Increasing Deal Flow of Large-Scale Community Investments The Role of Investment Intermediaries and Community Based Orga

1. Increasing Deal Flow of Large-Scale Community Investments The Role of Investment Intermediaries and Community Based Organizations Tessa Hebb Lisa Hagerman Public Pension Funds and Urban Revitalization Initiative Anna Steiger Federal Reserve Bank of Boston

2. Definitions • Institutional Investors • Investment Intermediary or Investment Vehicle • Community Based Organization or Community Partner

3. Investment Vehicle Investors Partners Projects Mixed-use/ Mixed-income Real Estate Community Development Sustainable Companies Commercial Banks Community Partners (e.g. CDCs) Government Entities (e.g. state housing agency) Joint Venture Developers Fixed Income Equity Real Estate Private Equity Insurance Companies Public Pension Funds Outcomes • Housing • Jobs • Infrastructure • Open Space • Environmental • Sustainability • Increased • Tax Base Foundations Source: Hagerman “Investment Intermediaries”

4. Presentation Outline • Motivation - Connecting institutional investors to economic revitalization • Background - The link between the institutional investor and the investment vehicle • Current Research - The link between the investment vehicle and the community partner • Discussion - How do we increase deal flow?

5. Investment Vehicle Investors Partners Projects Mixed-use/ Mixed-income Real Estate Community Development Sustainable Companies Commercial Banks Community Partners (e.g. CDCs) Government Entities (e.g. state housing agency) Joint Venture Developers Fixed Income Equity Real Estate Private Equity Insurance Companies Public Pension Funds Outcomes • Housing • Jobs • Infrastructure • Open Space • Environmental • Sustainability • Increased • Tax Base Foundations Source: Hagerman “Investment Intermediaries”

6. Motivation for Research • Engaging the financial markets • Environment of decreasing public funds • Transformative impact on community partners

7. Background Link between Institutional Investor and Investment Vehicle • Institutional investor does not have the time or expertise to actively manage these investments • Investment vehicle intervenes by pooling investments, spreading risk across investors, and pricing transaction up to the risk • Channel funds into 3 asset classes: fixed-income, equity real estate, private equity • 4 Operational models: contractual, ownership, legislative, and fund manager

8. Investment Vehicle Operational Models Source: Daniels (2004)

9. Current Research • The partnership between the investment vehicle and community partner is a symbiotic relationship that: • Helps make these deals possible • Ensures community benefits instead of gentrification

10. Case Studies Urban Strategy America (USA) Fund • For profit Fund-Manager model • Located in Boston, MA and invests in New England and Mid-Atlantic • Mixed-use real estate development with urban benefits Coastal Enterprises (CEI) • Ownership model: Nonprofit sponsor with for-profit subsidiaries • Located in Wiscasset, ME and operates in New England and Upstate New York • Investment themes include rural natural resource-based business investments and high-impact business and real estate investments

11. USA Fund Sample Projects Parcel 24 – In Partnership with the Asian CDC (Chinatown section of Boston) • 70 affordable rentals and 85 affordable and 160 market-rate condominiums • Also features parking, an urban park, and retail and community space • Will create 700 construction jobs and up to 40 permanent jobs in retail, community organizations, and property management Olmstead Green – In Partnership with Lena Park CDC (Mattapan section of Boston) • 287 workforce housing condominiums and 153 affordable rental units • 400 jobs in construction and 400 permanent positions • Energy-efficient green development, green spaces • 83 units of senior housing, a nursing care facility, an urban farm, a Heritage House mental health center, a job training center, fitness facility, and CDC Community Center

12. CEI Capital ManagementCEI’s New Markets Tax Credit Subsidiary • New Markets Tax Credit Program Awarded $249m investment capacity under Rounds I,II and IV, Utilized over $153m (1/07) • Works with multiple community partners including: • The Nature Conservancy (Washington, DC) • Western Mass Enterprise Fund (Greenfield, MA) • Capital Regional Development Corporation (Concord, NH) • Rural Opportunities, Inc. (Rochester, NY)

13. Some Structural Elements of a NMTC Transaction • In an NMTC deal, the capital flows through a special-purpose financing LLC, known as a Certified Development Entity (CDE). The 39% tax credit on the amount invested is realized over seven years. The investor(s) can get cash flow (return on capital), but no return of capital. (Any principal repayments must be held in reserve at the CDE level). The business gets the capital on favorable terms and the investor(s) gets the tax credits. • A bank, private equity investor, or other NMTC capital source can invest directly in the CDE (direct investment model) or through an upper tier "conduit" LLC as a means of leveraging the equity capital and bifurcating the tax credits (leveraged investment model). • In a leveraged transaction, investors can provide the debt, equity, or both. The equity provider would most likely receive its return using the available tax credits calculated on the basis of the combined total investment amount (debt & equity), thereby assuming nominal project risk. Any debt financing in such a leveraged NMTC model could be at market rates if the available tax credits are mostly allocated to the equity investors. Alternatively, some tax credits could be allocated to the debt provider as incentive to make the capital available at more attractive financing rates and terms. Source: Coastal Enterprises, Inc.

14. CEI’s NMTC Leveraged Investment Model Lender Equity Investor (Owns 99.99% of Investment LLC) CDE Sponsor & NMTC Mgr (0.01%) Investment Pooling Conduit LLC (Owns 99.99% of CDE) CDE Sponsor & NMTC Mgr (0.01%) CDE (99.99%) In Direct Investment Model, investors place investments directly into the CDE Borrower (QALICB)

15. Role of the Investment Vehicle • Financial engineering • Sourcing deals • Building a niche industry

16. Role of Community Partner • Ensure community benefits • Recruiting additional partners and resources • Deal sourcing • Types of community partners • CDCs and CDFIs • Local, regional and state economic development authorities • Civic leaders and politicians • Foundations • Churches and other faith-based organizations • Minority-owned businesses and Local, Small, and Disadvantaged Business Enterprises (LSDBEs) • Cultural institutions

17. Investment Outcomes • Financial returns • Social returns • Economic development • Community impact • Wealth creation • Environmental Sustainability • Firm’s Measuring Social Metrics • CEI’s 5 metrics • Bank of America Capital Access Funds • LEED • Cherokee • Returns to the Community Partner • Capacity building • Innovation • Sustainability

18. Partnerships Between Investment Vehicles and Community Partners What works • Clear delineation of roles between partners • Partners with previous experience in putting together similar deals and a level of financial sophistication • Community partners with the organizational capacity to participate in these deals • Community partners with in-depth expertise of a community and relationships with local stakeholders • Patience and perseverance on the part of all partners – these deals take more time and more effort • Efforts to educate investors and communities about these partnerships

19. Questions for Discussion • What examples do we know? • What are best practices? • How to prepare community partners? • Can we collaboratively build a “toolkit” to better prepare community partners? • How to develop industry infrastructure? • How to best leverage public incentives for these deals?

20. Contacts Anna Steiger anna.steiger@bos.frb.org Tessa Hebb thebb@ouce.ox.ac.uk Lisa Hagerman lisa.hagerman@bnc.ox.ac.uk Public Pension Funds and Urban Revitalization Initiative http://urban.ouce.ox.ac.uk/index.php