Research Report Catalytic Capital for Neighborhood Reinvestment
Subtitle
Lessons from Cleveland
Brett Theodos, Eric Hangen, Noah McDaniel, Tanay Nunna
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Nongovernment investors play a key role in the financial ecosystems of underinvested places. Given the Urban Institute’s prior findings of disparities in capital flows, we undertook this research to determine if catalytic capital can accomplish its objectives, using Cleveland as a case study.

Catalytic capital is flexible money in search of social good. It is delivered through different financial instruments to fill gaps in funding from the mainstream private market. Catalytic capital is often an early component of a financing deal and is used across investments in affordable and mixed-income housing, microbusinesses, community facilities, commercial real estate developments, and other projects that create economic and social benefits for communities.

Our research focuses on nongovernmental investors—namely community and private foundations making program-related investments and community development financial institutions (CDFIs) assembling and redeploying capital from a variety of sources—working to catalyze growth and development across the city while seeking equitable outcomes for neighborhoods of color and lower-income neighborhoods. We focused on Cleveland because of its rich ecosystem of catalytic capital providers and its history of efforts to combat community disinvestment. To understand Cleveland’s capital flows and mission sector, we compiled data on real estate transactions and small business lending involving mission-driven organizations and we interviewed local stakeholders in Cleveland.

Catalytical capital works to attract and leverage mainstream capital through three channels that we identify: deal-level leverage (e.g., subordinated debt and patient terms), enterprise and fund-level leverage (e.g., program-related investments in CDFIs that enable those CDFIs to raise other capital), and neighborhood-level “spinoff” leverage (e.g., investment following the redevelopment of the Capitol Theatre in Detroit Shoreway).

Key Takeaways

We find that catalytic capital has played an important role in increasing investment flows in several Cleveland neighborhoods, including University Circle, Detroit Shoreway, Ohio City, and Midtown. However, catalytic capital does not operate in a vacuum, and the Cleveland story also suggests that catalytic capital must be accompanied by other enabling conditions, such as a strong community development ecosystem, robust planning, and partnership with government actors. Constraints on the impact that catalytic capital can achieve include racial disparities, variations in the underlying market strength of neighborhoods, long timeframes needed to develop neighborhood markets, challenges related to catalyzing small-scale investments, and the limited amount of catalytic capital available relative to the overall market.

For investors in other cities wishing to change neighborhoods through catalytic capital, we offer these recommendations from our examination of Cleveland:

  • Seek deep collaborations with other investors and partners. The strongest stories of revitalization involve active engagement from numerous types of organizations. Invest not only capital in deals but also operating money in ecosystem strength.
  • Support community-based and inclusive planning efforts to guide focused and sustained investment in neighborhoods over time. The more catalytic capital investors can coordinate with each other and align around community goals, the more likely these planning efforts are to be effective and broadly shared.
  • Keep context in mind when setting goals and strategy. Catalytic investment is challenged to reverse broad regional and macroeconomic trends. Moreover, in neighborhoods that face discrimination and in neighborhoods less primed to attract mainstream capital, catalytic capital investors will likely have to work harder to achieve their goals, including investing more and on more concessionary terms.
  • Be patient. The stories of the Cleveland neighborhoods of Detroit Shoreway and University Circle show that catalytic capital can indeed strengthen neighborhoods, even to the point when it is no longer needed, but this process can be a decades-long journey.
Research Areas Neighborhoods, cities, and metros
Tags Capital flows Community development finance and CDFIs Community and economic development Foundations and philanthropy
Policy Centers Metropolitan Housing and Communities Policy Center