This is the first in a series of three of posts about the new working paper, The Capital Absorption Capacity of Places: A Research Agenda & Framework. We view this paper as the basis for continuing dialogue and invite your reactions and comments. Please respond below in the comment section or by emailing Robin Hacke at email@example.com.
Today, Living Cities and the Initiative for Responsible Investment at Harvard University are releasing a working paper that begins to explore what we are calling the “capital absorption capacity” of low income communities. The paper is the first product of a research effort that will continue over the next year as we seek to understand how investors can deploy their capital to support the expansion of opportunity for low income people and revitalization of underserved communities.
The research is an outgrowth of the Living Cities Integration Initiative, an $85 million effort that began in 2010 with an invitation to 19 cities to apply for a combination of grants, below-market rate loans and commercial debt. We expected the applicants to put forth proposals for efforts that were getting good results but lacked the capital to expand.
What we found was different: in many cases, communities were not prepared to take in the capital that was offered and deploy it to advance their objectives. In some cases, the difficulty was that the intermediary, the organization that would borrow the money, was too small to absorb $10 million or so of new debt. In other cases, the intermediary lacked experience with the particular type of lending (to small businesses, for example) that was being proposed. And in most cases, we found a disconnect between the civic and philanthropic leaders who were applying for our support and the leaders of the financial institutions that would have to make transactions happen.
Why was this so? We think a number of things were going on, including the following:
Housing focus : For at least 25 years, the focus of most community development investment has been housing. Programs like the Low Income Housing Tax Credit were successful in spurring the development of hundreds of thousands of units of affordable housing and creating extremely capable intermediaries to develop and finance these units. However, important as the real estate aspects of communities are, the aspirations of community development go well beyond “bricks and sticks.” As the field broadened its focus to encompass a wider set of issues—transit-oriented development, fresh food access, and small business development, as well as education and public health, to name a few—only a small subset of intermediaries developed the expertise to address these new areas.
Business model : Community development financial institutions (CDFIs) evolved to serve the complex and specialized needs of low income communities. Many CDFIs became adept at crafting transactions that blended multiple sources of financing, complied with arcane regulations, and achieved difficult social goals. But the funding for these institutions depended upon getting deals done. As a result, many CDFIs lacked resources to invest in developing the infrastructure and relationships that would position them at the center of a city’s civic leadership. They were called in when deals were on the table, but in most cases did not help develop strategies to transform their regions.
Lack of a systems view: Funders and non-profits committed to creating opportunity for low income people have spent millions of dollars creating individual programs and building the capacity of organizations such as community development corporations and CDFIs. Some of this investment has resulted in high-functioning and innovative organizations. Yet, interventions that focus on a single program or institution are less likely to succeed than interventions that consider how the single effort fits into an overall system. In many cities around the country, community investment is stymied by the lack of a coherent vision and priorities, the absence of capable intermediaries and an environment that does not support significant efforts to improve the lives of low income residents. The overall ecosystem is not functioning well.
What needs to be done? We believe that the community development field is at an inflection point. As a field, we need to think carefully about our overall approach, broadening our focus from affordable housing and community facilities to a sustained effort to address dysfunction in the systems, such as education, healthcare and land use, that shape the lives of low income people. We need to develop the tools, policies and expertise that will enable us to tackle a wider set of issues, including development of small businesses in disadvantaged communities, increased availability of fresh food in food deserts and creation of mixed income communities near transit lines. And, we must analyze what is happening in our communities in “systems terms,” intervening not just to support a single actor but to help “connect the dots” and create a civic leadership that will use its local strengths, as well as call on capable national institutions, to transform communities into places of opportunity for all.
This piece was originally posted on April 12, 2012.