Creative Financing for Community Inclusion

Season 1, Episode 7

In Episode 7: Creative Financing for Community Inclusion, podcast hosts Nina Crook, graduate of Yale SOM with a Masters in Global Business and Society and Camilo Monge, MBA guide listeners through a series of conversations exploring different models of creative financing to build inclusive models for economic development and make possible investments in innovation that maximize community benefit.  Guest interviews with: Joe Evans from The Kresge Foundation, Aliana Pineiro from Boston Impact Initiative, Greg Reaves from Mosaic Development Partners and Eric Letsinger from Quantified Ventures. Topics covered include: use of impact covenants for Opportunity Funds to differentiate funds with community benefit commitments, crowdfunding and other strategies to share the wealth potential of OZ projects with community members, and environmental impact bonds as another arrow in the quiver for municipalities layering OZ projects alongside other investments as part of a broader OZ development planning process.  Take a listen!


1. Kresge Foundation OZ fund covenants, more info here

2. To read more about the use of covenants in investing: Impact Covenants: Term Sheets as Tools for Change, by Confluence Philanthropy, read more here

3. As mentioned in the conversation with Joe Evans, Guiding Principles and Reporting Framework for Opportunity Zones  (Feb. 2019) from Opportunity Zone Investor Council, convened by the Beeck Center at Georgetown University.

3. For a write up of Mosaic’s use of crowdfunding: Crowdfunding and Opportunity Zones joining forces in Philadelphia, Next City, more info here

4. Quantified Ventures

*Photo of Eastern Lofts, a project of Mosaic Development Partners in Philadelphia, courtesy of Greg Reaves

Episode Transcript: 

Kate Cooney (00:00):

This is CitySCOPE.

Camilo Monge (00:01):

A new podcast from the Inclusive Economic Development Lab at the Yale School of Management.

Lauren Harper (00:05):

Where we learn about what might be possible in our city by talking with others about what is happening in theirs.

Liam Grace-Flood (00:11):

Are we ready?

Paul Bashir:

Let’s go.


Camilo Monge (00:00:28):

Welcome everyone to Episode Seven of Season One of CitySCOPE podcast - Remaking the City: Charting the Opportunity in Opportunity Zones. This is Camilo Monge.

Nina Croock (00:00:38):

And I’m Nina Croock. You know Camilo, a few of our guests so far have talked about such things as blended capital stacks and partnerships between different sets of actors to leverage subsidy from the public sector and private foundations alongside investors to create opportunities for projects that provide more community facing benefits than might otherwise be developed if only market forces were in play.

Camilo Monge (00:00:59):

That’s right, Nina. Lauren and Christian in Episode Two highlighted how the affordable housing field has become quite sophisticated by using multiple sources of capital to create affordability in the housing market, combining low interest loans from city and state public sources and equity from investor tax credit sales.

Nina Croock (00:01:17):

A difference between the affordable housing LIHTC program and the Opportunity Zone program is that the Opportunity Zone program doesn’t really come with any strings attached. There are no community benefits required per se as long as the investment is made in the OZ census tract as an equity investment and follows a general guidelines about substantially improving the real estate or business asset.

Camilo Monge (00:01:37):

It’s true. Although there is talk that the IRS may require some reporting and some data collection on impact, as of this recording, the OZ investors could pay the OZ census tracks with self-charged lockers and fast food restaurants and still be meeting program requirements. But there are some efforts to use creative financing strategies such as those developed by folks working on affordable housing space, small business investing and social impact bonds as methods for seeding more community oriented investments.

Nina Croock (00:02:05):

Episode Four introduced us to the work of Joe Evans from The Kresge foundation and Aliana Pineiro from Boston Impact Initiative, who’ve been using low interest loans and impact oriented equity investments with small business development. To start off this episode on creative financing, we wanted to begin with hearing about how providers of impact oriented capital can take what they’ve learned from the impact investment strategies and apply it to the Opportunity Zone space. As you heard in the previous episodes, the Opportunity Zones have the potential to promote investments in socially and economically distressed neighborhoods; but without any requirement for community benefit, this potential may go unrealized. We’re excited to share our conversations with a group of practitioners in the Vanguard of using creative financing to lock in community benefit.

Camilo Monge (00:02:48):

First, let’s hear from Joe Evans from The Kresge Foundation. Our classmate, Allie, interviewed Joe about the work Kresge is doing to use foundation investment alongside OZ investment as a mechanism for acquiring impact commitments and reporting at the deal level, even though none exists for the program overall.

Joe Evans (00:03:05):

I’m Joe Evans. I’m the portfolio manager in the social investing practice at The Kresge Foundation.

Allie Yee (00:03:11):

Before we jump into the opportunities and specifically, we’d love to learn more about what Kresge does. To start us off, could you share a bit more about Kresge’s mission and how social investing has become part of the foundation’s work?

Joe Evans (00:03:24):

The Kresge Foundation was founded by Sebastian Kresge who was a retailer at the turn of the last century, founded Kmart or what eventually became Kmart, that’s what the K in Kmart stands for. We’re a $3.5 billion foundation. For about the first 80 years or so of the foundation’s life, we primarily offered challenge grants for capital building projects. So there’s Kresge halls on many universities across the country, health centers, other community facility projects that received matching challenge grants from The Kresge Foundation. When Rip Rapson joined as the President about 8 to 10 years ago, he started a shift toward a more strategic philanthropy with dedicated programmatic strategies and funding, as well as a place-based practice for deep engagement in our hometown in Detroit. And about 10 years ago, started to look at how to use investments other than grants to achieve the program’s priorities.

Allie Yee (00:04:28):

How do you think about different types of capital and how that achieves the mission beyond grant making?

Joe Evans (00:04:31):

The event that propelled it was the recession in ‘08, and the feeling that there was a cutting back both on the philanthropic assets being made available and the increase in the need from the human serving organizations. We started a initiative that we called The Community Relief Fund, where we, through an RFP process, we originated about a dozen zero interest loans to human service organizations that could point to a future promise source of funding to kind of bridge that need to that future source. As an investment approach, people who had not done it before filled a need and highlighted lots of learnings about if you were going to build processes to use tools other than grants, to achieve your charitable outcomes, that there’s a whole slew of questions that needed to be answered, different agreements, as a platform to think about additional ways to utilize the tools of investing to achieve our programmatic outcomes.

Allie Yee (00:05:29):

I’m curious how Kresge is thinking about Opportunity Zones and what is promising about them, and what concerns or questions might you have?

Joe Evans (00:05:37):

We’re excited and fearful and motivated from the moment we started to hear about the Opportunity Zone tax credits. It’s directionally right in several ways, primarily because of the opportunity to unlock this frozen capital of hundreds of billions of dollars if not more, of unrealized capital gains. Also, very exciting to the investor, the possibility to put off the capital gains tax liability and make a new investment that could be free of tax on capital gains. So, it’s a potentially huge amount of capital to be invested in these state by state identified Opportunity Zones. We also see a lot of risks for the community certainly in a number of ways, primarily because there isn’t much in the way requirements under the regulations about how the money is invested, what kind of benefits, if any, might accrue to the residents of those areas. And we identified this early as a real potential problem reliability of the program for the residents of the Opportunity Zones.

Joe Evans (00:06:47):

In partnership with the Rockefeller Foundation, we put out a request for ideas essentially from both these community development finance institutions, many of whom were abuzz with wanting to talk of potentially being able to develop funds themselves and the broader fund management universe where most of the real dollar activity is going to take place. Through that process, we identified two ways that we would invest and participate, and we have two goals here. One is to influence investor activity and influence fund development and deployment; and secondly, to try to get into the public domain, some examples with data of what a fund investment can do when structured correctly. After reviewing all of the proposals, we developed two approaches. One was to fund Calvert social investments to set up an incubator for promising community development finance entities that wanted to develop their own fund but had never done it before or only in limited ways, provide some TA, provide some expertise and advice around the fund management development and how to market it to attract capital.

Joe Evans (00:08:00):

Second, we made two specific guarantees, commitments to our tariffs [??] and to community capital management, two entities, developing funds, one primarily real estate space, the other in a more operating small and medium enterprises space. Those are the two that we got to the finish line on. We discussed the sets of covenants that we wanted folks to agree to in exchange for a Kresge seal of approval, if you will. Our goal through the process is to create some amount of differentiation within the marketplace between OZ funds that are compliant with the regulations today and OZ funds that are more intentionally impactful than what their requirements are. We’re calling those funds, those latter sets, Impact Certified OZ Funds.

Allie Yee (00:08:48):

It would be great to hear more about the covenants - where did you want to put the bar on those covenants?

Joe Evans (00:08:52):

Of course, we’d like to put the bar further than the funds would like to agree to the bar. There was some other guidelines that were put out by the US Impact Investing Alliance - certainly complementary and aligned with what we’re trying to do, but the specific covenants that we’ve got a couple of funds to agree to, I don’t touch on quite all the areas that those guidelines do, and those guidelines are voluntary, and the covenants that we were applying are legally binding obligations of the funds. We couldn’t quite be as expansive as we might like to be; at the same time, we’ve got some very meaningful, impactful covenants both on what the actual work is and then also on what the agreements are in terms of reporting out use and impact over time.

Allie Yee (00:09:37):

Could you give us a couple examples?

Joe Evans (00:09:39):

One is something that we like to incorporate into national funds that we developed. The funds have agreed to convene an advisory board of national experts in the areas most germane to the sector that the funds are investing in, primarily, a backward looking evaluation of community impact of the investments that have been made. A couple that are related to direct scope of the investments is that for a fund making housing investments that at least 50% of all the housing units created have to be affordable to families earning less than 120% of area median income. A second would be that 50% of all portfolio investments are going to create a net positive number of living wage jobs, and that there’s some commitment and process for local hiring for those positions. Funds that we will provide the guarantee to have to certify that they will adopt an anti-displacement strategy, a risk to crowding investment into disinvested areas is that they’re going to seek the easiest, the most likely to appreciate safest, risk-free projects that can be found. And those are often, if not aligned with, even at odds with, where community priorities might be. One clear example for us of that are self-storage units.

Joe Evans (00:11:00):

You can develop a piece of land in a disinvested area and put a self-storage unit there that maybe creates one full time job, typically not hired locally, and has a big fence put up around it and barbed wire on the top. Not that self-storage unit places are bad, but that we want to ensure that there is commitment to making investments that have direct benefits to the people who live in the zones themselves. And then further, there’s agreements around reporting out that the manager will commit, which is not required in the regulations, but will commit to reporting out what the investments were, where they were, what form they took, and what impact measures tell us over time, that they’ll share that data, both qualitative and quantitative data with a third party yet to be identified, who then will help us with evaluation of it in the next few years in particular.

Allie Yee (00:11:58):

Kresge is providing a guarantee for investments that align with these values and requirements. Is that for all of the investments that the fund makes, or is that a guarantee that goes to just specific investments within the fund that use those requirements?

Joe Evans (00:12:15):

The guarantees at the fund level, it covers all investments made by the fund. Overall, the fund also has promised to adhere to these covenants, including around housing and job creation and reporting across all the investments in the fund. So, it’s at a average level, so one very impactful housing development or investment that creates a lot of low income affordable units could offset other investments that are maybe less impactful to the community, but at a portfolio level, make the fund work. What the fund’s got from us is not only this guarantee, which I think is maybe of some limited value to them because the appreciation of the assets is one source of income - a steady, fixed income like return is another source of income. The guarantee is a limited amount more on the back end of individual investments if they fail. But what’s even, I think more impactful for the funds is this differentiation within the marketplace of an Impact Certified Fund, and then also Kresge’s seal of approval, if you will, and our helping connections to socially motivated capital to help raise money for the funds.

Joe Evans (00:13:28):

As we touched on a little bit earlier, there’s maybe hundreds of billions of dollars qualified to invest in this way. There’s going to be many, many funds by many, many experienced fund managers that’ll be developed and deployed. We’ve tried to move as fast as we could, particularly for private philanthropy to stand up a couple of funds that have this differentiation and that will provide an example about how this could be done well and with a benefit to the communities where the funds invest.

Allie Yee (00:13:57):

I’m curious to dig into that a little bit more beyond setting up this fund, how Kresge is thinking about its role as Opportunities Zones roll out, and thinking about the role of philanthropic dollars or foundation dollars in that. Are you trying to influence at all how other foundations play or how private philanthropy can fit into the capital stack, whether that’s directly within investments or targetting a place and having additional grant funded initiatives that will complement the private investment?

Joe Evans (00:14:30):

I think there’s a role for Kresge and other philanthropies at more than one level here. We’ve made these two guarantees, we hope to make a third guarantee, we’d love to see additional guarantees in a large cohort of Impact Certified Funds. Our own limitations will limit us to three. We’re helping to stand up a community investment guarantee facility that would provide guarantees across all sorts of community development finance needs, and it’s possible that some future, as funds might also be able to receive guarantees in that way, would welcome participation from other foundations who are interested in providing potentially a similar sort of guarantee, particularly for a place based fund being developed. But one level of the role that philanthropy can play and that Kresge is trying to play is to have these examples of funds that are doing it in a way that benefits communities to provide on the earlier end of this process, examples that then will be replicated if they’re seen as successful.

Joe Evans (00:15:35):

If Impact Certified Opportunity Zone funds raise capital faster, I know it’s only two or three, it’s a very small proof point, but if they do raise their funds quickly, are able to deploy, get good press, those sorts of things, they’ll be copied. That’s at the high level of what philanthropy can do. I think inherent in your question was, what role foundations might be able to play at a local level where folks are thinking about how to leverage Opportunity Zone funds or partner with fund managers. I think that the large national fund managers who are setting up funds that don’t have geographic restrictions, they’re going to be tough for foundations to partner with locally. The community sourced, community identified and pursued projects, they do tend to need to take a bit more time to need more handholding, and so it’s likely that a fund manager is looking for lower risk, ability to appreciate, ability to move quickly projects will bypass those sorts of opportunities.

Joe Evans (00:16:45):

But I think to the extent that there are foundations interested in projects at their local level, there are certainly opportunities to invest in and partner and to nurture projects along, to provide pre-development money to keep the people around the table, and then to invest directly to provide some risk protection to either, probably most likely, a local fund that’s being developed that has that geographic focus that includes your city.

Allie Yee (00:17:15):

You mentioned that with the funds that Kresge is backing, you’re hoping that it will be a differentiator for them to attract more investors. Are you getting a sense that it is attracting more folks who are interested in a fund that’s also going to not only create returns, but also have social impact?

Joe Evans (00:17:35):

The early indications are good. We’ve been approached by two national banks so far that are diligencing these two funds, have reported to us that it is an important and meaningful differentiation for them, and are considering offering them on their platforms, that investors, like everybody else, are trying to make sense of what these are, how do they work? And so, that’s a helpful thing to be able to talk to investors who care about what impact they will have in the communities. The early indications are good.

Camilo Monge (00:18:05):

Nina, it’s great to hear about The Kresge Foundation’s work certifying OZ funds and building impact governance in exchange for their certification. It will be really interesting to see what kind of deals end up flowing out of these funds.

Nina Croock (00:18:18):

I agree, Camilo. There’s so much talk about the lack of impact metrics and low levels of transparency or reporting requirements, that these kinds of certifications may become important, especially the impact oriented OZ funds looking to reassure investors. The Kresge Foundation is not the only one thinking this way, Aliana Pineiro, Director of Impact for The Boston Impact Initiative has been using covenants in her deals and imagined perhaps playing a similar role in the OZ space.

Kate Cooney (00:18:45):

What’s your view of Opportunity Zones?

Aliana Pineiro (00:18:47):

Opportunity Zones have created a really great opportunity for us to focus, for investors to focus, for legislators to focus, for people with money to focus on specific geographic areas that have been ignored and economically depressed. And I think that is a positive thing, but I think that from a background in impact measurement, the fact that that didn’t come along with minimum standards that need to be met is worrying. Now hopefully, communities that have Opportunity Zones in them or that are in Opportunity Zones will be able to have a say and define what success looks like in those Opportunity Zones. But we’ll see if that happens, and the fact that that is not specifically said within the legislation is worrying. I think overall that Opportunity Zones are a positive step towards moving money, investment and economic attention towards certain places that need it. However, we need to be careful about how we measure success and who we include in the conversations about success.

Kate Cooney (00:20:07):

We spoke with Aliana about some of the additional metrics they use and considered how they might inform the movement around building metrics into OZ investing.

Aliana Pineiro (00:20:15):

At the Boston Impact Initiative, we’re really focused on closing that racial wealth gap. And so, we’re thinking about the metrics that are going to help us understand how a company is contributing to that.

Kate Cooney (00:20:31):

What kind of assurance do you have that these impact goals will indeed be met?

Aliana Pineiro (00:20:37):

One thing that we’ve done is included impact covenants. Now, these initially started as guidelines a couple of years ago when we launched the fund in the first few investments that we made. We found that actually including them in the loan documents or in the equity paperwork that we do, drawn up by our lawyers, that including a nonfinancial commitment, non-financial covenant to doing some social impact, so having the wage being brought up to a certain amount or hiring in certain populations, hiring alternative workforce, these types of commitments to impact were best if they were codified alongside the financial commitment that the company had back to us. And so, we found that while it’s something that companies are not used to, because Bank of America will not do this to you, or other large financial institutions won’t include a nonfinancial covenant around who you’re hiring next, but because it’s so central to our mission, we found that the best way to convey that was to include it within the loan documentation.

Kate Cooney (00:21:57):

Have you thought about raising an opportunity fund, how that could amplify the work that you’re doing, since I think one of the exciting opportunities for inclusive economic development is investing in businesses in these zones, and you’re really developing an expertise in this area. Have those conversations been happening or how are you thinking about the possibility of raising an opportunity fund yourself?

Aliana Pineiro (00:22:24):

At this point, Boston Impact Initiative is not going to be raising an opportunities on fund ourselves. One way that I see Boston Impact Initiative working with Opportunity Zone funds is potentially advising other funds that are taking advantage of the Opportunity Zone structure to model something around what Boston Impact Initiative has done. Part of our work is not only to do work in Boston, but also pilot this strategy to show that work in investing in businesses in this way with this intersectional lens and doing the due diligence process the way that we do it, not asking for credit scores and putting the business and the entrepreneur at the center of the process, that model, in order to reduce the racial wealth gap, is something that other cities are looking to do. And so we’ve had engagements from Grand Rapids, from Oakland, from Atlanta and from other cities that are really looking to either copy this model or take pieces of this model, and there are some places that do have Opportunity Zones in them as well.

Aliana Pineiro (00:23:40):

And so I think there’s a possibility for us to see where those overlap and potentially advise on Opportunity Zone funds that would like to model the type of work that we’re doing with the type of mission that we’re doing.

Nina Croock (00:23:54):

Camilo, I’m glad that there are people out there like Joe and Aliana pushing forward on these kinds of practices that demand accountability through these covenants.

Camilo Monge (00:24:03):

Through OZ fund certification, I have a feeling investors may need these kind of certification insurance given how easy it is for really anyone to set up a fund. Are you ready to hear about some more cutting edge approaches to drive community benefit?

Nina Croock (00:24:14):

I think I know which interview you’re going to queue up next - Greg Reaves from Mosaic Development Partners?

Camilo Monge (00:24:19):

Yes. Greg Reaves. Greg and his partner at Mosaic, Leslie Smallwood, have been experimenting with equity sharing with the communities in Philadelphia where they focus their development work, many of which are now the same OZ tracks. In fact, they’ve build a crowdfunding equity tranche alongside OZ investments just to see if it could be done.

Nina Croock (00:24:38):

That’s right. I remember Greg saying that it would have been easier not to do it that way, but he was interested to see if crowdfunded equity could be used as a way to provide more robust community benefit from OZ invested driven projects. Let’s listen in on his conversation with Professor Cooney.

Kate Cooney (00:24:54):

Mosaic focuses on projects in disenfranchised communities to reduce blight, increase jobs, and help make new housing more affordable. Tell us a little bit about why real estate?

Greg Reaves (00:25:07):

Before we started the company in 2008, I spent a few years working for a commercial real estate developer where I learned really what real estate was beyond owning a home, when I started working specifically in real estate developments and seeing the direct impact that it had on people’s lives. We are very committed to creating a model that we thought built respect around people who have been historically marginalized, but it’s still a profit model.

Kate Cooney (00:25:33):

Can you tell us about the key ingredients to that model?

Greg Reaves (00:25:36):

To build this model, they’re typically very complicated financial capital, we call them capital stacks. The reason why they’re so complicated is because they almost never economically work on its surface, so we have to use different strategies and tools, and we have to look at the business from the very beginning, which is, how are we buying the land or the building from the very beginning? What’s the mechanism by which we buy it? What’s the purchase price? For us to be able to have a deal work, we have to go into neighborhoods very early. Once they’re established, it’s more than likely that the value of the land is too high for us to really make that kind of impact. Because if you’re buying too expensively in the very beginning, everything else flows from that. We then have to look at what we think is possible for that community - is it truly a residential community? Could it be a community where you could bring both residential use and commercial use? And you have to be realistic about whether that’s really viable or not.

Greg Reaves (00:26:38):

And then, we talk about construction being a really critical part because that ends up being what almost always stops these projects from moving forward - the high cost of construction and urban centers. We look at mechanisms where we are directly involved in not only identifying what gets built, but we actually design it before we even bring architects on board, and we run our own financials because we know what we think we can build at the price that it would make economic sense to build it in certain neighborhoods and then we bring architects in to make sure that we do it to code. That’s a very critical element that’s different, and I think because of our business model, then you’ll find other developers, they’ll bring architects in very early on and have them design what’s possible, we don’t do that.

Kate Cooney (00:27:22):

There is another dimension which is connected to concerns about who the OZ program is going to benefit. The real estate industry is very homogenous, and this is something you notice right away when you got into real estate after having a career in the pharmaceutical industry. In a minute, we’ll turn to talk about the ways in which you’ve been experimenting with financial models to share financial benefit with the neighborhoods where you are working, many of which are now qualified OZs. But first, let’s talk about the industry side of things.

Greg Reaves (00:27:53):

When I left the pharmaceutical industry, one of the things that I was actually impressed with at the time that I left was there were significant levels of diversity and women who were in leadership positions. Then I come to the real estate industry where it’s Joe drinking beer at the bar, and there’s no one who looked like me or any women there. It’s 80% white male, and it really reflected what probably it looked like in the ’70s. There was almost no change in the industry, and I thought, huh, this is interesting because the skill sets aren’t any higher than what you would expect in the pharmaceutical industry. We have some lawyers, we have some finance people, but for the most part, nothing that I would think would be insurmountable to bring other people into this industry. The difference was really wealth, that became the gap, that this industry was driven by legacy builders and the legacy builders were high net worth individuals that would bring their friends and family into the business, to the exclusion of others who weren’t a part of that network.

Greg Reaves (00:29:03):

And so, while there are REITs that exist and institutional investors, most of the businesses that are growing grow on a local basis in these markets, and those businesses are led by wealthy individuals who really decide who comes in, in the leadership model as a part of that, and to the detriment of women and people of color, they were being consistently excluded. And that was something that Leslie, my partner and I decided we did not want to continue, at least in our little circle. In building the model that we built, we’re very inclusive. We have white males, but we also have women, we also have people of color, we spend much more time educating women and people of color about the business because they’re not part of the wealth model. What we find is many of the males who are investing with us, they know this business, they’ve been in it for generations and it’s something that’s very easy for them to understand and move forward with. The other part is a bit more difficult, but if we can build the wealth model for the community that’s been excluded, I think it will also help solve a lot of community problems, because it really is about spreading the wealth to other communities.

Kate Cooney (00:30:10):

One of the things you’ve done early on and you’re continuing to experiment with are creating opportunities for the community to actually invest in these real estate development projects. Early on, it was a 20% stake you gave to the … what in New Haven, we would call the Community Management Team, in Philadelphia, it’s called the…

Greg Reaves (00:30:32):

A Registered Community Organization.

Kate Cooney (00:30:35):

Tell us about that first deal, and then we’ll talk about the crowdfunding experimenting you’ve been doing as well.

Greg Reaves (00:30:41):

We built the student housing development back in 2012 in a community that hated student housing. The reason we did it was because it was frankly the best use for that property. It was 2011 when the economy was just very, very bad. The recession was still going on; we were having a tough time getting any investment in Philadelphia, especially for a ground up project. And prior to that, about a year prior, we engaged the community and we said, look, you’re having problems with students coming into your neighborhoods, buying up row homes, turning them into party houses, and coming in and infiltrating the fabric of these neighborhoods. We have a site that could be a concentrated location for students. We can put them in an apartment building. We can build it in the way that the students could feel as if they have the independence that’s different than living in a dorm. It’s an apartment style group. It’s got security so that both the residents are protected and the students are protected, so we have 24 hour observation on both sides .And we’re willing to bring you in as a partner, a full-fledged owner in the project because you’re invested in this project as well. The project probably wouldn’t happen without the community support.

Greg Reaves (00:31:56):

So, because we believe it’s an investment quality project, because we believe it does generate significant income, we’ll make you a 20% partner. Now, those numbers come in because it depends on who will guarantee the project. Typically, when you guarantee, you need to be 20% or greater with our lenders, at least. If you stay under the 20% threshold, you don’t have to be a guarantor, so we end up being somewhere around the 20% ownership range when we bring community groups in. But we do that because we think the project’s strong enough that it could afford both an adequate return for investors and an adequate return for the community; and the return is better than we’re building a nice building. The community doesn’t really care about that if they don’t benefit from it, but to now say that you’re a part owner in this building, it kind of changes things. It changes how they view equity, it changes how they view the land, it changes how they view the development. We also ended up hiring about 50 people from the community to work on the construction projects there, people they vetted.

Greg Reaves (00:32:59):

So, what we asked them to do is you tell us who the community folks are, you vet them and you send them to us and we’ll employ them, and the community helped us with that. We thought that was great, that worked out really well. We’ve done that in other projects as well where the community, we’ve asked them to participate in helping us find people from the neighborhood who we can employ. We trust what they say, like you should hire this person, maybe not this person. And that’s good actually, I think, because they’ll know better than we will. I’m not going to pretend to know which people are going to be hard workers or which people might present a problem in the neighborhood and they’d rather have somebody who’s really been committed to the neighborhood as opposed to somebody who maybe hasn’t been. So, we invest in those ways.

Kate Cooney (00:33:44):

Well, let’s talk about the crowdfunding and the opportunity fund that you have experimented with alongside new market tax credit. So, you’ve just closed a deal?

Greg Reaves (00:33:54):


Kate Cooney (00:33:55):

That has all three, right? It has new market tax credits, it has an opportunity fund investment and it has the crowdfunding. Let’s start with the crowdfunding since we’re building on the earlier conversation about 20% shared equity with the RCOs in Philly. How’d you go about building that crowdfunding tranche, and how big of a tranche was it? How many folks did you eventually end up with? What was hard about it?

Greg Reaves (00:34:25):

That was really my partner, Leslie. She was really insistent on finding another mechanism. We had tried… we have been looking for years to figure out a way to get people of color and women to invest in our projects, because our investment community is not reflective of that at all, our current investment community. It’s high net worth individuals who tend not to be people of color and women. No problem with that, although we’d like to have it more inclusive, that’s our goal. So we had a series of meetings at our offices to bring people in - small business leaders, community folks, government officials, you name it. We said, all right, what if we raised 5,000 a person, 25,000 a person, 1,000 a person? We tried all these different mechanisms. I think we were able to get commitments from two people, they happen to be white males in the whole process and they were each going to give 25,000. We probably met with 300 people too. And I realized that there’s a problem. There’s a wealth problem in our community; our folks don’t have the money and they don’t have $5,000 to invest.

Greg Reaves (00:35:42):

We’re dealing with people who their minimum investment is 500,000 and they’ll write the check. So now to say, would you rather deal with one person who will write a 500 or a million dollar check, or do you want to deal with 100 people who are writing you $1,000 check and you still have to go and get that guy anyway or that person? So Leslie said, “Well, let’s try this crowdfund strategy.” It was started during the Obama administration through the Jobs Act in 2009. It allowed this investment quality structure to come in where people could invest, but literally from around the country. But it allowed unaccredited investors, people who make less than $200,000 a year who don’t have significant assets, $2 million in assets, to now invest in a quality investment, a serious investment. They could invest as little as $500, which was the real key for us. We thought that that was the minimum we could deal with.

Greg Reaves (00:36:41):

And the beautiful thing about this crowdfund platform is we don’t have to do with paperwork at all; they do. And so that makes it so much easier for us. We pay a fee, they manage all of the investment documentation, they send it to the investors. And we don’t have to be involved. They’re regulated by the federal government, which is all great. But it allowed us to now, for the first time, bring more than 40 investors into a project where in the past, I’ve said we’ve had no more than five, but really in the past, we’ve had one or two. So by using that mechanism, we’ve gone out to local community members and saying, “We’re going to come into your neighborhood. This might be the first time you know our company, but we now have a mechanism we’re using where you could also be an investor for as little as $500.” So when we’re having the dialogue about what’s happening in their community and them not being able to play a role, we’re now giving them an investment role to play, where they can be an owner and a beneficiary of the good things that will happen in that neighborhood and a direct beneficiary economically. It’s a model that we believe we should grow.

Greg Reaves (00:37:49):

The hard part is the marketing piece. It’s very difficult to communicate investment quality marketing to communities of people. It’s probably hard to do it to anybody who’s not already an investor, right, who doesn’t understand it. But in a community that’s never invested because they, or we, don’t have the money to invest at those levels, the education gap is quite significant and that’s one thing that we hadn’t taken into account. We thought it would be a no brainer for people and it wasn’t a no brainer. But later on, we had to extend the investment time period to get more people on board. But in the end, we think it was a great first start for us and we will do it in the future. We want to build this as a part of our model moving forward.

Kate Cooney (00:38:35):

You’ve talked about building alongside some work that’s already been done in this crowdfunding approach in local communities through church networks, can you talk about that model and how you’re hoping to partner with…

Greg Reaves (00:38:50):

The Sullivan Trust. Leon Sullivan was a famous Philadelphia reverend. Since I was born, I’ve heard about Reverend Sullivan and all the work he was doing, but there was a program that he established in the late ’60s because he had a large church in Philadelphia, and he was very, very interested in economic equity of people in marginalized communities, so he started this program called the 1036 program. And what it was, it was an investment of his community of people to invest $10 a month for 36 months into an investment pool that they can go on and invest in real estate. They bought shopping centers, they bought furniture stores, they bought other retail businesses. I think the retail businesses may have struggled in the years as many do, but the underlying real estate is still active and being used to fund their trust. And we see the crowdfund model as being one that can really nicely mirror what he was doing in the late ’60s. Now, this was also a person that wrote the Sullivan Principles that gave corporations guidance about apartheid South Africa and how to divest from South Africa during those policies. So, he was incredibly forward thinking for many years, for the years that he was alive.

Greg Reaves (00:40:11):

It just seems interesting to me that there is economic activism that also has economic benefits if we use it in a way that empowers the masses of people. And so the way for communities to build community wealth is for communities to invest as communities as opposed to individuals. I think Leon Sullivan got it right in the ’70s, and we didn’t provide a mechanism to extend that. So we’re starting to see that again in our model that that’s something that needs to be a part moving forward, and technology has provided the vehicle by which it can happen.

Nina Croock (00:40:48):

Camilo, it’s inspiring to hear about the creative approaches Mosaic Development Partners is taking with that work, isn’t it? I really appreciate the care and consideration they show for the communities they work in. Before we sign off, do we have one more guest we want to bring into the conversation?

Camilo Monge (00:41:03):

We do. Eric Letsinger, Founder and CEO of Quantified Ventures.

Nina Croock (00:41:08):

And an SOM graduate as well.

Camilo Monge (00:41:09):

He’s one of us. Eric gave us a lot to think about in terms of how OZ investment could fit into a portfolio of investments occurring in the same section of the city or rural area for that matter.

Nina Croock (00:41:19):

The work he’s doing, on Environmental Impact Bonds really embodies the title of our episode, doesn’t it? Let’s listen.

Eric Letsinger (00:41:26):

I’m Eric Letsinger, I’m the CEO of Quantified Ventures. I am a proud SOM grad of the class of 1996, which sort of feels like the Paleozoic era when I throw that date on the end of that.

Camilo Monge (00:41:39):

At Quantified Ventures, one of the things you’ve been working on is setting up a pay for success partnership. What is it exactly a pay for success partnership and how does it generally work?

Eric Letsinger (00:41:51):

At Quantified Ventures, we generally work with the pay for success model, which is, in its simplest form, enabling public sector agencies and governments and cities and states to pay for results that are validated and delivered, enabling governments to pay for those results on the backend once they’ve been delivered and validated as opposed to paying for them on the front end and merely hoping for the best. Most of the way that we spend our government dollars is all on the front end. We make decisions, we make policy. Rarely do we evaluate whether what we just spent money on actually delivers the outcomes that we intend and hope, and predict, and we argue that will happen. And at the municipal and city and county level, those decisions to not spend that money for rigorous evaluation on whether those outcomes were received or were delivered. It’s not because we don’t want to in the government, it’s just that we tend to get faced with very stark choices about how to spend scarce nickels and dimes.

Eric Letsinger (00:43:09):

And when you’re being faced with, should we spend a little bit more, should we reserve some of these dollars to spend on evaluation of this program that we just green-lit and we’re going to spend a whole bunch of money on, or should we not do that and take those nickels and dimes and just serve some more people or build a bigger project? Those are really tough decisions for governments to be making. So as a result, we tend to not invest in the evaluation. What pay for success does, because the capital that’s being spent is from private investors who are agreeing to pay for that service on the upfront and have their return on investment directly tied to whether the outcomes of that program are actually realized or not, because their return on investment is directly tied to that, rigorous evaluation of those outcomes and whether they were delivered or not is a non-optional component of a pay for success transaction. As a result, not only are you enabling private capital to come to take that upfront programmatic outcome delivery risk or the performance risk, but you’re also embedding rigorous evaluation. So what happens over time is, you’re allowing the government to pay for results, pay for success, as opposed to pay for process. And number two, you’re adding to the library of evidence as to what works and what doesn’t work in terms of moving the mission needle for municipalities.

Kate Cooney (00:44:54):

Eric, can you give us an example of one of the deals you did in this social impact bond space?

Eric Letsinger (00:45:00):

A simple transaction to think about is the City of Washington DC was under a consent decree to fix their sewer system. The way we capitalize most projects at the municipal level is they float bonds and they pay for the solution. Then that bond that they have floated, they’ve got to repay that bond holder regardless of whether the performance of the project actually achieved its outcomes or not. Matter of fact, that bond buyer is just betting on the credit worthiness of that municipality, meaning that the city doesn’t even need to spend that money. It could spend it on something else. As long as it pays that bond holder back, everybody Is good to go. When you’re a municipality in that situation under a consent decree to fix your sewer system, because you’ve got to pay that money back regardless of whether the project actually works or not, you’ve got to be choosing solutions that have a certain risk profile, meaning not too risky, which is one of the contributing reasons why we at the municipal level, tend to choose business as usual over innovation when faced with those two stark choices. In this context, the business as usual solution was a $1 billion gray infrastructure tunnel, which we know will work, meaning the risk profile is quite low.

Eric Letsinger (00:46:22):

And then the alternative solution would be a green infrastructure solution. Let’s talk about what that is. So green infrastructure can solve a lot of different problems. One of the things that it can address is the stormwater challenges that were driving the need for the city to invest in their sewer system. By putting in 350 acres of green infrastructure, which are things like green roofs, and rain gardens, and permeable pavement, and bioswale - there’s about 12 different practices that make up the generic term green infrastructure. What you’re doing is you’re just implementing like a big sponge around the city. So, when we have these rain events, which we’re having with increased frequency in Washington, DC, maybe the solution, the innovative solution, the alternative to the grand infrastructure, would be put a bunch of green infrastructure around because they’ve got a whole bunch of positive externalities and secondary benefits that come with that green infrastructure - health benefits, environmental benefits, workforce development benefits. But the risk profile of its performance, nobody’s ever implemented that much green infrastructure to try to solve this problem. We don’t reward our public sector leaders for choosing innovation. Matter of fact, we clobber them over the head when they choose innovation because sometimes innovation doesn’t work. We love them when it works out, but we certainly don’t applaud them. So, we wonder why they only choose business as usual.

Eric Letsinger (00:47:45):

So, by giving them this pay for success model, what we’re doing is bringing in private capital to essentially pay for that green infrastructure and take the financial risk off of the pie… or share it with the government, and then basically structure the transaction in such a way that the private sector is the one taking the bet that that particular innovation will yield the outcomes and the outputs that that solution is predicting to be able to deliver.

Kate Cooney (00:48:19):

Thanks, Eric. So in that example, you contrasted this impact bond with the traditional municipal bond in the traditional scenario - the private investor buys the bond, they’re paid back regardless of whether the project yields any kind of public savings or impact. In this case, is it true that you are tying the repayment of that bond to certain performance metrics and what are those performance metrics?

Eric Letsinger (00:48:50):

If the outcome we want is a cleaner Potomac River and the solution to get there is green infrastructure, I think one of the things that we try to do at Quantified Ventures is try to find proxy metrics for these outcome metrics that are expensive to evaluate. Meaning, we could have structured an evaluation model that could have cost a whole lot of money that we could have controlled for and tested water quality in the Potomac River and tried to control for all the various factors that drive pollution into the Potomac River. That transaction, like most social impact bonds that have been attempted in the United States, tend to implode under their own weight when you have massive evaluation models that are overly complicated and expensive. So by looking for a very simple proxy metric, we found flow in the sewer, and by the way, it’s like a sentence long metric, millions of gallons per unit of time, etcetera, etcetera, reasonable people agreed, by reasonable people I mean the EPA, the regulators and those in the field, some in academia had some differing opinions and that’s reasonable, but that’s not the bar we are aiming for when we’re doing pay for success transactions.

Eric Letsinger (00:50:13):

We are trying to clear the bar of regulators and municipalities. So by focusing on the proxy metric of flow in the sewers, because reasonable people agree that if you control the flow in the sewer, you will end up with a cleaner Potomac River; we then, just by finding that simple metric, we could then put flow meters in the sewers to actually measure that particular metric and use that as a proxy metric for whether we ended up with a cleaner Potomac River. And then once we had that metric, we were able to predict by running some Monte Carlo simulations of these types of green infrastructure in this area of the city and predict how well that green infrastructure would perform. Once we had our confidence intervals in our normal curve, we ended up with three areas of that normal curve. The middle base case is, that’s where we think it’s going to land. And then you had the far right tail, which would be terrific over performance of the green infrastructure. And then the far left tail was, wow, green infrastructure totally didn’t work.

Kate Cooney (00:51:27):

What did you do with those analyses? Did you use those to structure different kinds of returns for those investors?

Eric Letsinger (00:51:37):

Correct. In the spirit of trying to keep things simple, once we had that predictive normal curve and those three areas of that model, all we did was apply interest rates to those three shapes. We basically said, in the middle, since we think that that’s where it’s going to land, let’s just have the interest rate associated with landing in that middle bucket, performance bucket, have that interest rates be commensurate with that city’s normal cost of capital. And then in the far right bucket, let’s just say green infrastructure performs twice as good as we thought it would. So that middle bucket was about 3.43%. And then that far right interest rate was about 6.6%. And then the far left tail was 0%.

Kate Cooney (00:52:33):

In some of the early social impact bond partnerships we saw philanthropy being used as a way to mitigate downside risk for that private investment. In this case, the investor will receive the investment back. It’s just the level of interest rate that is linked to the success performance.

Eric Letsinger (00:52:59):

Correct, and this is something worth noting. At Quantified Ventures, we very much try to use preexisting financial structures as the backbone for our deals, because we are aiming for the capital markets. Meaning we know we’ve got work to get past the breakers to get to the broader ocean of the capital markets, but that’s where … we are all about trying to pick use cases and financial models that are scale… replicable and scaleable. For this particular deal, we wanted this Environmental Impact Bond in Washington, DC to behave as much like a municipal bond as possible with still being true to the spirit of tying that return on investment to outcomes. So by starting with the municipal bond vehicle, we had things like a normal semi-annual coupon rate. And we set that semi-annual coupon rate to that middle bucket interest rate, which was 3.43%.

Eric Letsinger (00:54:03):

Once the bond buyer, which was Goldman Sachs and Calvert Impact Capital, when they bought those bonds, they will receive their semi-annual coupon rate of 3.43%. Let’s just say it comes to the end of the five-year rainbow, and we do the evaluation and we pull up the flow meters and it says it landed where we predicted it would, which is in that middle bucket. Then because we’ve been paying the coupon rate out at 3.43% over the last five years, and that 3.43% happens to correspond with that middle performance bucket, then just like any other normal bond, we will repay the principal at the time of tender and then game over, and everybody’s square and everybody’s happy. However, if the green infrastructure, let’s just say for easy math, it performs twice as good as we think it will, which is worth talking about a little bit. Remember, nobody has done this amount of green infrastructure to solve this particular problem.

Eric Letsinger (00:55:06):

And the way that we came up with the performance, predicted performance for green infrastructure is through a software model. That we’re informed by some pilots here and there, but we can’t just merely take the results of what happened in Philadelphia or what happened in Portland, Oregon in terms of their green infrastructure and comport those and think that they’re going to be a good predictor of how green infrastructure works in Washington, DC because the performance of green infrastructure is all driven by local conditions like soil composition and gradation and climate, etcetera. I say this to say there is risk, there is a solid opportunity that green infrastructure could perform twice as good as we think it will. So let’s say it does land in that tail, that interest rate was the 6.6%, and so at the time of principal repayment, we will tack on a success payment back to the bond holders, which represents the delta between the 6.6% and the 3.43% that we’ve been paying out at the coupon.

Kate Cooney (00:56:13):

This sounds like an attractive investment opportunity for that investor. What’s in it for the city? Some of the social impact bond multi-stakeholder partnerships as they’re sometimes referred to carefully chose initiatives that very clearly had the potential for government savings, so the nurse family partnership initiatives around preventing recidivism. So these have some health care savings, some criminal justice system savings. In the Environmental Impact Bond, if this performs at that 6.6 level, is there a savings associated with that or is the city’s interest just in driving capital to allow it to innovate savings or not?

Eric Letsinger (00:57:07):

Terrific, terrific question. There are two buckets of savings for the city. Number one, think about where we started, should we do a $1 billion tunnel or should we do $350 million worth of green infrastructure? If it turns out that the 350 acres of green infrastructure is the right solution to move forward with and it performs as good as the tunnel, you’re already in the money. So that’s number one, just the delta between the 1 billion, it’s about a million dollars an acre in Washington, DC. So at 350 acres, $350 million versus the $1 billion, you’re already in the money. Number two, the way we structured this Environmental Impact Bond was, we said, “Listen, let’s not use the Environmental Impact Bond model as a way to finance all 350 acres, let’s just use it to actually figure out what works, and does it work consistent with the predictive software model that we’re betting quite a bit on?”

Eric Letsinger (00:58:14):

At a million dollars an acre, just to learn that you need fewer acres or you need more acres to solve the same problem at the level that the tunnel would - a million bucks an acre, that variance is material. So we said, “Listen, let’s just do 25 acres. So we’ll do a $25 million Environmental Impact Bond as opposed to throwing all the money at green infrastructure. We’ll use this as a way to test the innovation, to pilot the innovation and truly measure the degree to which it works.” Now let’s go back to the model; if in five years we open up the magic box and it says, wow, green infrastructure performed twice as good as we thought it would, our software model said and the city software models, then that means it landed in that 6.6 far right bucket. So now, the investor got about a $3 million success payment for taking that performance bet that came up good.

Eric Letsinger (00:59:14):

What did the city get? The city just learned that it needs half as much green infrastructure as it originally thought; not 350 acres, but half of that. At a million dollars an acre, they just saved $175 million and paid $3 million to find that out. So everybody’is in the money no matter where it lands in those three performance tiers. If it lands in that far left tail, let’s just say again for easy math, green infrastructure doesn’t work, the investor basically had a 0% return on their principal. They shared in the downside, the financial downside of testing green infrastructure. And the city now knows that green infrastructure, despite the testing, despite the discussion, despite what we all hope, green infrastructure doesn’t work in this particular soil composition, climate gradation, etcetera. The city now hasn’t blown its whole budget on green infrastructure, they didn’t go whole hog into $350 million worth of green infrastructure to figure that out, they can now move ahead with the building of that $1 billion tunnel knowing that that particular innovation that they were flirting with, turns out would have been a disaster had they gone whole-hog into that approach.

Kate Cooney (01:00:37):

Washington DC was your first foray into the environmental impact bond space; it was a private placement. The second in Atlanta was publicly traded. From the city perspective, what kind of projects do you see being pitched for these Environmental Impact Bonds? What’s been your experience in moving on from DC into other cities?

Eric Letsinger (01:01:00):

The DC water transaction was thrilling in the sense that … I think one of the big pokes in the eye that the pay for success world gets is that the transaction costs are very high, the transaction costs in the DC water transaction were very, very low. Matter of fact, they’re commensurate with floating a standard municipal bond, which is about as low as you can get in terms of transaction costs. And number two is the first impact bond that was actually a bond. So we broke some good plains there with the DC water. In Atlanta, we wanted to see if it was possible to sell this bond straight to the markets without all of the negotiations and time consuming negotiations associated with bespoke transactions. Atlanta was publicly traded, which was a phenomenal day for the impact bond community to have broken that plain. You’ll see a steady drum beat of these closing… Baltimore closes here in the next month or two. You’ll see Hampton, Virginia right behind it, Camden, New Jersey, etcetera.

Eric Letsinger (01:02:04):

We are using this model to pay for on-farm agricultural best management practices to reduce phosphorous and nitrate runoff into local water bodies that go downstream to municipalities who are regulated by the EPA, and having to make significant capital expenditures on their treatment facilities to process that fertilizer runoff coming from upstream farms. So we’re using this model as a way to pay for the development of wetlands and other best management practices on farms. We’re also using this model to pay for the development of wetlands on coastlines in Louisiana to slow down the degradation of coastlines. Louisiana is losing about a football field a day. The development of wetlands falls into the same model of a riskier solution than other gray infrastructure, seawall type solutions. We are using this model to finance the thinning out of forests to reduce wildfires and building recreational facilities on national forest land to attract visitors.

Eric Letsinger (01:03:09):

So the use cases that are municipalities and states and counties around the country that are bringing to Quantified Ventures to see, can we shoehorn this problem into the Environmental Impact Bond model has been a thrilling process for us and very exciting. I think we’re just getting started.

Camilo Monge (01:03:29):

Eric, as we mentioned briefly before, this podcast is exploring the Opportunity Zones, legislation that has been recently passed. We hear many of the amazing stories you’ve been telling us and we just can’t help to wonder, how would you translate that here if it’s an environmental related project or a social impact bond that you’ve seen work? Has there been any thinking about how to construct a social impact bond or an Environmental Impact Bond that could be translated into a project through an opportunity fund? Could you talk to us a little bit about how you’re seeing this opportunity?

Eric Letsinger (01:04:15):

The way we think about Opportunity Zones, we’re thrilled, we think it’s great. There’s a lot of enthusiasm for this new tool. The way we think about it, we think about it as just another arrow in the quiver. At Quantified Ventures, we like to think that we’re financing things that are stuck. Meaning they wouldn’t have moved forward without the weird financing structures that we put on top of the things that we finance. The way we look at broader development efforts is it’s no longer a … one model addresses everything of the redevelopment of the Wharf in New Haven for example. The winning approach is to bring all the arrows of the quiver to the table and be able to play, not just the scales with each one of those arrows, but play jazz with each one of those arrows and bring outcomes and bring solutions to bear that might not have otherwise been able to have been brought to the table. If Environmental Impact Bonds is the right tool to finance this particular piece of that redevelopment effort, and because that’s the optimal solution, fantastic, we pull that arrow out.

Eric Letsinger (01:05:38):

If it’s the Opportunity Zone mechanism that brings that particular capital to the table to solve something else, then fantastic, then that’s the appropriate arrow to bring for that particular component of that particular redevelopment effort. You’re seeing that across all of the mitigation banking world; you’re seeing that across all of the conservation land arena. How can you stack a whole bunch of revenues, even if they’re marginal, how can you stack enough solutions on top of each other to make the deal flip from being underwater to being viable? That certainly requires a deep understanding of all those arrows in your quiver, don’t get me wrong, but none of them are rocket science. I think it’s more of a mentality, and an approach, and an obvious way of thinking because that’s the way you’ve been thinking for decades, than it is a mathematical complexity problem.

Kate Cooney (01:06:36):

From the city’s perspective, it’s just striking me as you’re talking, really thinking very strategically about the timing and lining up a green bond or an Environmental Impact Bond project in an Opportunity Zone that will then become an incentive for investors investing side by side because they see, oh that green infrastructure piece is going to be an important part of this zone and that’s moving forward. So that means my investment will be, over the next 10 years, gaining from that other investment that’s occurring as well.

Eric Letsinger (01:07:17):

That’s right. And who owns that green infrastructure thing you were just talking about? Because by the way, the owner of that can stack revenue on top of that green infrastructure. Meaning if there’s a stormwater credit to be obtained through that particular piece of green infrastructure that was built to solve a different problem, here comes nutrient trading, here comes a lot of different slices of revenue. Meaning that owner of that particular green infrastructure asset that you were just talking about, I think is a massive opportunity for developers and for municipalities to be thinking about very, very differently. Whereas, I think historically, we got into, okay, great, we’ll build that and pay for that, and that will solve that problem and we’ll put it over here. There’s another way of thinking about that, which is, all right, let’s build that to solve that problem, but let’s have somebody else own that, and let’s not pay full scale for that because that owner of that green infrastructure, let’s just say wetland for example, can layer on other revenue streams on top of that, that will be invisible to the human. It’ll look the same, but they can be driving other revenue sources on top of that wetland that makes it a better deal for that owner as opposed to the city owning that and having it be a one revenue stream asset.

Eric Letsinger (01:08:42):

I think these are thrilling times for municipalities, cities, counties, states as new arrows like Opportunity Zones get added to the quiver of financial structures that they can be using to de-risk projects and bring in more nature-based solutions to solve some of these vexing challenges. It is very clear that we are asking cities to do way more than they are capable of doing given the dwindling budgets that we are handing to them. So in order for us to expect them to be achieving what we’re asking them to achieve, they’ve got to be choosing innovation over business as usual more often than not. We’re not going to business as usual our way out of some of these challenges. So, if we’re going to do that, if we’re going to expect them to be choosing innovation, we’ve got to give them the tools that make it a rational choice for them to choose innovation over business as usual. We think the Environmental Impact Bond is a model that can contribute towards that objective.

Camilo Monge (01:09:54):

Lots of important insights there, Nina. For me, a big takeaway from Eric’s interview is the notion that the OZ program could act as a catalyst to bring lots of our types of creative financing initiative for a more comprehensive plan for development in these zones. And here would be important to reflect upon what Eric Letsinger said. In a pay for success model here for environment or social goals, the risk is shared by both investors and the area where the projects are implemented.

Nina Croock (01:10:24):

And this is great. This means there are people out there willing to invest their capital in projects with specific positive goals for societies and take a bet on a positive outcome. But there ‘s a second lesson. There may be different parts of the same project that would be attractive to very different types of investors. So figuring out the capital stack and incentives along that stack or the layering of separate projects is an important skill for cities and other economic places to develop.

Camilo Monge (01:10:49):

That’s for sure. Lastly, creates the question about who owns this investments and what are their incentives. I was excited about the simplicity of Greg Reaves and Leslie Smallwood’s Mosaic Development Partners technique of providing equity in some projects to the OZ Registered Community Organization in Philadelphia sounds a lot like the Community Management Teams in New Haven.

Nina Croock (01:11:09):

What we’ve seen in the early episodes on commercial development and business expansion and CLTs is that by leveraging creative financing structures, we can not only address the need for upfront investments across different types of deals, but also by utilizing mechanisms for exit, such as self-liquidating equity, ESOP buyouts, or lease to own contracts. There could be ways for the community to enter these businesses at the end of term as owners.

Camilo Monge (01:11:34):

Well, this is all for today. We hope we all got a better sense about how there are innovative ways to attract capital and connect impact covenants that provide better steering for those investments toward development projects that truly benefit the current residents of the OZs. Thank you for following us and we will see you for Episode Eight, our last episode.

Nina Croock (01:11:54):

You’ve made it this far; you’ll listen to the end with us, won’t you?


Lauren Harper (18:49):

This podcast was recorded in studios at the Yale School of Management, the Yale Broadcast Studio and the Poorvu Center for Teaching and Learning.

Liam Grace-Flood (18:56):

Created by Kate Cooney and the students of the Spring 2019 Inclusive Economic Development Lab class.

Kate Cooney (19:03):

Special thanks to everyone at the Yale SOM studio and Media Control Center: Froilan Cruz, Abraham Texidor, Donny Bristol, Enoc Reyes, and Jessica Rogers.

Kate Cooney (19:12):

And at the Poorvu Center for Teaching and Learning: Brian Pauze and John Harford.

Paul Bashir (19:18):

Audio engineering and production by Ryan McEvoy and Kate Cooney.

Kate Cooney (19:22):

Music from the album, Elm City Trees, composed and performed by the artist, K. Dub. For more information and show notes, visit our website at

Camilo Monge (19:36):

Thank you for listening.