Place-based Investing: A Q&A with Urban Institute

The Urban Institute recently released its C3 research project on the impact of place-based investing activity and the role that catalytic capital plays in the work. Brett Theodos, senior fellow and director of the Community Economic Development Hub at Urban, talked to C3 about the takeaways of Catalytic Capital for Neighborhood Reinvestment: Lessons from Cleveland.

C3: Your project focused on community investment activity in Cleveland as a case study for place-based investing, and you found that the city has one of the highest levels of mission-driven lending per capita in the country. Is that why you chose it for a deep dive into housing and economic development data?

BT: We knew Cleveland had a strong level of mission lending from our national data work. It is a good example of a city that combines both capacity and need. It is an older legacy city that has a rich philanthropy sector, good engagement from the city and state, and a strong network of community development corporations (CDCs) and community development financial institutions (CDFIs). Some cities have a lot of need but not a lot of capacity to address it, and there are others on the continuum that don’t have quite the same level of need. Cleveland was a bit of a sweet spot.

C3: You found that most neighborhoods in Cleveland had some level of mission investing but that it didn’t flow equally. What does that say to new investors about strategy? Should they be attracted to the same local factors that have drawn in other capital, or should they be looking at communities that have not been able to attract financing, where there are still significant gaps?

BT: All of this is couched in the broader objective of using catalytic capital for place-based development. You can almost always do a great project anywhere with enough subsidy. But place-based redevelopment means building a pipeline of projects to sustain themselves, to move toward attracting other capital and to, ideally, do it without displacing existing residents.

When thinking about a strategy, there has to be some market demand. I don’t mean that to exclude other communities. But, when we are talking about place-based change, there is the question of how much subsidy you have and how far it can go. There is also the X factor: who cares about the neighborhood? Is there a CDC that will see the process through? Is there an anchor institution, like a university or health system? If there are organizations that care, and that are not going away, that is one reason why we see catalytic capital moving in, where in other deserving places it might not.

C3: What about capital absorption capacity? You highlight it in the report as being critical to impact, but it seems difficult to judge—especially for new investors. How can you tell if a community has the social infrastructure it needs to put impact capital to effective use?

BT: That’s challenging, but it will depend on whether you are trying to make a direct investment at the project level or if you are investing in another institution, like a CDFI or investment fund. In both cases, you still need to judge what kind of capital can be absorbed. We hope to do more to quantify capacity in future research, but in the meantime, it takes getting to know the market yourself or finding a local or regional organization that knows the market, and saying, “Here are the resources; what can we do?”

C3: Talk a bit about the sustainability of investment in a particular geography. Beyond any single development project, it can take many years to make a measurable difference in the well-being of communities. How should investors approach that long time horizon?

BT: It’s relatively quick to change a neighborhood if what you are doing is replacing who lives there. It’s much harder to change in a way that preserves the right for residents to remain in that neighborhood, while at the same time introducing new services, amenities and housing stock that adds diversity—especially of income—to the place.

How long does that take? Decades, really, because the approach needs to be incremental. Look at it this way: the construction process for just one large real estate project can take four years. When that moves forward, maybe there is enough demand for the next parcel, and maybe there is enough subsidy to address the parcel next to it, and maybe you introduce a transit stop so people can walk…it is slow and painstaking, but it can succeed.

C3: The report outlines some general advice for investors, like collaborating with other investors/partners and plugging into community-based planning. What else should catalytic capital providers know?

BT: I think, sometimes, people want one solution, one organization, one fund, one tool, one program when, really, it is the multiplicity of those that builds resilience and expands access to different land uses, sectors and neighborhoods. You want this to be multi-nodal, with different groups that are active.

We found that the outcomes catalytic capital achieved are largely commensurate with the level of investment activity. But the thing to keep in mind: even at its high water mark, catalytic capital is a small player in the financial landscape. We have high expectations because this financing is targeted and strategic, but we have to have measured expectations as well, because on its own it isn’t enough.

C3: Any final thoughts?

BT: This work is hard, especially in places that are not growing—where demand is basically seeping out of the city. But it’s worth it. There are a lot more people purporting to have place-based intentions and designs than the number of sustained efforts that actually get there. Most are delivering nice things to a place that needs it, and that’s valuable. But to actually change a community in sustainable ways takes more. Be patient. Stay with it.



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