Capital Gap Partially Filled (Sponsor Letter)

Titus Williams, President, Prosperiti Partners

In 2019, a Springfield capital gap existed which we discussed in Springfield Business Journal’s Economic Growth Survey-Flow of Capital forum and publication.

When you look at business investment risk on a 10-point scale, banks make loans to businesses with a relatively low risk of 6-10 points, usually due to regulatory limitations. Angel investors operate on the other end of the spectrum, 1-3 points, which are high risk. Springfield’s capital gap in 2019 was at the 4-6 points level.

Startups with midlevel risk are beyond the scope of angel investors or startup microloans, but still too risky to be bankable. That’s where Community Development Financial Institutions Fund programs come into play. They are certified by the U.S. Treasury Department and funded by banks and individual investors.

According to the Treasury, the CDFI funds play “an important role in generating economic growth and opportunity. … By offering tailored resources and innovative programs that invest federal dollars alongside private sector capital, the CDFI Fund serves mission-driven financial institutions that take a market-based approach to supporting economically disadvantaged communities.” These funds are used for the development of affordable housing, the creation of jobs and local businesses, and the expansion of community facilities.

A CDFI-certified financial institution must match the awards received with private investments.

These types of funds allow four things to occur in our community:

1. Provide a vehicle for local investors, who are currently looking for investments and tax credits.
2. Import wealthy investor equity from other cities and states. Springfield is in a healthy growth pattern, making it an attractive investment.
3. Allow a vehicle for higher risk, but nevertheless solid business ideas to start and flourish in Springfield.
4. Bring federal tax dollars back into our local community.

This gap is starting to be filled locally.

Legacy Bank & Trust Co. and its affiliate Legacy Economic Growth Fund brought to the area the first New Market Tax Credit loans, which is one of seven types of CDFI funds. New Market Tax Credits are designed to help economically distressed communities attract private capital by providing investors with federal tax credits. This tool creates a flexible financing structure. According to the Treasury, historically these have generated $8 of private investment for every $1 invested by the federal government.

The Legacy Economic Growth Fund was selected from a pool of 208 applicants that requested an aggregate total of $15.1 billion in tax credit allocation authority. Of the $5 billion in New Markets Tax Credits awarded to a total of 100 community development entities, the Legacy Economic Growth Fund received $60 million.

I am hopeful that Legacy Bank will be successful in attracting private capital into our market from other areas and will be investing a large portion into our local small businesses. If the historic $8 multiplier holds true in this case, that is a $480 million influx of new capital.

The New Markets Tax Credit Program has existed for 20 years and facilitates the rebuilding of communities after years of disinvestment and enabling rebuilding after external forces like that of the pandemic, which have caused disproportionate harm to the same communities.

Another CDFI Fund exists that would be a great boon for our local economy: the Capital Magnet Fund. The program invests in CDFIs and nonprofit housing organizations to finance affordable housing activities, which is another topic highlighted throughout the Economic Growth Survey. Scarcity of availabile and affordable housing inside the city limits of Springfield is a threat to our future economic vitality. Lack of developable land and the cost of construction is hindering housing development, so supply is decreasing while demand is increasing, forcing upward the price of housing.

I hope next year we are able to discuss the innovative institution that is bringing Capital Magnet Fund investments to Springfield.