The Opportunity

Businesses occasionally require infusions of outside capital—in the form of equity or debt—in order to expand. These capital investments by outside investors or lenders may originate from financial institutions, nonprofit corporations, and even government agencies, to name a few. Those providing the capital investment—banks, for example—are in a position to leverage that capital to extract concessions from the borrower such as pledges of collateral and promises to open other accounts. Taking this simple concept a step further, some lenders and financiers make socially-responsible investments[1] in which they require recipient businesses to implement asset-building initiatives as a condition of receiving capital. Local governments are sometimes in a similar position to demand that private companies undertake socially-responsible activities as a condition of receiving local government loans or economic development incentive grants.  

How the Tactic Is Applied

• Place asset-building conditions on equity investments by community development venture capital funds
• Require implementation of asset-building programs as a stipulation of business loans
• Evolving practice: link incentives to community benefits agreements

Place Asset-Building Conditions on Equity Investments by Community Development Venture Capital Funds

Rural Venture Fund (North Carolina)
Kentucky Highlands Investment Corporation (Kentucky)
Pacific Community Ventures (California)

The earliest community development venture capital funds were formed in the 1970s to invest in rural businesses with two primary goals in mind: produce economic growth in rural areas and create employment opportunities for low-income rural residents.[2] North Carolina’s Rural Venture Fund joined the ranks in 2007 and concentrates its investments in distressed counties in North Carolina. To the extent that these venture capital funds succeed with their investments, resultant business growth may provide a significant boost to rural communities. However, a few venture capital funds have gone beyond these traditional aims and seek to leverage their investor role in order to enhance asset-building for those on the economic margin.

Kentucky Highlands Investment Corporation (KHIC), in rural Southeastern Kentucky, was the first venture capital firm to focus entirely on financing businesses in struggling rural counties.  In determining where it will invest its equity, KHIC strongly prefers companies that provide living wages and a minimum benefits package (life, health, and disability insurance) to low-income employees.[3]  Additionally, KHIC requires all companies in its portfolio to establish an equity compensation plan—e.g., an employee stock ownership plan—as an additional asset-building mechanism for low-income employees.[4]

Pacific Community Ventures (PCV), through its affiliate PCV Funds, provides venture capital support for established and growing businesses located in low- and moderate-income communities.  PCV makes its investments based not only on a company’s growth potential, but also on how high a portion of the workforce was hired from low- and moderate-income communities.[5] As part of its management efforts, PCV instructs its portfolio companies on how to establish programs to help low-income employees build and retain wealth.[6] Programs include employee financial education, retirement plans for low- and moderate-income employees, and equity sharing for lower-income employees. According to PCV, its portfolio companies experience higher growth rates, provide higher median wages, and are more likely to provide health benefits to hourly wage employees than similar companies across the nation.[7]

Require Implementation of Asset-Building Programs as a Stipulation of Business Loans

Coastal Enterprises, Inc. (Maine)

Coastal Enterprises, Inc. (CEI) uses its gap financing loan product as a means to increase asset-building opportunities for low- and moderate-income rural residents.  As a condition of receiving certain gap financing products, a borrowing business must agree to target the majority of its job creation toward low-income workers, provide an employee benefits package that includes health care, and partner with workforce development organizations to provide skills training programs for its low-income employees.[8]  Prior to offering one of these loans, CEI evaluates a borrower’s existing and proposed jobs at the company in terms of the  education and job skills required, advancement opportunities, likely wage progressions, and job creation projections.[9]  CEI gives preference to business borrowers that offer employment opportunities with family-sustaining wages and that lead to the development of valuable skills.  CEI reports that it has formed agreements with more than 260 businesses since 1983, resulting in the creation of more than 6,700 quality jobs for low-income residents.[10]

Evolving Practice: Link Economic Development Incentives to Community Benefits Agreements

When government agencies offer economic development incentives to businesses, they typically make the offer conditional upon job creation requirements and wage standards. The negotiation occurs between the local government and the business and usually does not involve any third parties. However, proponents of community benefits agreements seek to change that practice.

A community benefits agreement (CBA) is a binding contract regarding a single economic development project between the project developer and a community organization (private or public). CBAs seek to secure one or more benefits for community members such as family-sustaining wage requirements, local hiring requirements or “first source” programs, environmental protections, affordable housing development, space for local businesses, and recreation or park space.[11] In return for these concessions by the developer, the community organization agrees to publicly support the developer’s requests for zoning modifications, permit approvals, and economic development incentives.[12]

The first CBA was reportedly negotiated in Los Angeles in connection with the construction of the Staples Center sports arena in 2001, and it won concessions such as “living wage” jobs, local hiring and training programs, affordable housing, and open space requirements.[13]  Since that time, CBA campaigns have occurred in cities throughout the country, although none has gone into effect in Southern states or in rural communities.  In one recent rural example, a CBA campaign was launched by the Postville Community Benefits Alliance in rural Postville, Iowa, in an effort to secure concessions related to a meat processing company’s treatment of workers and its support of local institutions, among other demands. The ultimate goals and success of the campaign remain unclear as of the time of this writing.[14]

Learn More

L. Ray Moncrief
Executive Vice President & Chief Operating Officer
Kentucky Highlands Investment Corporation
London, KY
606-865-5175
lrmoncrief@khic.org
http://www.khic.org/

On the Internet

North Carolina Rural Center Small Business Credit Initiative
http://www.ncruralcenter.org/business-programs6/bizcap

Coastal Enterprises, Inc.
http://www.ceimaine.org/