“Charity feeds a person who is hungry. Philanthropy is meant to go upstream and innovate.”
-Helen Davis Johnson
President, Michigan Municipal League Foundation
This comment from Helen is resonating with me now more than ever. This year has turned most communities upside down. Small business owners have taken on grants and public financing, a first for many. Local foundations in communities have stepped up to help provide relief which I am in awe of their generosity. But how does capital move through these layers in our places and how should they participate?
Let’s start with the most straightforward capital.
Real estate developers don’t make a lot of money. Sure, the big specialty developers doing high rises in cities or bringing Walgreens to a corner near you…likely across from a CVS… those developers make money. Small town generalists like myself are a different story. I raise equity from investors for every project and take out bank loans. Projects always have a developer fee to cover the cost of the work they involve to deliver but I often defer half of that fee into an equity stake so I have some long-term investment and ownership in projects. Mentors of mine have waited 10 years for their developer fees on some projects!
Why am I telling you this? Because if we’re going to have an honest conversation about public, private, and philanthropic capital shaping your community – you need some background about the private risks people are taking to improve your place. Historically, the people who developed your place were lauded by the community but as industrialization, regulations in land use, financial systems, and construction methods evolved developers built bigger, uglier, more specialty buildings and quickly earned their reputation for being greedy.
We’re not here to talk about that extractive development, we’re here to talk about additive development and generalists like myself. Locals who choose to invest their time and energy into place, taking countless risks along the way. It also means the only stakeholders are the lender, investors, and developer.
Whenever you can simply use private capital to complete a project and it makes sense… do it. I tell this to clients who approach me asking about grants for their projects or for local initiatives I’m part of. If you have to pull the numbers apart and put them back together or get financing from a lender but it can work, do it.
How will a project make money and how much will it make? I’m beginning to sound like the investors I work with.
Private capital has to make financial sense. Private capital makes sure there’s food on their own table.
Like it or not, this is where charity comes in to play. Public or government funding programs exist to solve for a variety of issues in our communities. Hunger is in the above-mentioned quote but when we talk about community, charitable sources are your government housing programs, economic development initiatives, and small business support. Incentives to save a historic building? Public financing. Affordable housing? Public financing. That new manufacturing facility on the edge of town? Public financing.
There is always a specific purpose behind these sources. Many are competitive and complex to earn. You’ll be up against your neighboring place, or the one across the state, or if it’s a federal program something across the country. Proving your place as a good and trustworthy investment is crucial. Following the guidelines, dotting every i, and crossing every t is the only way to get the capital.
It is a lot of brain damage. R John Anderson calls this the Return on Brain Damage or ROBD scale…. The more complicated the financing you need or capital stack you assemble, the higher the ROBD. The Legacy for example had equity and bank debt, private capital up to a certain point. It only went to a certain level because of the future appraised value. Our small town rents and future revenues will never be that of Chicago or a larger city to make the redevelopment make sense (when the end value is say $6M but the cost of the project is $12M you have a gap. That $6M gap is what has to be filled for your project to move forward). The Legacy utilized historic tax credits, a loan from the Michigan Economic Development Corporation, a grant from the Michigan Economic Development Corporation, Brownfield Tax Increment Financing, and a local Obsolete Property Redevelopment tax incentive program. It took lots of public financing to help us close the gap and redevelop the property. A very high ROBD.
I’ll add this work isn’t easy and if your work doesn’t fit the mission, the public financing will find a better fit. Remember all of these funds are available thanks to state and federal tax dollars so if you can’t compete locally for any of them, funds from your place will help support that awesome new thing you wish you had in another place.
Public financing feeds the hungry and whomever can feed the most people for less or make the biggest impact gets the food.
Admittedly, I do not and have not ever run a foundation but I do serve on two foundation boards and am the daughter of a philanthropist. Perhaps what I love most about Helen’s quote is that it well-articulates my opposition to a donation my dad may mention over the dinner table. Often, he’s telling me about something he’s proud to contribute toward and occasionally I push back citing that there is public financing for that and it shouldn’t be philanthropy.
There’s the rub. Innovation is crucial to philanthropy. Grantmaking often seems to mimic public support but it’s typically different as foundations look for how sustainable organizations and efforts will be. Both public and philanthropic capital work to build the economic mainstream and close the gaps. Philanthropy is risk capital looking for new ways to solve problems.
Partnerships are a big part of that. Not only in collaboration with like-minded organizations but in leveraging other sources of capital and coming in for the final ask. Philanthropy is meant to support strategy. Accelerate ideas that catalyze on the foundations of public and private capital.
No one owes you an annual gift or operating funds. A foundation is not and should not give you a million-dollar grant for a building. It is not philanthropy’s job to come in and help with a real estate development project… At least not on the grant side but some foundations are willing to join the capital stack as equity in their pursuit of having a well-rounded investment portfolio.
Philanthropic capital’s goal is to divert people from ever becoming hungry or to create sustainable food ecosystems for their longevity.
How do you get the capital needed to thrive?
This year threw us all a curveball. Like it or not, you can stay the course or pivot. Many jobs and organizations can happily stay the course. Some need to pivot and won’t. Many already have and are seeing ways it’s better as well as improvements they can make. Tech companies launch without knowing their audience so they can fix it and try. They know they may fail but it’s better to fail then wait years in darkness trying to perfect a product. This year gave us all an opportunity to launch. Risk it. Pilot that new strategy.
With public and private capital being more reserved or scarce in some instances, you need to innovate if you want change. It doesn’t have to be big. Incremental and small strategies or pilots are incredibly impactful plus give you a track record. Do you want to look back on this year where you could have more easily embraced innovation and realize it passed you by? Regardless of the resources you have or where you’re operating at for your community… it’s time to get creative.