How Can We Spur Transformational Community Development?

How Can We Spur Transformational Community Development?

By Bernel Hall, New Jersey Community Capital

 

Bernel Hall president CEO of New Jersey Comm CapitalAbove: Paterson, NJ Habitat for Humanity – A $5.2 million New Markets Tax Credit allocation for the construction of 12-14 single-family homes, part of a larger neighborhood plan to preserve affordable homeownership opportunities.

With their innovative investment strategies, community development financial institutions (CDFIs) are spurring positive economic development in overlooked areas and delivering competitive returns.

Community development efforts to achieve equity in housing, health and education have been a cornerstone of our nation since the early 1900s. But for many reasons, ranging from top-down decision-making to misunderstanding communities’ needs, traditional community development has often been unproductive. “Limited market conservatism” is part of the problem, concluded a recent paper in the Stanford Social Innovation Review. Its authors proposed a new paradigm instead that prioritizes impact over scale, emphasizes creative responses to local needs, employs flexible financing strategies and empowers community members to become active changemakers.

That model already exists and has powered Community Development Financial Institutions since they emerged in the 1970s as an outgrowth of the Civil Rights Movement. CDFIs were designed to expand economic opportunities to spur transformational change for communities and businesses in overlooked markets. Classifying them as federally regulated private financial institutions and establishing the CDFI Fund in 1994 further strengthened their efficacy and impact. As the CEO of New Jersey Community Capital, a CDFI that is strengthening communities through strategic investments in affordable housing, community-oriented real estate and educational projects and diverse minority-owned small businesses, I can explain how we accomplish this goal. 

How CDFIs Advance Equity and Opportunity through Creative Financing

Diverse entrepreneurs, individuals, small businesses or organizations in overlooked communities often hit a wall when they apply for financing. They may not have a deep enough credit history, or past hardships and credit problems may prevent them from qualifying. When banks or other traditional lenders turn them down, some rack up debt on credit cards or turn to high interest loans or even less reputable sources like predatory lenders. 

This is where CDFIs step in; they have innovative financial products and services for those without sustained or solid credit histories. Unlike traditional banks, CDFIs focus on financing projects that advance equity or address systemic issues overlooked communities may face. Examples include diverse entrepreneurs whose businesses can create jobs and generational wealth; educational programs for residents; affordable housing, mixed use developments and centers that can benefit entire communities and more. 

Because CDFIs have strong relationships with the individuals, businesses, and organizations they serve, they’re willing to take on the additional risk — and deeper vetting process of borrowers — to support them. Sometimes it takes more than just a loan; they may also provide financial literacy education, coaching or mentoring. But because CDFIs’ use debt capital from their investors for these loans, the return rates investors receive are predetermined and competitive.

For that reason, CDFIs seek creative and diverse sources of income rather than just interest from lending and fees. In fact, they excel at obtaining funding through other sources, including donations and grants, to make sure they can meet predetermined returns. Besides banks, credit unions, philanthropies, venture capital funds and institutional investors, they can get funding from technical assistance and consulting contracts, New Market Tax Credits, management fees and real estate development earnings. Many also receive awards from the U.S. Department of the Treasury CDFI Fund’s annual monetary awards program and grants from the Freddie Mac Equitable Housing Finance Plan.

How effective are CDFIs? Very. For example, in NJCC’s 36-year history, our Community Loan Fund — the oldest business line in our company, has grown its assets under management from $50,000 at its inception to $707 million at the end of the 2024 fiscal year and has deployed almost $900 million in debt capital through almost 1500 loans. That capital provides leverage to its recipients that adds up to completed developments worth about $3 billion today. 

CDFIs Excel at Escalating Impact and Diminishing Investor’s Risk

Because CDFIs have excelled at unlocking untapped market segments to broaden financial opportunities and create transformational change in the areas they serve, be it affordable housing, education or health care, they’ve earned reputational acclaim for effective and responsible lending in low-income communities, the U.S. Department of Treasury’s 2024 CDFI Fund overview noted. At NJCC, we are one of the few CDFIs to serve the full ecosystem of real estate development and business creation. We have three business lines to provide flexible financing and lending programs. Each is structured differently to allow us to blend capital and gain uncorrelated risk and performance advantages, as explained below.

  1. Community Loan Fund of New Jersey: As a certified CDFI, CLFNJ serves as the heart of our organization and offers an innovative toolkit of financial products, programs and services to support sustainable community development ventures that increase housing and jobs, improve educational offerings and strengthen neighborhoods. These projects include the development and preservation of affordable housing, diverse small businesses, high-impact neighborhood stabilization projects and commercial property developments that support economic growth, from mixed-use office and retail projects to school buildings and childcare, job training and community centers.  

As mentioned above, the CLFNJ has deployed almost $900 million in financing and supported more than $3 billion in development costs across almost 1500 investments and loans since its inception in 1988. It has also been awarded NMTC allocations of $340 million, of which it has deployed over $325.5 million and leveraged over $1.1 billion in additional private capital. One of our most innovative and effective programs in this business line is Address Yourself, a comprehensive homeownership platform for low-to-moderate income individuals and families. Since its inception, Address Yourself has provided housing counseling for 2,040 households and has deployed more than $8,950,000 in down payment assistance to more than 525 households.  

  1. Community Asset Preservation Corporation: CAPC, NJCC’s wholly owned, vertically integrated nonprofit real estate development subsidiary, is dedicated to building capacity and completing community-focused real estate projects in overlooked areas. While it develops and renovates single-family homes, multifamily buildings and commercial developments, it was established in 2009 to negotiate bulk purchases of mortgage notes, real estate owned and other failed properties from financial institutions and transfer them to nonprofit organizations, private institutions, local government agencies and other partners able to rehabilitate and return the properties to productive use. Today, this effort has evolved to include our Restart Home Preservation Program, a foreclosure prevention effort that provides distressed homeowners with one-on-one assistance applying for mortgage modifications that often include significant principal reduction so homeowners can enter a newly modified mortgage they can afford. 

CAPC also rehabilitates and returns properties to productive use and rents renovated homes to low and moderate-income families. So, it also provides construction management, property management and brokerage services. With its wide range of services and entrepreneurial real estate efforts, it is the first nonprofit organization of its kind and has a unique expertise in the CDFI ecosystem: the ability to stabilize neighborhoods by acquiring and redeveloping vacant and abandoned properties and returning them to productive use as quality, healthy and affordable homes. 

Cumberland County College Arts and Innovation Center
Cumberland County College Arts and Innovation Center – Through THRIVE South Jersey, New Jersey Community Capital provided Millville Urban Redevelopment Corporation, the lead developer, $6.9 million in New Market Tax Credits to finance the new Center.
  1. University Ventures: Structured as a specialized Small Business Investment Company, UV is a growth capital fund focused on high-potential small businesses led by diverse entrepreneurs or operating in underserved communities. It provides capital and managerial assistance, specifically targeting the needs of entrepreneurs who have been denied the opportunity to own and operate a business because of social or economic disadvantage. Because of its structure, UV can draw on federally backed SBA loans at a 2:1 leverage ratio, which can offer high-potential businesses tremendous opportunities to expand and thrive.  

The Future of CDFIs

While CDFIs have been a strong and steady force for positive economic development in overlooked communities for decades, they have been particularly effective in the recent past. They tripled their assets to over $450 billion and increased their numbers by 40% from 2018 through 2023, the New York Fed’s most recent CDFI market report noted. But today, as our nation faces a dire affordable housing crisis and shortages of capital to achieve equity in education, small business creation and homeownership, they are more needed than ever and play an indispensable role in today’s competitive lending environment by prioritizing people and communities over profits yet still delivering competitive returns. 

Fortunately, CDFIs’ most significant programs are recognized as vital to the nation and have broad bipartisan support, as Novogradac, one of the leading consultancies working on these issues, noted recently. So, as we look towards 2025, we are inspired by the opportunities to create and sustain transformative change for those we serve.

 

Article by Bernel Hall, president and CEO of New Jersey Community Capital, the largest community development financial institution in New Jersey.

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