In The Works: Understanding How Investments Get Made in Low-Income Communities... Or Don't

Posted by John Moon on

One of the unique components of The Integration Initiative is the focus on the integration of program and capital strategies from the planning stage through implementation. To qualify for the Initiative, sites were required to have a Community Development Financial Institution (CDFI) or similar financial intermediary partner in their work. Living Cities entered into this work with the belief, like many other funders, that what low-income communities need is more capital to support efforts to strengthen their vitality. What we are learning through the selection process for The Initiative and in our work with the sites is that communities need not merely dollars, but also an effective capital absorption ecosystem.

What do we mean by capital absorption? Capital absorption describes the process by which capital flows to support the needs of low-income communities, either through direct investment or through financial intermediaries. Effective capital absorption requires a sufficient supply of capital moving from market, government or philanthropic sources to a set of capable borrowers. The borrowers then use the capital to strengthen a community’s vitality through the development, preservation or expansion of assets such as affordable housing, small businesses, health clinics and grocery stores.

While capital absorption addresses the flow of investment, the ecosystem describes the interplay of actors (banks, philanthropy, financial intermediaries, borrowers, governments, etc.) and environmental conditions (laws, practices, and policies, etc.) that can facilitate or impede the flow of investments to develop, preserve or expand community assets.

Based on what we were seeing, we started to do research to understand the factors that contribute to a robust capital absorption ecosystem. While this work is in its very early stages, we have interviewed leaders in the community development finance sector about capital absorption in general, and leaders in two ecosystems-Chicago and Atlanta-about the strengths and weaknesses of their ecosystems in particular. We interviewed leaders in the five Integration Initiative sites to understand their ecosystems, and also conducted an online survey and a literature review.

What have we learned through this research? It is clear that there are gaps in the delivery and finance systems required to revitalize low-income communities. In some cities—especially in the South and Southwest—there is a lack of financial intermediary capacity in general. Across the country, most CDFIs do not have the financial capacity to absorb large amounts of capital that would allow them to scale activities and increase impact. Indeed, only 6% of non-depository CDFIs have assets greater than $50 million, the threshold for participating in The Integration Initiative.

Even in places where the financial intermediaries are stronger, most specialize in traditional types of products like affordable housing. There are many fewer institutions that have an expertise in areas like small business lending, or the capacity to lend in multiple product lines. As a result, there are very few financial intermediaries who are able adapt to meet new programmatic demands in areas like transit-oriented development, commercial real estate, charter schools, mixed-income housing, or healthy communities (ie fresh foods, health clinics).

Beyond these insights into financial intermediaries, we have also identified some other important lessons through our work to date. One of the most important of these learnings is that when looking at how to improve the level and quality of investments in low-income communities, the unit of analysis needs to be the capital absorption ecosystem. Traditionally, the field has focused on simply increasing capital sources, improving the capacity of particular financial intermediaries, or concentrating efforts at the project level.

The ecosystem frame helps us understand why many interventions have struggled to create enduring change. Successful deployment of capital in a low-income community requires more than a strong financial intermediary or a good project, it requires a larger enabling environment including an engaged local government, quality developers and more. By understanding the importance of the ecosystem in capital absorption, we can work to strengthen systems, and help intermediaries adapt to new programmatic demands like transit-oriented development and healthy communities.

Through The Integration Initiative, we have learned the importance of requiring that our financial intermediaries actively participate at the governance table that frames and implements program and capital strategies for each of the sites. Making these intermediaries an integral part of the civic infrastructure that helps to drive the initiatives enables them to develop relationships with key decision-makers and stakeholders—the other actors in the capital absorption ecosystem. The “one table” with cross-sector participation provides a place to develop a shared vision and collaborate to see it through, to overcome obstacles, and to clearly articulate and align resource needs from government and the private sector.

Our research on the capital absorption ecosystem is still in its very early stages and many questions remain. Going forward, we want to identify the factors that contribute to a strong ecosystem, regardless of geography and market dynamics. We look forward to building the understanding of this work and sharing it with you. If you have feedback or ideas about this work, please feel free to reach out to John Moon at jmoon@livingcities.org.