When Subsidy Becomes Scarce: Rethinking Community Development Finance

Julia Sass Rubin

This chapter focuses on two types of community development financial institutions (CDFIs): community development loan funds (CDLF) and community development venture capital (CDVC) funds, which provide debt and equity capital for transactions that conventional capital sources consider too risky. CDLFs and CDVCs primarily fund organizations, including businesses, housing and real estate developers, and nonprofit community groups, with the objective of furthering economic development of distressed communities by creating high-quality jobs and infrastructure.

The late 1990s was a hospitable economic and political environment for CDFIs (Benjamin, Rubin, and Zielenbach 2004). Like all CDFIs, CDLFs and CDVCs grew significantly both in absolute numbers and in capitalization levels. However, the environment has changed dramatically since 2000, leaving many CDLFs and CDVCs struggling to survive as the subsidized capital necessary to fund their operations largely has evaporated. This environmental change has sparked a conversation within the industry and among its supporters regarding future business and industry models for these organizations.

This chapter begins by reviewing the structures and current activities of CDLFs and CDVCs. It then discusses the historic sources of subsidized capital and why they have shrunk, reviews potential new and underutilized sources of capital as well as the organizational ways that CDLFs and CDVCs are responding to their changed environment, and concludes with recommendations for policymakers and funders.

The chapter is based on interviews with CDLF and CDVC staffs, foundation and bank officers, and policymakers involved with the field. It also is based on documents from individual CDLF and CDVC institutions, on contemporary press accounts, and on organizational-level data from the CDFI Data Project (CDP). To protect their confidentiality, most of the individuals interviewed are not identified.

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