Article In Brief:
- The Problem: Nonprofits are hamstrung in their ability to make a bigger impact due to limited access to funding resources.
- Why it Happens: Government and philanthropic financial resources, as currently deployed, are only addressing the symptoms of social problems, not actually solving them.
- The Solution: Accessing capital through new instruments, such as social impact bonds, can help pay for solutions to some of our nation’s protracted social problems.
Nonprofit organizations, foundations, and even government leaders often face social issues with a deficit mindset:
Philanthropy and government only have enough money to address the symptoms of a social problem, not to actually solve the problem. Nonprofits often envy the private sector, which seems to have unlimited capital. Imagine the impact we could have, and the problems that could be solved, if we could find a way to use private capital for public good.
This was the idea that germinated in the coalition between the Californian city of Richmond and Richmond Community Foundation Connects (RCF Connects), a local community organization where I serve as CEO. A key social issue that our city faced centered on blighted, abandoned homes and their impact on the local neighborhoods. Both local government and our organization know that blighted properties decimate neighborhoods, create unhealthy and unsafe conditions, and cost cities millions of dollars each year just to maintain. And when those blighted properties consist of housing, they are an insult to communities who lack affordable housing. In 2016, our city struggled with over 200 blighted and abandoned properties, each of which cost Richmond around $7,000 per year to maintain in the property’s deteriorating conditions.
Together, the city government and RCF Connects knew that we could address this issue if we could raise the capital necessary to reclaim, rebuild, and sell these properties to low or moderate income, first-time homebuyers. However, no such source existed, as housing funds were designated to support large-scale, multi-family developments. We needed a different option.
Pursuing an alternate route, we created a new social impact investment bond to attract private capital to fund the rehabilitation of abandoned properties in the Richmond area. Simply put: we built our own model that uses private capital for public good.
To get investors to invest in this new model, the City of Richmond acted as the conduit issuer of social impact bonds[i], and RCF Connects served as the borrower. The city offered a 2% interest rate on the bonds as well as a return of principal at the end of the 5-year bond term. Investors were so excited about this opportunity that RCF Connects received a $3 million investment at 0% interest for the 5-year term of the bonds. After the pilot, we attracted more investors, raising an additional $10 million in capital.
We were a little surprised, to say the least. Why were investors interested in this type of investment? Why were they willing to put millions at risk to solve a community problem?
We realized that private investor interest and financial support arose because we had developed a unique type of investment. Our investment not only addressed a key community problem but had a financial model that could provide a return of the investment principal. And, if all went well, this model also offered a potential additional return on the investment: a 50% split on any profit generated during the pilot. With these financial incentives, we realized we were speaking the investors’ language.
During the COVID-19 pandemic, many foundations shifted from funding direct services to funding policy work and community activism, so private capital has become more important than ever. We are on a mission to share this model so that all communities tap into private capital.
How to Make Private Capital Work in Your Community
|1||Establish a city ordinance that outlines the social impact bond’s parameters.|
|2||Clearly outline project vision, metrics, and partners’ roles.|
|3||Seek out other sources of financial support.|
|4||Have a strategy for how to prioritize target communities or populations.|
|5||Be open to new ideas and partners for the model.|
|6||Establish absolute priorities.|
|7||Promote your achievements.|
|8||When changes and challenges arise, innovate.|
Leveraging private capital through an instrument like a social impact bond might offer an elegant method of paying for solutions to some of our nation’s social problems, such as affordable housing, homelessness, recidivism, lack of early childhood education, and chronic disease. Unfortunately, elegant does not mean simple, so we also wanted to share the seven steps we took to develop private investors as a source of capital. Hopefully, your organization can use our experiences to fund your own mission!
Step 1: Establish a city ordinance that outlines the social impact bond’s parameters.
The ordinance provided a guide and established a legal connection between current and future partner organizations as well as the city in any social impact bond. This guide did many things, including outlining the intent of the program and what the money was to be used for—in our case, turning dilapidated buildings into housing and community program centers.
It also identified who could invest in the bond; although any qualified investor—individual or company—was permitted to invest, our program’s housing-specific mission primarily interested banks. The ordinance also outlined what we were allowed to do with the proceeds from the bond. One final aspect that the ordinance specified was that there was to be no debt on the city’s part, placing the burden instead on RCF Connects and the investor.
Crucially, the city ordinance also created a commitment to issue social impact bonds for other projects that would withstand future changes in government leaders. The City of Richmond put on public record a framework that would guide not only this social impact bond but future investments for other issues. This was a critical first step because we wanted to create a structure that lived beyond both our project and changes in city government leaders.
Step 2: Clearly outline project vision, metrics, and partners’ roles.
In combination with the city ordinance, we wrote a memorandum of understanding to create a common set of metrics for success, define the role of each partner, and establish a clear project vision. It was critical that the partners also understood that this project was an investment and not a grant program—the financial model had to be understood by all partners.
For us, the vision was theoretically simple: increase affordable housing opportunities by reclaiming abandoned homes and selling them to local, first-time, low-to-moderate income homebuyers. This was our stipulation from the beginning, although we did build in a safeguard: if we didn’t have a qualified buyer who wanted the property, we put it back on the open market and roll the funds back into the program.
With this vision in mind, we defined the housing project’s metrics as:
- The number of homes reclaimed and sold to first-time homebuyers
- Economic indicators, which included local spending, repaid taxes and liens, and reduction in code enforcement costs
- Reduction in neighborhood crime statistics
- Increases in neighborhood property values and other investments
In terms of project partner’s roles, we decided that the City would be the conduit issuer of the bonds; their code enforcement officers would also identify target properties and assist with access to the properties to evaluate construction costs. In turn, RCF would operate the program by coordinating the acquisition, rehab, and resale of the homes to first-time buyers who were graduates of our local HUD-certified housing programs. Finally, the investor, besides providing the capital, would also market and promote the program with local, state, and national media outlets.
Step 3: Seek out other sources of financial support.
While the bond funds might have provided us sufficient capital to get the job done, additional financial support allowed us to create more flexible and creative solutions. For example, in response to ongoing illegal dumping on home sites, we leveraged funding from the EPA Brownfields program so we could assess and remediate toxins on the properties. Similarly, California Department of Energy funds required that each rebuilt home meet the highest level of energy efficiency standards; this ensured that each home was not only affordable to purchase but affordable to maintain.
Step 4: Have a strategy for how to prioritize target communities or populations.
Once word of our investment went public, people and organizations wanted to promote their community or population as the one to be served. Very early on we had to develop criteria for our selection process, both in terms of specific communities and populations in general that would be considered. We decided on a system wherein potential sites were ranked based on a number of factors, including proximity to schools and parks, proximity to other houses in the program, number of years vacant, number of code violations, and ease of acquisition.
Step 5: Be open to new ideas and partners for the model.
As a pilot project, we felt it was important to create a feedback loop that allowed us to evaluate the model in real time and add new ideas or partners as needed to achieve the goal in the most efficient manner. As mentioned in Step 3 above, challenges with illegal dumping led us to partner with the EPA. Similarly, property break-ins and squatters led to a strong partnership with our county’s homeless services team.
However, be selective in your partnerships and proceed carefully—you do not want to be the Christmas tree that fell over because it had too many ornaments.
Step 6: Establish absolute priorities.
These are the non-negotiables without which the project cannot move forward.
For our project, these commitments were two-fold: eliminating housing blight in order to restore neighborhoods and promoting home ownership opportunities for local first-time low-to-moderate income homebuyers. Of course, these commitments were also indelibly linked, as home ownership is one way to build wealth and preserve it for future generations, particularly in communities of color impacted by generations of racist redlining housing policies. By clearly establishing our highest priorities upfront, we created the metrics against which the project’s success was measured.
These priorities may also help you meet your community redevelopment goals if investors want to try to change the model to better meet their financial needs, for example altering the project’s mission to take on less risk. Though this did not occur in our project, we prepared for it anyway. Without establishing absolute priorities at the beginning, we worried we could end up flipping houses for profit or targeting easier properties with a greater return rather than taking on the properties that were most damaging to the local community.
Step 7: Promote your achievements.
In order to be future-oriented, we realized we had to celebrate our successes, acknowledge partners, and market the program to different audiences. We hosted “Key Ceremonies” for new first-time homebuyers, inviting both the neighborhood and our partners to attend in hopes of rebuilding local connections. We nominated our partners for various awards—our investor won the San Francisco Business Times Award for Philanthropic Innovation, and the bond attorney won California Attorney of the Year. Our program was also featured in three television stories on PBS, CBS, and Fox News as well as in dozens of print and online media platforms. These marketing efforts gave us a chance to highlight the social impact of the current investment while building interest with prospective investors for future projects.
Step 8: When changes and challenges arise, innovate.
In Richmond’s social impact bond pilot, the model created a win-win-win for the neighborhoods, communities, and new homeowners—17 new homeowners in the pilot Richmond program. The compelling results of the social impact bond’s 5-year pilot led our investors to extend their investment for another five years. It even attracted additional investors interested in serving other communities both across California and in other states.
While the Richmond pilot was successful and our investments have grown, affordability remains a challenge, even when backed by a social impact bond. To achieve our commitment to affordability, we had to explore new ideas and bring new partners and investors to the table.
But we realized that because these problems are interlinked, their solutions might be as well. That is, our new partners brought expertise in new ideas—like down payment assistance to help lower the cost of a home loan—and new investors developed additional financial assistance models to support first time homebuyers. And our marketing paid off: after seeing our program on CBS News, a local church raised over $250,000 to help first-time Black homebuyers cover closing costs and any other financing gaps during their home-buying processes.
Make Private Capital Work for You
Lately, many investors have become interested in having their investments demonstrate positive social impact. Many investors are looking to avoid companies that clash with their beliefs, desiring instead to designate a portion of their wealth for projects that can do some good. Nonprofits need to target these investors.
Alternately, some investors, like banks, are legally encouraged to support such ventures (see the Community Reinvestment Act of 1977)[ii]. Partnership with such institutions is mutually beneficial: for example, social impact bonds can help banks move up in credit rating. And as this type of investment moves into the mainstream, more and more investors will take notice.
Private capital for public good—it is an idea whose time has come.
About the Author
James Becker joined Richmond Community Foundation in 2005, becoming its President and CEO in 2014. Prior to RCF, James served as the Executive Director of Housing California, Inc. He served on the Berkeley Global Campus Community Working Group and co-chairs the Ensuring Opportunity Campaign in Contra Costa County. He was recognized in 2013 as a Contra Costa County Man of Merit and in 2015 received the United Way of the Bay Area’s Dream Award for his work. In 2016, the Richmond Community Foundation received the Foundation of the Year Award from the East Bay Leadership Council.
Prior to RCF, James served as the Executive Director of Housing California, Inc. He brought this experience to the foundation to create a housing renovation program financed by the region’s first successful social impact bond.
James’ career began at the Minneapolis YMCA, and he has worked to strengthen families and build communities for more than 30 years. He chaired the Contra Costa Tobacco Prevention Task Force, writing one of the first smoke-free workplace ordinances in the United States. At the request of Congresswoman Ellen Tauscher, he served on a children’s services panel with First Lady Hillary Clinton and served on the State Advisory Board for Child Development and Home Instruction with California First Lady Sharon Davis.
i For those readers unfamiliar with the term, a social impact bond is a kind of municipal bond with specific features, including an element that recycles funding from project to project. Social impact bonds also have more flexibility than traditional municipal bonds. In our case, the City of Richmond acted as the conduit issuer for the bond, which meant that the City issued the bond and collected revenue from the bond but was not liable for its repayment; essentially, the government acted as the middleman without any liability if the project proved to be unsuccessful. This lack of liability made the social impact bond attractive to the government. On the investment side, the social impact bond was appealing to investors because it offered certain tax advantages, mainly the fact that any interest earned on the investment was tax-free to the investor.
ii The Community Reinvestment Act is a federal law designed to encourage banks to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. It was created in response to discriminatory redlining policies.
Articles on Blue Avocado do not provide legal representation or legal advice and should not be used as a substitute for advice or legal counsel. Blue Avocado provides space for the nonprofit sector to express new ideas. Views represented in Blue Avocado do not necessarily express the opinion of the publication or its publisher.