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Cascade: No. 83, Fall 2013

CDFIs: Intermediaries for Financing to Low-Income Communities*

In communities across America, community development financial institutions (CDFIs) successfully connect the “last mile” of the financial credit chain. Just as local cell phone towers across the country connect cellular networks to local users, CDFIs connect larger and remote sources of capital to local communities. CDFIs act as intermediaries of capital to advance their missions, proving that responsible investing can build incomes, assets, and wealth in low-income communities. Increasingly, CDFIs also intermediate market data and other information necessary for successful investments in the unique places they are founded to serve.

Michele Speaks-March and Erich March obtained financing from The Reinvestment Fund to convert a vacant building into the Apples and Oranges Fresh Market, which provides fresh food options in a low-income Baltimore neighborhood.Michele Speaks-March and Erich March obtained financing from The Reinvestment Fund to convert a vacant building into the Apples and Oranges Fresh Market, which provides fresh food options in a low-income Baltimore neighborhood.

Analyzing market data and providing capital are approaches that have been successful. According to a 2012 Carsey Institute report, CDFIs have been effective in lending to and investing in communities not served by the conventional financial sector. They accomplish this, the study suggests, while maintaining loan performance standards generally equivalent to those of conventional financial institutions.1 At The Reinvestment Fund (TRF), like so many of the organization’s peers, this track record of success is reliant on a deep understanding of the block-by-block circumstances in underinvested neighborhoods. This contextual knowledge of local markets is a tool that CDFIs use to lower risk and target scarce investment dollars. Sources of capital that lack this market knowledge are more susceptible to using broad strokes to survey markets, which can hamper development in overlooked neighborhoods, or connect them with projects that lack authentic local support.

A case in point is TRF’s efforts in Baltimore, where the organization recently helped finance a supermarket in the Howard Park neighborhood. The community had been without a supermarket for over a decade, and local leaders, elected officials, and the Baltimore Development Corporation had been working to restore access. TRF’s data analysis revealed that the neighborhood is located in a USDA-designated food desert2 and a TRF limited supermarket access (LSA) area.3 According to the 2011 LSA analysis, there is $64.8 million in grocery demand in the Howard Park neighborhood.

Working with the community organizing network Baltimoreans United in Leadership Development, TRF successfully applied for Healthy Food Financing Initiative funds for the supermarket project from the U.S. Department of Health and Human Services. The funds supported predevelopment costs and helped kick-start the development, which finally broke ground this past spring. TRF is also providing new markets tax credit financing to support the store’s construction. The new ShopRite supermarket is expected to provide much needed fresh foods and create 250 full-time and part-time jobs, many of which will be filled by neighborhood residents. In addition to TRF’s own community partnerships, local support and the store’s commitment to hiring from the surrounding neighborhoods served as critical elements to solidifying the project as a viable opportunity. The combination of information, capital, and community partnerships is a critical component in helping TRF mitigate risk.

Another element that has contributed to the growth and success of the CDFI industry is consolidation within the traditional banking sector. In 1980, the 10 largest banking organizations held only 13.5 percent of the banking assets.4 In 2000, that number had risen to 36 percent, only to rise again to roughly 50 percent of banking assets in 2010. During that span, the retail banking experience has become more automated and less based on familiar relationships between the bank officer and the borrower, as well as between the bank and the neighborhood. As a result, bank staff who are tasked with investing in low-income communities have less first-hand experience in these markets, as they are required to cover wider geographies and sometimes multiple metropolitan regions.

TRF’s financing of Apples and Oranges Fresh Market (A&O Market) in East Baltimore through the Baltimore Integration Partnership (BIP) is a recent example of a transaction that traditional banks passed over. TRF is the financial intermediary for BIP, which is supported by Living Cities, a philanthropic collaborative of 22 foundations and financial institutions that works to improve conditions in urban areas and increase opportunities for low-income individuals. As part of its role in BIP, TRF provides financing to transform community investment in three underinvested target Baltimore neighborhoods.

A&O Market was being developed by a local minority entrepreneur couple, Erich March and his wife, Michele Speaks-March. The couple had several successful businesses. In addition, they have been part of the local community for generations. They wanted to repurpose space in a building that had stood vacant for many years to create a 4,800-square-foot supermarket that would bring healthful fresh food options to the local low-income community. The couple had originally approached three banks and failed to obtain financing from any of them, especially after cost assessments proved higher than earlier projections.

TRF has a strong knowledge of the neighborhood because it is an area in which TRF helped develop affordable housing and community businesses. TRF’s data also showed that the project site was at the nexus of three TRF LSA areas. TRF was able to step in and figure out an affordable financing option for the project. The CDFI provided $750,000 in financing for this $1.16 million project, including federal Healthy Food Financing Initiative funds. TRF’s financing supported the necessary fit-out of the leased space and the purchase of equipment for the grocery store and deli. Apples and Oranges Fresh Market opened in March of this year to much media fanfare because it was the first grocery store in its neighborhood. The grocery store created 15 jobs.

In Baltimore, as in the rest of the mid-Atlantic region, TRF has successfully scaled its ability to efficiently manage capital, work with data, and build on local relationships that ensure the delivery of capital and opportunity to low-income communities. While these are examples specific to geography and sector, every CDFI has the capacity to replicate this model and harness the power of its local experience and relationships — the very ingredients that have made CDFIs a success as the critical last mile in the credit chain.

For information, contact Donald Hinkle-Brown at 215-574-5859 or donald.hinklebrown@trfund.com E-Mail; www.trfund.com External Link.

  • * The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
  • 1 CDFI Industry Analysis Summary Report, Carsey Institute, Spring 2012, available at http://carseyinstitute.unh.edu/publications/Report-Swack-CDFI-Industry-Analysis.pdf. PDF
  • 2 The U.S. Department of Agriculture conducted a study to assess the extent of areas with limited access to affordable and nutritious food. These areas are sometimes called “food deserts.” See Access to Affordable and Nutritious Food: Measuring and Understanding Food Deserts and Their Consequences, available at www.ers.usda.gov/media/242675/ap036_1_.pdf. PDF
  • 3 A limited supermarket access (LSA) area is an area in which the residents must travel significantly farther to reach a supermarket than the “comparatively acceptable” distance traveled by residents in well-served areas. TRF defines “comparatively acceptable” as the distance that residents of well-served areas (block group with incomes greater than 120 percent of the area’s median income) travel to the nearest supermarket. See Searching for Markets: The Geography of Inequitable Access to Healthy & Affordable Food in the United States, The Reinvestment Fund, 2012, available at ow.ly/oR0TP. PDF External Link
  • 4 Robert M. Adams, “Consolidation and Merger Activity in the United States Banking Industry from 2000 Through 2010.” Federal Reserve Board of Governors, Washington, D.C., 2012-51, 8 August 2012.