This interview is part of Next Up: CDFI Leaders Thinking Ahead and Acting Now, an 8-part series exploring the Community Development Financial Institution industry.
Tim Ferguson: There is a perception that CDFIs have become too bank-like to fulfill their mission to provide capital and resources to underserved communities. Do you agree?
Maurice Jones: There’s no question that CDFIs need to continue to push deeper into our communities and take more risk – smart risk – but more risk. Frankly, we need to demonstrate that we can invest in small businesses, entrepreneurship, commercial corridors – and we do that by mitigating risk, and finding good partners to work with. We need to help transform people and neighborhoods.
There is risk, but CDFIs are not actually taking the risks that could distinguish them from mainstream financial institutions. We need to make sure we’re asking ourselves these questions, and pushing ourselves, our systems, and our partners to go with us.
So, from that perspective, your statement is the very question that we should be asking ourselves – we need to make sure that we can distinguish ourselves from banks. If the feedback is that we aren’t taking enough risk, we need to take that seriously.
TF: And to what extent do you think the ability to take more risk is driven by your current funding sources?
MJ: I definitely think we need to continue to expand and diversify our funding sources, as they contribute to this. But at the end of the day it’s our job to present the compelling business case to our partners (including our funding sources) for why we need more long-term capital, why we need to take more chances in the communities we’re serving, and how to do it more prudently to mitigate risk. At the end of the day, I put it back on us. We need to present the compelling case to get our partners to go on this journey.
Let me add on to that: Before going to access the capital markets, our significant motivation was to get funding with fewer restrictions – both geographic restrictions and term restrictions (long-term versus short term) – so we could do more work in rural America, so we could do more work on economic development, and so on. I want to be clear that we can’t take the funding sources out of the game.
TF: Let’s look at 7A activities as an example. If you look at 7A activity since 2010, the SBA guarantees provided to minority businesses are a tiny percentage of the whole – I think black-owned businesses received less than 5% (and at its height it was only 8-9%). One of the questions I have is this: to what extent are you and your peers constrained in lending to smaller enterprises by the bankers’ perception of what the credit box should look like? Do you believe that by changing the types of capital used to fund your activities, you would be able to take more smart risk in terms of lending to entrepreneurs?
MJ: It’s a combination of us continuing to search for new sources of capital, while also continuing to make the case to funders that this is where we truly need to be if we want to have transformative impact. And third, we need to believe the gospel – we need to push our organizations to find more minority-owned businesses, more women-owned businesses, and other underrepresented groups. The above are strategies that we need to pursue, but it starts with us aspiring to make an impact in these spaces. It starts with us paying just as much attention to investing with enterprises as we do with real estate. And that’s on us; that’s where we have to lift our game.
TF: That’s really interesting. How do you think you can make that happen? It seems to be quite engrained that most financing is facilities based?
MJ: It is, but again, it starts with us. We need to build up our muscles in these other places where we’re underplaying – that means investing in small businesses, or in commercial corridors. We have to build our own competency to do this and to do it well in order to build confidence among funders that they should feel comfortable and allow their money to be used in this way. The biggest job to be done is building our capacity to do this well.
What we have done up until now (though this is a generalization you could definitely punch holes in), is we have built strong competencies around real estate development. That’s good- we don’t want to stop this– but we have to build equal competencies around other things. And once we do that, the money will follow.
TF: As you’ve begun to talk about this internally – do you see a desire to do this?
MJ: Absolutely – it’s hard to argue with the fact that in order to truly help people transform themselves and the places where they are raising families, we have to bring more economic and commercial enterprises to the community. It is not a hard case for people to see. So, no, it hasn’t been hard for people to believe that. It’s no question that they’re on a journey to make sure they have comparable muscle in those spaces, as they have in the real estate space.
TF: You know this area well given your past role at the CDFI fund, but one of the original goals of New Markets Tax Credit is that 50% would be utilized for small businesses. But the reality is that it hasn’t happened.
MJ: I don’t have any data and haven’t done any hardcore analysis, but if I were basing it on what we have done, and what I’m seeing anecdotally, I’d say the CDFI industry is 80 percent in the housing space. And there might be some commercial on the first floor, but I’d guess it’s still 80 percent in community facilities and housing. The business lending is 20 percent or less. Again, that’s anecdotal, but I’d be willing to say it’s close to accurate.
TF: And where would you like it to be?
MJ: I would love for it to be 50/50 – I’d love to see 50 percent in the business space.
TF: What do you think we need to make that a reality?
MJ: We need to see to it that those doling out the credits offer more incentives to weigh business lending more heavily–which, again, was the original intent of the credit. And then they need to require more commitment from those of us out here doing the work to really forge a path on the business side. No matter what explanations people may have, we need to do the work: we need to develop the pipelines, increase our competencies, and find new partners to work with, so we can deploy more capital in the business development space.
A big piece of this is giving more incentives, and giving more allocation to folks that commit to using the credits first for business development.
TF: The business development piece means more than just providing capital
MJ: Absolutely. Capital is certainly a part of it. But, as with everything else, it’s consulting, technical assistance, helping with technology, talent, permitting, helping rehab commercial space – it’s all of the above.
TF: So a holistic approach to transforming neighborhoods?
MJ: Housing is absolutely a part of it. The challenge is the lack of balance right now. We should be striving for 50/50… for the industry overall. We need more balance, and to get more balance we need to put our money where our mouths are; we need to start allocating the incentives so we can get more balance.
TF: When we look at the types of investment, historically CDFIs have been debt providers. How do you envision this changing?
MJ: That’s a great question. We have to develop more products on the equity side – this is where the risk tolerance and competency piece comes in. Equity investments, equity products, even having an equity mindset are going to be really important moving forward if we’re going to improve the business development piece of this. We have to keep doing the debt piece and the grant piece, but will need more equity.
TF: Right, because otherwise you won’t be able to support entrepreneurs. My sense is that one challenge is helping wealth to be created in the neighborhoods.
MJ: Absolutely – we have to invest in the creation of wealth in communities – and you need enterprises to create wealth.
TF: That reminds me of a real estate fund I’m aware of that was created to invest in neighborhoods, for which the money is provided by large corporates. I remember asking “how this is going to benefit the community beyond providing money for facilities? Shouldn’t you be sharing some of the returns with the community?” What are your thoughts on this?
MJ: This is an interesting thought. It’s like I said – I’m not suggesting we do less facilities, or less housing – I think we have much more to do in that. We don’t have anything close to the balance we need. We need to be thinking more like business investors: what do we do to generate wealth-creating enterprises in these communities? This sort of mindset is the next step for all of us.
TF: It’s not just about a bunch of “senior white guys” thinking about providing a bit of their corporate resource to a poor neighborhood…
MJ: Exactly – how do we generate something? Everybody in the business world knows that the name of the game is equity: getting a piece of the equity so you can benefit from the highs and lows. It’s the same way with neighborhood transformation: we have to create vehicles that allow the community to share in the ownership and the equity. That’s the piece to be intensified in the next chapter.
TF: You’re optimistic?
MJ: That’s the next frontier in my mind. That’s what we’re going to try to lean into, and hopefully with lots of partners.
TF: That’s a good segue. One of the buzzwords of the day is “impact investing” – my sense is that there’s huge skepticism about it in general. In theory, CDFIs – particularly the larger ones – are very well placed because they are deeply “in place,” and believe in having the feet on the ground. Do you believe that there is a new group of investors who believe in financial returns with social impact? What do you think about that in general?
MJ: I kid with people a lot on this: we were doing impact investing before it was cool. In my mind, it’s not a new thing. I do think, though, that there are new sectors that are investment prospects … whether you look at it from a mindset of an impact investor or not. I’ll give you a couple of examples:
First, healthcare. This has little to with what people are calling “impact investing” and much more to do with an awakening around the health of communities – including what’s happening beyond clinics themselves. We need to get involved in housing, jobs, healthy food, other community facilities that contribute to the reduction of stress, and so on. I see incredible alignment between health care and what we’re doing; whether they want more social return or financial return is unclear, but this will definitely be a big area of investment going forward.
The second example is technology. The technology community is ripe for partnering with us. They come at it more from a standpoint of realizing that if they want to be able to attract and retain talent, they need to do something about the issues in the communities that surround them. If you look at those communities – take Boston for example, where housing affordability is a key issue around talent recruitment. San Francisco is also experiencing this, and we’re seeing more and more tech companies realizing that it’s in their best interest to be helpful. They’re starting to look for who they can partner with on these issues, and we see them as a great source of potential partnerships on this work.
TF: Is that the rationale behind the Facebook initiative?
MJ: Absolutely. Facebook picked affordable housing as the issue they want to do something about. It’s a great challenge and risk to their being able to recruit and attract talent in the Bay Area, where the median housing price is more than $730,000. There’s definitely a question about impact investing, but from my perspective, that’s not new; what’s new is the ripeness of certain industries to get involved in the work we’ve been doing for the last 35-40 years.
We have a hypothesis that we’re trying to test around another industry that is ripe for partnership, which is the sports industry. What you have now is an incredible awakening of social consciousness within the sports world. Right now you see it manifested in whether or not one kneels for the national anthem. But the opportunity to translate that into community development work is great. We’ve had a partnership with the NFL for 20 years to build and rehab football fields. They’re one of our largest grant funders every year…we have a great opportunity to build and expand on what we’ve been doing with them to date.
TF: I know LISC was a driver behind a lot of the work done in Indianapolis when the Superbowl was there – that was phenomenal. It depends on the host city of course; for example, NY didn’t do as much or use the money as a catalyst for anything. Often the stadium becomes a ‘black hole’ that doesn’t have much impact on the surrounding communities. So with that in mind, I wonder whether you would extend that to include individual athletes. Do they have the conduits or knowledge of how to go about reinvesting back into communities? Is that something you’d explore?
MJ: That’s exactly it: both the franchises and the leagues—and also the individual athletes. Right now they’re all great prospects for this work, and what we have to do is be much more aggressive about trying to tell our story to them, so that they understand how we can be used to do the work that they want to get done. Our biggest challenge is that these are not industries that we’ve historically focused on with the same intensity that we’ve focused on the financial sector. The understanding and knowledge of what we do in these spaces is much less than in the financial space.
TF: I want to go back to the conversation around the Facebook initiative. Did they approach LISC, or vice versa?
MJ: They actually issued an RFP for a manager of this fund they wanted to set up. The fund sort of came out of Facebook’s interaction with community based groups in East Palo Alto. Facebook proposed partnering to build more housing in the area, and finding someone that knows how to do this to manage it.
This is the type of thing that I think we’re going to see more of. I was joking with someone the other day about the Amazon race. It’s represents unbelievable potential impact, but the question is if people are preparing for all of the impact. People are focusing on the 50,000 new jobs, without thinking about the potential serious disruption it would cause. What are we doing to make sure that a wide swath of people benefit from this? That’s where groups like ours can play a role.
TF: It’s certainly interesting. I hope you can engage them – they clearly have a lot of financial resources. But they also have the technology, which would be beneficial.
MJ: It’s a real focus. You’re going to see this kind of need in these economic development “sweepstakes” more and more, and this is a role that the CDFI industry is well positioned to play. We haven’t really done this before, and we need to now. When I look at the work to be done, at the opportunities to forge new partnerships with economic development, technology companies, healthcare, higher education, etc., I think the prospect of having more folks in the space is really great. It is incumbent on us to be much more aggressive in making sure people know who we are and what we can do.
Over the last 40 years the financial industry has been the anchor of this work – mostly because of CRA and things like LIHTC. If 10 years from now we’re not talking about healthcare and technology also being anchors for this work, we’ll have missed an opportunity. But it’s on us: we have to aggressively pursue these partners.
TF: Do you still think of yourself as a CDFI?
MJ: You know…that’s interesting. We are clearly a certified CDFI by the Treasury Department. But, I think of us as more of a social enterprise fund, to be honest. We are looking for ways to invest in socially motivated enterprises in the communities that are underserved all over the country – both urban and rural… We are also investing in talent, leadership, and capacity building – we’re really trying to invest in social enterprises that are going to be producing benefits for people and communities all over the country.
TF: And you don’t care whether they are for- or non-profit?
MJ: No. As long as they share our aspirations and are pursuing the impacts we want to have, then it doesn’t matter if they’re for-profit or not.
TF: When someone asks you what LISC’s impact is, how do you respond to them? For example, back to our earlier conversation around engaging a wealthy athlete.
MJ: We measure it in several ways – there’s the traditional way of counting units that have been constructed or rehabbed, counting square footage, etc. But our success also has to be measured in terms of how much impact we’ve had on individuals who are trying to build or improve their credit scores, improve net incomes, get employment in living wage jobs, or invest in businesses that are creating sustainable jobs. These are the kinds of things we would use to measure our impact.
And then there’s the overall impact on a particular neighborhood, looking at things like life expectancy in specific zip codes. These are the kinds of metrics we need to measure ourselves by.
We do it better on the real estate side right now- we need to up our game on the people and neighborhood side.
TF: Is this true for industry overall?
MJ: Yes. The industry has its strongest muscle on the real estate side, and we need more balance.
TF: On balance: LISC’s breadth is enormous, with both an urban and a rural focus. How do you think about those two things?
MJ: Yes, and they’re fabulous. I love the fact that we’re everywhere. We have more than 80 partners in rural America, and we’re in hundreds of counties. The rural piece is big. We need to throw in one more metric here: another space we’re trying to add value in is the lack of broadband, which is a big issue in lots of America. One of our goals moving forward is to figure out what partnerships we can forge to help more rural places find sustainable ways to bring broadband access to these communities, because if you don’t have this in a sustainable way, the notion that we can bring economic development is fanciful at best.
The rural piece is a big one for us. If you look at the country to date, there are still 70 million people living in rural America—22% of the country. They need to be doing well also. This is one of the things that attracted me to LISC: the rural focus.
TF: Do you believe the CDFI industry is keeping up?
MJ: I would say that the industry itself continues to innovate, but the changes in the economy are happening at a faster pace. We need to innovate more intensely and more quickly than we are right now, particularly around the impact that the digital revolution is having in our communities. We need to make sure we are building our muscle to leverage digital innovation for the sake of our communities. That’s where we need to get much faster.
The thing about these “digital revolutions” is that they‘re happening one right after another at warp speed, which is having an impact in how we work, our sense of community, and so on. This is where the industry as a whole needs to get more innovative. In that space, we’re behind.
TF: I agree. One of the observations we have is that collaboration is not a strong suit of the CDFI world. Do you agree? What could be done to change this?
MJ: For us to have the kinds of impact that we want to have, we have to be stronger at collaborating. There’s collaboration all over, but to have impact at the scale we want, and to keep up with the pace of change going on, we have to be better at innovation and collaboration than we have been historically. We’re not keeping up right now. We need to find new partners to collaborate with, and we have to do it faster: with the technology community, with the healthcare community, with higher education – these are all places where better collaboration is an imperative.
TF: Do you think it’s important to build up other CDFIs?
MJ: Oh yeah. You have to have a strong industry and field to attract resources to the work that we’re trying to do. You also need a community. We need one another for intelligence, for feedback, for collaboration, problem-solving, experience. You need a robust development finance structure.
TF: I’ll finish by asking an internal question: you talk about #OneLISC, but historically, LISC has had independent offices across geographies. I understand that you’re focused on bringing it together. What does that mean for your internal investment? And how do you think about relationship between yourselves and the Board?
MJ: It definitely implies, at a minimum, more technological connection across our offices. So, we are actually a family of three companies: LISC, which is focused on housing and facilities; New Markets Support Company, which is our New Markets syndicator; and the National Equity Fund, which is our housing tax credit syndicator; along with the individual LISC offices that have to respond to their markets. Our individual offices have to do a better job of drawing on all of LISC’s resources when pursuing opportunities. So for example, we need to make sure that the Boston office is orchestrating the entire family of LISC assets, not just what the Boston office happens to have on the ground, as well as be thinking about what the team can leverage from New Markets, from NEF, from headquarters, and so on.
We all have to be committed to the others’ success, no matter where we are in the enterprise. What that means—and here’s the key—is that each one of us has to invest in knowing what else LISC can bring to the table. Believe it or not, we’re not all sufficiently informed about what else we have. Our first job is to become scholars in ourselves, so that when we’re in the communities we serve, we know what tools we can bring.
TF: That’s a very different way of operating. How are you going about that?
MJ: We’re trying to make sure that we better inform one another about what we’re all doing. For example, we have an all-hands meeting where each part of the organization is invited to do a sort of “show and tell” about its work, so we can become better informed.
The Facebook initiative is an example of a #OneLISC success. Historically, we would have gone after that RFP through our San Francisco office. The interview would have been conducted with San Francisco staff, materials would have come out of that office, and we would have only relied on the assets of that office. Instead, we sent a team comprised of people from the New York office, the Bay Area office, and NEF, who put together the RFP and went to the interview. This showed people that we’re more competitive when we’re #OneLISC – if we can show people that, it moves people.
TF: Do you have any final thoughts?
MJ: For me, the lesson is that just like the most important assets of any business are its people, the same can be said for all of the communities in America. The most important assets are the people. What we need to do is to find ways to help the people transform themselves and their communities. This notion that we be just as focused on people as on place is really important. It’s the journey that we’re on. We can’t just be mesmerized by the real estate–the most important aspects are the people.
That’s really what we have to keep our eye on.