П. Challenges Facing the Field

Of all the challenges that CDLFs and CDVCs currently face, by far the greatest is raising capital necessary to fund operations. The economic and political environment for community development finance has changed dramatically since 2000, making it increasingly difficult to raise capital at subsidized rates. Part II reviews existing sources of subsidized capital for CDLFs and CDVCs and why they have shrunk.

Community Development Financial Institutions (CDFI) Fund

The CDFI Fund is one of the few sources of grant and equity capital for community development finance. Under the Bush administration, the CDFI Fund was dramatically reduced, from $118 million in FY 2001, the last budget under President Clinton, to $55 million in FY 2007. Additionally, a large portion of the Fund's appropriation is devoted to administering the New Markets Tax Credit (NMTC) program, leaving even fewer dollars to fund CDFIs.

Conventional Financial Institutions

Commercial banks have been a very important source of capital for CDFIs, since the 1995 regulatory revisions to the Community Reinvestment Act (CRA), which instituted the investment test and expressly recognized community development financial institutions as qualifying CRA investments and borrowers (Pinsky 2001). Recent changes to the CRA, however, reduced the number of banks expressly evaluated for their investment activities. This change, in combination with the dramatic consolidation in the banking industry and the growth of alternative options that meet the investment test while providing a market-rate return, made it more difficult for CDFIs to raise subsidized capital from banks.


Foundations have been a small but important source of capital for CDVCs and CDLFs for the difficult-to-obtain operating support and equity dollars. In the last few years, foundation support for community development finance declined partly because of the stock market decline that began in 2000, which shrank foundation assets and led to an overall reduction in foundation giving. More significant, however, have been decisions by the most active foundation investors to change the nature of their support for the sector or to withdraw support entirely. Foundations generally view their dollars as seed money, intended to catalyze other sources of capital and ultimately lead to organizational or project sustainability. For CDFIs, this has meant subsidized dollars foundations provided to many organizations in the industry's beginnings have become rare or unavailable.

Some foundations pulled back entirely, no longer funding CDFIs except when the work of individual organizations overlaps with their other programmatic interests. Others focused resources on organizations or programs perceived to be the most innovative and likely to bring about the next wave of significant development. Even those few foundations that have continued to fund CDLFs and CDVCs evaluate these investments relative to the range of other options available that promise comparable social impact and a market rate of return.

New Markets Tax Credit Program

NMTC combines public- and private-sector resources to bring $15 billion in new investments to impoverished rural and urban communities. The program was enacted as part of the Community Renewal Tax Relief Act of 2000, along with NMVC. In 2006, the program was extended through 2008, with an additional $3.5 billion credit allocation.

The CDFI Fund, which administers NMTC, allocates a set pool of tax credits to financial intermediaries, called community development entities (CDEs), on the basis of a competitive application process. The CDEs then offer the credits to investors in exchange for equity capital investments. The credit is equal to a 39 percent cumulative tax reduction for the investors and must be used over seven years – allowing for a 5 percent reduction in taxes in each of the first three years and a 6 percent reduction in each of the remaining four years.

The program came into existence with strong encouragement and support from the CDFI industry. When the program was being designed, there was great hope that it would be a significant new source of equity capital to fund business lending and investments. Because of several statutory and regulatory provisions, however, the program has so far been primarily used to finance real estate-related transactions (Rubin and Stankiewicz 2005), making it of very limited applicability for the CDVC industry.

The NMTC has been a more useful tool for CDLFs, many of which have come to rely on it for critical fee income they use to subsidize operations. Initially, the competitive nature of the program and the expense and expertise required to meet its legal and compliance requirements precluded all but the largest and most sophisticated CDFIs from being able to take advantage of NMTC. Some of the smaller CDFIs, however, have been able to access the program by partnering with larger entities. Nevertheless, the future of the NMTC past the 2008 allocation is still uncertain, and its usefulness for CDVC and non-real estate debt transactions is limited.

New Markets Venture Capital and Rural Business Investment Programs

NMVC and Rural Business Investment Company (RBIC) programs were designed to increase the supply of equity and near-equity capital flowing into distressed communities. Both programs are administrated by the Small Business Administration, which selects NMVC and RBIC entities that are provided with matching debenture capital. Both programs went through one round of funding during which six NMVC and one RBIC funds were created. Subsequent funding was rescinded by Congress, but efforts are ongoing to approve new authorizations.

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