful or on-the-brink-of-successful organizations—rather than taking the time to provide the flexibility and assistance needed by those earlier in their development—and then declare success prematurely. “We have a way of identifying high performers and everybody running for that same performer,” says Adams, “and it won’t work. If we’re only going to identify low-hanging fruit then we’re missing the boat, because the smaller ones, those are the ones that should be given a little extra helping hand.”

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