An Opportunity Model: Utilizing a Community Development Entity
A Community Benefits Agreement (CBA) is the first and necessary step to ensuring the project also serves the community’s needs; however, the finance model plays a central role in determining the scale of benefits and whether the needed community investments will be made to achieve the community benefits goals. A governance structure that is inclusive of community and dedicated to community well-being, in addition to a CBA, would achieve an even greater scale of community investment.
We recommend that the development of the Berkeley Global Campus is financed and structured in a manner that commits to serving the community needs of Richmond; we consider a public-private partnership that utilizes a 501(c)(3) Community Development Entity (CDE) to be the finance vehicle that can achieve both the goals of the university and the Richmond community. A CDE is any duly organized entity treated as a domestic corporation or partnership that has a primary mission of serving or providing capital investment to low-income communities or persons that maintains accountability to the low-income community, and is legally certified.40 An existing or newly established CDE could be positioned to be the Master Developer, competing in the University’s bidding process to win contracts to develop projects on the Richmond campus. The CDE could act alone or enter into a partnership with an existing developer, combining the development capacity of the partner with the mission and governance structure of the CDE. The CDE model is nearly identical to the public-private partnership model previously described, with the exception of the community-serving entity inserted in the process.
A new CDE could be established with the financial backing of foundations and in cooperation with Richmond community groups. If the CDE alone or with a partner obtained a contract with the University, it would secure financing, tax-exempt and otherwise, and execute development of the Berkeley Global Campus while simultaneously investing profits into large-scale community programming serving low-income community needs.
Legal Requirements of a Community Development Entity
Primary Mission. A CDE must demonstrate a primary mission of serving or providing investment capital for Low-Income Communities (LICs) or Low-Income Persons. There are two components to this requirement:
- an applicant must provide organizational documents evidencing such a mission; and
- an applicant must certify that a minimum of 60 percent of its activities (e.g. loans and investments) are or will be directed towards serving low-income persons or LICs.
Accountability. A CDE must demonstrate that it maintains accountability to the LICs that it serves or intends to serve. There are two components to this requirement:
- an applicant must indicate which LICs it serves or intends to serve; and
- an applicant must show that a minimum of 20 percent of either its governing board or advisory board(s) is representative of the LICs that it has designated.
Legal Entity. In order to be certified as a CDE, an applicant CDE must be a domestic corporation or partnership for federal tax purposes and be duly organized and validly existing under the laws of the jurisdiction in which it is incorporated or established. For-profit and non-profit organizations may be certified CDEs by the Community Development Financial Institutions Fund of the United States Department of the Treasury.41
In this case, the CDE would need the technical, legal, and financial capacity to develop state-ofthe-art facilities at the Berkeley Global Campus. The CDE could be an existing entity, or newly established. Either way, its governance structure (board and by-laws) and staffing would be arranged to meet the needs of the University and the community. A CDE is an approach that achieves three necessary goals:
- meets the University’s quality expectations for the project by securing the most qualified, competitive developers and team with demonstrated experience;
- guarantees benefits to the low-income community by reinvesting profits from the project into the community, guided by the Community Benefits Agreement; and
- maintains financial feasibility through CDE-specific financial incentives and other investments.
Meeting University Project Expectations UC
Berkeley’s development plans will move forward, bringing cutting-edge research and education projects and facilities to Richmond. The University’s campus development goals can be met through effective planning and design of a CDE. The CDE would have the ability to attain third party professionals who have the experience and expertise from developing similar facilities. This is standard practice for developers of projects like the new campus, where highly specialized firms are contracted to play various roles in campus construction. The Berkeley Global Campus could be financed through a CDE that would assemble a team of high caliber professionals that might include the same expert professionals that a forprofit developer would have hired.
Serving Low-Income Communities
The CDE adds serving low-income communities to the mission of the campus development governance structure. A CDE acts as a non-profit development entity and guarantees the reinvestment of profit from the development back into the community.
If the University entered into a conventional public-private partnership, a developer’s fee would be negotiated with the University; private developers typically take 15 percent of revenue as profit. The amount of profits accrued by developers depends on the costs of the project, so while the cost of the project is currently unknown, it is expected to be a substantial amount of revenue. For example, if the full build-out of the campus entails $4 billion in costs, the profits accrued by developers could be in the realm of $600 million.
With a CDE model, the share of the project profits otherwise held by the developer could instead be invested according to the CDE mission. A non-profit development organization- with local accountability and appropriate business capacity that has won the contract for developing the campus- could create a substantial structure for financing community benefits aligned with many of the recommendations set forth in a Community Benefits Agreement.
Through a CDE, the impact of the anchor development will be captured on behalf of the community. Profits will be delivered to the community over the extensive period of time that the development takes place, and can begin to address the lack of opportunity in Richmond described in the first part of this report. Whether the goal is to invest in workforce development programs that support historically excluded workers or to protect and expand the affordable housing for Richmond’s low-income residents, the previously outlined community objectives can be best achieved through a CDE model.
Through a Community Development Entity, the impact of the anchor development will be captured on behalf of the community.
Accessing Unique Financial Tools
A CDE also offers competitive financial incentives for universities that have reached their debt capacity. A CDE has access to tax-exempt financing, so it can benefit from low interest rates. This allows a CDE to provide a competitive bid, possibly more competitive than that of a private developer working within a traditional public-private partnership. The non-profit CDE model has access to a wide range of funding opportunities, including grants, private sector support, completion and cost overrun guarantees, tax-exempt bond offerings, and New Market Tax Credits. This approach can result in the lowest-cost delivery for both variable and fixed expenses.42
If the CDE wins the Berkeley Global Campus project bid, UC Berkeley’s commitments to the CDE will serve as bankable contracts the CDE can use to leverage additional financing through traditional lending. As well as development fees, the CDE, like any developer, can utilize private lenders and financing intermediaries or third party guarantors to help create the necessary financing package for its projects. In addition to quantifiable savings, the social benefits to the community will be invaluable.43
New Markets Tax Credits. A leading financial incentive for the CDE model is the opportunity to benefit from New Markets Tax Credits (NMTC), a tax incentive for investing in economically disadvantaged communities like Richmond. Enacted by Congress through the Community Renewal Tax Relief Act of 2000, the New Markets Tax Credits program is primarily intended to encourage private capital investment in eligible low-income communities and is arguably the most successful of the federal legacy programs for stimulating investment in distressed areas.
CDEs are the only qualified investment groups allowed to apply for an allocation of the NMTC from the US Department of Treasury’s Community Development Financial Institution (CDFI) Fund. Once the CDE has secured its NMTC allocation authority, it can begin using the NMTC allocation as an incentive to attract investors. CDEs secure taxpayers—individual or corporate— to make Qualifying Equity Investments (QEIs) in the CDE. The CDE then must make equity investments in qualifying low-income communities (LICs) and low-income community businesses (LICBs). Investor proceeds must be “substantially”44 used for eligible investments in qualifying LICs. After the CDE is awarded a tax credit allocation, the CDE is authorized to offer the tax credits to its private equity investors. These investors can be individual or corporate taxpayers who then claim a credit against federal income taxes for their QEIs.
Investors receiving the credit can claim the NMTC over a seven-year period, at a rate of 5 percent for each of the first three years and a rate of six percent for each of the next four years, for a total of 39 percent. According to new data on the first 11 application rounds of the program (FY 2003 through FY 2013), the CDFI Fund has made 836 NMTC awards, allocating a total of $40 billion in tax credit authority to CDEs.45 Although the NMTC program expired at the end of 2014, there is bipartisan support and various legislative and executive proposals to make the program permanent and increase its allocation amount.
Program-related Investments. Further along in the project, private investors would have the opportunity to make program-related investments by investing in bonds used for development. Program-related investments (PRIs) are investments made by foundations to support charitable activities or to further some aspect of their charitable mission. Considered a longterm, recoverable investment, PRIs offer the potential return of capital within an established timeframe, unlike grants. Often used to finance affordable housing and community development, PRIs include financing methods commonly associated with banks or other private in vestors, such as loans, loan guarantees, linked deposits, and even equity investments in charitable organizations or in commercial ventures for charitable purposes.46
PRIs must significantly further the foundation’s exempt activities. According to the IRS, some typical examples of program-related investments include:
- “low-interest or interest-free loans to needy students;
- high-risk investments in non-profit low-income housing projects;
- low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available;
- investments in businesses in deteriorated urban areas under a plan to improve the economy of the area by providing employment or training for unemployed residents; and
- investments in non-profit organizations combating community deterioration.”47
The primary benefits of PRIs for the recipients are access to capital at lower rates than may otherwise be available. For the funder, the primary benefit is that the repayment or return of equity can be recycled for another charitable purpose.48 As financial tools that help missiondriven organizations attract additional funding sources, build income and assets, and achieve long-term financial stability, PRIs would likely be a critical component to the CDE model.
Impact Investing. The CDE model also attracts impact investment. This newer type of investment model offers a hybrid of philanthropic services and sustainable investments. Although exact definitions of impact investments may vary, Credit Suisse defines them as “investments made with the primary intention of creating a measurable social impact, with the potential for some financial upside.” Impact investments can take form as “innovative impact bond structures to peer-to-peer funding platforms to seed stage investing forums.”49
According to Credit Suisse, impact investments “may face some risk of financial downside, but no deliberate aim of consuming capital as with a charitable donation. In short, impact investments place capital in businesses and other vehicles that are designed to generate a tangible social impact as well as a financial return.” While impact investments are evaluated against standard risk and financial return metrics like traditional investments, a key difference is the added performance parameters of social impact.50 Since the development of the Berkeley Global Campus offers the potential for financial and societal benefits for Richmond, the project could attract additional long-term funding through impact investments.
Comparison of the Conventional and Opportunity Public-Private Partnership Models
A CDE would potentially achieve the same capital and efficiency of a conventional public-private partnership. A CDE, by filling the same role as a private partner in a public-private partnership, assumes “not just the more conventional responsibility for Design, Bid, and Build project functions, but also shoulders the Financing, Operations, and Maintenance responsibilities and risks.”51 A CDE could achieve the same efficiency as a public-private partnership because it would employ the same level of expertise to plan and execute development of the Berkeley Global Campus. Furthermore, the perceived financial savings of a public-private partnership model is often only possible through significant yet often overlooked societal and economic costs.
Disadvantages to the basic public-private partnerships include the following.
- A lack of public participation. Public-private partnerships often provide “limited opportunity for meaningful levels of transparency or public participation.”52
- A neglect of equitable partnerships between public entities and disadvantaged communities. Public-private partnerships have also been criticized for the “ambivalent and even deceptive core of such partnerships that enable their effective operation as a form of privatization, advancing the interests of the private sector and the market under the banner of sharing power with the poor and the state.”53 Studies on the impacts of publicprivate partnerships often conflate economic growth and poverty alleviation by only examining wealth creation, and failing to also examine wealth distribution.54 In the pursuit of one economic objective, public-private partnerships are at risk of neglecting other opportunities to benefit disadvantaged communities.
- An achievement of profitability or cost-effectiveness at the expense of wages and benefits. Public-private partnerships may partially be generating long-term savings by pushing down employee wages and benefits. Without legal requirements to provide stable, decent wages and benefits to local employees, private partners may choose outsourcing to avoid union representation and better labor standards.
A CDE is a superior model in achieving an inclusive process for the low-income residents it is serving. A CDE also commits to a higher level of accountability to its community than a public-private partnership. Under a traditional public-private partnership, the development of the Berkeley Global Campus would be more likely to exacerbate Richmond’s economic exclusion and displace its low-income residents. Both of these pitfalls can be mitigated by utilizing a CDE instead.
A CDE has the capacity to provide alternative financing to UC Berkeley while also achieving the same efficiency as a public-private partnership. Furthermore, a CDE would also provide the added benefit of meeting the community’s inclusion and equity goals.
There are risks associated with the Berkeley Global Campus that would remain, regardless of the finance model. Also, given its mission-driven structure to serve the low-income community, a CDE would have limitations on its for-profit ventures. While this could be considered disadvantageous for for-profit developers, the trade-off is advantageous for the City of Richmond and its low-income residents, as project profits circle back as a community investment.
- 40. As of July 31, 2012, there were 495 certified CDEs in California, including three in Richmond: the Community Housing Development Corporation of North Richmond, SunPower Community Development, and Mechanics Bank CDC. Source: Department of Treasury (August 2, 2012) Certified Community Development Entities (with Subsidiaries) as of 7/31/2012. CDFI Fund. Retrieved from: http://www.novoco.com/new_markets/resource_files/cde/cde_bystate_080212.pdf.
- 41. CDFI Fund. 2005. ‘New Markets Tax Credit: CDE Certification Question and Answer.’ https://www.novoco.com/new_markets/resource_files/cde/ CDE_Q_A_0705.pdf.
- 42. Recchie, Joe. 2014. ‘A Model for Deeper Partnership.’ Praxia Partners.
- 43. Recchie, Joe.
- 44. This requirement is met if at least 85 percent of investor proceeds are used to make eligible investments in the first six years of the NMTC period and at least 75 percent in year seven of the investment.
- 45. CDFI Fund. 2015. ‘CDFI Fund Releases New Markets Tax Credits Public Data for 2002-2013.’ http://www.cdfifund.gov/news_events/CDFI-2015-21-CDFI_Fund_Releases_New_....
- 46. PRIS. 2015. ‘Grantspace.’ http://grantspace.org/tools/knowledge-base/Grantmakers/pris.
- 47. . IRS. 2015. ‘Program-Related Investments.’ http://www.irs.gov/Charities-&- NonProfits/Private-Foundations/ProgramRelated-Investments.
- 48. PRIS.
- 49. Credit Suisse and the Schwab Foundation for Social Entrepreneurship. 2012. ‘Investing for Impact: How social entrepreneurship is redefining the meaning of return.’ http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid....
- 50. Credit Suisse and the Schwab Foundation for Social Entrepreneurship.
- 51. Bay Area Council Economic Institute.
- 52. Hodge, Graeme A., and Carsten Greve, eds. The challenge of public-private partnerships: Learning from international experience. Edward Elgar Publishing, 2005.
- 53. Miraftab, Faranak. “Public-Private Partnerships The Trojan Horse of Neoliberal Development?.” Journal of Planning Education and Research 24, no. 1 (2004): 89-101.
- 54. Miraftab, Faranak.