(Illustration by Doug Chayka) 

Increasingly, leaders are acknowledging that isolated approaches to fixing the most challenging social problems—problems such as growing economic disparity and failing urban systems—have not worked. As a consequence, there is a growing interest in approaches to social change that transcend any one sector, locale, or issue. My organization, Living Cities, created the Integration Initiative (TII) partly in response to that trend. Launched in 2010, TII is an $85 million effort to help cross-sector groups of local leaders to explore potentially needle-moving outcomes for low-income people. (I discussed the origins of TII in “Revitalizing Struggling American Cities,” an article that appeared in the fall 2011 issue of SSIR.)

In its initial phase, TII targeted a series of seemingly intractable problems in five US cities: workforce development in Baltimore, economic development in Cleveland, urban revitalization in Detroit, equitable transit-oriented development (TOD) in Minneapolis- St. Paul, and education and health in Newark. After three years, we undertook an assessment of our relationship with each site. As a result of that review, we have improved our understanding of the challenges that are likely to affect any ambitious effort to confront systemic urban problems.

One challenge that has drawn our attention involves the readiness of our partners in each city to deploy investment capital. At each site, TII incorporated several core strategies into its work, and one of those strategies was to supplement traditional government and philanthropic funding streams by tapping private capital markets. Although TII has made notable gains on multiple fronts, the work of leveraging private investment capital to achieve social impact has proven to be surprisingly difficult. As part of the next phase of TII, we are taking steps to meet this challenge.

“Corridor” of Cooperation

The experience of the TII effort in Minneapolis- St. Paul, called Corridors of Opportunity (COO), illustrates what people in the five TII cites have been able to achieve. COO was a partnership jointly led by the McKnight Foundation and the Metropolitan Council, a regional government agency that covers seven counties in and around the Twin Cities. For decades, the Twin Cities region followed a path of decentralization similar to the path taken in many US metropolitan areas: Investment and employment moved to the regional periphery while core cities stagnated. To reverse this trend, COO worked to advance the build-out of several transit “corridors” and to ensure that the associated investments in transit, housing, and economic development would benefit people in underserved communities. (COO came to an end in 2013, but its members formed a new entity called the Partnership for Regional Opportunity, and TII is supporting that group’s work.)

COO used resources from TII, along with a Sustainable Communities grant from the US Department of Housing and Urban Development, to set an ambitious agenda for reshaping regional development. Unlike many efforts that focus on TOD, this partnership set out to track not just outputs from its work—the number of units of affordable housing preserved and created, for example—but also changes made by local institutions in how they operate to achieve long-term goals. Among the variables that COO has measured are changes in community attitudes toward transit, funds leveraged in support of the initiative, and shifts in the direction of public policy.

The core infrastructure of the initiative—its “table,” as we call it in TII—was the COO Policy Board. It consisted of senior leaders from multiple sectors who had the stature to influence funding and policymaking decisions. “Members of this table have said that it’s the one place where they get a holistic view of the region,” says Mary Kay Bailey, project director of COO. Participants in COO used the Policy Board to hold each other accountable for making long-term systems changes. In 2012, for example, the Metropolitan Council launched a new five-person TOD office, directed $32 million to support TOD projects in the region, and created a $5 million annual TOD grant program. The Minnesota Housing Finance Agency and the cities of Minneapolis and St. Paul, meanwhile, updated their Low-Income Housing Tax Credit application processes to award more points for transit-related projects.

The COO process also led to a broad shift in how local philanthropic institutions operate. The Saint Paul Foundation, for instance, created two new programs that use program-related investments and loan guarantees to increase access to capital. One of those programs, the Accelerator, is financing development projects along the transit corridor that connects Minneapolis and St. Paul. A second program, called the Job Creation Loan Fund, is building the capacity of two intermediaries (the Neighborhood Development Center and the Metropolitan Economic Development Association) for lending to midsized companies that have a high potential for job creation.

Integrating private capital into COO had a profound impact on the effort. The need to manage risk and to pay back funds forced COO partners to ask “different and deeper questions than grants alone require,” Bailey says. The use of privately financed debt also gave partners a chance to pursue more ambitious plans than would have been possible if they had relied solely on grant funding. High-impact real estate development, in particular, typically requires resources on a larger scale than grant sources can provide. The element of debt helped bring the partners’ aspirations to life in a brick-and-mortar way.

Ready for Investment?

Yet the effort by COO to deploy private capital met with obstacles along the way. Minneapolis-St. Paul is home to many small community development financial institutions (CDFIs). Historically, these organizations have provided loans from grant funds and not from borrowed dollars, so they were unaccustomed to using debt to finance their lending. In addition, many of them were ineligible to borrow money through TII because the Great Recession had weakened their balance sheets or because they were simply too small or too new for us to underwrite them. Cumulatively, the inability of local CDFIs to deploy capital—to “lend with loan dollars”—limited the ability of COO participants to access adequate funding for their projects.

We are looking at how communities can build an environment that allows them to put investment dollars to work on behalf of low-income people.

This aspect of the COO effort exemplifies what turned out to be one of the biggest and most surprising challenges that we encountered during the first three years of TII. Nationwide, there are more than 900 CDFIs. But relatively few of them have the financial strength, the programmatic expertise, and the lending experience to absorb and deploy capital on the scale that TII requires. In three of the five TII sites, we discovered, there were no organizations that could effectively play this intermediary role. In Detroit and Baltimore, for example, we had to bring in larger, more experienced CDFIs—Capital Impact Partners and the Reinvestment Fund, respectively—to fill that gap.

That experience led us to develop a new body of work that covers what we call “capital absorption capacity”—the ability of a community to make effective use of investment capital in its various forms. We have developed a research agenda that aims to illuminate the political, social, cultural, and financial conditions for developing that capacity. Our focus is not on the supply of capital, although an adequate supply of funding is clearly essential. Instead, we are looking at how communities can build an environment that allows them to put investment dollars to work on behalf of low-income people. Our emerging framework for understanding capital absorption capacity assumes that many stakeholders (intermediaries, community groups, and public agencies, along with mainstream investors) are required to make community investment possible.

As part of this work, we have developed a self-analysis tool for community leaders, and we are using that tool in a capital absorption workshop that we have delivered in a half-dozen cities. In the workshop, 30 to 40 stakeholders come together with the goal of identifying concrete actions that would enable community investment to occur more effectively in their region. In real estate deals, for example, lenders and other stakeholders might find ways to coordinate pre-development funding with long-term funding, so that borrowers do not have to cobble together projects piecemeal. Another action step might involve encouraging referrals between small-business lenders, so that the burden of finding the right lending partner would not fall entirely on borrowers.

One example of how TII participants are developing capital absorption capacity involves the Woodward Corridor in midtown Detroit. When we started in Detroit, there had been no commercial capital investment in that part of the city in the previous 10 years. At our request, Capital Impact Partners assessed the local investment ecosystem and began to build relationships with local stakeholders. It then helped create the Woodward Corridor Initiative Fund, a $30 million funding vehicle that supports a broad development plan for the area. Today, the firm is a leading partner in the Detroit Corridor Initiative, a TII-supported effort that succeeds the earlier Woodward Corridor effort.

As we proceed with a second three-year phase of TII, we expect to see the impact of this work on capital absorption capacity deepen further. In the meantime, we have invited five other US cities—Albuquerque, New Orleans, San Antonio, San Francisco, and Seattle (King County)—to take part in the initiative. By doing so, we hope to expand our understanding of how systems-level change happens in different kinds of communities.

Read more stories by Ben Hecht.