Entrepreneurship | August 7, 2018

Community capital stacks bring the right money to the table in new ‘opportunity zones’

Dennis Price
ImpactAlpha Editor

Dennis Price

The rebuilding of America’s low-income neighborhoods is not that different from the rebuilding of Houston after Hurricane Harvey.

After a disaster, vulnerable communities need first to rebuild roads, bridges and other infrastructure. They need financing for health centers, after-school care providers, and small-business assistance. And they need growth capital for business expansion and new projects. 

Similarly, low-income neighborhoods designated as “opportunity zones” need multiple flavors of capital in order to create thriving communities with jobs, housing and services for current residents and growing revenues for local business owners.

Community development lenders attract new investors to low-income neighborhoods

Around the country, local entrepreneurial ecosystem-builders were piecing together such “community capital stacks” even before the provision of last year’s tax bill that has set off a frenzy of activity around the opportunity zones. Under the Investing in Opportunity Act, 8,700 low-income census tracts have been designated to qualify for investment from so-called opportunity funds. Such funds must deploy 90% of their capital inside the zones.

The abundance of equity capital that may be headed to America’s poorest communities through such tax-incentivized funds by itself won’t transform neighborhoods for the better. The key is “whether you have the right capital to do the different jobs to really transform the community,” Maurice Jones, CEO of Local Initiatives Support Corporation, one of the nation’s largest community development finance institutions, told ImpactAlpha. In May, Jones testified before Congress on what opportunity zones need to succeed.

Real estate funds move into opportunity zones, raising concerns about displacement

Like any business, a community requires a different type of capital for each development stage. “If you’ve seen one underinvested community, you’ve seen one underinvested community,” says Jones. To seize the Opportunity zones opportunity, communities will need to mobilize the full stack of capital – not only the different stages and types of financial capital, but their social and human-capital as well.

Community capital stacks can include debt, equity, grants and even municipal-bonds. By stacking all forms of capital, communities can also ensure that the right stakeholders are at the table as opportunity funds actively look for deals. That means that more kinds of investments can participate in the uplift, not only real estate, but small businesses, affordable housing and other basic services. LISC is among a number a early movers planning a series of opportunity funds.

Such holistic plans will help create a pipeline of deals for investors at different stages. Including community members in the governance, and even ownership of such assets, will help steer capital toward projects that benefit the community.

Coordinated capital

With a planned $100 million opportunity fund in development, Melissa Bradley of Project 500 is gearing up to address the funding pipeline challenge facing business founders of color in opportunity zones in 10 cities and regions, Bradley told ImpactAlpha.

Melissa Bradley: Boosting the success of Washington D.C.’s founders of color

Already in Washington D.C., 525 black and latino founders have participated in Project 500’s business accelerator, grown collective revenues to $268 million and created 2,800 local jobs (see, “Melissa Bradley: Boosting the success of Washington D.C.’s founders of color). More than half are located in opportunity zones.

Project 500’s “10 by 10” fund, as Bradley calls it, will commit $10 million to entrepreneurs of color in the DC-Baltimore metro area, Chicago, Detroit, Oakland, Puerto Rico and five other competitively selected cities.

In Chicago, Detroit and Oakland, the 10 by 10 fund will provide later-stage debt and equity capital to founders supported by J.P Morgan Chase’s Entrepreneurs of Color funds, a family of earlier-stage debt funds. JPMorgan Chase’s philanthropically-backed initiative to get more capital into the hands of minority entrepreneurs began in Detroit, and has since expand to the San Francisco bay area, the Bronx and Chicago. 

Entrepreneurs of Color Fund expands to Chicago

Teaming up with the Entrepreneurs of Color Fund family of funds is a way to mitigate risk, says Bradley, as businesses will already have been vetted. Adding later stage debt and equity capital to the mix will help complete the capital stack necessary for black and latino entrepreneurs to start and grow businesses. “We’re building a pipeline ecosystem,” she says.

Project 500’s fund will blend philanthropic grants, debt capital, and equity raised from high net-worth individuals and families via the Investing in Opportunity Act.

Community capital

Opportunity zone investors might look to other champions of inclusive prosperity already working to ensure that investment strategies align with community goals and fund local businesses that create good jobs, raise wages and build wealth for local communities as well as investors.

In Cincinnati, Mortar’s Derrick Braziel is helping local entrepreneurs of color participate in the revival of the city’s Over-the-Rhine neighborhood. Braziel’s inclusion strategy includes providing physical space for founders of color to pilot business ideas and a rotating loan fund to replicate “family and friends” startup capital. Mortar’s 12-week accelerator program has graduated 13 classes, with a 96% graduation rate, and 180 student alumni.

Derrick Braziel: Breaking down barriers for Cincinnati’s entrepreneurs of color

“On the surface, the opportunity zone legislation sounds like a good idea,” says Braziel, who said he’s not yet building an opportunity fund. “However, when you look under the hood, there is a ton of concern about who makes the decisions for which organizations to access the resources, and who will have the ability to profit from the investment decisions.”

Community involvement is key, he says. An inclusive strategy, Braziel told ImpactAlpha in an email exchange, “includes residents and people of color representing the community at the table” and “dollars set aside to support developers of color, goals and objectives promoting equity and inclusion… and technical support to create a pipeline for prospective businesses and developers to understand the opportunity and participate.”

LISC itself is teaming with venture firm Village Capital, and Louisville-based Access Ventures, another developer with an inclusive community investment strategy. Their planned $100 million fund would take Access Ventures’ multi-asset class investment approach for Shelby Park, one of Louisville’s poorest neighborhoods, to three to five other U.S. cities.

Bryce Butler: Quarterbacking capital into Louisville’s neighborhood economies

In the past four years, Access Ventures has invested $2.4 million in commercial properties and residential units, alongside co-working spaces, bakeries, local tech companies and more, and created 200 jobs. VillCap and Access Ventures “have incredible expertise in the equity space. We have debt expertise and feet on the ground to mitigate risk,” says LISC’s Jones.

Together, says Jones, “we can collectively bring the whole capital stack.”