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summer 2005

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This Just In... OCC's Districts Report on New Investment Opportunities for Banks
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OCC's Community Affairs Department

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CommunityAffairs
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Articles by non-OCC authors represent their own views and are not necessarily the views of the OCC.

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Bay Area Funds Focus on the Double Bottom Line
Arial view of San Francisco

A family of three community development funds in San Francisco is making a tempting offer to banks: Invest with us and you'll obtain a good return for your bank's bottom line as well as for your community.   The Bay Area Family of Funds says its bank investors can expect to get more than just possible Community Reinvestment Act (CRA) credit. Bay Area Fund Executive Vice President and Managing Director Elizabeth Ferguson says the fund's investments in environmental cleanup, local business growth, and real estate will seek to generate private equity market rates of return for bank investors.

Double Benefit

The fund describes itself as making a regional investment effort to reach underserved areas with private investment dollars.   To attract investors, the fund is seeking market-rate financial returns.   To further economic development, the fund is financing projects that create jobs and promote community wealth.   This dual effort is called a "double bottom line."

Bay Area Fund investors choose among three funds with different objectives.   The Smart Growth Fund (SGF) focuses on mixed-use, mixed-income smart growth real estate development.   The California Environmental Redevelopment Fund (CERF) provides loans and lines of credit for environmental cleanup. And finally, the Bay Area Equity Fund (BAEF) is a venture capital fund targeting job creation in the consumer products and services, technology, and healthcare fields.   Bank investments in all three funds have been made under the Part 24 community development investment authority, and may qualify for CRA consideration.

"Citibank has invested in all three of the Bay Area Family of Funds because we like their holistic, local approach to addressing real estate and economic development in underserved areas."

Evelyn Kenvin, Director of Investments for Citibank Community Development

The Bay Area Fund delivers market-rate returns in each of the three funds.   It accomplishes this by hiring investment managers who know their asset class and have a proven track record. The fund is also committed to returning economic, social, and environmental benefits to the community.   To ensure that the social bottom line is being fulfilled, the fund has developed a management assessment tool, the Social Impact Report.   This report is the outcome of documentation, monitoring, and evaluation conducted for each investment.

Based on the concept of "more bang for each buck," the fund has attracted over $175 million in private investments from banks, insurance companies, a pension fund, private foundations, and individual investors since its inception four years ago.   Of those dollars raised, over $100 million has been invested in projects and businesses.

Working Together

The Bay Area Family of Funds is the brainchild of The Bay Area Council, a business roundtable started in 1945 by Bank of America, American Trust Company (later to become a part of Wells Fargo Bank), Bechtel, Pacific Gas and Electric, Fireman's Fund, and others. Today the council has collaborative corporate, government, and community partners dedicated to making the Bay Area's low- and moderate-income communities more livable through smart growth investments in sustainable, environmentally friendly economic development.

Council members are interested in bettering the quality of life, facilitating smart growth, and addressing those elements of the community that have been left behind.   According to Ferguson, the Bay Area Council has had many other types of initiatives throughout its history. However, this is the first effort to sponsor funds to attract private investment into lower-income communities.

Kitchen at Star's BBQ restaurant, Gateway Retail Center Mall
At Star's BBQ, Steve Williams, left, and Larry White - show off the new kitchen in their restaurant at the Gateway Retail Center Mall.

Smart Growth

As one of the Bay Area Family of Funds' three distinct investment vehicles, the Bay Area Smart Growth Fund, structured as a limited liability company (LLC), has raised over $65 million to invest in mixed-use, mixed-income real estate developments. So far, SGF has invested $61 million in twelve projects. Initially, the SGF sought returns to investors ranging in percent from the high teens to low 20s.   To date, the fund's returns have done better than predicted, due to a very good California real estate market and good timing (see sidebar, below, for details about the SGF investment in Marin City Gateway Retail Center).

Marin City Gateway Retail Center, a Smart Growth Fund Investment

Dry cleaners at Gateway Retail Center Mall
Russell Lam, owner of Gateway Cleaners, opens his door to encourage customers to come in for the grand opening of the new business.

The flagship project for SGF is Marin City Gateway Retail Center (GRC), a shopping center built about a decade ago in a lower-income area surrounded by more prosperous areas.   GRC tenants are national chains and include a restaurant and drug store.   The original ownership structure of the center paired a real estate group with a non-profit owner/manager, Marin City Community Land Corporation (MCCLC).   But the deal wasn't working. The nonprofit had trouble accurately billing and collecting rents, there was a poor mix of tenants, and the nonprofit didn't have the expertise to fix GRC's problems.  

SGF stepped in and invested $7.1 million in partnership with MCCLC which bought out the real estate partner.   SGF became an equity partner, bringing along a plan to turn the property around over a seven-year time period through tenant repositioning, a full facelift of the buildings, and training so the community group's staff members learn how to effectively lease and manage commercial property.   Revenues from the property now flow through MCCLC and profits are used to fund community projects such as the development of a garden, playgrounds, ball fields, and a library. The project was refinanced in early 2005.   In the future, MCCLC expects to become full owner and the SGF will exit, after having met its financial and community goals.

Another element of the social bottom line to this particular investment is that SGF is helping local businesses to incubate their services and create new business opportunities. SGF and the Bay Area Council have been able to support the development of new businesses because they are able to combine with larger, more experienced players.   The SGF is incubating maintenance and painting, security, and landscaping small businesses that can provide services to GRC.   The goal of the incubation effort is to help grow stable businesses that can expand beyond GRC and provide their products and services to other projects being supported by the Bay Area Family of Funds.

Environmental Benefit

The Bay Area Family's second fund, the California Environmental Redevelopment Fund, has commitments of just over $34 million.   Structured as an LLC, investors commit to a term of 10 years.

The fund's goal is to provide investors with a return in the high single digits.   CERF, a revolving loan fund, is also a certified community development financial institution (CDFI), and is a provider of California Recycle Underutilized Sites (CalReUSE) funds. The CalReUSE program provides state pre-development dollars to finance environmental site assessments.

The CERF fund has completed fourteen debt-oriented investment transactions; four are in the Bay Area with the other ten located throughout California.   The fourteen investments represent about $36 million, providing gap financing prior to construction, either as a line of credit or a loan, to fund environmental cleanup activity with the take-out being the construction loan.   The fourteen projects range from the acquisition and rehabilitation of a gas station to the remediation of 60 acres of abandoned rail yard land (see the sidebar, below, for a description of the CERF project in downtown San Francisco).

CERF investors receive a return from interest and fee income. With interest rates low, the profit to be made is great and therefore attractive to investors.

Habitat for Humanity Develops Downtown Site

Apartment building in San Francisco California
CERF helped develop Habitat for Humanity's new eight-unit apartment building in downtown San Francisco.

CERF provided a $1 million loan to Habitat for Humanity San Francisco to clean up and prepare the land beneath a recently completed five-story condominium project that now houses eight low-income families.   Like Habitat's more common single-family housing projects, this one brought in future owners who helped build their own units with sweat equity.   The average income of the residents is 49 percent of the area median income.

Venture Capital

While CERF and SGF improve the physical environment and appearance, housing, and services of the community, the Bay Area Equity Fund (BAEF) is about job creation.   The idea is to provide human resources and support that can help link qualified local employees to jobs in every portfolio investment.   To this end, BAEF invests in companies that are willing to provide jobs, most at entry level, for low- and moderate-income community residents through local employment development programs.   The Equity Fund also plans to invest in industries that are the strength of the Bay area: consumer products and services, technology, and health care services (see sidebar, below, for a description of an equity investment.)

The fund has raised $75 million and, to date, has invested more than $11 million in seven companies.   Investors include the Contra Costa County Employees' Retirement Association, a pension fund.   Contra Costa decided to invest in the BAEF because it can maintain both its fiduciary responsibility and reach its social mission through the same investments.

Venture Capital For New Pharmacy Concept

Entryway to Elephant Pharmacy
Elephant Pharmacy, with a venture capital investment by the Bay Area Equity Fund, has brought jobs and a new business concept to the San Francisco Bay area.  

BAEF provided $2.2 million in venture capital to the flourishing Elephant Pharmacy. In the short period since the pharmacy opened its doors, it has generated 70 new entry-level jobs for the local community. The pharmacy is an innovative, start-up business, combining traditional pharmaceutical products with complimentary and alternative products, such as food, flowers, and consulting health practitioners. This combination of merchandise and service is targeted to health conscious consumers. The business model for the pharmacy meets the requirements for BAEF's double bottom line because store is located in or near a low- and moderate-income geography in the Bay area; the majority of new jobs are entry-level positions with compensation that exceeds the livable wage ordinances in Berkeley, Oakland, and San Francisco; and staff benefits include health care, equity-sharing, and training.

The Whole is Greater than the Sum of Its Parts

The Bay Area Funds are successful in part because of the unique coalition of business, government, and community groups working together through the Bay Area Council. Ferguson also describes the Bay Area as the type of community that is rich in caring about neighborhoods and in caring about the environment.   In addition, many elements of what the fund has done by designing the complementary work of the three funds could be replicated in other cities.

What's Ahead

Having had initial success in attracting banks, insurance companies, a pension fund, and private investors, the Bay Area Family of Funds is now able to focus more on deal flow and community impact.    Additionally, the fund wants to ensure it delivers financial, community, and environmental success through the work of each individual fund. The real burden for the fund is to prove to the world that investments in lower-income communities can make good financial returns and help a community gain economic strength.  

Acting as a catalyst, the fund is working on two new efforts.   One is the Joint Venture Project (JVP), sponsored by the Ford Foundation.   The JVP facilitates joint ventures between the private sector and community-based organizations in the Bay Area. This is an effort to expand the scale of development, including mixed-use redevelopment, and use of market-rate tools seldom employed by community developers.   JVP is working to reduce poverty and promote self-sufficiency in low- and moderate-income neighborhoods.  

The second effort is participation in the Bay Area Community Investment Network (BACIN), a vehicle for leveraging capital in the Bay Area region.   BACIN emphasizes sharing community development investment initiatives and opportunities to stimulate network member collaborations. It also encourages the exchange of underwriting criteria and referrals between network members.

Finally, documenting, monitoring, and evaluating the social and environmental impacts of the fund investments is essential to the success of the double bottom line concept.   Without this follow-up, the fund loses its unique value and investors will be hard pressed to determine the social value added by the investments.   To this end, the fund is developing impact reports and narrative evaluations on each investment project.   These tools describe the strategies used by the portfolio companies, the implementation process, and the results achieved.   This information sets the fund apart from other social investments and keeps portfolio companies cognizant of both bottom line commitments.

For further information about the Bay Area Family of Funds, visit http://www.bayareacouncil.org or contact Elizabeth Ferguson at The Bay Area Council, 200 Pine Street, Suite 300, San Francisco, California 94104.   The fund's telephone number is (415) 981-6600; its fax number is (415) 981-6408.

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