The Bottom LineThe Bottom Line

Bottom Line Year In Review: Communities Finding More Investors With a Taste for Something Different

More cities and investors are gaining a taste for things that used to scare them. 

You remember what it was like when your parents still had to make you eat your vegetables. I certainly do. But eventually I came to love steamed broccoli, roasted cauliflower, and even kale. Some of us go vegetarian, and some even go vegan eventually. (Not me — or at least not yet.)

Looking back at some of the news in community and economic development this past year, you can find more cities and investors gaining a taste for things that used to scare them.

Some cities were already making sure their investments were serving their priorities — divesting from fossil fuels and private prisons in recent years (See NYC, Philly, Boston). This year, the Bottom Line covered how, in St. Louis, City Treasurer Tishaura Jones asked the banks holding municipal deposits to outline how they would help implement the Black Lives Matter agenda locally. A small but growing number of cities are talking about going further with their municipal deposits — especially in California, where this year community organizers passed state-level legislation creating a pathway for city and county governments to charter their own banks. It’s no surprise that San Francisco is among the first that are starting down that path.

Many investors long ago pulled their money away from industries they didn’t want to support, such as fossil fuels, gun manufacturers, the defense industry or private prisons. This year in the Bottom Line newsletter, one of the emerging themes has been how some investors are finding ways to invest directly in opportunities created by and for the benefit of historically redlined and marginalized communities. Or, rather, these communities are learning how to create investment opportunities, and they’re finding investors with an appetite for what they’ve got.

In Oakland, community organizers and cooperative entities have been tapping private capital markets to finance the acquisition, rehab or construction of properties. This year the Bottom Line reported on how the worker-owned Hasta Muerte Coffee Shop partnered with Oakland Community Land Trust to raise $600,000 in private capital from community investors in order to finance the acquisition of its building in East Oakland. Meanwhile in West Oakland, Community Foods Market opened its doors this year — it sold ownership shares to over 400 community investors, and community investment helped boost credibility and confidence that opened up doors to other investors on the $11 million project.

In public markets, investors buy, sell and trade stocks and bonds on highly-regulated public exchanges with extensive public disclosures of company finances. In private capital markets, a company or a real estate developer uses one of several legal mechanisms under the U.S. Securities and Exchange Act to avoid any required public disclosures and go directly to investors to sell ownership shares or borrow money.

Public markets used to be where most dollars got invested, but in 2018, public markets saw $1.4 trillion in new investment, while private markets attracted $2.9 trillion.

Since private capital markets have much less oversight from the U.S. Securities and Exchange Commission (SEC), private capital investments have historically been considered riskier, and the regulations around them are designed to protect — and therefore exclude — people who aren’t already relatively wealthy. To participate in a private capital investment you usually have to be what the SEC considers an “accredited investor,” generally meaning you have to have a net worth of at least $1 million or an annual income of $200,000.

There are some legal ways for non-wealthy folks to participate in private investments alongside wealthy folks. All the Oakland examples above included accredited and “non-accredited” investors. This past year the Bottom Line covered how the East Bay Permanent Real Estate Cooperative raised $200,000 in private investor capital from using a state-based California law that allows cooperatives to raise up to $1,000 from each of their members, including some non-accredited investors. The Bottom Line also covered how Illinois passed legislation this year to create a similar legal mechanism for co-ops to raise capital from their communities.

Historically marginalized and disinvested communities are also finding that investors are gaining a taste for more favorable terms than they initially expected.

When Hasta Muerte did its private transaction, it let investors choose their own interest rate between 0 and 4 percent. Of the 22 investors, a majority chose zero percent. Nearly half of East Bay Permanent Real Estate Cooperative’s investors so far have declined to take an annual dividend from their investment.

Across the country, the Boston Ujima Project has an investment fund where its voting members — all residents of Boston’s working-class communities of color — approve every loan or investment. In 2019, the project pooled $1.3 million from 179 investors into their investment fund, and 57 of those investors opted for a lower interest rate than they were entitled to take. (Ujima also recently announced its first loan, $100,000 to CERO, a worker-owned food composting cooperative.)

None of these stories above are opening any massive floodgates of capital to historically disinvested communities, but that’s not necessarily a bad thing. Too much money without enough community leadership has been bad news before. Many cities are still living with the consequences of the Urban Renewal era, which sent billions into low-income areas but with the end result being large-scale displacement, often in favor of highways serving suburban commuters.

Similar fears are now arising around Opportunity Zones, the new federal tax break for making investments in the nearly 9,000 designated census tracts around the country. There is nothing in the legislation creating Opportunity Zones that requires those investments to create housing that’s affordable to existing residents or support businesses that will hire those residents or give those residents a chance to open or scale up their own businesses. There aren’t any requirements to report on any potential impact benefiting the 35 million people who currently live in Opportunity Zones, a majority of whom are people of color. In general, Opportunity Zone investments will take place in private capital markets.

Only one city so far has stood up and told Opportunity Zone investors that they couldn’t build just anything and everything they want in its Opportunity Zone — Boulder, Colorado.

The Boston Ujima Project, the East Bay Permanent Real Estate Cooperative and the rest of the Oakland stories stand as evidence that communities do have ideas and things that they would like for investors to help them finance, and they are finding ways for investors to back them. In 2020 there will be more to report, as more and more communities and community organizers become familiar with the legal mechanisms and legal expertise that’s out there to help them raise capital in ways that work for them and with them. Groups like these are also connecting in new ways to share their lessons and build on each other’s work.

And yes, some are even working to build connections between community organizers and Opportunity Zone investors.

There’s always the threat of profit-driven investors coming to take neighborhoods and lives away from the historically disenfranchised. But communities looking for people to invest directly in their vision are having some kind of a moment that started in 2019.

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.

Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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Tags: opportunity zonesimpact investing

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