Impact Voices | March 20, 2024

Three ways impact investors can help CDFIs provide stability in a high-cost environment  

Anna Smukowski
Guest Author

Anna Smukowski

Even as inflationary pressures begin to subside, affordable housing and community-based organizations continue to operate on thin margins. That means they’re less able to quickly absorb changes in the capital environment, leading to ripple effects for years to come in the communities they serve. 

Inflation, high interest rates, and supply chain disruptions acutely impact affordable housing and community development. These market forces lead to rising project costs, cause financing gaps, and create long delays as affordable housing developers compete for scarce government subsidies and other low-cost funding sources. 

That’s where community development financial institution loan funds come in. As non-bank, mission-driven lenders, CDFI loan funds provide partners with capital they may not find in conventional markets, including early-stage financing for projects that face public approvals, increasingly complicated capital stacks, and other challenges. 

CDFIs have even been called economic shock absorbers and financial first responders due to their patient capital, strong balance sheet management, and deep ties with local communities.

Investment opportunities

For impact investors, CDFIs provide exposure to real assets like infrastructure, real estate, and natural resources, with the benefit of geographic and programmatic diversification. And their varied portfolios have demonstrated  performance across a variety of market environments — even during the Great Recession and the current market environment.

While CDFIs face funding constraints in a high-cost environment, the industry’s track record of sustained investment makes them an attractive option for partnerships from investors, philanthropy, and community-based organizations alike. Here are three innovative ways impact investors can participate in new public and private partnerships to solve capital access challenges for CDFIs:

Recoverable grants. Early in the planning stages, community-based developers need flexible capital to make affordable housing projects happen. In markets with competitive subsidy environments, it may take years to assemble all the financing needed to begin construction. Recoverable grants are a powerful tool for projects because they provide an organization with a greater degree of flexibility in achieving agreed-upon financial or impact milestones before needing to return capital to a funder for future grant or recoverable grant recommendations.

CDFIs are helping unlock this tool for affordable housing providers through new sources like donor-advised funds. Recoverable grants through DAFs can be blended with other capital sources or passed directly through CDFI intermediaries to support early-stage project development expenses like market and engineering studies, energy audits, solar feasibility, architectural designs, consulting assistance, legal work, and environmental testing. For CDFIs, this provides credit enhancement for early-stage projects, helping mitigate a project’s risk profile while providing lower interest rates to borrowers. 

According to CapShift, a research platform for private investing, recoverable grant opportunities offered a significant boost during the COVID-19 pandemic. Use of proceeds ranged from deferring principal and interest payments on qualifying loans to bridging capital to begin constructing affordable multifamily housing. 

Impact notes. An impact note is a broad classification of a fixed income security that is made with the intention to generate a positive social and environmental impact and financial return. Impact notes can generate a market-rate return or, in some cases, investors can give up some financial return for greater social or environmental impact. 

CDFIs and the Capital Markets: Trends in Investment & Impact Measurement, a recent white paper from Enterprise and LISC, found that three rated impact note programs, totaling $500 million in capital availability, and 19 unrated impact note programs, totaling $311 million, are currently offered. There are also unrated impact note programs that are not listed available to accredited investors where the amount of information that is shared publicly is limited due to investor solicitation laws.

A high-rate environment is challenging for community-based lenders and other nonprofits in the impact space. Interest in rated and unrated note programs appears to be growing, with unrated note programs serving as attractive vehicles to raise low-cost capital in a high interest rate environment due to mission alignment and high renewal rates once an investor is initially onboarded. 

Given exposure to real assets paired with geographic and programmatic diversification, investors can use impact note programs to reduce a portfolio’s volatility while providing capital to projects that can strengthen the fabric of a community to withstand future economic shocks.

Regional coalitions. A growing number of CDFIs are forming statewide coalitions to exchange information and advocate for new funding on a local level. For example, the Washington Community Investment Coalition worked with the Washington State Department of Commerce to create the Equitable Access to Credit Program, a tax credit program to award grants to community development financial institutions to provide access to credit for historically underserved communities. Washington State businesses with business and occupancy tax liabilities can receive a dollar-for-dollar tax credit for funds contributed to the Equitable Access to Credit Program, reducing their tax liability while unlocking new funding to boost community and economic development. 

The New York State CDFI Coalition partnered with Impact Finance Center to create the NYS CDFI Investor Club to identify, educate, and activate philanthropists and investors who want to make an impact by supporting NYS CDFIs. 

These coalitions provide new opportunities for impact investors to learn and engage with the CDFI community, while enabling new sources of public sector capital that can strengthen balance sheets, build loan loss reserves or provide additional project-level subsidy. This is all critical to educate the market around the role CDFIs play as stewards of capital; participating in the programs developed by these coalitions can boost an organization’s mission-aligned activities or corporate social responsibility initiatives. 

CDFIs are key to providing the capital needed to address current and persistent market gaps in the affordable housing industry. The call is out to take advantage of these partnerships to provide low-cost, flexible capital for projects that lay the foundation for the key elements of a high functioning society: access to safe homes, good jobs, high-performing schools, and healthy living environments.


Anna Smukowski is senior director of the Enterprise Community Loan Fund, Enterprise Community Partners’ CDFI. She is responsible for ECLF’s Impact Note program and supports capital raising, fund structure, and impact measurement and management efforts for on-and-off balance sheet lending.