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MARKETS and
STRONGER
COMMUNITIES
the case for a
community development
tax credit
Community Development Tax Credit Coalition
Community Development Tax Credit Coalition
The Community Development Tax Credit Coalition (CDTCC) is a nationwide association of
local, regional, and national organizations promoting and practicing economic development
in economically disadvantaged urban and rural communities.
Steering Committee: Robert Agus, National Cooperative Bank; Frank Altman, Community Reinvestment Fund;
David Beck, Center for Community Self-Help; Bill Bynum, Enterprise Corporation of the Delta; Helen Dunlap,
Shorebank Advisory Services; Bill French, Rural Community Assistance Corp.; Alan Greenlee, Enterprise
Foundation; Gloria Guerrero, Rural Development & Finance Corp.; Mary Nelson, Bethel New Life; Ron Phillips,
Coastal Enterprises, Inc.; Mark Pinsky, National Community Capital Association; Roy Priest, National Congress
for Community Economic Development; Buzz Roberts, Local Initiatives Support Corp.; Welthy Soni, Association
for Enterprise Opportunity; Kerwin Tesdell, Community Development Venture Capital Alliance.
Contents
Executive Summary
3
The Case for a Community Development Tax Credit
4
Profile: Coastal Enterprises, Inc.
5
Profile: Delaware Valley Community Reinvestment Fund
7
Q&A: Who benefits from a community development tax credit?
8
Profile: Enterprise Corporation of the Delta
11
Profile: New Community Corporation
13
Profile: Rural Development & Finance Corporation
15
Photo credits:
5 Coastal Enterprises, Inc. / Adam Fernandez
7 Delaware Valley Community Reinvestment Fund / Jane Whitehouse
13 Washington Post / Helayne Seidman
April 1999
New markets, stronger communities —
why a community development tax credit makes sense
The nation's economy is booming - but not everywhere. Many urban and rural
areas continue to be held back by stubborn problems such as high unemployment and
underemployment, insufficient affordable housing, shortages of services such as day-care
and shopping centers and - perhaps most importantly - by a chronic shortage of the
private investment capital needed to stimulate and support community development.
Hard-pressed communities need new tools. Investment capital tends to flow toward
where money is already accumulating - in fast-growing metropolitan areas, counties,
and regions. Less fortunate places, particularly inner-city neighborhoods and low-income
rural areas, have comparatively few investment resources to call upon, and the resources
they have are typically stretched thin. Although community development organizations
such as community development corporations (CDCs), community development financial
institutions (CDFIs), community development venture capital funds, micro lenders, and
national and regional intermediaries have demonstrated their resourcefulness and skill in
leveraging funds, unmet needs continue to outstrip available resources.
Targeted tax credits can create new markets. Tax credits offer an incentive for the
private investment community to put more of its funds where the returns, measured in
human capital as well as dollars, are likely to be greatest. Properly targeted, tax credits
can stimulate whole industries and jump-start job growth. Two prime examples are the
Low Income Housing Tax Credit (LIHTC) and the Community Development Corporations
Tax Credit (CDCTC) pilot program. The LIHTC has become the nation's main funding
stimulus for affordable rental housing, generating 80,000-100,000 units annually and
more than $1.8 billion annually in related wages. The CDCTC, although authorized only
as a pilot program, has been used by some of the nation's most innovative CDCs to raise
funds with which to encourage start-up businesses, help entrepreneurs get past the pitfalls
of growth, and create the kinds of solid local jobs that, among other things, are a key to
making the nation's welfare-to-work efforts effective. These success stories demonstrate
that modest incentives at the federal level can yield high returns at the community level.
Tax credits + market discipline = sustainable community development. Because
they act as incentives, not subsidies, tax credits do not artificially channel funds to places
where the most crucial resources for community development - local commitment,
skills, and accountability - may be lacking. Where those resources are in place but are
held back because local market opportunities are viewed as marginal by investors, tax
credits can make the difference. And in helping to build strong networks of community
investment organizations, tax credits contribute to sustainable economic development.
A community development tax credit is a win-win proposition. With the national
economy strong, Congress and the President have an opportunity to use the tax code to
level the playing field, promoting sustainable progress in areas that need a helping hand.
Millions of Americans - and their communities - stand to benefit from this strategy.
3
The Case for a Community
Development Tax Credit
An important key to the success of small and large businesses is having access
to capital and credit Credit alone is not the answer. Businesses must have equity
capital before they are onsidered viable candidates for debt financing. Equity
acts as a bufter against the vagaries of the marketplace
Continued
efforts
to
develop the markets for private equity investments will be rewarded by an
innovative and productive business community. This is especially true in lower-
income communities. where the weight of expansive debt obligations on small
firms can severely impede growth prospects
Barriers still impede the free
flow of capital and people to their most productive employment. In the small
business sector, potential impediments include: lack of market information,
difficulties in assessing risk, high transaction costs for small loans, and, in rural
areas, special challenges associated with geographic distances from lenders and
potential markets One particular barrier - apparent disparities in access to
credit for minority-owned businesses - raises disturbing questions. To the
extent that market participants discriminate, consciously or unconsciously, credit
does not flow to its most profitable uses and the distribution of output is
distorted. In the end, costs are higher, less real output is produced, and the
distribution of output is distorted
We need to make further progress in
establishing business relationships between the financial services sector and, the
rapidly growing number of minority- and women owned businesses.'
- Federal Reserve Board Chairman Alan Greenspan, March 1999'
The nation's economy is booming -
but not everywhere.
Nine years into an unprecedented period of economic expansion, the U.S. economy seems
to be in great shape. The unemployment rate nationwide, at 4.4 percent, is approaching its
lowest level in three decades. Inflation appears to be staying under control. High-tech start-
ups and upstart Internet enterprises are creating millionaires virtually overnight. But it isn't
strictly true (despite what President Kennedy used to say) that a rising tide lifts all boats.
Much of the tidal surge has been taking place in a relatively small number of economic
and geographical sectors. Private venture capital investment, for instance, rose 24 percent
in 1998, to, $14.3 billion. But technology-based companies accounted for 76 percent of the
total. And most of those dollars flowed to a few urban/suburban areas. About 50 percent of
the venture capital invested during the fourth quarter of 1998 went to just two regions -
continued on page 6
4
and policy development work on topics such as
Maine
the social return on investment, welfare-to-
work, microenterprises, sustainable natural
is a
resources and telecommunications.
Capital connections
CEI has also established Coastal Ventures
GOOD
Limited Partnership (CVLP), Maine's first socially
place, but it's also a largely
responsible venture capital fund, which seeks to
OYAMPLE
rural state where conventional investment
connect investors' equity capital with businesses
capital can be hard to come by.
offering socially beneficial products and ser-
That's where Coastal Enterprises, Inc.
vices. Cuddledown of Maine, a catalog store
(CEI) comes in.
nationally known for its premium-quality bed-
Based in the seacoast town of Wiscasset,
and-bath merchandise, used CVLP financing to
CEI is a private non-profit community develop-
triple its manufacturing capacity while main-
copital
ment corporation (CDC) with a 21-year record
taining its commitment to creating quality jobs
time
of service as a community investment catalyst,
with above-average wages and benefits.
creating opportunities to link Mainers' strong
entrepreneurial traditions with venture capital
Putting tax credits to work
py
and technical assistance.
In its role as a "critical link" to a better life
As its name suggests, CEI initially focused
for Maine people, CEI utilizes a wide range of
vant wat hm
on the needs of Maine's coastal communities,
investment tools. One of 20 CDCs selected to
where the three-centuries-old fishing industry
participate in the 1993 CDC tax credit pilot
could no longer be relied
we
on to provide employment
and sustain local econo-
kenter hpbard lek
mies. Today CEI operates
statewide - and, through
CEI Development Services,
has even "gone global,"
providing assistance to a
number of Eastern Euro-
pean communities seeking
to develop sustainable,
self-reliant economies.
More than money
CEI has participated in
over $200 million of eco-
nomic development fi-
nancing, benefitting 1,000
businesses, social services
Coastal Enterprises, Inc., works with firms such as New England 800,
and housing projects; has
a custom inbound call center, to create good jobs with benefits.
created or sustained
10,000 jobs; and has counseled over 8,000
program, CEI raised $2 million in grants and
small businesses. With a staff of 60 (and 20
loans from KeyBank Corp., using the funds to
AmeriCorps participants), CEI is able to pro-
underwrite a revolving loan fund which has
vide in-depth technical and capital assistance
helped finance more than 20 businesses that
in the development of such areas as housing
provide some 600 jobs.
and child care, the natural resources industry,
CEl's first-hand experience with tax credits
business financing, employment and self-
illustrates how they can be used to channel
employment for people with low incomes and
investment capital in ways that yield high re-
women in business. CEI buttresses its invest-
turns - in innovative, sustainable community
ment initiatives with results-oriented research
development.
5
California's Silicon Valley and New England's high-tech corridors Another 16 percent went
to the greater New York, Los Angeles/Orange County, and Washington, DC, metropolitan
areas. Only 5.7 percent of all venture capital investments went to the South Central
Southwest, and Northwest regions combined.² Notably, all three regions have significant
lower-income, typically rural populations.
We're paying a price for allowing the tide to lift some boats so much more than others.
The already-affluent may be becoming more so, but millions of Americans are losing ground,
relatively speaking, and the gap has widened during the 1990s. The top 20 percent of U.S.
households took in half of the national income in 1997; the other 80 percent divided the
other half. Income disparities are stark: in New York the richest 20 percent, with average
incomes of $132,390 in 1997, were more than 19 times as wealthy as the bottom 20
percent, who had average incomes of $6,787. For the lowest three-fifths of the population,
income levels after adjusting for inflation remain below where they were in 1989.
And the employment situation, which seems so upbeat nationally, is distinctly downbeat
for many Americans. For example, while Hispanic males have the greatest labor participation
rate (79.6 percent, compared to 75.8 percent for white males and 68.7 percent for black
males), Hispanic families have the highest poverty rate (27 percent, compared to 26.4
percent for African American families and 8.5 percent for white families).⁴ This problem -
people working hard but unable to escape poverty - is aggravated by lack of access to
financial services and capital, manifesting itself in lack of housing and community facility
developments in low-income Latino and African American communities."
For many rural areas, the current economic boom is a distant echo. The ten poorest
counties in the U.S. are rural, with poverty rates in some cases exceeding 60 percent.⁶ In
Appalachia, where the Appalachian Regional Commission considers a county "distressed"
if unemployment and poverty rates are 25 percent higher than the national average, there
were 97 such counties in 1998, compared to 90 in 1992. And the South today has been
described as "a tale of two economies, one rising and one falling." Jobs, mostly high-tech,
are being created at record rates along the Interstate 85 corridor between Richmond, VA,
and Greensboro, NC, but when you leave I-85 and fan out along the secondary roads, you
discover that in the same area at the same time more than 200,000 lower-skill apparel and
textile-manufacturing jobs have been lost.⁸
Hard-pressed communities need new tools.
These are problems that an economic boom alone isn't likely to resolve. Investment capital
tends to flow toward where it is already accumulating - in fast-growing metropolitan areas,
counties, and regions. Less fortunate places, notably inner-city neighborhoods and low-
income rural areas, have comparatively few investment resources to call upon, and the
resources they have are more likely to be stretched thin.
This is not to suggest, however, that the entrepreneurial spirit is lacking in such places.
There is abundant evidence that it's alive and well.9 And the importance of small businesses
in building healthier communities would be hard to exaggerate. The nation's 23 million small
businesses produced an estimated 64 percent of the 2.5 million new jobs created in 1996
()/1
6
community development tax credit ?
What will be the impact of the tax credit?
sustain community development. The Low Income
It's estimated that the tax credit will channel $6
Housing Tax Credit (LIHTC), initially enacted in
billion in new equity investment capital to low- and
1986, has spurred the construction and rehabilita-
moderate-income rural and urban communities
tion of nearly 1 million apartments dedicated to
over the next 5 years. With venture capital invest-
low-income tenants at restricted rents. Although
ment nationwide estimated at about $14 billion in
the tax credit represents less than 3% of all federal
1998, the tax credit represents a significant increase
tax expenditures for housing (paling in comparison
in investment in underserved areas.
to homeowners' mortgage deductions), it has be-
come the nation's single most important stimulus
How will the funds generated by the tax credit
for affordable rental housing, generating 80,000
be invested? A network of private community
100,000 units annually and more than $1.8 billion
development organizations will build on existing
each year in related wages. Although much smaller
efforts to provide credit, equity, and technical assis-
in scope, the Community Development Corpora-
tance to businesses which create jobs, products and
tion Tax Credit (CDCTC) pilot program, enacted in
services that benefit the community. Operating
1993, has been used effectively by a number of
within broad overall guidelines, community devel-
CDCs to support business development, job retrain-
opment organizations will make their own determi-
ing in a local industry downsizing situation, financ-
nations regarding how best to use funds to promote
ing of a key local enterprise as it took steps to adapt
new business start-ups and support existing, job-
and grow by shifting product lines, creation of re-
creating businesses of all sizes, from micro-enter-
volving loan funds capable of stepping in and pro-
prises to major firms. For example, they could
viding crucial short-term financing assistance for
choose to support inner-city shopping centers,
growing businesses, and leveraging of additional
manufacturing firms with 5 or 500 employees, retail
investments in the community.
stores, services providers, telecommunications and
other technology firms, small business incubator
How does community development compare
arrangements, co-op marketing initiatives, and es-
with other kinds of investment? Hard-pressed
sential community facilities such as child-care cen-
inner-city neighborhoods and poverty-plagued rural
ters, health centers and senior centers.
areas don't change overnight. Investing in commu-
nity development means, by definition, getting in
What kinds of organizations will be involved
for the long haul, not the quick hit. So it may lack
in investing these funds? Entities eligible to use
the allure of, say, betting on a high-tech, high-pro-
allocated tax credits to generate investment capital
file start-up that generates a lot of buzz. But the
include community development corporations
nation's more than 2,000 community development
(CDCs), community development financial institu-
organizations have long since demonstrated that
tions (CDFIs), venture capital funds, micro enter-
patience, skill, and sheer stubbornness can be pow-
prise development organizations, regional and na-
erful change agents. Rooted in the communities
tional intermediaries, secondary market institutions,
they serve, accountable to the people who live
and other community development organizations.
there, they've learned how to combine human and
financial capital. Community development is an
How can we be confident that this kind of
investment in the nation's future. Who stands to
targeted tax credit will work? Targeted tax credits
benefit from a community development tax credit?
have already been used effectively to promote and
We all do.
9
continued from page 6
June
(and virtually all of the net new jobs added to the economy); accounted for 67 percent of
all first-time jobs and basic skills training; and hired a larger proportion of younger workers,
A
older workers, women and workers preferring to work part-time.¹⁰
weare
The work ethic, too, is alive and well. Employers are finding, for example, that most
people making the transition from welfare to work are strongly committed to succeeding.
To illustrate, UPS found that only 12 percent ot the former welfare recipients hired at its
welkne to
Philadelphia air hub quit in the Nist six weeks compared to a normal rate of 40 percent, and
Sprint reports that only 15 percent of former-welfare new-hires at its Kansas City call center
crok_
left in the first 12 weeks, compared with a normal quit rate of 70 percent.¹¹
transition
The policy problem facing the nation, as the Small Business Administration has noted,
is not that there's a shortage of enterprises poised to grow or people willing to work. The
problem is that "the rapidly growing firms that are generating most of the employment are
not getting an adequate supply of equity capital to maintain a healthy debt-equity ratio." 12
In other words, they re starved for oxygen. The obvious solution is to increase the flow.
That could be an all but impossible task, how-
ever, if direct connections had to be made between
each and every small business and each and every
Small, community-building
potential private equity investor. Relatively few
businesses are starved for
institutional or individual investors have strong links
the oxygen of equity capital.
to inner-city neighborhoods or rural regions. Bank
The obvious solution is to
mergers may have exacerbated this problem by, in
many cases, removing decision-making from local
increase the flow.
managers. 13 Without some means of efficiently
channeling private investments to communities in
need, the oxygen flow would be unlikely to im-
prove. And Alan Greenspan's admonition to "make further progress in establishing business
relationships between the financial services sector and the rapidly growing number of
minority- and women-owned businesses" would remain unaddressed.¹⁴
Fortunately, however, a nationwide network of community development organizations
is already in place. Better still, many of these organizations (five of which are highlighted in
this report) have long and varied experience in leveraging financial resources for the
betterment of the communities where they work.¹⁵
These organizations take various forms: Community development corporations (CDCs),
which originated in the 1960s, are locally-based, locally-controlled, non-profit entities
(sometimes with for-profit affiliates) dedicated to improving the well-being of the lower-
income areas they serve. There are now more than 2,000 CDCs in the U.S. Many have
focused on producing affordable housing; they have built more than 500,000 units and
account for more than a third of all affordable housing nationwide 16 CDCs have also
become heavily involved in supporting job-creating local businesses, and "have developed
a solid capacity to undertake community development in partnership with the private sector,
even while remaining community-based and controlled."¹
10
"Capital
Aggressive financing
But ECD, which went into business in
1994, has made inroads. In its first five years,
is scarce
the organization has provided financing and
technical assistance to 633 firms, resulting in
in the
5,252 jobs. And, to attract more venture capi-
tal from individual as well as institutional inves-
Delta
tors, ECD has established ECD Investments
Example
(ECDI), a limited liability company.
and the fruits of an extended bull market have
With an impressively diversified portfolio
yielded little benefit for the nation's poorest
ranging from furniture manufacturers to retire-
region," says Bill Bynum, President of Enter-
ment communities, ECD has a five-year strat-
prise Corporation of the Delta (ECD), based
egy calling for aggressive financing and techni-
in Jackson, MS.
cal assistance that will generate 37,500 jobs,
Bynum is talking hard facts, but he isn't just
increasing job creation in the region by 33%.
wringing his hands. He's searching full-time for
It's a region, Bynum believes, whose people
DELTA
more sources of investment capital to deploy
are ready to become full partners in the na-
across a region whose human as well as eco-
tion's economic progress - - and to return high
nomic potential, he believes, has been greatly
dividends on regional investments.
undervalued.
What they need is more capital - whether
to facilitate promising
Attacking obstacles
PROGRESS MARKERS
business start-ups or
A private, tax-exempt
help an enterprise
vertur
What ECD's investment programs
business development and
grow to meet increas-
have accomplished, 1994-1998
finance organization, ECD
ing demand for its
products and services.
works to strengthen the
Pin
Total businesses assisted
633
economy and improve the
ECD stands ready to
Minority-owned
262
quality of life for a tri-state
back up investments
Female-owned
345
with the technical as-
region covering 58 urban
Financing commitments:
sistance that can assure
and rural counties along
ECD
$19.1 million
the Mississippi River in
Leveraged (non-ECD)
$34.8 million
their success, but funds
Jeef
western Mississippi, east-
Jobs impacted
5,252,
have to flow to make
Annual sales impact
$201 million
the formula work.
ern Arkansas and north-
technit
Loan lossès
under 3%
eastern Louisiana. ECD
That's why ECD is
fulfills its mission by pro-
among many like-
viding financial and tech-
minded organizations
nical assistance to companies and entrepre-
strongly committed to the concept of a com-
munity development tax credit. Where a
neurs in the region, and forging strategic part-
nerships with private, public and non-profit
potential investor is poised to make the right
move, a tax credit can make the difference
sector organizations committed to developing
between action and hesitation - and in the
the region's human and economic assets.
Delta, as in the stock market, that difference
ECD clearly faces a major challenge. The
can be crucial.
Delta's 1990 Census numbers tell part of the
story. The high-school dropout rate was 44.3%,
"The key thing to keep in mind," Bynum
almost twice the national level of 24.8%. The
says, "is, yes, the Delta may have had more
rate of households below the poverty level was
than its share of problems, historically speaking
27.9%, more than twice the national rate of
13%. Median household income was $16,583,
but the
about half the national rate of $30,056. These
disadvantages, coupled with out-migration,
possibilities
scarcity of resources and racial disparities,
represent huge obstacles to regional economic
are enormous.'
development.
11
Community development financial institutions (CDFls) combine principles of social and
economic justice with solid business performance, borrowing money from investors and
lending it to finance housing construction and renovation, business start-ups and expansions,
and essential community services. In addition to CDCs, CDFIs include community
development loan funds, community development credit unions, microenterprise funds, and
community development venture capital funds. National, regional, and local intermediaries
channel investments and technical support to community development organizations.
These organizations rely on a wide variety of public and private funding sources, working
closely with federal, regional, state, and municipal agencies, banks, businesses, philanthro-
pies, and other entities. As public/private partnerships, they have skillfully used public funds
at modest levels to leverage substantial private investment, building broad-based alliances,
nurturing long-term relationships among stakeholders, and bringing the best thinking from
both public and private sectors to bear on community revitalization. They are, in many
instances, a community's most vital resource, its most effective agents of change.
A community development tax credit
can work wonders.
Tax credits offer an incentive for the private investment community to purmore of its funds
where the returns, measured not only in dollars but also in development of human capital,
are likely to be greatest. Properly targeted, tax credits can stimulate whole industries and
support sustainable job growth.
The Low Income Housing Tax Credit (LIHTC), initially enacted as part of the Tax Reform
Act of 1986 and made permanent in 1993, has been notably effective in engaging the
private sector in community-building. The tax credit has increased the nation's supply of
affordable housing by nearly 1 million units. It has become the main funding stimulus for
affordable rental housing, generating, each year, 80,000 to 100,000 units plus an estimated
70,000 jobs, more than $1.8 billion in wages, and upwards of $700 million in tax revenues.¹⁸
In 1993, Congress authorized a Community Development Corporations Tax Credit
(CDCTC) demonstration program, administered by the Department of Housing and Urban
Development (HUD), which selected 20 CDCs across the nation as participants, with each
CDC eligible to receive up to $2 million in private-sector investments encouraged by
favorable tax treatment. The pilot program became effective in mid 1994. Since then,
participants have raised about $20 million via the tax credit. Funds have been used to
support business start-ups, provide small-scale infusions of capital to help entrepreneurs get
past the pitfalls of growth, and underwrite essential community improvement projects that
lay thé foundation for sustainable growth.
The CDCTC pilot program has also been a highly useful learning experience for the
participants. Those that have not yet raised significant amounts using the tax credit have
identified a number of barriers that needed to be addressed, ranging from increasing their
own marketing activities to forming the kinds of limited partnerships that can attract investors
and obtaining clear, timely direction from the Internal Revenue Service in order to be able
to precisely quantify the tax advantages of investing in community development.
12
ington Post reported in a March 5, 1999,
Looking
profile. Pathmark found that inner-city resi-
dents will use their buying power to reward
for examples
businesses that meet their needs. The long-held
belief that inner cities are a bad investment risk
to follow?
is slowly giving way to the discover that in the
right hands they represent real opportunity.
Look to
Partnering with Prudential
Newark.
NCC doesn't have to speculate about
whether a community development tax credit
would help attract more capital. The organizat-
Yes, Newark. Anyone who's still skeptical of
ion took part in the 1993 CDC tax credit pilot
the power of community development should
program, partnering with Prudential Insurance,
consider a trip to New Jersey, to see what New
which purchased $2 million in tax credits. That
Community Corporation (NCC) has accom
kind of funding has helped advance NCC
plished in gritty inner-city neighbor noods that
projects such as converting an abandoned
were all but destroyed by the riots of 1967.
Borden Milk plant into a home for New Com-
Talk about great oaks from little acorns. The
munity Technologies, which builds pre-fab
acorn, in this case, was a church basement, a
panels for local housing projects, employing
refuge from the riots where parishioners hud-
inner-city people who are making the transi-
dled with their parish priest, William Ainder,
tion from welfare to work. Prudential, based in
and had their faith tested.
Newark and committed to social investment,
Build a new community out of the ashes of
stands ready to partner with NCC again.
the old? In an era when those who could were
Does a community development tax credit
abandoning the cities? It seemed impossible.
make sense? Look to Newark.
But thanks to "faith, hope, and leverage" - as
Father (now Msgr/ Linder shrewdly
puts it - NCC has prevailed. And
then some.
More Retailers Are Sold on Cities
Community commitment
Now the nation's largest commu-
Highlights from
Strategic
nity development corporation, NCC is
Mindshare's study
on urban retailers:
tough to capture in numbers alone.
More urban stores
than rural or suburban
But consider: 3,100 apartments and
ones fell within the top
10 percent of (Main's
best performers
town houses in 18 complexes. Day
When renified by
sales per square foot
urban stores had an
care centers caring for more than 700
even better showing
within the top 10
children. More than 1,500 employees
percent of best
performers
.
in
terms
of
providing services to 35,000 people
profitability retailers
with only urban
locations fared belief
daily - helping them get high-school
than those with mixed
locations.
diplomas, learn job skills, get to and
I
Williams
Linder,
outside
store's
I
from work or the Pathmark supermar-
required
I
affort.
pathmal
ket that NCC persuaded to locate in a
They Say There's Money There After All
neighborhood that hadn't had a mar-
By MICHAEL A PLATCHES
Fashington
POR
"Why did Willie
ket for 25 years. Or to the New Com-
NEWARK
Sutton rob banks?
munity Neighborhood Center, proud
I
many the small shupping
croter - this Impoverished
INs simple. Because
assural ward is quite unreasarkable
just
an
arrey
of
fast
food
stalls
and
that's where the
symbol of an entire community's
small parcel delivery alore apchored by
busiling supermarket
money LS. Why do we
Mary Les Ortis
NEW YORK
commitment to itself.
it is the type of development abiqui-
leaves the
tous in suburbis the heart
open stores in the city?
athmark store in
Because that is where
Newark, where
Today policymakers and the me-
Newark
most of the
dia look to NCC and Newark as a
case study of what can be accom-
plished with the right mix of capital
NCC's Bill Linder was profiled in a recent Washington Post
and human resources. As the Wash-
account of inner-city Newark's progress. The headlines tell the
story - part of it, anyway. There's more than money at work.
13
With these obstacles addressed, the stage has been set to make broadly effective use of
a community development tax credit. Indeed, a recent analysis of the pilot program by The
Brookings Institution concluded that "a federal tax credit targeted toward [community
development] activities can be an important tool for drawing private investment into
low-income communities. The timing is right. The ground-level network of strong
organizations that can make effective use of a tax credit exists. The private sector has
demonstrated a willingness to participate. And the neighborhoods themselves are ready,
with many now able to sustain development over the long term.
It is important to note what tax credits are not. They are not subsidies. Because they act
only as investment incentives, tax credits do not artificially channel public or private funds
to places where the most crucial prerequisites for community development - local
commitment, skills, accountability, and track records - may be lacking or in short supply.
Tax credits alone cannot spur investment where the necessary infrastructure is missing. But
what they can do is help level the economic playing field. Where local resources are strong,
tax credits can make a critical difference, attracting investors who might otherwise shy away
from investing in the future of lower-income communities.
A community development tax credit, in short, represents a sound investment for the
nation, whether from an economic or social perspective. In Alan Greenspan's terminology,
it means more real output and better distribution of output. In the language of social change,
it means improving the prospects for sustainable community development. And for the
people at the front lines - the millions of lower-income Americans trying to start or grow
businesses, provide needed services, or earn a living wage in a job with decent benefits -
it means hope.
Sources:
1. "Changes in Small Business Finance," remarks at the Federal Reserve System Research Conference on Business
Access to Capital and Credit, Arlington, VA, March 9, 1999. Chairman Greenspan's remarks have been edited here
for brevity; the unedited text is available on the Federal Reserve Board web site at: www.bog.frb.fed.us/boarddocs.
2. PricewaterhouseCoopers, MoneyTree Survey Report, February 24, 1999.
3. Center on Budget and Policy Priorities, Analysis of Census Bureau's Income and Poverty Report, October 1998.
4. Bureau of Labor Statistics, Employment and Unemployment, February 1999, March 5, 1999.
5. "Strong Economy Leaves Young Blacks Behind," Wall Street Journal, March 9, 1999.
6. USDA, Economic Research Service, Rural Development Perspectives, January 1999.
7. "Pockets of Decay Are Plaguing the South," Wall Street Journal, March 6, 1998.
8. Ibid.
9. See, for example, USDA, Economic Research Service, Rural Conditions and Trends, Vol. 9, No. 2, March 1999.
10. Small Business Administration, Small Business Vital Statistics, March 1999.
11. "Former Welfare Recipients Aren't Quitters, Some Companies Say," Wall Street Journal, March 2, 1999.
12 "Small Business Finance in Rural and Urban Regions," Jere W. Glover, Chief Counsel for Advocacy, Office of
Advocacy, Small Business Administration, unpublished paper, December 1998.
13. Small Business Administration, "The Impact of Bank Mergers and Acquisitions on Small Business Lending: A
Conference Report," January 1998.
14 Op cit.
15. See, for example, Reinventing Communities, Rapoza Associates, Washington, DC, February 1999.
16. Life in the City, Center for National Policy, Washington, DC, 1997
17 the CDC Tax Credit: An Effective lool for Attracting Private Resources to Community Economic Development,
Center on Urban and Metropolitan Policy, The Brookings Institution, Washington, DC, August 1998.
18. Ibid.
19. Ibid
14
A
Rural, not disposed.
lower-income families - that it has financed in
June-
Rural America
colonias settlements. Policymakers and practi-
tioners often think of housing and economic
is Martia-
development as different activities. Guerrero
mention
NatAm
points out that housing is economic develop-
especially
ment - generating jobs, adding value to the
community, and showing skeptics that when
you stick with it, you can get something done.
hard-pressed
Adding financial muscle
for investment
With an $8 million loan fund, RDFC has
been able to supply some financial muscle to
capital, and
micro-enterprises that offer the potential to
create real change and new opportunities.
the challenge is probably nowhere greater than
For example, RDFC provided a $290,000
in the areas where the Rural Development &
loan a few years ago to help a south Texas
Finance Corporation (RDFC) is at work: the
entrepreneur, Dr. Charles Taylor, move ahead
colonias areas along the U.S.-Mexico border,
with plans to process kenaf, a natural fiber that,
native American lands, and largely African-
among other things, can substitute for cellulose
American rural communities in the Southeast.
in the production of newsprint and paper.
Along with Appalachia, these areas account for
Kenaf is fast-growing, needs little water, and
virtually all of the nation's 500 persistently poor
doesn't require massive applications of fertiliz-
counties, described by Agriculture Department
ers and pesticides, so it's environment-friendly.
economists as "those sections of the country
Today Kenaf Paper is planning a $130-million
where the trajectory of poverty and economic
newsprint mill, and Kenaf Industries is develop-
depression has historically headed downward."
ing other applications. The two enterprises
No one living in these areas likes being
have generated 40 jobs thus far; if all goes well
trapped in that kind of trajectory. No one likes
they'll create another 500 or so in the near
living in colonias settlements lacking basic
future. RDFC's modest start-up investment is
amenities such as adequate roads, sanitary
beginning to yield high dividends in value-
water and sewer systems, and decent housing.
added manufacturing and non-seasonal jobs
No one likes living with the uncertainty and
that pay a living wage.
the often brutal conditions of low-wage sea-
sonal jobs and the 50%-and-up real unemploy-
ment rates typical of persistently poor counties.
Shaping a future that works
No one wants to live without being able to
A participant in the CDC tax credit pilot
glimpse signs of change, without hope of being
program enacted in 1993, RDFC discovered
able to make things better.
that the program had limited applicability to
RDFC's service areas, largely because the tax
credit and the investments that could be fi-
'Everything great starts small'
nanced through it weren't sufficient to attract
Making things better is RDFC's mission.
investors. But Guerrero remains convinced that
Based in San Antonio, the private, non-profit
tax credits can be used effectively to promote
RDFC started out in 1977 as the National Rural
community development as long as the credits
Development & Finance Corp.; in 1994,
are large enough and long-lasting enough to
"national" was dropped as the organization
meet investors' needs.
redirected itself, in effect deciding to focus on
Guerrero envisions using such a credit to
the toughest cases. Currently, with a staff of 10
build a multi-state venture capital fund to
and an annual operating budget that hasn't yet
broken the million-dollar mark, RDFC is obvi-
underwrite business development offering
viable alternatives to regions long in need of an
ously among the nation's smaller financial
economic boost. "Despite the enormous obsta-
intermediaries. But to CEO Gloria Guerrero,
cles we face," she says, "we can shape a future
small is OK: "It's how everything great starts."
that works - and tax credits have a major role
RDFC points, for example, to the 500 units
to play in it."
of affordable housing - homes now owned by
15
Community Development Tax Credit Coalition
1250 Eye Street NW, Suite 902, Washington DC 20005
tel: 202-393-5225 fax: 202-393-3034
SOY INK