Podcast

Related Links

• Investing in Rural America Conference
• Rural Investment Collaborative

Transcript

Tim Sablik: For the seventh annual Investing in Rural America conference, the Richmond Fed worked with the Federal Reserve System, Rural LISC, and other community partners to bring together community development practitioners, financial institutions, policymakers, researchers, and rural leaders from across the country. The theme of the three-day event in Asheville, N.C., was "The Strength of Rural Places," highlighting the people, institutions, and strategies that power rural economies.

Today's episode dives into one of the key themes discussed at the conference: how rural communities can secure the capital needed to finance development projects. Robin Hacke, co-founder and senior fellow at the Center for Community Investment, shared some of the factors that can impede the flow of capital to rural places.

Robin Hacke: First of all, the number of investments that are available to make and the size of those investments may be fewer and smaller than what investors like. Many investors, especially investors in community development, would like to be able to write one check and have that check go to a lot of different purposes. In rural areas, sometimes that's impossible.

Second, if you're trying to diversify risk, then it may be difficult to put money into a very small community. If something happens like Hurricane Helene, you're wiped out and that's very tough.

I think the third thing is having the skill and capacity in the rural place to know what to ask for and who to ask. Developing a pipeline of projects and then constructing them in a way that makes investment most likely may not be a skill that's available locally.

Sablik: So, impediments both on the investor side and in the community as well.

Based on the work that you've done, what are some of the key ingredients that you think can help improve the flow of capital to rural places?

Hacke: We have a framework called the capital absorption framework that has been successfully applied in rural regions all across the country, from the Coachella Valley in California to Central Appalachia. What we've seen is that the key is a couple of things.

One, you have to be really clear about what you're trying to achieve. We call that the shared priority. Articulating a big goal that's ambitious but not impossible is the first step. In the Coachella Valley, for example, it was 10,000 affordable homes in 10 years. That was a region that, when they started, was producing only 38 homes a year.

The second thing is getting together and collaborating, not working individually in a scarcity mindset where everybody is competing with everybody. Creating a community pipeline that has more than one deal in it and thinking about where to secure resources for that pipeline together rather than competitively is really important.

Finally, we talk about what we call the enabling environment, the context in which the deals get done. You want to think strategically about how to make that better over time. Organizations like Invest Appalachia have been really successful in thinking about the enabling environment and putting the skills that are missing into the places that need them.

Sablik: The Richmond Fed has been partnering with Invest Appalachia to help more rural communities develop the skills needed to seek capital for local projects. Jason Smith, director of the Richmond Fed's Rural Investment Collaborative, shared more about why the Richmond Fed started the collaborative and how the partnership with Invest Appalachia came about.

Jason Smith: In 2021, the Richmond Fed was considering replicating a place-based initiative that the Boston Fed was doing. It quickly became clear it was not the right time to launch the initiative because communities were receiving a large amount of stimulus funding with very little time for planning. Communities that already had plans and had worked on enabling environments like Robin was talking about helped them to be able to absorb the funds. But if they didn't have that in place already, it was really difficult in those moments. It's like when an intense rainstorm comes and the rain just runs off of some areas where the ground is too hard or the terrain is too steep for it to be absorbed. We realized then that planning time wasn't available for folks and we needed to have a different approach.

The Rural Investment Collaborative's early design team and steering group identified ways to help investors see how to invest in rural communities and some of the best practices investors already were doing that might be able to be replicated. But they also wanted to make sure that communities had investment-ready projects. Stephanie Tyree, who was the executive director of the West Virginia [Community Development] Hub at that time, shared about a pilot training that Invest Appalachia was doing that was informed by the capital absorption framework that Robin talks about. The other rural leaders thought that there could be an opportunity to test that model in other areas beyond Appalachia.

As part of that process, I had the opportunity to go and interview many of those first pilot participants. They identified things that were really helpful in the training, and they also said some things that would be helpful before the training and after the training to help them be able to make the most of the learning [and] to keep their projects going.

From there, the Rural Investment Collaborative began to develop the community investment cohort model. It still works with Invest Appalachia and licenses the curriculum. Also, the Invest Appalachia team helps to facilitate the 16-week training that covers the fundamental information about the capital absorption framework, developing shared vision, and the types of financing that can help projects become reality.

So far, 63 people have completed the training component and are part of the community investment cohorts. There's a lot of energy when these cohort members get together to share their stories and it's really exciting to be able to follow their work.

Sablik: On that note, can you share an example of a community investment cohort participant and their project to illustrate what this process looks like?

Smith: Sure. In November, I will get to attend a ribbon cutting for the Mace's Lane Community Center. Keith Cornish participated in the training cohort a few years ago and has really been moving that project forward.

The project is in Cambridge, Md., on the Eastern Shore. The community had a historically African American school that was not in use any longer. Even though the building had fallen into disrepair, the community still saw it as an asset to build upon. So, the community decided to renovate the building for use by nonprofits, including a Boys & Girls Club, a museum, and other community services that would fit into the fabric of [the] community, honor the legacy of the building, and continue to contribute.

But it was a multi-million-dollar project that was going to require a lot of different types of funding and definitely more than philanthropy could do on its own. Through the things that Keith learned in the program and leaning on his team in the area, they were able to bring in funding from philanthropy, from government tax credits, gap financing, loans.

I've been able to go once when there were people there working on it during the construction. Now, I'm really excited to go and see the intent in real life of what they wanted to be able to make out of this community asset and to be able to use these different forms of capital.

Sablik: Alex Flachsbart, the founder and CEO of OPAL Community Capital — a community development financial institution, or CDFI, based in Birmingham, Ala. — shared his perspective on what motivates funders to invest in rural projects.

Alex Flachsbart: The motivations for investing in rural communities are just as diverse as the panoply of funders who might want to do something there, right? I tend to think about it as a capital spectrum. There are a lot of different ways you can break up the spectrum, but maybe the best is to think about a continuum from truly local all the way up to national.

We love when we can capitalize deals exclusively with people who are of the place or working from the place. It's better for a hundred reasons that I probably don't have to go into here. Their motivations typically are, "I am of this place. I care about this place. I want to see it thrive. I want to see my children have an opportunity to continue living here." And so, your capital requirements around that kind of motivation are very different than one of our national funders. They have underwriting boxes. They have a set of criteria that, if not met for very good regulatory reasons, they're not going to be able to participate. Most of the national funders that we work with do deeply care about place, but there's other motivations they have, too — CRA, for example, on the bank side.

Sablik: If you're a community and you're trying to secure funding from a bunch of different places to build a capital stack for some project, how should these communities think about these different goals and return expectations from funders?

Flachsbart: The simple answer is always start local. There's actually really interesting research out of the Tulane School for Real Estate that shows that you are far more likely to get a construction loan on a real estate project if your project is physically in a location where there is a community bank.

This is what I think people sometimes forget: capital raising is not writing an application. At the end of the day, capital raising is about networking. If you're doing that networking, if you're trying to find you know who your potential local funders are, it's important to understand what tools might motivate them to do something when they otherwise wouldn't — like opportunity zones, for example.

Sablik: Get to know them, get to know their motivations.

Flachsbart: Exactly right. And you don't need to be an expert on every federal tax program [and] every state tax program. But you should know who to call. Do that reach-out, figure out what tools might be available to help move capital locally, and then from there scale out. Once you've built the base of your capital structure, the other slots are far easier to fill in.

Sablik: Local CDFIs do more than just provide the funding for a project, according to Diane Standaert, senior vice president of policy and advocacy for HOPE Credit Union, a CDFI loan fund and policy institute based in Jackson, Miss.

Diane Standaert: We were talking about this yesterday in the pre-conference seminar with Rural LISC. In that conversation, we really talked about CDFIs as capital catalysts. CDFIs are serving as vehicles through which capital can flow from institutions who may not know how to reach the hardest-to-reach communities in the country. I think a really important role that we play is helping capital move to community leaders who know what they need for their communities.

We play a matchmaker, knowing where there are investors or opportunities that could meet the need of a community. Is that a project that is ready for a New Market Tax Credit investment, or is that a project that maybe could benefit from a program from USDA, or just a regular commercial loan? It's also making sure that those with resources to invest see the potential and opportunity in rural communities and not just approach those communities with a risk- or deficit-based approach.

Sablik: That's super interesting. I think a lot of people, myself included, might think CDFIs [are] providing the loans and the capital. But you're doing so much more in terms of connecting people and providing expertise.

Can you give us an example of how a CDFI has helped assemble funding from multiple investors who had different motivations or different expectations around returns on the project?

Standaert: Bringing together different types of investors, different types of partners is embedded throughout HOPE's 30-year history of serving the Deep South. I really want to highlight some really innovative work that I think demonstrates the creativity and what's possible when you have a CDFI at the table working to solve hard problems.

One of the things that HOPE has been doing is helping renters in apartments that were financed by the Low-Income Housing Tax Credit program to buy those units that they've been living in for more than 15 years. In Mississippi, over 5,000 units include this promise that tenants will be offered the right to purchase their unit after year 15, and that's due to a state policy decision. Now HOPE is, along with our partners, helping make that promise a reality.

So far, we have helped provide small mortgages to just over 30 people who are now homeowners, creating wealth and equity overnight in rural Mississippi. We have additional ones in the pipeline that we're excited about. Each step of the way, we've been able to combine different types of resources and support, and we hope to do so as that program continues.