Following the murder of George Floyd, the Black Lives Matter movement demanded concrete change from our political and economic institutions. Two years later, NCRC is evaluating the impact of banking institutions’ racial equity commitments. This is part three of a three-part series amplifying the experiences of our members and their relationship with private funders since 2020.
The Long-Term Impact of CDFIs
Major banking institutions have increased their funding of community development financial institutions (CDFIs) in recent years. CDFIs deliver high impact by providing capital to individuals, non-profits, and small businesses in underserved communities. This strong track record has led major banks to channel millions to CDFIs as part of their racial equity commitments (including the NCRC Community Development Fund).
Acquiring private capital, however, is only one part of a larger challenge CDFIs face today. Private institutions investing in CDFIs must account for their capacity to deploy these funds toward transformative projects by thinking critically about how these investments are structured. Such capacity-building innovation in terms of investment can strengthen the impact of CDFIs without compromising the investors’ return.
CDFI-directed capital has built affordable housing units and nurtured small businesses in low-income areas, urban and rural alike. These kinds of investments are successful so long as CDFIs consider their capacity to establish below-market interest rates and provide their partners with not only long-term investment but also flexibility. When these favorable conditions are met, CDFIs can be used as an effective instrument in reducing existing racial wealth disparities in the United States. But the larger institutions that provide private capital to CDFIs can do more to help foster the conditions that generate effective projects on the ground.
NCRC interviewed Rex Fowler, the chief executive officer of Hartford Community Loan Fund (HCLF), an NCRC member and grassroots-focused CDFI in Hartford, Connecticut, to explore ideas on how to make the process of securing private capital easier for CDFIs.
The Need for Flexibility and Innovation in Private Capital
HCLF is using a two-fold approach to narrow the racial wealth divide in Hartford by investing in both affordable housing and in small businesses owned by Black, Indigenous, and people of color (BIPOC). Like many CDFIs, HCLF is lending towards housing development and rehabilitation projects to increase affordable housing supply for BIPOC communities. In contrast to other CDFIs in the region, HCLF has for the past decade specifically focused its lending to real estate developers of color, with 75% of its loans to non-white borrowers. In essence, HCLF reduces barriers to capital access for local entrepreneurs of color which enables them to execute their small-scale real estate projects with the goal of increasing BIPOC homeownership rates. They join a growing share of banks and corporations utilizing this model as one of many available to expand affordable housing in their communities.
Overall, HCLF has invested more than $40 million in housing and entrepreneurship within Hartford. But the group still faces challenges to securing private capital from banks and corporations.
In the past, HCLF has applied for and received equity equivalent investments (known as EQ2) from major banking institutions. The process of securing this funding was not simple, however. It involved a rigorous underwriting process that in some cases took 6-9 months to complete. Fowler noted that private funding has become less appealing to HCLF since then, as rising interest rates and short drawdown periods made the arduous process of seeking EQ2 money harder to justify.
Fowler shared several specific thoughts on how to make the process of receiving private funding more equitable, efficient, and effective for CDFIs.
Firstly, he said, major banks should lower interest rates for CDFIs. Though the high cost of capital is currently on the minds of many banks as the Federal Reserve seeks to curb inflation, these pressures are even harsher for CDFIs. High interest rates hinder CDFIs from offering below-market loans to real estate developers of color already burdened by cost increases in construction and redevelopment. Ensuring low-cost, low-interest loans would subsidize the cost increase and reduce the pressure on developers to either rent or sell at higher prices, reducing the feasibility and overall affordability of these projects. CDFIs are better equipped than banks to lend to entrepreneurs of color because their proximity allows them to build institutional trust. They are more aware of local needs, which informs the development of flexible loan products and personalized assistance. But if banks continue to be risk averse in lending, CDFIs may struggle to continue supporting entrepreneurs of color to the extent they have up to now, with negative consequences for historically marginalized communities.
Fowler also recommends that major banks mirror public financing sources by extending their drawdown periods for loans. HCLF once received a sizable loan from a major banking institution, Fowler said, but had to draw 100% of funds down within 12 months, which did not align with their strategic plan. The bank’s inflexible drawdown terms meant that HCLF faced an unnecessarily difficult choice: Draw down all funds within the bank’s 12 month timeframe and pay interest on what couldn’t immediately be deployed, or lose access to the capital entirely. Fowler noted that major banks could allow for drawdown periods of 3-4 years instead of only 12 months, so that organizations can deliver more effective and equitable projects on the ground.
Private Capital’s Role in Transformative Equity Projects
HCLF now wants to take their holistic approach to racial justice into a new sphere of influence in Connecticut’s capital city. Their Healthy Hartford Hub project aims to build a supermarket serving Hartford’s North End to help low-income Black residents access healthy foods and health-promoting services. The prospective new market will be surrounded with BIPOC-owned businesses. Fowler hopes the Healthy Hartford Hub will substantially reduce not only racial health disparities in the region, but serve as a hub for wealth-building BIPOC entrepreneurial activity.
“Residents leading the project have envisioned a development anchored by a full-service supermarket, but leveraging the store’s foot traffic to support an array of unique BIPOC-owned retail businesses, including health-promoting businesses, being recruited to the development area,” he said. “Trinity Health, an anchor healthcare institution in the city, has also been integrally involved in the project and may have a presence itself in the development area. We see a critical role for anchor healthcare institutions and major insurance companies to play in community-driven holistic and equitable health and wealth-building projects like the Healthy Hartford Hub.”
HCLF’s transformative work, however, can only continue with the support of public and private funders. HCLF receives a significant portion of its funding from public sources, notably the Connecticut Housing Finance Authority (CHFA). Several years ago, the CHFA created an innovative, low-cost and flexible revolving loan fund for Connecticut-based CDFIs, including HCLF, to draw from for the financing of new affordable housing developments, and its flexible terms allow CDFIs to draw down funding on a deal-by-deal basis.
The CHFA funding line has restrictions that confine the program for only certain properties, however. That leaves HCLF to rely on private banking institutions for the remainder of its funding. The less flexible investment terms and strenuous application processes imposed by these larger financial institutions has made it difficult for HCLF and similar CDFIs to acquire private capital under terms that fit with the CDFIs’ needs. This puts not only HCLF’s work at risk, but more broadly, the wealth, health, and livelihoods of poor communities of color.
It is imperative for private funders to develop partnerships with grassroots organizations, like HCLF, that are bridging different policy domains such as housing, small business development, and food security in order to maximize their impact on narrowing the racial wealth divide. This requires major banks to streamline the process of investing their capital and equitably structure those investments so that local, grassroots organizations are able to realize the vision of racial and economic justice for their communities.
Manan Shah is the Racial Economic Equity Coordinator at NCRC.