By Devin Culbertson and Sondra Ford
In 2019 the SPARCC initiative was making plans for a second phase, but capital deployment was slower than we had hoped for. More importantly, our local partners were frustrated by our inability to lend to projects in their communities—which was the initial promise of SPARCC: changing the way we build and invest in cities. Through the first phase of SPARCC, we had closed one debt capital project and had few serious prospects in the capital pipeline. Yet, we knew we were on to something. Our balance sheet investments in organizations had started to show progress, and some of the predevelopment grants had seeded viable projects. So, at the start of our second phase in 2020, we looked inward to challenge our own White dominant culture biases and began changing the ways we approach capital and projects. We also did more to listen and learn from our community partners about the kind of support that they would need to be successful.
Since then, we have closed debt capital into seven projects, with five others approved and waiting to close. We have an additional ten projects in the pipeline, all of which serve or are in partnership with BIPOC communities and eight with BIPOC-led organizations.
Triage Capital: A Function of the CDFI Model
Much of community development finance operates in a conventional model of creating capital products. This typically consists of: (1) assessing the capital needs and gaps in the current market, often through interviewing existing clients; (2) creating products and tailoring capital strategies that fit the gaps of those capital users; and (3) looking for capital deployment opportunities that fit the predetermined product. While rationally sound, and articulating a clear theory of change, this approach creates a few problems:
- The interviews and data collection tend to focus on clients who already have a relationship with CDFIs and rarely collect information from those outside a lender’s existing network.
- It leaves little flexibility to respond to the capital needs of unique or innovative projects. The innovation in effect ends up being focused on the product rather than the project.
- Lenders tend to quickly set aside projects that don’t fit their current capital sources and underwriting guidelines, thus missing the opportunity to learn from and support creative developers trying to advance new models.
The triage approach especially breaks down when we look to work with organizations outside of typical CDFI borrowers (i.e., developers). SPARCC explicitly sought to work with community-led organizations or to support community-led projects, which often have little development experience and smaller (or non-existent!) balance sheets.
Transitioning from Triage
When SPARCC launched in 2017, we intentionally designed the program with more flexible capital—knowing that the default product-focused model rarely funded the kind of transformative and community-led projects we had envisioned for SPARCC. In our first phase, we successfully deployed capital grants but had only one loan on the board. While technically a “fail” on SPARCC’s promise to make substantial investments in the first three years, just leaving it at that would have missed one of the primary focuses of the initiative, the opportunity to learn.
We struggled during the first phase, in part, because we were still operating at arm’s length from community leaders who had project ideas. We expected to review investment-ready projects and tailor capital to meet those needs. Early-stage ideas brought forth by local partners were met with well-meaning scrutiny about the execution path. But community leaders aren’t always developers. Their expertise rarely lies in real estate or complicated financial deals; it often lies in cultivating trust-based relationships, intimate knowledge of community needs, and innovative ways to meet those needs. In response, we shifted our staffing model and local partnerships to spend more time supporting projects as they matured and weaving in non-capital tools like real estate strategy assistance, deal analysis, and networking with local partners to strengthen the project team.
At this same time, our national team was engaging in a much deeper conversation about how the history of real estate, finance, and community development has been shaped by white, wealthy voices. The residual norms and practices from that history calcified a White dominant culture that, even as a multicultural team, we struggle(d) to unlearn. Interrogating our expectations of developers, the path of community progress, and our roles as technical assistance providers and capital intermediaries, led us to start rethinking how we show up in support of communities and local leaders.
We assessed our biases, teased apart real and perceived risks, and questioned the reporting and operating requirements of our partners. In our lending work, this meant working through how we assessed risk generally and what external shocks (like COVID) might mean for the construction process. For our grant-based equity investments, we have worked with partners to minimize reporting requirements and avoided any cash control accounts to control the flow of project funds.
We stopped operating at arm’s length with our local partners and dove in, shoulder-to-shoulder, on their early-stage concepts. In practice this meant things like building pro forma models, reviewing project documents, and editing pitch decks. We began to think differently about what was “our job” and began supporting projects more flexibly. Our capital TA became intertwined with our capital origination.
We invested in projects multiple times rather than contributing once and moving on to another deal. This typically meant braiding multiple kinds of investment, including grants, SPARCC staff time, paying third-party consultants, and ultimately making loans. We broadened our thinking beyond just grants and debt and began providing capital to projects in ways that intentionally absorbed risk and anticipated loss of principle for some projects. It is important to note that we strive to absorb risk at the deal level rather than credit enhancing to protect the lender. In multiple projects we have positioned our funds to play a first loss role, shielding the community organizations from certain project risks. For share-based community ownership projects, like Groundcover in Atlanta or the East Bay Permanent Real Estate Cooperative, our funds have shielded community investors from the risk of loss. This type of credit enhancement unlocked capital investment but also enabled community participation in these projects.
Location, Location, Location? Relationships, Relationships, Relationships!
Working in this model clearly requires a different relationship between capital providers and community partners. Showing up and asking to build trust because it is your job to do so is inherently inauthentic. But we have found that when you engage people as people, are honest about your constraints, acknowledge your mistakes, and operate from a place of partnership rather than self-interest, then you can start to co-create something. For our part, the SPARCC team has shifted to have the program staff work more closely with capital staff and lending teams, acting as a connector and relationship manager through the underwriting and investment process. We have also structured our investments based on faith in the capacity of our project partners. CDFIs often do relationship management with their borrowers and capacity-building programs aren’t unusual. Where the SPARCC capital program differs is that we are working in pursuit of the community’s goals, not CDFI’s. This means that our community partners have learned about real estate and accessing capital, but we’ve learned about tailoring capital and responding to the nuanced goals of community leaders.
If you’re interested in funding or engaging in similar community-led, transformative investments, here are some of our takeaways for intermediaries:
Capital requests are a conversation starter
Most project-based conversations start with a financial request, typically for grant funds. While investment-ready projects are ideal, the most innovative and impactful solutions all start as early-stage concepts. Those ideas often occur to people who understand the community and people’s needs better than they understand real estate. Serving community-led projects requires a pipeline development approach that allows for maturing projects with a spectrum of needs and some two-way learning along the way.
As we get to know the projects and the people and organizations behind them, we often find out that completing the capital stack isn’t the only roadblock. Through those exploratory conversations, we have found opportunities to support business planning and site control strategy, networking with public landowners, developing pitch decks for funders and landowners, assessing energy efficiency opportunities, and coaching local leaders for conversations with project partners. All of this strengthened the projects that ultimately moved forward.
The ability to do this effectively relied partially on the values and community-focused disposition of SPARCC, allowing “but for” capital and staff flexibility. SPARCC has had the staff capacity over several years to work in support of community partners without having to close loans to earn revenue. Bringing program staff and capital staff closer together, and in some cases bringing lending staff into project support roles, requires philanthropic support, funding teams to pursue more adaptation of the capital system in pursuit of racial equity.
…but if it doesn’t result in a loan, that’s not necessarily a bad thing
When exploring real estate solutions to wide-ranging community needs and challenges, invariably there will be great ideas that emerge but don’t develop into financeable projects. Over the course of SPARCC, we’ve had countless conversations with community-based organizations seeking capital for creative and holistic projects that ultimately can’t support debt, require significant subsidy/grant funding to be viable, or because of various circumstances aren’t able to evolve past the concept stage. While these conversations didn’t lead to loan originations, they often left us with sharpened insights into community priorities, organizational capacity needs, and the gaps in our own capital offerings and financing system. They also help our community partners lay the groundwork for future capital-ready projects, an important outcome even if our CDFIs aren’t part of those future deals. Here again, programs designed to be funded beyond deal origination can be a key to broadening the inputs into capital intermediaries as well as building relationships and technical expertise among community leaders.
Learning, much like trust, happened most effectively through shared action
Technical assistance and capacity building are more time-consuming and seemingly less effective when they are standardized, predetermined, or limited to group training. Many times, we have found that rolling up your sleeves and doing some pro forma work, reviewing a document, and being part of the development team can be incredibly effective for the time spent. It can also help capital staff better understand the nuanced issues at the community level. One of Elevated Chicago’s CDFI partners, IFF, published a blog that captures this well.
Capital work should also happen in the light of day. Bringing organizers, residents, and “non-capital” colleagues into conversations about acquisition strategy, feasibility, and deal challenges allows for informal capacity building, unorthodox ideation, and occasional unexpected breakthroughs. It also gives capital staff an opportunity to practice using more accessible language and start to undo the gatekeeping effect of our field’s reliance on technical jargon.
Toolkits work better than products
One of the things that we got right at the outset of SPARCC was to keep the capital tools flexible. All the approaches outlined there were made possible by the flexibility built into our grant sources. These funds covered the staff costs without needing to earn revenue from the SPARCC investments and allowed us to structure investments that absorb risk and meet the needs of the community partners.