Community Capital Management: Bonds As an Engine for Equity

Impact Reflection

In a capitalist economy, access to capital enables investment and business growth that can lead to a better standard of living and build wealth over generations. Mortgages provide an avenue of support for building intergenerational family wealth. Education expands opportunities and builds valuable skills. Funding for small businesses creates employment and the capacity for ongoing income growth. For certain communities, access to these engines of growth has been restricted, and wealth accumulation has been constrained.  

In 2020, the murder of George Floyd spurred many individuals and institutions to better understand and address systemic instances of structural and cultural racism. One investment manager that we work with, Community Capital Management (CCM), responded by creating a focused opportunity for investors to direct capital to underserved minority communities to accelerate the process of narrowing economic disparities: the Minority Cares Program.  

CCM’s portfolio is a diversified pool of market-rate bonds that seek to provide steady returns to investors while also creating a positive impact in the communities they are lending to. Below, we profile three key investments made during 2023 as part of CCM’s Minority Cares Program. 

A central story of generational wealth-building in the US is the story of the mortgage interest deduction, and government support for mortgage lenders starting with the creation of the Federal Housing Administration (FHA) during the Depression in the 1930s. Homeowners could deduct the expense of a mortgage, and defer tax payment on the appreciation of their home for decades. 

By the 1970s, it was clear that many communities of color were systematically excluded from access to mortgages via redlining and differential underwriting standards.  Banks did not equitably provide capital for mortgage loans, and the Community Reinvestment Act (CRA) was passed in the 1970s to require banks to place at least 2% of their loans into lower-income and “majority-minority” neighborhoods.[1]  

When even rental housing is a stretch, access to corollary programs that help provide food assistance, childcare, and other services is often key to remaining housed.  Continued financing for new low-income housing construction, as well as periodic upgrades to facilities, is a large part of impact that housing bonds can have. 

CCM’s portfolio includes a commercial mortgage loan to the Preservation of Affordable Housing, which financed the upgrade of affordable housing at Bay Meadow Apartments in Springfield, MA. Located in an area with 75% residents of color and 25% residents living below the poverty line, they have preserved over 13,000 units in an existing 28-acre housing development. Upgrades included developing on-site services such as childcare, job training, and a summer food program, building and upgrading recreational facilities, replacing windows and heating systems for better energy efficiency, and funding an on-site resident service coordinator. 

North Carolina A&T State University is a land grant doctoral research university in Greensboro, North Carolina. Established in 1891 under the Second Morrill Act of 1890, it was the first university in the state for people of color is currently America’s largest Historically Black College or University (HBCU) by enrollment. Its endowment totals $164.5 million – dwarfed by its land grant university sibling in our backyard – UC Berkeley boasts an endowment of $7.4 billion. Adjusted for enrollment, UCB has $15 in endowment funds for every $1 that NC A&T has. More broadly, the 2022 endowment gap between Predominantly White Institutions (PWIs) and HBCUs stood at $127.5 to $1, according to data from the National Association of College and University Business Officers. 

States have not lived up to their legal obligations to fund HBCU land grant universities at a similar rate to non-HBCU universities. In September 2023, U.S. Secretary of Education Miguel Cardona and U.S. Secretary of Agriculture Thomas Vilsack sent letters to 16 governors emphasizing the over $12 billion disparity in funding between land-grant HBCUs and their non-HBCU land-grant peers in their states that occurred between 1987 and 2020. This disparity has forced many HBCUs to operate with inadequate resources and delay investments in campus infrastructure, student support, research development, and more.   

CCM’s investment in a mortgage security supporting funding for NC A&T has helped finance the construction of a health center and upgrade its football facilities for better broadcasting and fan access.

The US Small Business Administration (SBA) was established in 1953 to provide financing to aid small businesses, primarily by backing local banks issuing business loans that met SBA standards. By the mid-1960s, it was expanded to provide specialized help to low-income applicants, and over the ensuing decades it gradually shifted its focus to support a more sustainable and equitable economy and not just generically finance new business start-ups. 

Much like mortgage lending, banks have historically avoided investing in particular census communities with a high proportion of residents of color or that are largely low-income. Designations such as the Qualified Historically Underutilized Business (HUB) Zone have helped direct more capital to financing for people who would historically have lacked access entirely. The latter program specifies that 3% of federal contract dollars should be awarded annually to HUB Zone-certified businesses. 

In addition, since 2019 the SBA has directed more than half of their lending to Persistent Poverty Counties that have more than 20% of their population below the poverty line for 30 years or more.[2]

CCM invested this year in an SBA loan pool that included a loan to help the minority owners of Afrodisiac Nola turn their successful food cart business in New Orleans into a full-service restaurant. The loan helped them retain six jobs and hire six additional employees as well. The team worked with Turning Tables, a nonprofit that addresses racial inequity in the restaurant industry to provide training to up-and-coming minority hospitality professionals. 

At North Berkeley, we have many clients who want to be part of efforts to create positive change and, in particular, to help create more equitable access to financial opportunities. Community Capital Management is one key example of a company that makes it possible for our clients to have impact while also earning an investment return to support their own families. 

Resources

[1]  Community Capital Management’s flagship fund was originally called the CRA Qualified Investment Fund, and supplemented pension funds and other institutional investments that wanted to direct their capital to CRA-identified communities.

[2] California has three Persistent Poverty Counties:  Fresno, Tulare, and Imperial County. The majority of PPCs are rural, and a majority are located in southern states.