The Investment Vehicle and the Community Partner Relationship

The community development finance industry is looking to tap institutional investors – insurance companies, large commercial banks, public sector pension funds, foundations – as new sources of capital. Such investors can provide the patient capital needed for community investments, many of which do not yield returns for several years out. The underlying assumption is that engaging the financial markets in economic development is an effective way to transform lower-income communities. Several market barriers have traditionally prevented institutional investors from allocating capital to these types of investments. Daniels and Economic Innovation International (2005) cites five reasons that capital does not flow easily to low-income neighborhoods: (1) insufficient risk pricing, pooling, and spreading mechanisms; (2) high information and transaction costs; (3) market prejudice; (4) insufficient market competition; and (5) market-distorting government policies.

Institutional investors seeking to deploy capital to underserved areas do not have the time or expertise to actively manage these specialized investments. Investment vehicles intervene by using their financial expertise to pool assets and lower transaction costs. By creating scale, the investment vehicle produces the high financial return and large-size investments required by institutional investors. These investors allocate capital to economic revitalization through three asset classes: fixed income, equity real estate, and private equity (Hagerman, Clark and Hebb 2007).[1] Many community developments are multiuse projects, which are seen by investors as inherently more difficult to evaluate and implement. Investors consequently favor larger, more experienced fund managers and developers for these types of projects (Gyourko and Rybczynski 2000).

The community partner links the investment vehicle to the neighborhood. It uses its local knowledge to identify investment opportunities, enlist the participation of other partners such as developers, and assemble the support of civic leaders, government officials, and residents. The community partner also works to ensure that the investment yields benefits for the local neighborhood rather than lead to the displacement of lower-income residents – which occurs when revitalization projects raise property prices to the point that local residents can no longer afford to live and/or work in the community. Generally, community partners have previous experience promoting economic development through assembling smaller-scale investments in affordable housing, mixed-use real estate, community facilities, and small businesses.

Structures of Investment Vehicles

The investment vehicle links the institutional investor to the revitalized area through a variety of operating models. Daniels (2004) identifies four approaches to the oversight of an investment fund (see Table 5.1). We suggest that two models, the contractual model and the ownership model, hold the greatest promise for unlocking value for institutional investors and communities alike. In the contractual model, a not-for-profit community partner or “sponsor,” such as a registered 501(c) (3), contracts with a well-established for-profit investment fund manager. In the ownership model, a not-for-profit community partner (often a well-established CDC or CDFI) owns the for-profit fund manager. The legislative model has been effective in Massachusetts, but it is dependent on supportive legislatures. The fund manager model is effective in aggregating investment for institutional investors but can lack grounding in the community unless it affiliates with a community partner. We find that most funds currently operating in this investment space fall into the fund manager model and may or may not affiliate with a community partner.

The contractual, ownership, and fund manager models draw on the strength of the for-profit fund manager to aggregate investments that allow for the scale and track records necessary for institutional investor engagement. Such for-profit fund managers often establish a commingled fund structured as a limited partnership or limited liability company. Often, reciprocal targeted investing is a feature of a commingled fund.[2] Another for-profit fund manager structure used in private equity investing in underserved capital markets is a fund-of-funds to achieve scale and diversification. An institutional investor can have small investments in ten funds but makes only one large investment in the single fund-of-funds (Hagerman, Clark and Hebb 2007). This lowers the degree of due diligence required by the investor, who selects only the fund-of-funds vehicle rather than each of the smaller vehicles that receive funding.

Table 5.1 Structures of Investment Vehicles

Legal Model






Not-for-profit community partner sponsors or affiliate contracts with a proven fund manager to serve as fund manager; project can be structured either as an LLC or limited partnership

Proven outside fund manager

Fund manager can run off with the idea with no accountability to not-for- profit sponsor or affiliate, if ongoing funds are not built into the contract

Genesis LA Funds, Bay Area Family of Funds, San Diego Capital Collaborative, Nehemiah Sacramento Valley Fund


Not-for-profit community fund sponsor owns for- profit fund manager

Not-for-profit community fund sponsor has control over fund manager

Institutional investors may not have confidence in the not-for-profit manager

Community Preservation Corporation (owns CPC Resources, Coastal Enterprises (owns CEI Ventures), MA Housing Investment (owns MHIC Equity LLC)


Fund criteria and tax deal codified in state legislation

Good option with a sympathetic legislature

Not an option with an unsympathetic legislature

MA Life Initiative, MA Property and Casualty Initiative

Fund Manager

For-profit fund manager operates without a not-for- profit sponsor or affiliate*

Investors like returns, fund managers, and double bottom line concept

Who is monitoring second bottom line?

American Ventures, CA Urban Investment, Urban Strategy America Fund, New Boston USA Fund, Urban America, Canyon Johnson Urban Fund

Source: Adapted from Daniels (2004).

*We present in this case study an example of a for-profit fund manager that affiliates with a not-for-profit CDC, as shown in the case of the New Boston USA Fund affiliating with Lena Park CDC and the Asian CDC.

The Community Partner “Toolkit”

Community partners work with the investment vehicle and the community to unlock both the financial and social benefits of investments. Community partners are organizations and businesses that are rooted in the community and have an explicit mission to promote community benefits. Community partners also make use of various "tools" to help structure community investments. The first set of tools is financial tools. Community partners have access to tools that affect the financial value of investments, such as land zoning and encumbrances, Low Income-Housing Tax Credits (LIHTCs), NMTCs, philanthropic grants provided by foundations and private donors, and other types of public and private subsidies.[3] Not all community investments require these types of subsidies, but in some cases these tools help to create investments that otherwise might not have occurred or to provide greater social returns than otherwise might have been possible. The second set of tools is social and political tools. Community partners are rooted in the local area and often have a track record of contributing to local economic development. As a result, they have earned the community's trust and have extensive ties with key community stakeholders that can be called upon to help get a development project approved and to leverage resources. The third set of tools is material tools. A community partner may own or manage the land or community facility that underpins the investment opportunity.

Types of Community Partners

Community partners by definition are rooted in the local community and are mission-driven. We categorized partners into five types: not-for-profit fund sponsors; other not-for-profit affiliates; mission-driven wholesale lending intermediaries – either not-for-profit, for-profit, or public intermediaries; local governments and public officials; and underserved businesses, including minority- and women-owned businesses and state-certified local, small, and disadvantaged business enterprises (LSDBEs) (see Table 5.2).

Not-for-profit fund sponsors and affiliates – CDCs and CDFIs – are the strongest community partners because their mission is closely aligned with the needs of underserved areas and because they have access to the broadest sets of tools described. Mission-driven wholesale lending intermediaries can play the roles of either community partner or investment vehicle, depending on the investment. However, these institutions often have a more focused mission and role than a CDC (e.g., to assemble housing loans), which can limit their ability to bring diverse community benefits to an investment. The public sector can bring resources to an investment but may not be focused on securing benefits for lower-income and other underserved groups. Finally, underserved businesses can also be community partners in as much as they provide investment opportunities tied to public incentives for investors but have a limited set of tools with which to create community impact.

Table 5.2. Types of Community Partners


Key Roles/Tools




Not-for-profit fund sponsors (such as civic organizations organized as 501 [c] 3s)

Create a fund and select a fund manager; help identify and structure deals


• Social and political–ties to community stakeholders

• Financial–philanthropic funding/NMTC/LIHTC

Robust community benefits that are often tied to regional priorities

Difficult to start, fewer examples

Bay Area Council sponsorship of the Bay Area Smart Growth Fund (of the Bay Area Family of Funds); Genesis LA sponsorship of the Genesis LA Family of Funds

Not-for-profit partners or affiliates (such as CDCs and CDFIs)

Help identify and structure deals


• Social and political–ties to community stakeholders

• Financial–philanthropic funding/NMTC/LIHTC

Robust community benefits; well-established CDCs and CDFIs have been successful in partnering with for-profit investment vehicles

Varying organizational capacity

Coastal Enterprises, Inc.; Lena Park CDC; Asian CDC

Mission-driven wholesale lending intermediaries (such as state housing finance agencies)

Help identify and structure deals; provide housing finance: loans, guarantees, tax credits Tools:

• Financial–loan guarantees, LIHTC, and other tax credits

Strong institutional capacity

Narrow mission (i.e., housing finance)

Illinois Housing Authority (with the AFL-CIO HIT): senior housing project in Chicago; Mass Housing Investment Corp (with Access Capital): Holyoke Housing Center

Local governments and public officials (such as mayors)

Use zoning/permitting authority for community benefits Tools:

• Social and political–ties to community stakeholders

• Financial–zoning/permitting authority

Ability to recruit public and private resources to deal

Not necessarily looking to maximize benefits for the n derserved or low-income

Canyon Johnson and Mayor of Miami: down payment assistance for city workers)

Minority or women-owned businesses or businesses in underserved areas (such as local, small, and disadvantaged businesses [LSDBs])

Entrepreneurial activity Tools:

• Financial–some states offer incentives to investors such as loan guarantees

Public incentives tied to LSDBE investment opportunities

Limited set of tools

LSDBE program in Washington, DC

In areas that do not have a strong presence of not-for-profit partners like CDCs or CDFIs, underserved businesses can provide opportunities for institutional investors seeking to make community investments.

Investment vehicles can partner with multiple community partners to augment the social returns of a project. The contractual model lends itself to multi-institutional partnerships. In this model, the fund sponsor – sometimes a council of local organizations (e.g., Bay Area Council) – works closely with local stakeholders to identify investment opportunities and recruit additional private, not-for-profit, and public resources. The fund sponsor often has a regional focus and connects investment decisions to regional economic priorities (Flynn et al. forthcoming).

  • [1] Public pension funds investments include three asset classes: fixed income, equity real estate, and private equity (early- and later-stage venture capital).
  • [2] The fund manager targets investments in geographic areas based on the limited partner's investment percentage in the fund, while the investor receives a return based on the total portfolio, not just its own geographic target.
  • [3] Subsidies for economic development come in a variety of forms, including grants, loans, loan guarantees, the provision of in-kind products and services, regulation, and tax credits. Land zoning includes land use regulation; easements are land preservation agreements between a landowner and a municipality or a qualified land protection organization on conservation lands; the LIHTC is run by the IRS and allows companies to invest in low- income housing while receiving ten years of tax credits; and the NMTC permits taxpayers to receive a credit against federal income taxes over a seven-year period for making qualified equity investments.
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