Author Archive: Oscar Perry Abello

These Oakland Entrepreneurs Didn’t Need a Shark Tank to Raise $237K

(Credit: Spotlight:Girls)

Lynn Johnson and Allison Kenny’s business, Spotlight:Girls, uses arts and performance to teach social and emotional skills to girls. That might sound like a model nonprofit, but the two, who are married, thought otherwise.

“I came from the world of nonprofits and very specifically did not want to run a nonprofit,” says Johnson, who is a theater artist. “I wanted to be in a situation where I was generating wealth for myself, my family and my community. I was fighting against the idea of having to be a starving artist, to prove that what we do for the world has value.”

Thanks to an array of tools, some new and some old, they’re taking their business national now. Their first girls-only summer camp was in an Oakland church basement in 2008, with just 17 campers. Their after-school and in-school programs now reach over 460 girls, and their main summer/winter camp business now reaches around 500 first- to fourth-grade girls a year, across multiple sites in the Bay Area. For those who cannot afford to pay the $699 camp fee, Spotlight:Girls has secured paid sponsorships from local businesses looking for exposure to camper parents.

Lynn Johnson, left, and Allison Kenny, right (Credit: Spotlight:Girls)

The business now earns around $400,000 in revenue a year, and they have a plan to take their trademark “Go Girls!” summer camp to 35 sites nationwide by 2020, using a franchising model. They’ll teach franchisees how to run the camps as well as how to recruit local business sponsors.

“As we’re growing into that we want to be a relatively low point of entry for franchise buy-in, so we can work with a diversity of entrepreneurs,” says Johnson.

Starting up a franchise like a McDonald’s can run in the hundreds of thousands of dollars, up to $2 million according to one estimate, plus an annual cut of revenues. For Go Girls! camps, franchisees will pay a $7,500 training/set­up fee and then 8 percent of annual revenues from their Go Girls! camps. The opportunity is open to non­profit franchisees too, who will pay a one­-time fee of $5,000. All franchisees will also have access to the core Spotlight:Girls team for ongoing technical support in running the camps.

Johnson raised $237,500 in capital for the national expansion, for training costs and materials for new franchisees and a new marketing director and a larger marketing budget. When thinking about how to get that capital, Johnson considered many options, from banks to venture capitalists, but she knew the numbers.

Loan approval rates for women-owned businesses are 33 percent lower than what men-owned businesses get, and loan denial rates for minority-owned firms are around 42 percent, compared to those of non-minority-owned firms at 16 percent. A bank loan doesn’t quite make sense, either, for this kind of business; banks generally want steady payments all year round, but a business built on a summer camp and other education work doesn’t get steady revenue all year round.

On the venture capital side, Project Diane analyzed the 10,238 venture capital investments made in the U.S. from 2012 to 2014, and found just 24 of them had a company with a black woman founder. That’s 0.02 percent.

“We looked at all the different options,” Johnson says. “Based on the size of the business, who I am in the world, there’s so many types of investment I’m just not going to get.”

Instead, Johnson combined an array of tools to raise the capital Spotlight:Girls needed from their own backyard and from a community of like-minded individuals who believed in Johnson and the company’s mission. Throughout the process, Johnson worked with Oakland-based lawyer Jenny Kassan, who specializes in helping mission-driven entrepreneurs raise capital.

“I’ve raised this money by being supported by a community of women entrepreneurs,” Johnson says.

Kassan has two decades of experience helping dozens of clients all over the U.S. to raise capital through similar processes, as an alternative to the “shark tank” style of venture capital investing: three-minute pitches, huge conferences and high-pressure conversations.

“That is not a good model for 99.9 percent of businesses but a lot of people don’t realize there are a lot of other options,” Kassan says. “Even if you do get the money, you might end up regretting it, because basically you’re bringing on a boss and they might push you to do things you might not want to do.”

Johnson’s capital raising started with her community; she raised $50,000 from two friends. With Kassan’s guidance, she used what’s called a private offering, in which entrepreneurs sell non-voting ownership shares of their business — so they can maintain control but allow other investors to share in the profits.

The U.S. Securities and Exchange Commission (SEC) has lots of rules about how to advertise and how much any one investor can put in and how much an entrepreneur can raise through the private offering process, but as long as you follow the rules, pretty much anyone you know can invest. One of Johnson’s friends set up a self-directed IRA (individual retirement account) so that they could move retirement savings into that account and from there make an investment in Spotlight:Girls.

It can still be intimidating, Kassan says, but having a mission helps. “When you first start raising money for your business, you might feel like you have to promise really high returns or that there’s no way you’re going to lose someone’s money,” she says. “It gets better when you start to have confidence in your mission and who you are.”

Johnson found the experience starkly different from going to a bank or a venture capitalist, where the investors’ expectations are the main drivers of the discussion. Investors, especially venture capitalists, are on the hunt for businesses that will take their $1 million and turn it into $10 million or $100 million.

“When you go to your community you give them the term sheet,” Johnson says. “Some have said yes, some have said no, but I’ve raised what I needed to raise.”

Next came WeFunder, one of a wave of new online platforms that allow entrepreneurs to raise capital from investors. Spotlight:Girls used WeFunder to raise $87,500 from more than 40 investors. The minimum investment was just $500.

Proponents of crowdfunding have said it could help level the playing field for business investment, and since the rise of these platforms, there is some early evidence that promise may hold up. Investibule, an online investment aggregator, analyzed the first 500 online investment offerings listed on its site, and found that women and minorities are succeeding at far higher rates than they have using the traditional venture capital route. Across a diverse array of industries, led by food and beverage, there were 134 women-owned businesses and 62 minority-owned businesses among the “Community Capital 500.” Investibule found that 76 percent of women-owned businesses and 73 percent of minority-owned businesses successfully raised the capital they needed from online investors.

The last and biggest chunk of capital for Spotlight:Girls’ expansion came from the Force for Good Fund, a unique investment fund that itself used the same tools above — and raised around $700,000 from a private offering and $401,401 from 201 investors via WeFunder. The fund plans to make investments in 10 companies, focusing on women- and minority-owned businesses.

“Women and people of color generally have much less access to capital for business, and we really wanted to change that,” says Kassan, who helped assemble the fund. “It’s a good investment to have a more diverse portfolio. If everyone you invest in looks the same and comes from the same background, that’s not diversity.”

Spotlight:Girls was Force for Good Fund’s first investment, with $100,000. Instead of ongoing repayments, the company pays back a percentage of its annual revenues for up to eight years. If the company does well, it could pay back what it owes early. The fund has since made two more investments, in The Town Kitchen (also based in Oakland) and Community Services Unlimited, in Los Angeles.

According to Kassan, Force for Good Fund has offered to open source documents and exchange knowledge so others can create similar funds across the country.

Force for Good Fund portfolio companies also get discounted technical assistance to become a certified B corporation, or B corp for short, as Spotlight:Girls did after receiving its investment.

“One of our goals is we would like to see the B corp community be more diverse. We want that community to be really accessible to lots of different kinds of businesses led by very diverse founders,” says Kassan.

B corps commit to embedding social and environmental goals into their core business models, and to reporting social and environmental outcomes on a regular basis to B Lab, the nonprofit organization that administers B corp certification. There are currently 2,310 B corps around the world. Certifying her company as a B corp was always important to Johnson, as a way of being transparent and being held accountable for the positive impact of their business on their community.

“It was something that seemed like a no-brainer because it gives the roadmap for how to do business in this way,” says Johnson.

Being a mission-driven company, with B corp certification to prove it, could become a key advantage for businesses that use these alternative ways of raising capital from their communities.

“Every company I’ve worked with to raise money has been a mission-driven business,” says Kassan. “I actually think if you’re not a mission-driven business it could be harder. I could be wrong, but I think it’s just easier to find people who are excited to support you.”

Lawmaker Proposes Floating Benefits for Gig Economy Workers

Seeing the rise of the independent contractor workforce or “gig economy” jobs in her state, Washington legislator Monica Stonier introduced a bill this week that would require companies using gig economy workers to contribute to a portable benefits fund that would cover part of the costs of health insurance, paid time off, retirement and workers’ compensation insurance.

In an op-ed for Fortune, Stonier wrote, “As an independent contractor, a worker should be afforded autonomy and flexibility. But American workplace protection laws barely acknowledge that independent contractors exist … . When I talk to gig workers, I hear again and again that they want good jobs, and should not be forced to choose between decent wages and flexibility.”

The new bill would require companies that use a minimum of 50 independent contractors in any given 12-month period to contribute funds to qualified benefits providers serving these workers, who often work in the app-centric, on-demand service sector. Companies would be required to contribute either 25 percent of the fee charged to consumers or $6 per hour, whichever is lesser. It would only apply to services provided to consumers in Washington state. The bill spells out that companies would be allowed to pass on the cost of the contribution to consumers.

Workers would have a say in the benefits they receive, accounting for at least half the members of the independent benefits administrator boards that administer the funds.

It’s a bill that goes further than what other states or localities have provided so far. Late last year, New York City passed a bill giving key rights to independent contractors, including protections against wage theft. According to a 2014 survey, freelancers lose an average of $5,968 in unpaid income yearly, or 13 percent of the average survey respondent’s annual income. Half of freelancers said they had trouble getting paid in 2014, and 71 percent said they have had trouble collecting payment at some point in their career.

However policymakers choose to deal with the problem, the new contractor-based economy seems to be inevitable at this point. A new study published today by the Freelancers Union and Upwork predicts that freelancer work will include the majority of the U.S. workforce within a decade, with nearly 50 percent of millennials already taking part in the freelance economy. The study also estimates that freelance work contributes $1.4 trillion to the economy. An estimated 57.3 million people currently receive income via independent contractor work, according to the study.

“We are in the Fourth Industrial Revolution — a period of rapid change in work driven by increasing automation, but we have a unique opportunity to guide the future of work and freelancers will play more of a key role than people realize,” said Stephane Kasriel, CEO of Upwork and co-chair of the World Economic Forum’s Council on the Future of Gender, Education and Work, in a statement announcing the study.

Moves like Stonier’s could help make that future more equitable. Will more lawmakers follow suit?

With Cities Facing Tech Displacement, Google Offers $1 Billion Pledge

Google CEO Sundar Pichai announces a new initiative called Grow With Google during a news conference at the Google offices in Pittsburgh, in October. (AP Photo/Keith Srakocic)

In Pittsburgh, the city where Google is prototyping a future of driverless cars and other artificial intelligence-powered products, the internet company this week pledged $1 billion toward addressing the needs of workers replaced by new technology.

In his announcement, Google CEO Sundar Pichai said the funding would be dedicated to “closing the world’s education gap, helping people prepare for the changing nature of work, and ensuring that no one is excluded from opportunity.”

While the quest for a driverless future has its merits, Next City’s Johnny Magdaleno reported in June that driving has long provided crucial employment for those without access to greater opportunity; ninety-three percent of the 4.1 million employed drivers in the U.S. don’t have a bachelor’s degree, yet drivers on the whole average a poverty rate that’s lower than workers who aren’t in the driving field.

Pichai announced the $1 billion in grants would go to nonprofits, along with a pledge of 1 million Google employee volunteer hours. Perhaps Google could do well to work closely with cities whose workforce development systems and social safety net will be coming under added pressure from displaced former drivers. As Magdaleno reported:

Maya Rockeymoore, a lead researcher on the report and director of the Center for Global Policy Solutions, says she’s also worried about what a sudden influx of unemployed drivers would do at the municipal level.

“What this could mean for those areas where there’s disproportionate impact, is that we see more unemployment, and people scrambling to get jobs but when they do get jobs they’re earning less,” she says. “That means human need will increase, and the burden will fall on public programs in cities to meet that need.

Earlier this year, Pittsburgh Mayor Bill Peduto called for technology companies like Google to do their civic part with regards to their impact on the changing economy.

In addition to the billion-dollar pledge, Pichai announced the launch of Grow With Google, a new initiative to help Americans with the skills they need to get a job or grow their business. The initiative kicks off with a tour in partnership with libraries and community organizations to host these events providing career advice and training for people and businesses. Pittsburgh is the first stop; additional visits announced so far include Indianapolis, Oklahoma City and Louisville, Kentucky.

Pichai also announced a $10 million grant — Google’s largest single grant yet — to Goodwill Industries, which Pichai says will enable Goodwill to offer 1.2 million people digital skills and career opportunities in all 156 Goodwill locations across every state over the next three years.

Google also unveiled the Google.org Impact Challenge, which invites nonprofits to submit proposals for “bold ideas” to “make neighborhoods better.” Together with a panel of advisers, Google will review these applications and will choose four finalists who will receive $50,000 in funding and other support from Google. Then, Google will invite the Pittsburgh community to cast their vote to help decide on the most impactful idea, and the winning project will receive an additional $50,000 grant.

Pichai also spoke with the Pittsburgh Post-Gazette about his outlook for the future of employment in a changing economy, lamenting that industry and the private sector can only do so much.

“I think the government has to do it, educational programs have to do it, and all the companies sort of play a part. It’s a long game,” Pichai told the newspaper.

Public Housing Residents Ask the Crowd to Fund Sustainability Projects

The market at Rockaway Youth Task Force’s community garden (Photo by Oscar Perry Abello)

The Rockaway Youth Task Force has a long waiting list of families who want spots in its community garden, but more of those aspiring harvesters might be tending fresh veggies soon thanks to a new crowdfunding effort by the New York City Housing Authority.

“My vision for the organization is to provide young people the tools that they need to advocate for themselves,” says Milan Taylor, who founded Rockaway Youth Task Force in 2011 and was born and raised in the Rockaways, a beachside community at the far southern edge of New York City.

Most of the Rockaways was a food desert before Superstorm Sandy hit New York in 2012, and after the storm, access to fresh, healthy foods only got more limited when some retailers didn’t recover. “At the same time there’s plenty of fast food options around,” Taylor says.

Wanting to help residents take things into their own hands, Rockaway Youth Task Force created its first community garden, right across the street from one of the city’s largest public housing communities, Ocean Bay (Bayside) Apartments. No one expects the gardens to meet all the participating families’ food needs, but Taylor estimates that, on average, each raised bed produces some $500 worth of food per year. What families don’t need, they may choose to sell through an onsite community market.

There are 70 families on the waiting list, according to Taylor. Many are from Ocean Bay. However, a plan to build two new community gardens on the Ocean Bay grounds, adding 40 new raised beds for growing, should shorten that list significantly.

To pay for the project, the group tapped into a new partnership between NYCHA and crowdfunding platform Ioby to raise nearly $30,000.

NYCHA’s sustainability agenda defines the authority’s environmental health and sustainability goals for the next 10 years, and outlines several strategies to achieve those goals — including the creation of an online “Ideas Marketplace” for resident-led and community-led initiatives.

“Having a very visual place for all these projects to live, and the transparency, creates an ability for residents to reach out to each other and exchange ideas,” says Vlada Kenniff, NYCHA’s director of sustainability programs.

While NYCHA is making other large-scale capital investments in sustainability, such as putting solar panels on top of 20 buildings at Ocean Bay, there are many smaller projects that Kenniff says would be meaningful for residents and often led by residents but don’t require enough funding to make it worth moving the mountain of bureaucracy that is the nation’s largest local public housing authority. NYCHA communities are home to some 400,000 residents, including 4,000 at Ocean Bay alone.

“There are large investments happening on the capital side, but these are smaller projects,” Kenniff says. “There may not be funding for it from NYCHA central, but they’re needed.”

In terms of getting approval from the massive bureaucracy, projects coming through the Ideas Marketplace also get an internal champion at NYCHA: Rasmia Kirmani-Frye, director of public-private partnerships at NYCHA. In her capacity, she is also head of the Fund for Public Housing, a NYCHA-affiliated nonprofit created in 2016 to raise philanthropic dollars in support of NYCHA residents.

“One of the benefits of the Ideas Marketplace is that NYCHA is at the table right from the beginning,” Kirmani-Frye says. “If other folks at NYCHA need to be brought in, that’s something that Vlada and I can focus on.”

There is no set list of project types eligible for funding. NYCHA didn’t want to put limits on residents’ creativity. “We want to make sure we’re flexible with the ideas that are coming in,” says Kenniff.

Ioby’s model has its roots in the community-organizing world, encouraging and supporting projects led by people who live near and potentially benefit from the project. So far, 1,325 projects have successfully raised $3.8 million through the nonprofit organization’s platform, with an average donation of $30. Around 87 percent of projects on the platform successfully hit their funding goals, and the average funding goal is around $4,100. Within NYC, about half of projects funded through Ioby to date are in areas earning below the median household income for NYC, or about $50,000.

“Lots and lots of tech companies and businesses use online fundraising to raise money for their companies,” Kirmani-Frye says. “So in a lot of ways this is about equity in crowdfunding.”

At a training day in September, which brought together a range of nonprofits with experience in raising money and working with public housing residents, David Weinberger, city partnerships director at Ioby, talked through the model.

“While we don’t want to lean on residents and make it seem like NYCHA residents are solely responsible for funding their own projects, we think these communities are often overlooked as potential funders for projects, especially those that they lead themselves,” Weinberger says. “We want to test the waters and get projects from higher-capacity groups that are already working with residents in some capacity, demonstrating the model can work. In the future, we hope more ideas come straight from residents themselves, with or without an established community partner.”

In the case of Rockaway Youth Task Force and Ocean Bay (Bayside), there was an additional partner: MDG, the developer that’s currently working on a half-billion-dollar renovation of Ocean Bay as part of NYCHA’s first public housing conversion under the federal government’s Rental Assistance Demonstration Program, a new large-scale public-private partnership model to finance long-delayed repairs and modernization of public housing. MDG marketed the community garden project to its staff and subcontractor network. It wouldn’t have been possible to raise the needed funds without their help, according to Taylor.

“That was one of our concerns initially with crowdfunding. There’s not that much disposable income in our community,” Taylor says.

Work on the garden expansion has already commenced. Once completed, the Rockaway Youth Task Force will also have a part-time paid staffer available to train and assist residents with their raised beds.

“For a lot of residents this will be their first time growing, even for older adults living in NYC all their lives,” Taylor adds.

The ribbon cutting ceremony for the new gardens is scheduled for Oct. 28.

How 6 Universities Are Keeping Promise of Being a Good Neighbor

Drexel University in Philadelphia, above, is part of a group of anchor institutions that made a commitment to local investment two years ago. (Photo by Sebastian Weigand)

Universities in the United States employ over 4 million people, spend over $43 billion annually on goods and services, and hold around $535 billion in endowments.

Two years ago, Buffalo State College, University of Missouri–St. Louis, Rutgers University–Newark, Cleveland State University, Drexel University, and Virginia Commonwealth University each made a commitment to investing, hiring and purchasing locally. Now, a new report from the Democracy Collaborative by Emily Sladek illustrates how they take seriously their role as “anchor institutions” when it comes to economic impact on their local economies.

Buffalo State College’s Small Business Development Center has been supporting and incubating small local businesses owned by minorities and women. The office has nurtured entrepreneurs such as an organic goat farm owner and an artisan who was able to build up her business into providing costuming for singer Katy Perry’s tour.

A Rutgers faculty member, Kevin Lyons, led an effort to map out local procurement needs for hospitals and universities in the area. He found hospital socks were shipped in from out of state; now a local business provides them instead.

Virginia Commonwealth University worked with a grassroots coalition to create a jobs training program in construction for formerly incarcerated residents. It places graduates in state-funded construction projects at a living wage.

As a group, the six universities also hashed out a shared dashboard and data collection process to track the local economy impact of all existing and new initiatives. According to the report, internal conversations about the local economic impact of universities are becoming more “sophisticated” and “in some cases enthusiastically embraced.”

The report outlines five big indicators for success, starting with leadership from the top. Jennifer Jettner, assistant director of community-engaged research at Virginia Commonwealth University, told Democracy Collaborative, “A champion in a leadership position to drive the ship — specifically, clearly communicate the vision, gain buy-in, empower others to act on the anchor mission, and garner resources to fund the effort.”

The anchor institution’s efforts in this sphere must also be part of a broader strategic plan. Another success factor was the establishing of anchor committees — an unexpected development that came about after the group of six came together. Five formed anchor committees, which meet at varying frequencies, from once a quarter to biweekly. Some campuses have a leadership team made up of high-level administrators (e.g., chief of staff, provost, deans, chief information officer, chief financial officer) as well as working groups with other staff. Committees include, on average, six to eight members.

Implementing data collection protocols was another indicator for success. The report includes sample surveys and metrics used among the group to track data in a transparent way that allows universities to compare performance between themselves. One key question: How do universities define “local”? Each university in the cohort selected at least two geographies to collect data on. Most selected three: the university, the city and a specific low-income neighborhood. The locations were selected for various reasons including preexisting university impact objectives and programming, and a desire to reach historically underserved communities.

The fifth success indicator was relationship building with external partners. While important, it’s also something that needs more clarity in some cases.

Alan Delmerico, a Buffalo State behavioral scientist, told the Democracy Collaborative: “This is one of the challenges that our committee has encountered. Our committee does not have a standard definition for what a partnership is but rather labels an organization as a partner if we do any service work with them. The quality to which we define a partnership is the bigger issue.”

Impact Investors Have a New Way to Put Money Into Communities in Need

(Photo by Oscar Perry Abello)

If you’ve listened to KQED public radio in northern California in the last week, you may have heard a spot from a new sponsor: the Low-Income Investment Fund (LIIF), a CDFI (community development financial institution) based in San Francisco.

The spot is part of LIIF’s marketing campaign to raise $35 million through its new LIIF Impact Note, marking the first time the CDFI has sought capital from individual investors.

Like many community development lenders, LIIF has traditionally sought capital from banks, foundations and other large investors.

“We really wanted to open the fund up and democratize capital raising and bring in people that we know care about their communities and make community development investing available to all investors,” says Jessica Standiford, director of development and impact investing at LIIF.

For the campaign, LIIF is using ImpactUs Marketplace, an online platform where organizers of mission-driven projects can raise capital (and which I covered previously). Community Note is among the first offerings open to retail-level investors — those who are not super-rich.

Although the minimum investment is $1,000, anyone can invest as long as they live in one of the following: California, New York, Connecticut, Colorado, Massachusetts, Maryland, Maine, New Hampshire, New Jersey, Virginia, Vermont, and the District of Columbia.

“Those geographies align with where we mostly lend, though we work nationwide,” Standiford says.

The interest rate on the money varies from 1 to 3 percent, based on how long investors decide to loan their money to LIIF: 6 months, three years, five years or 10 years. Longer terms get a higher return, in exchange for the greater risk.

The process is a significant undertaking, which includes filing paperwork in each of the eligible states, but LIIF was encountering growing demand from individual investors for the opportunity to invest in its work.

“I don’t know why, if it’s because of what is going on in this country right now, but they’re coming to us,” says Standiford. “We didn’t have [an investment] product for them until now.”

And LIIF is not the only CDFI encountering that demand. Since 2010, Enterprise Community Loan Fund has raised $78 million through its Impact Note, 62 percent of which has come from individual investors. This year alone, Enterprise has raised or gotten commitments for $25.5 million through that — with a minimum investment of $5,000, and without any opportunity to make those investments online.

More online platforms are emerging that allow more individual investors to put money into community development. CNote launched a year ago but only just opened up to all investors. Previously, it was only open to “accredited” investors — the Securities Exchange Commission’s shorthand for wealthy individuals, specifically those with a net worth of at least $1 million or an annual income of at least $200,000 for the previous two years. CNote pools the capital it raises from investors and invests it in CDFIs.

Meanwhile, more CDFIs are also in talks with ImpactUs Marketplace to list investment offerings online.

“Our institutional partners have been fantastic and they continue to be great partners, but we think we can help fuel a movement that’s already happening where CDFIs and impact investors can combine more efforts,” says Standiford.

Federal Regulators Aim to Curb Payday Lending “Debt Traps”

A block in Albuquerque, New Mexico, has several small loan storefronts. (AP Photo/Vik Jolly, File)

The Consumer Financial Protection Bureau (CFPB) last week issued its long-anticipated final rule on payday loans, restricting lenders’ ability to profit from high-interest, short-term loans and earning the agency high praise from community lenders and consumer advocates.

Payday loans are typically for small dollar amounts and are due in full by the borrower’s next paycheck, usually two or four weeks later. The Pew Charitable Trusts estimates that 12 million Americans take out payday loans every year, paying $7 billion in fees. Most payday loan borrowers pay more in fees than the amount borrowed; according to Pew, the average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees for borrowing just $375.

According to the CFPB, these loans are heavily marketed to financially vulnerable consumers who often cannot afford to pay back the full balance when it is due. The agency found that more than four out of five payday loans are reborrowed within a month, usually right when the loan is due or shortly thereafter; nearly one in four initial payday loans are reborrowed nine times or more, with the borrower paying far more in fees than they received in credit.

CFPB’s new rule also includes protections against predatory practices in auto title lending, in which borrowers put up their car as collateral for a loan, also typically encountering expensive charges and borrowing on short terms usually of 30 days or less. As with payday loans, the CFPB found that the vast majority of auto title loans are reborrowed on their due date or shortly thereafter.

“This new rule is a step toward stopping payday lenders from harming families who are struggling to make ends meet. It will disrupt the abusive predatory payday lending business model, which thrives on trapping financially distressed customers in a cycle of unaffordable loans,” says Mike Calhoun, president of Center for Responsible Lending, a nonpartisan think tank affiliated with the $2 billion Self-Help Credit Union based in North Carolina, adding that the rule is “years in the making.”

The new protections apply to loans that require consumers to repay all or most of the debt at once. Under the new rule, lenders must conduct a “full payment test” to determine upfront that borrowers can afford to repay their loans without reborrowing, and there are limits on reborrowing. In effect, lenders will be allowed to make a single loan of up to $500 with few restrictions, but only to borrowers with no other outstanding payday loans.

There are also restrictions on the number of times a payday lender may attempt to automatically withdraw repayments from borrowers’ bank accounts. The CFPB found that the average payday loan borrower paid $185 in penalty or overdraft fees to their bank for failed payment attempts, in addition to any fees charged by payday lenders.

The CFPB developed the payday regulations over five years of research, outreach, and a review of more than one million comments on the proposed rule from payday borrowers, consumer advocates, faith leaders, payday and auto-title lenders, tribal leaders, state regulators and attorneys general, and others.

“We need to ensure that all Americans have access to responsible basic banking products and services and that they are protected from abusive lending from unsavory financial predators. This rule from the CFPB is an important step in that direction,” says John Taylor, president and CEO of the National Community Reinvestment Coalition, a national network of bank watchdog and community development organizations.

The new rule includes an exemption for organizations that do not rely on payday loans as a large part of their business, earning praise from community bankers. Any lender that makes 2,500 or fewer covered short-term or balloon-payment small-dollar loans per year and derives no more than 10 percent of its revenue from such loans is excluded from the new requirements. Certain alternative loans already offered by credit unions are also exempted.

“This exemption will enable community banks the flexibility to continue providing safe and sustainable small-dollar loans to the customers who need it most,” the Independent Community Bankers of America said in a statement.

Payday lenders were less than pleased with the decision. A payday lending industry group estimated that the proposed regulations would lead to the closings of many payday loan storefronts around the country. There are now more payday loan stores in the United States than there are McDonald’s restaurants, The New York Times reported, and the operators of those stores make around $46 billion a year in loans.

A spokesperson for Advance America, a payday lending chain with 2,100 locations in 28 states, told The New York Times that the new rule “completely disregards the concerns and needs of actual borrowers,” and called on President Trump and Congress to intercede.

Under the Congressional Review Act, Congress has 60 days to reject the new rule. Isaac Boltansky, the director of policy research at Compass Point Research & Trading, told The New York Times that in this case the odds of such a reversal are very low despite the Trump Administration’s anti-regulatory stance. Most moderate Republicans, he said, do not want to be seen as anti-consumer.

Oakland Incubator Is Keeping Tabs on City’s Promises About Equity and Legal Cannabis

A mural in Oakland (Photo by Oscar Perry Abello)

When Ebele Ifedigbo was growing up on the East Side of Buffalo, Ifedigbo’s father, an architect, would point out the check cashers and the rent-to-own shops as they drove around the neighborhood and the city. Those drives helped to cultivate curiosity about the ongoing economic injustice that undermines black communities in cities everywhere, but Ifedigbo couldn’t have known then that the path would lead to looking to correct that injustice through opportunity in cannabis legalization.

“He would show me all this stuff and he would say ‘these are the things that actually prevent us from being able to build wealth,’” Ifedigbo remembers. “They suck out the resources that we don’t really have.”

The wealth disparity today: Median net worth for white non-Hispanic households ($132,483) is 14.6 times the median net worth of black households ($9,211), according to figures released this month by the U.S. Census Bureau. Ifedigbo’s curiosity about this injustice led to studies at Columbia University, work in the financial and nonprofit sectors, and a degree from Yale’s business school.

“We can talk about political power, social power, all of those are important, but for me I feel like economics is the foundation for those other things to stand sturdy and be sustainable,” Ifedigbo says. “When I went into business school I was thinking, can business serve the ends of social justice, and if so, what would that look like?”

The path toward an answer came sooner than Ifedigbo expected, in 2015, when a wave of pot legalization began to spread across the United States.

“The War on Drugs has been decimating our communities for decades, and even racist drug policy before that has been disenfranchising our communities, and now here we are at this moment where that same exact plant is now legalized and people are making millions and billions off it,” Ifedigbo says. “We got to figure out a way to get our people on that path.”

As co-founder and co-director of the Hood Incubator, a cannabis industry incubator designed to cater toward cannabis entrepreneurs of color, Ifedigbo was announced last week as a member of this year’s cohort of Echoing Green Fellows. The fellowship gives Ifedigbo some runway capital and access to networks of previous fellows, other potential advisors, funders and investors to help grow Hood Incubator.

Ifedigbo and co-founder/co-director Lanese Martin, along with co-founder and lead community organizer Biseat Horning, have a vision for a national network of Hood Incubators that will tap into the growing cannabis industry as a force for social justice on multiple fronts.

“We recognized there’s no accelerator or real hands on direct pipeline to get our people in the cannabis industry and actually start a business,” says Ifedigbo.

Funding for Hood Incubator has so far come from individual donations, grants from foundations and also from the Drug Policy Alliance, and local industry sponsorships. “What’s special about Oakland and why it’s great we started there is not only is the community well-organized around social and political issues, but the mainstream cannabis industry is pretty organized around Oakland and they’re pretty cognizant about this issue,” Ifedigbo says.

Another reason the co-founders chose to pilot their first Hood Incubator location in Oakland is the city’s Equity Permit Program. It’s part of the city’s broader vision to be intentional about carving out a pathway into the legalized cannabis industry for those who have been systematically targeted by the drug enforcement policies of the past.

Under the Equity Permit Program, half of all cannabis industry permits issued will be reserved for Oakland residents with an annual income at or less than 80 percent of Oakland area median income (adjusted for household size), and who live in one of a predetermined set of police precincts where previous cannabis arrests have been historically concentrated — and were arrested after November 5, 1996 and convicted of a cannabis crime committed in Oakland. The equity permit applicant must be at least a majority owner of the business. The city opened the equity application process about two weeks ago.

That equity permit carve-out is a temporary measure, which the city intends to keep in place until its full Equity Assistance Program for the cannabis industry is funded and implemented. Through that initiative, the city intends to eventually provide applicants with financial and technical assistance, including zero-interest business startup loans.

It’s early days yet for Oakland’s equity permit program and the overall cannabis permit program. (San Francisco also recently announced its own measures for its cannabis industry regulations and support.) There are still some kinks to work out, but Ifedigbo is confident that the city will maintain open lines of communication to improve things as they go along. That includes a mandated six-month check-in on the equity permit program.

Ifedigbo says two out of their first cohort of 15 Hood Incubator fellows are eligible for the equity permits. The cohort, chosen from an applicant pool of 40, began intensive business courses in January, completing about 100 hours of instruction, and ended up with a business plan, preliminary financial projections, and a rehearsed pitch presentation — which each fellow delivered to investors, community members and potential customers assembled on Hood Incubator’s inaugural pitch day, on May 6.

While it’s common for incubators or accelerators to take partial ownership position in cohort businesses, Hood Incubator chose not to do so for its first cohort. Ifedigbo says they are considering that for the next group. But Hood Incubator’s vision for equity also extends to potential cannabis industry investors. They’re hoping that mostly white, mostly male venture capitalists aren’t the only ones having all the fun and reaping all the returns from investing in a tremendous new industry.

“We made an effort to bring people in the community who might not always think of themselves as investors but they have capital to deploy,” Ifedigbo says. “Some of the pillars of black communities have been hair salon owners, barbershop owners, small mom-and-pop shops who have had presence in the community and they might have a little extra, whether it’s $10,000 or $5,000 or $25,000, to deploy and support other businesses.”

In addition to supporting cannabis industry entrepreneurs of color around the U.S., Hood Incubator’s vision for national expansion includes rallying more of these community-level investors, you might call them friends and family, to back cannabis industry entrepreneurs of color with capital as well as mentoring and other support as fellow business owners. Some of these community-level investors may even have customer networks to share.

“It’s about how do we corral the community assets that already exist to continue investing in that community,” Ifedigbo says.

Chicago Directs $3.2M to Neighborhoods, Thanks to Developer Fees

West Chicago Avenue (Photo by Matt Watts on flickr)

Air is becoming an increasingly popular bargaining chip for big city mayors. Mayor Bill de Blasio’s Housing NYC Plan works through the city’s zoning code, allowing developers to build higher in exchange for setting aside a portion of their buildings as permanently rent-regulated housing units. Chicago Mayor Rahm Emanuel’s downtown development plan allows developers to build taller and denser in Chicago’s downtown areas in exchange for payments into a pool of funding he calls the Neighborhood Opportunity Fund.

Last week the city of Chicago announced the first $3.2 million awarded out of the Neighborhood Opportunity Fund. The nine awardees included restaurants, a dental office, a marketing company, a bakery and an ice cream shop scattered across low- to moderate-income areas on the South and West Sides of Chicago, overlapping with commercial corridors the city previously targeted for revitalization.

One such corridor is West Humboldt Park, where, as I previously reported, the West Humboldt Park Family and Community Development Council is working to revitalize the area, starting with an anchor commercial tenant, local celebrity chef Quentin Love and his new Turkey Chop restaurant. With Love on board, the group recruited another local celebrity chef, Stephanie Hart, to open a second location for her Brown Sugar Bakery along the corridor — and that location is one of the Neighborhood Opportunity Fund’s first-round awardees.

The city says it received 700 applications in the first round of funding, and 32 winning businesses were selected.

“These investments are going to directly support neighborhood entrepreneurs on Chicago’s south, southwest and west sides,” Emanuel said in a statement. “But they will also expand quality food options, create neighborhood meeting places, support tech business growth, and generate new retail options. By linking growth downtown directly to growth in our neighborhoods we can ensure the entire city of Chicago thrives for generations to come.”

The Chicago Sun-Times characterized the announcement as “the first concrete steps to shed his image as ‘Mayor 1 Percent.’”

Previously, the city’s Zoning Bonus Ordinance allowed downtown developers to build higher and denser than current zoning allowed if they agreed to build underground parking garages, outdoor plazas, winter gardens and other features. That changed after Emanuel’s proposal passed city council last spring. While the fund got started with $4 million in initial payments, there is a $15.6 million payment in the works on a single pending deal, the Chicago Sun-Times reports.

Not all of those funds would go out into the designated South and West Side neighborhoods. Under Emanuel’s proposed changes, 80 percent of developer payments go directly into the Neighborhood Opportunity Fund.

Meanwhile, another 10 percent goes into a citywide fund to support the restoration of structures designated as official landmarks by City Council, and the remaining 10 percent goes into a project local impact fund to support improvements within 1 mile of the development site generating the development funds, including public transit facilities, streetscapes, open spaces, river walks and other sites, including landmarks.

Air is becoming an increasingly popular bargaining chip for big city mayors. Mayor Bill de Blasio’s Housing NYC Plan works through the city’s zoning code, allowing developers to build higher in exchange for setting aside a portion of their buildings as permanently rent-regulated housing units. Chicago Mayor Rahm Emanuel’s downtown development plan allows developers to build taller and denser in Chicago’s downtown areas in exchange for payments into a pool of funding he calls the Neighborhood Opportunity Fund.

Last week the city of Chicago announced the first $3.2 million awarded out of the Neighborhood Opportunity Fund. The nine awardees included restaurants, a dental office, a marketing company, a bakery and an ice cream shop scattered across low- to moderate-income areas on the South and West Sides of Chicago, overlapping with commercial corridors the city previously targeted for revitalization.

One such corridor is West Humboldt Park, where, as I previously reported, the West Humboldt Park Family and Community Development Council is working to revitalize the area, starting with an anchor commercial tenant, local celebrity chef Quentin Love and his new Turkey Chop restaurant. With Love on board, the group recruited another local celebrity chef, Stephanie Hart, to open a second location for her Brown Sugar Bakery along the corridor — and that location is one of the Neighborhood Opportunity Fund’s first-round awardees.

The city says it received 700 applications in the first round of funding, and 32 winning businesses were selected.

“These investments are going to directly support neighborhood entrepreneurs on Chicago’s south, southwest and west sides,” Emanuel said in a statement. “But they will also expand quality food options, create neighborhood meeting places, support tech business growth, and generate new retail options. By linking growth downtown directly to growth in our neighborhoods we can ensure the entire city of Chicago thrives for generations to come.”

The Chicago Sun-Times characterized the announcement as “the first concrete steps to shed his image as ‘Mayor 1 Percent.’”

Previously, the city’s Zoning Bonus Ordinance allowed downtown developers to build higher and denser than current zoning allowed if they agreed to build underground parking garages, outdoor plazas, winter gardens and other features. That changed after Emanuel’s proposal passed city council last spring. While the fund got started with $4 million in initial payments, there is a $15.6 million payment in the works on a single pending deal, the Chicago Sun-Times reports.

Not all of those funds would go out into the designated South and West Side neighborhoods. Under Emanuel’s proposed changes, 80 percent of developer payments go directly into the Neighborhood Opportunity Fund.

Meanwhile, another 10 percent goes into a citywide fund to support the restoration of structures designated as official landmarks by City Council, and the remaining 10 percent goes into a project local impact fund to support improvements within 1 mile of the development site generating the development funds, including public transit facilities, streetscapes, open spaces, river walks and other sites, including landmarks.

NYC Pension Funds Made a $48 Million Statement About Private Prisons

(Photo by Wagner T. Cassimiro via Flickr)

With $175 billion in investments, NYC’s pension funds are collectively the fifth-largest retirement plan in the entire United States. Of that, $58 billion is invested in the stock market. As of last week, those stock market investments no longer included shares in private prison companies. With the sell-off, NYC’s public pension system became the first in the country to divest from private prison companies, selling off $48 million in shares.

“With Donald Trump in the White House, we’re seeing more and more industries try to profit from backwards policies at the expense of immigrants and communities of color. But because of this major new step, we are demonstrating that we will not be complicit. We are standing up for what’s right,” New York City Comptroller Scott M. Stringer said in a statement announcing the successful sell-off.

The move comes practically on the heels of the announcement that NYC has begun the process of cutting ties with Wells Fargo as its primary banker. While city officials said that decision had only to do with Wells Fargo failing its most recent Community Reinvestment Act examination, the bank is also known to be one of the most active financiers of private prisons, as reported in a story from Take Part last fall.

The city’s pension fund trustees, which include Stringer, voted to divest from private prisons in May, after studying the financial implications of doing so. “As fiduciaries of NYCERS (NYC Employees’ Retirement System), we have a responsibility to protect the hard-earned money of thousands of New Yorkers,” said Public Advocate Letitia James in a statement after the vote. “It is apparent that investments in private prisons are not only an unstable and risky investment, but a deeply troubling one.

In the final divestment announcement last week, the comptroller’s office cited reputational risks (poor conditions, high rates of violence, improper staffing levels, inmate abuse and other human rights concerns), legal risks (lawsuits stemming from human rights abuses can lead to high payouts, making private prison companies less profitable), and regulatory risks (such as a future presidential administration reinstating the Obama administration’s plan to phase out the use of private prison companies in the federal prison system).

Both civil rights and immigrant rights activists cheered the decision. Private prison companies also happen to own and operate many of the nation’s immigrant detention centers. The National Network for Immigrant and Refugee Rights is a member of a national prison divestment campaign.

The comptroller’s office found that privately owned detention centers hold as many as 65 percent of Immigration and Customs Enforcement (ICE) detainees, and at least eight immigrant detainees have died while in those private facilities.

“Our investments need to reflect our values. To that end, divesting our city’s pension funds from private prison companies reflects our belief that the abuses of this industry do not advance safety or justice in our society. As a NYCERS trustee, I was proud to cast my vote in favor of full divestment,” Brooklyn Borough President Eric L. Adams said in a statement.

Millions of Affordable Housing Units Are Flying Under the Radar

Chicago mural (Photo by Oscar Perry Abello)

In times like the Great Recession, when the economy grinds to a halt, entrepreneurs like Michael Altheimer can’t help but start thinking: What if?

“Before the crash, we were doing mostly for-sale housing, but during the crash, we started learning about underwriting rental housing,” Altheimer says. “Market values came down tremendously, a few buildings came up. We thought to ourselves, ‘hey we could take this on,’ and we came up with a vision of becoming a major provider of affordable rental housing.”

Fast-forward to today and Altheimer’s company, Miro Development, owns and manages 330 units of affordable housing across more than 20 multifamily buildings, mostly on the South Side of Chicago. With HUD facing the prospect of continued cuts to funding to build and operate low-income housing, affordable housing developers like Altheimer may become even more crucial than they already are — because they don’t use any subsidies. No Low-Income Housing Tax Credits (LIHTCs) to build or rehab, no project-based rental assistance to operate. Altheimer says he may come across some tenants with federal housing vouchers, but those are few and far between.

“The neighborhoods where we do business have a natural affordability,” he says. “You can try to charge somebody $1,500 for a two-bedroom but you’ll never get it.”

Michael Altheimer, of Miro Development

In the markets where Altheimer offers apartments for rent, he says he can typically get $900 a month for a two-bedroom, “maybe $1,000 a month if it’s really nice.” At that price point, a unit is in the ballpark of costing 30 percent of income for a three- or four-person Chicago household earning 50 percent of the city’s area median income or AMI — $34,000 a year and $38,000 a year, respectively.

Altheimer’s business model is to provide quality housing that is affordable for people at or around that income level in Chicago, without subsidies. Miro Development is a firm that operates in what’s called the “naturally occurring affordable housing,” or NOAH, segment of the market. These are unsubsidized, market-rate rental units that are affordable to people living at various levels below median income.

“It doesn’t mean that subsidies don’t exist. I just don’t see them. These deals are typically too small,” Altheimer says. “Even if we have a 30-, 40-unit building, I don’t see it. The LIHTC deals I’ve seen are larger.”

HUD data verify Altheimer’s experience. The average LIHTC-financed building in Chicago has 91 total units, 80 of which are low-income designated. Other large cities show a similar pattern. NYC’s average LIHTC-financed building has around 76 total units, with 57 designated low-income; Los Angeles LIHTC buildings average 66 units, 59 designated low-income. Houston is an outlier: Its average LIHTC project has 184 units, 135 designated low-income. Nationally, LIHTC buildings average 66 units, 54 designated low-income.

The numbers are similar for multifamily rental buildings with project-based federal assistance from HUD. Nationally, these buildings contain 1.36 million assisted units, at an average of 71 units per building, with 62 units receiving rental assistance per building.

How much NOAH is out there? It’s not easy to nail down. According to the latest Census Bureau estimates, there are around 17.9 million renter-occupied housing units in buildings with five or more units — the threshold for what’s considered multifamily housing. Meanwhile, there are 2 million units of LIHTC-financed housing, 1.36 million units of project-based rental assisted housing, and another 2.1 million units of federal voucher-supported housing. Another 1.2. million households live in public housing.

While some of the remaining balance — about 11.3 million unsubsidized units — are luxury rentals, most households earning above median income opt to own. Fannie Mae estimates that there could be as many as 8.5 million rental units in multifamily buildings that are affordable but are not subject to rent restrictions nor do the units receive government subsidies. Another estimate from CoStar, a real estate data and analytics company, puts the figure at closer to 5.6 million units of naturally occurring or unsubsidized affordable housing.

There are also another 24.3 million rental units in buildings with less than five total units, and many of those may have rents that are low enough that they count as NOAH units.

However many millions of NOAH units are out there, supporting developers in this space is vital to preserving existing affordable housing stock. Developers like Altheimer are competing against larger firms that want to acquire unsubsidized housing and flip those units into luxury units or condos. Altheimer says in the past three years he is already seeing some acquisition deals for buildings at higher per-unit prices he has never paid before, in some of the same neighborhoods where he currently owns buildings.

In both of their proposed duty-to-serve plans, which outline how Fannie Mae and Freddie Mac propose to support housing in underserved markets from 2018 to 2020, each government-sponsored enterprise promises more support for NOAH developers like Altheimer in urban areas across the U.S.

Fannie and Freddie are both already very active in the NOAH space. Just as they each purchase loans from lenders who make 30-year, fixed-rate mortgages to single families for home purchase, they each purchase a smaller but still large annual volume of loans made to developers to acquire or rehab multifamily rental housing.

In 2016, Freddie Mac’s loan purchasing preserved or rehabbed 407,000 units with rents affordable for low-income or very-low-income households. It made 354,200 loans to developers of unsubsidized or naturally occurring affordable housing. Over 80 percent of Fannie Mae’s $55 billion in multifamily loan purchases in 2016 were for buildings accessible to struggling Americans, most of it unsubsidized. And yet, even though that’s a large volume of NOAH, Fannie and Freddie are still not quite reaching developers like Altheimer.

“I would say a typical borrower owns 10 apartment buildings, average size 200-250 units each, and have been in business for at least a decade,” says Peter Giles, vice president for multifamily production at Freddie Mac.

For that reason, both Fannie and Freddie’s proposed duty-to-serve plans contain targets for outreach and loan purchasing with smaller lenders, those with less than $10 billion in assets, who make loans to developers of multifamily buildings of five to 50 units each.

Yesterday, Freddie Mac launched a partnership with the Greater Minnesota Housing Fund, creating a $25 million NOAH Impact Fund that plans to acquire 1,000 units of rental housing over the next three years, and maintain affordable rents for at least the next 15 years. The $25 million comes from Minnesota foundations, community banks, and state and local government. Freddie Mac committed up to $100 million in debt financing on top of the initial $25 million investment. That’s $125 million in capital on the table right now for developers to access and preserve existing unsubsidized affordable housing in the Twin Cities metro. Smaller developers won’t ever be walking around with suitcases full of cash, but the combination of local capital plus Freddie Mac is meant to provide a more competitive edge for smaller developers of naturally occurring affordable housing.

“Speed and certainty of execution is really critical,” says Corey Aber, manager for community mission and impact finance at Freddie Mac.

Speed and certainty of execution has also been a hallmark of Community Investment Corporation (CIC), a Chicago-based CDFI (community development financial institution) that has specialized in NOAH financing from the very beginning.

CIC doesn’t work with Fannie or Freddie. Instead, they have long-standing relationships with 35 investors in the region, mostly local and regional banks, which provide a pool of capital that gets refinanced and replenished with five-year commitments from each investor.

“[Subsidies] just takes too long,” says Jack Crane, senior vice president and director of lending at CIC. “A LIHTC deal can take two, three, four years. Meanwhile you’ve got buildings that are sitting there, vacant, distressed. If we had to depend on exclusively LIHTC developments, there would be a lot of vacant, poorly managed, highly distressed buildings in the neighborhood.”

Since opening its doors in 1984, CIC has made more than 2,000 loans totaling $1.2 billion to buy or rehab buildings, adding up to 55,000 residential units. Ninety percent of that has been in unsubsidized projects. CIC’s typical borrowers, Crane says, own five to six buildings, five to six flats each, but some own as many as 1,000 units. In terms of diversity, 39 percent of CIC borrowers are minority-owned businesses, and 24 percent are women-owned.

Altheimer says he’s financed about a third of his portfolio through CIC, including one of his first rental properties, a six-unit building in the Chatham neighborhood on the South Side that he still owns. (“I wish all of my deals went that well,” he says.)

Altheimer has accessed construction loans as well as permanent refinancing from CIC, and doesn’t quite feel a need at this point to work with many others lenders, especially on permanent financing. “Don’t see a reason to have too many chefs in the kitchen,” he says.

The biggest threat to NOAH, however, may not be luxury housing developers coming in to flip those units into condos. Bob Simpson, vice president for affordable, small loan and green financing at Fannie Mae, says it’s actually still the lack of subsidies to support housing for the most vulnerable households. The growth in population of very-low and extremely-low-income households, those earning below 50 percent of AMI, has outpaced subsidies to build and operate units affordable for them, Simpson says. The market simply isn’t automatically building housing for these households without subsidies.

“From a developer’s perspective, without a subsidy, it’s extremely hard to build a unit at those rent levels,” he explains. “So many folks earning less than 50 percent AMI can’t find apartments that are affordable at those levels, and they’re forced to go out and rent apartments that would be affordable for people earning more than them.”

While Fannie, Freddie and CIC can do a lot to provide incentives for the growth or preservation of affordable housing, subsidized or unsubsidized, the ultimate solution for housing affordability goes beyond any of them: improving wage growth at the bottom of the economic ladder.

“Lack of income growth on the tenant side,” Giles says, is really the top threat to housing affordability for all.

Paying to End Homelessness vs. Paying for Homeless Shelters

(Photo by Wouter Engler)

A book that aims to offer a blueprint for overhauling the social sector in the United States — through private sector investment and a data-oriented focus on outcomes — had best incorporate a range of perspectives as varied as the complexity of that goal. To that end, the new “What Matters: Investing in Results to Build Strong, Vibrant Communities,” from the Federal Reserve Bank of San Francisco (FRBSF) and the Nonprofit Finance Fund (NFF), includes essays from 80-co-authors.

Muzzy Rosenblatt is one of those writers. Executive director of the Bowery Residents’ Committee (BRC), which is a major provider of shelter and services to New Yorkers who are homeless, battling drug addiction, senior citizens, or living with mental illness, Rosenblatt spoke at a Monday book launch at the Federal Reserve Bank of New York.

He laid out the following dilemma: As an organization founded by individuals who were essentially homeless, BRC’s aspiration has always been to help those who have landed in their beds to get back onto their feet and into permanent housing. They judge themselves ultimately on how many of their clients get out and into stable housing and into new jobs.

“But we don’t really get paid for that,” Rosenblatt said. “We get paid for filling our beds. Whether they’re there for 12 months or two years or three years, or on the other hand, if they stay for just six months. We get paid the same.”

As a homeless shelter contracted by the city of New York, BRC is paid a fixed amount per occupied bed, per night; its homeless shelters had 1,681 beds as of last year. By efficiently finding clients stable housing and providing or connecting them to resources, BRC could serve twice that many people, Rosenblatt explained. But that also means twice as many intake interviews, twice the workforce development, twice the housing placement, twice as many people to get to know. Meanwhile the revenue stream supporting those beds wouldn’t automatically double in size. That’s not very far from what happened last year, as BRC moved 1,009 previously homeless individuals into stable housing, and saw 383 of its clients rejoin the workforce at an average wage of $11.76.

“What Matters: Investing in Results to Build Strong, Vibrant Communities” explores pay-for-success financing as a solution to different versions of this dilemma that organizations like BRC face. Pay-for-success financing, which includes social impact bonds, are a different way of funding services like homeless shelters, federally qualified health centers, childcare centers and other public service providers.

The current system of funding public service providers doesn’t give staff like those at BRC the flexibility they need to actually do what they know is best for their clients in the long term, said Antony Bugg-Levine, CEO of NFF, at the Monday event. Pay-for-success financing promises to provide that flexibility by shifting from paying for specific outputs (like shelter beds or medical procedures provided) to paying instead for outcomes (like homeless families moved into stable housing or lower chronic disease rates).

In a hypothetical, oversimplified pay-for-success funding example, a city or maybe a foundation would promise to “buy” a certain outcome, such as moving a number of homeless individuals into stable housing over a certain period of time. Private investors would front the cash to pay for an organization or a cohort of organizations to “deliver” that number. The city or the foundation would pay back investors according to a predetermined schedule, most likely based on providers hitting certain milestones on the way to reach the target number, or perhaps all at once at the end of the period. Investors would earn a positive return only if the provider reaches the final milestone or target number, and they may get bonus payments if the service providers exceed the target number. (Here’s a helpful Next City chart that breaks down social impact bonds.)

Over the period of time the hypothetical example is in effect, the service providers would have the flexibility to change and adapt their approach as they see fit in order to hit the target number or their share of the target number in the time allotted.

But investors may also lose money if the provider or providers don’t hit the target number. That’s exactly what happened in the case of the first social impact bond transaction in the U.S., which targeted reduced recidivism for adolescents imprisoned on Rikers Island. The provider failed to meet its social outcome goals. Goldman Sachs invested $7.2 million into the deal, and would have lost all of it if Bloomberg Philanthropies had not set aside $6 million as part of the deal to guarantee against investor losses. Goldman Sachs still ended up losing the difference: $1.2 million.

So there are a lot of kinks still to work out in this marriage of private investment and social services, including what counts as an outcome and how to measure it in any given area like homelessness, healthcare, education, criminal justice, quality job creation, small business development and so on. Another kink is known as the “wrong pocket problem”: Since the savings for something like reducing chronic disease in low-income communities can show up on local, state and federal budgets in terms of reduced spending on healthcare, how should the different levels of government share the burden of paying back investors for a successful transaction? And which level of government should assume the burden of funding a successful solution to keep it going if necessary after paying back the investors?

With all those kinks and more, it’s no surprise that only one pay-for-success deal (the Rikers Island project) has been completed so far. Another 12 are financed and in progress, and 59 more are in development stages, according to PayForSuccess.org.

Rosenblatt told another story at the Federal Reserve Bank of New York that illustrated the potential of paying for outcomes instead of outputs. A few years ago, BRC noticed its shelter recidivism rate had quadrupled. The number of clients returning to the shelter system less than a year after moving into what should have been stable housing went from 5 percent to 20 percent. Digging into their data, Rosenblatt said, they realized it was because of the continued retreat of federal rental assistance. Only 1 in 4 families eligible for federal rental assistance actually receives it, due to budget limitations. And those who do get a Section 8 Housing Choice Voucher face routine discrimination from landlords, even in cities like NYC where such discrimination is illegal.

So instead of only renting space for homeless shelters, BRC envisioned developing its own property with a shelter in it, and using the money they would have paid to a landlord in rent to subsidize housing in the floors above the shelter. The trouble was, according to Rosenblatt, the Department of Homeless Services initially balked at the idea of their funds being used to subsidize permanent housing. He said they didn’t view permanent housing subsidies as their job, it was the job of the Department of Housing Preservation and Development or the city’s public housing authority.

With the help of others in the burgeoning pay-for-success world, BRC was able to push through and get the deal done. Their “Homestretch Housing” development in the South Bronx, with two bottom floors of shelter space and 135 units of housing on the seven floors above, is scheduled to open its doors later this year.

“As a result, our clients are better served, the money the city is spending gets leveraged, and our balance sheet gets better because we get assets and a little more money than we did before,” Rosenblatt said.

If it works, BRC hopes it can replicate the model elsewhere. If proponents of pay-for-success financing have their way, BRC would be one of many service providers given the freedom to do all they could imagine in order to achieve the goals everyone really wants in the first place: ending homelessness, healthier minds and bodies, better education, fewer people returning to prison, more quality jobs, and so on. At the same time, taxpayers or foundations wouldn’t get stuck paying for failed programs for years and years and years. And yes, investors would earn a little profit along the way.

Pay-for-success represents a huge shift for everyone, from the public sector to nonprofits to philanthropic organizations to private investors, and all have a role to play in pay-for-success financing. But the stakes could now be higher than ever. Shifting to a results-based public service funding model could help save the notion of public services, period, Bugg-Levine suggested.

“Without being too overtly political … a social system that works and gets results, we hope, is one that will be harder to attack,” he said.

Oakland Posts Low Affordable Housing Numbers

(Photo by Rich Johnstone on flickr)

Since 1975, the East Bay Asian Local Development Corporation (EBALDC) has developed and preserved over 2,200 homes, housing approximately 3,600 people in Northern California’s East Bay. The nonprofit says it currently manages 1,126 residential rental units in 19 properties. But recently, EBALDC has been sending notices that it has to increase rents on its tenants by hundreds of dollars, including units housing senior citizens and other vulnerable tenants, reports the San Francisco BayView.

And EBALDC isn’t alone. Nonprofit affordable housing developers are facing pressure to hike up rents due to the threat of budget cuts to HUD’s rental assistance subsidies, according to the BayView investigation. Oakland stands to lose $36 million in annual HUD funding, and $21 million of that is for Section 8 housing choice vouchers, according to Affordable Housing Online.

According to HUD data, there are 91,747 housing choice vouchers issued in the San Jose-San Francisco-Oakland area, and another 4,153 units receive project-based HUD rental assistance in multifamily buildings in Oakland alone.

By another count, there are 7,108 low-income units in buildings with low-income housing tax credit (LIHTC) financing in Oakland — including 2,370 developed by nonprofits. Out of LIHTC-financed nonprofit affordable housing in Oakland, about 1,100 units receive federal project-based subsidies of some kind.

No matter how you slice or count it, all of that low-income housing is at risk due to either HUD budget cuts, expiring LIHTC units (which have either a 15- or 30-year compliance period), or expiring federal rental assistance.

At the same time Oakland is losing affordable housing units, it’s hardly building many more. As reported in the East Bay Times, of the thousands of building permits Oakland approved in 2016, less than 2 percent were for affordable housing, according to a new city report on housing development.

The low figure was enough for the East Bay Express to ask whether Oakland discriminates against developers who submit construction permit requests for projects that include affordable housing. Oakland City Council, the East Bay Express says, is set to approve funding for a contract with a consultant to determine if that is the case.

Don’t Let the Cranes Distract From the Real S.F. Housing Crisis

Clarion Alley Street Mural in San Francisco’s Mission District (Photo by Oscar Perry Abello)

Construction cranes are some of the most visible signs of change in a city — teasing new office space, new hotels, new housing. The taller they are, the longer their shadow (figuratively and literally). And those who are most worried about the often unintended effects of urban development might opt for measures like proposed moratoriums on new construction. But that might be barking up the wrong crane, according to new analysis from D.C.-based think tank Urban Institute.

The vast majority of luxury housing sales in San Francisco have come from existing housing stock, according to the Institute. In other words, construction cranes and the new housing they represent aren’t the root cause of the city’s affordable housing crisis.

“Some blame the rapid rise in million-dollar homes on developers’ greed — building large, luxury condominiums, they say, leads to gentrification and pricier homes,” writes the Urban Institute’s Graham MacDonald. And yet, as he points out, “in 2016, at the height of the million-dollar home market of the past eight years, only 10 percent of home sales worth a million dollars or more were located in new complexes.”

The analysis suggests that a moratorium on new construction would hardly make a difference to reverse the tide on San Francisco’s affordable housing crisis. It might even make it worse, given the regional demand for housing.

“The primary factor is that the demand for housing in the region has outstripped new supply,” MacDonald writes. “Between 2010 and 2015, as million-dollar homes became commonplace, the region added six times as many jobs as it did housing units, despite Census data indicating that people typically lived just two or three to a unit.”

Construction cranes may prove a distraction from the real battle: the need to build more housing while preserving existing tenants in San Francisco’s largely rent-controlled market.

To turn over apartments and lease to higher-paying renters, owners of existing rent-controlled housing have resorted to a range of eviction tactics in response to market conditions and the legal tools available to them. The city of San Francisco’s Residential Rent Stabilization and Arbitration Board compiles annual eviction data, from March of one year to February of the next year. Evictions shot upward, according to their data, from 1,269 in 2010-2011 to 2,376 in 2015-2016.

(Credit: San Francisco Residential Rent Stabilization and Arbitration Board)

While some building owners can evict tenants at will, most San Franciscans live in buildings with an official occupancy date before June 13, 1979, which means they are covered by the city’s rent control ordinance and cannot be evicted save for 16 so-called just causes. The Residential Rent Stabilization and Arbitration Board keeps track of these evictions as well. Some of these so-called just causes have gained notoriety in recent years.

Owner move-in is considered a just cause for eviction under San Francisco’s rent control laws. In these situations, an owner can evict a tenant because they stipulate they or a family member of the owner will be moving into the unit. In November 2016, the local NBC news team did an investigation of 100 owner move-in evictions, and found that 1 in 4 were fraudulent — meaning the owner had lied about who was moving into the unit. Overall, owner move-in evictions have gone up, from 116 in 2009-2010 to a high of 417 in 2015-2016. City legislators proposed improving enforcement and increasing penalties for fraudulent owner move-in evictions, Hoodline has reported.

In another, even more insidious tactic, California state law allows for what’s known as “Ellis Act” evictions, in which the owner evicts an entire building to take it “out of business” and off the rental market entirely. Ellis Act evictions went from a low of 2013 in 2009-2010 to a high of 216 in 2013-2014.

David Campos, a San Francisco city legislator whose embattled Mission District constituents face enormous development pressures, introduced legislation in 2014 to mitigate Ellis Act evictions. The law passed, but was struck down in court a year later.

(Credit: San Francisco Residential Rent Stabilization and Arbitration Board)

In the meantime, the city piloted a program to fight eviction and displacement by financing mission-driven housing developers to acquire existing buildings with tenants at risk of eviction. As I previously reported, that program is now moving over into a permanent home at the brand-new San Francisco Housing Accelerator Fund, combining public and private sources of capital to scale up and speed up the preservation of existing affordable housing in the city.

New Orleans Has Power to Boost Affordable Housing, for Now

A plaque in New Orleans’ Bywater neighborhood commemorates the Plessy v. Ferguson case, the first post-Reconstruction legal challenge to segregation. (Photo by Oscar Perry Abello)

On Tuesday in Baton Rouge, a Republican-majority Louisiana state legislature did the wholly unexpected: A committee shut down a measure that would prevent municipalities from creating and using inclusionary zoning as a tool to boost affordable housing production.

As reported by The New Orleans Advocate, had the bill by Republican State Senator Conrad Appel become law, it would have made moot a plan by New Orleans Mayor Mitch Landrieu to require set-aside units for low-income residents in developments above certain size thresholds within targeted areas of the city. The bill would have also halted any exploration of the concept in other cities around the state.

Appel is the same state senator that also tried and failed to block New Orleans’ local hiring ordinance, which requires builders to give the city a five-day head start on job postings to try and fill them with qualified residents from disadvantaged neighborhoods whom the city has identified and trained through local workforce development partnerships.

Landrieu was pleased with the Tuesday move:

This is a win for affordable housing in #NOLA https://t.co/l2bFCjZEgK

— Mitch Landrieu (@MayorLandrieu) May 31, 2017

As the Advocate notes, the mayor’s inclusionary zoning proposal is a direct response to the 2015 Affirmatively Furthering Fair Housing (AFFH) rule from the Department of Housing and Urban Development (HUD). It requires recipients of HUD funding to “show their work” when it comes to establishing housing policies that actively counter existing racial segregation, and pushes local authorities beyond simply reacting to proven cases of housing discrimination.

Inclusionary zoning is one tool that municipalities and local housing authorities can use to help meet AFFH requirements by moving poor residents into wealthier areas of the city. Under Landrieu’s proposal, the targeted areas where set-asides for low-income housing would be required are already considered “strong” or “moderate” markets. They’re areas where housing costs are going up or are already among the highest in the city, including the French Quarter and the nearby neighborhoods of Marigny and Bywater.

It’s intentionally designed to be a total contrast to the history of zoning being used to keep low-income residents and residents of color away from white, typically wealthier communities. Even today, whiter and wealthier communities resort to NIMBY resistance to keep affordable housing out of their neighborhoods.

Appel’s bill would have been one more notch in the segregation victory belt for red state houses everywhere. Good riddance to that.

Also Tuesday, the Louisiana state legislature voted to extend domestic violence protections to LGBT individuals.

NYC Joins the Big City Exodus From Wells Fargo

The Brooklyn Municipal Building, right (Photo by Oscar Perry Abello)

In a rather nondescript beige fifth-floor conference room inside the Brooklyn Municipal Building, with a mere 45 chairs set up for audience members, the NYC Banking Commission met Wednesday, as it does every two years to approve depository institutions for the city of New York.

But this week’s meeting was different: The commission officially made notice it had initiated the process of the city government cutting ties with Wells Fargo, as a result of the bank’s failing grade on its recent Community Reinvestment Act (CRA) examination.

The CRA is intended to hold banks accountable for meeting the needs of everyone in the communities where they do business. Examinations take place every three years for national banks, and there’s a four-tiered rating system: outstanding, satisfactory, needs to improve and substantial noncompliance. When announcing the “needs to improve” rating for Wells Fargo in March, examiners cited “the extent and egregious nature of the evidence of discriminatory and illegal credit practices,” and “extensive and pervasive pattern and practice of violations across multiple lines of business within the bank, resulting in significant harm to large numbers of consumers.”

The NYC Banking Commission Wednesday announced an immediate moratorium on all new city of New York contracts and deposits into Wells Fargo, a winding down of its existing accounts. It also noted that the Department of Finance has already begun the process of moving its depository services to other institutions.

It was somewhat a formality, as Mayor Bill de Blasio and Comptroller Scott Stringer preempted the meeting with an announcement of the decision earlier in the day.

“What happened at Wells Fargo was a fraud, and there must be consequences for wrongful behavior,” Stringer said in a statement. “The problem was not that the fraudulent accounts went undetected. The problem was that management and the board failed to recognize that the unethical behavior was systemic. It wasn’t a few bad apples — it was widespread fraud resulting from perverse incentives imposed by management.”

NYC joins Philadelphia, Seattle, San Francisco and Chicago among the major U.S. cities that have taken steps to explore or begin cutting ties with Wells Fargo, the nation’s third-largest bank. The state of California even announced it would no longer work with Wells Fargo on underwriting state-negotiated bond sales, a key business for the bank.

At the Brooklyn meeting, with Dakota Access Pipeline protesters slowly filling the room, the NYC Banking Commission was quite clear that, at least on paper, its decision to cut ties with Wells Fargo was related solely to Wells Fargo’s CRA rating and sending a signal about penalizing the unethical business practices associated with the failing grade. (Wells Fargo is one of the bank lenders to the pipeline project.) The commission’s authority to remove or deny a bank as a city depository based on its CRA rating comes from Title 22 of the Rules of the City of New York, which require that a bank have at least a “Satisfactory” rating from federal regulators in order to be designated as a depository institution for the city.

The NYC Banking Commission, officially consisting of the mayor, the comptroller and the city’s commissioner of finance, has no authority to cut ties with banks based on environmental risk or socially responsible investment concerns.

Extricating from Wells Fargo, which has been serving as the city’s primary depository institution, is a gargantuan task. According to the NYC Banking Commission, Wells Fargo has annually processed 6.7 million individual transactions for tax collection, in excess of $27 billion dollars in volume. Those transactions include 3.4 million annual real estate tax transactions totaling over $20 billion. Commission representatives also mentioned 1.8 million parking summons transactions generating approximately $119 million in city revenues. As of May 26, 2017, Wells Fargo had 99 bank accounts with $227.7 million in city deposits supporting critical city services administered by multiple city agencies.

“Wells Fargo is heavily embedded in the architecture of the finances of the city of New York,” said Karen Cassidy, assistant commissioner for the Department of Finance, reading a statement at the Wednesday meeting on behalf of the commission. “There are only a limited number of banks capable of handling the volume of transactions and dollar amounts that flow through NYC central treasury. It would be extremely disruptive to the revenue collection function and the cash flow of the city of New York if the DOF were suddenly unable to use the depository services of Wells Fargo.”

For that reason, the NYC Banking Commission actually had to exercise its discretion to invoke a “necessity exception” under Title 22, allowing it to conditionally designate Wells Fargo as a city depository for the time being despite not meeting the CRA rating requirement. Wells Fargo’s conditional designation as a city depository, however, includes an immediate moratorium on all new deposits and contracts for depository services for the city. Existing contracts with Wells Fargo for payment processing, check printing and other banking services will also not be renewed under the conditional designation, the commission said.

No timeline was given for when the city would officially cut ties with Wells Fargo, although the commission emphasized that it must seek options that would not increase ongoing costs for the city whenever possible. Also, if at any time Wells Fargo receives a federal CRA rating of at least “Satisfactory,” the Banking Commission affirmed that it has the authority to reconsider the bank’s application for full designation.

Also on the docket Wednesday: Santander Bank, a relatively new arrival to NYC, was completely denied its application to become a city depository due to its own failed CRA exam. The banking commission even voted on a resolution to remove $5 million deposited from the city into a Santander Bank branch to support its expansion into a distressed Brooklyn neighborhood. (The $5 million deposit was made by the city as part of the state’s Banking Development Districts program.)

Twenty other banks, including union-owned Amalgamated Bank, Puerto Rico-based Popular Community Bank, Bank of America, Citi, JPMorgan Chase and HSBC were all given full designations as depository institutions for the city of New York for the next two years, effective immediately.

Citing the state’s open meeting law, the commission declined to give audience members an opportunity to testify or address the meeting on the record as part of the proceedings.