McDonough: Connecting Finance with Communities: Building Stronger Neighborhoods
|September 6, 2001
|William J. McDonough, President and Chief Executive Officer
Remarks by President William J. McDonough before the One London Conference Introduction
To create economically viable inner city neighborhoods, community entities must work together. When banks lend money, corporations provide jobs, services and investments, governments support infrastructure, foundations provide long-term capital and neighborhood organizations coordinate and manage the regeneration process, neighborhoods can be redeveloped effectively and efficiently. I suffer no illusion that this is easy. It requires skill, patience and determination. Above all, it requires leadership.
The Second Harlem Renaissance
In New York, one example of how the lessons from the past have shaped the future in a positive way is now developing in Harlem. As you may know, Harlem has a long history as the center of African-American culture. During the 1920s, the neighborhood abounded with artists and performers who created an outpouring of literature, drama, music and painting that has come to be known as the Harlem Renaissance. But during the past 40 years, as the problems faced by inner cities spread, the community became a national symbol of urban despair. There was a rise in homelessness and crime, and wholesale abandonment of buildings by landlords. In the early 1990s, as a result of foreclosures, 60% of the housing stock in central Harlem was owned by the City of New York. There was diminished economic opportunity for residents.
Let me tell you about a recent trip I took to Harlem with Chancellor Brown. During our visit, we saw first-hand what is now being called the Second Harlem Renaissance. On 125th Street, one of Harlems main streets, the crime rate is down, employment is up and where drug dealers once dominated, theres a supermarket that anchors the areas main commercial strip. Completed in 1999, this supermarket was the first new commercial project in Harlem in 30 years and the first supermarket of its size in Harlem ever. The company that owns this store has disclosed that it is one of its top performers in its first year. In addition to bringing a much-needed variety of products to the neighborhood, this store has provided 280 full-time jobs to local residents. Also on 125th Street, we saw the construction of Harlem Center, a new commercial development which, when completed, will include over 300,000 square feet of retail, office and hotel space and provide an estimated 760 permanent jobs.
On 116th Street, we saw a new 240-unit apartment building that offers homeownership opportunities to families with low- and moderate-incomes. Thanks to a combination of private and public funding, families earning up to 50% of the areas income can own their own homes for as little as a $5,000 downpayment and have a stake in their community. Sponsors of the project received over 3,500 applications for the 240 units. Neighborhood residents were given first preference.
On 127th Street, we saw a two-building housing complex with 66 low-income units, 30% of which are reserved for formerly homeless families, with rents that are affordable to those earning less than 50% of New York Citys median income or $28,000. Everywhere we went, there were signs of economic vitality. Through the energy of local residents and nonprofit organizations working with the private and public sectors, the area has been reborn. And the neighborhood is changing -- new people are moving in and new businesses are being created.
So is this gentrification? Should residents be afraid of how their community is being transformed? This is a much debated issue and many people are concerned that change is adversely impacting long-term residents. I believe that in the revitalization process change is inevitable and good. Communities that are not dynamic will not thrive. But as change occurs, the people who must be its primary beneficiaries the community residents - cannot be left behind. Their needs must be taken into account and, given a stake in the process, they will feel less threatened and more invested in the outcomes. They become the beneficiaries of the increased community wealth spurred by development. They are able to take part in capturing the value thats being created in the community to attain individual wealth and transform their lives. To accomplish this, there must be planning up-front for jobs, affordable housing, and homeownership opportunities for community residents and assistance for existing small businesses. These plans must be implemented in partnership with residents and local nonprofits. Managing community change successfully also requires ongoing communication and coordination.
Key Players and Their Roles
How did we get here? The key lesson is that to reverse neighborhood deterioration requires a diverse set of players, including, but not limited to, private foundations, governments, not-for-profits, banks and corporations. Id like to take a few moments to talk about the roles that each of these sectors plays, at least in the U.S.
Private foundations play a fundamental role in the community development process. In the earliest stages of revitalization efforts, foundations often fund feasibility studies and other community research and development initiatives. They also provide critical patient capital that seeds projects and acts as a catalyst for additional investment by the private and public sectors.
A key role of the government is to provide tax incentives and subsidies for housing and new business development. In New York, the federal, state and city governments have invested hundreds of millions of dollars, through grants and tax incentives, in inner city neighborhoods. Through the U.S. Empowerment Zone program, a national initiative to provide financial and technical assistance for designated distressed communities, during the last several years, Harlem has received $300 million of public investment. New York City provides tax abatement to property owners for the rehabilitation of substandard housing and during the past 8 years has transferred to private ownership most of its inventory of foreclosed properties and land. New York City municipal pension funds are major investors in affordable housing loans, creating liquidity in that market.
Are these government subsidies for the poor? No. Providing tax and other incentives for development, and job creation and retention for the community is an appropriate role for government. Its a common practice for large corporations to receive incentives to stay or relocate to non-inner city areas. Local governments provide tax rebates, build or improve roads and make other infrastructure investments using bonding authority to make their regions more enticing to companies. Whether it is in this context or in an inner city context, offering incentives to keep a community growing and vibrant is the right thing to do.
Community development corporations are tax-advantaged entities designed solely to represent and work within their local neighborhoods to improve the delivery of services and the condition of housing stock and to help support the development of local businesses. They channel public and private resources into community initiatives. Banks and other corporations provide money for programs and financial support to help build the capacity of these organizations. In Harlem, the Abyssinian Development Corporation (ADC) is involved in a great deal of the revitalization thats taking place in Central Harlem. ADC was formed in 1986 by a group of volunteers from Abyssinian Baptist Church, Americas oldest African-American church, who wanted to improve their neighborhood. The organization, which was started with a $50,000 grant from a private foundation and a staff of one, now has over 55 employees and has been the catalyst for the investment of more than $100 million in the Harlem community. In the Crotona Park East section of the Bronx, a neighborhood that has fought its way back from urban decay, another local community development corporation, colorfully named the Mid-Bronx Desperados Community Housing Corporation, is responsible for over 2300 units of housing with total development costs of $250 million.
During the past 20 years there has been a big shift in how U.S. banks do business in the inner city. Initially, the Community Reinvestment Act, a 1977 law that requires banks to help meet the credit needs of all communities in the areas in which they operate, was the catalyst for making capital available in low-income areas. At first, lending in inner cities was done under government duress and not part of a banks mainstream business. Since then, banks have had positive experiences and now realize that theres profitable business to be done in these markets. Most say they would continue making these loans and investments even without regulation. They have changed the lens through which they view inner city markets and developed business partnerships with local non-profit and intermediary organizations to create a new generation of products and services that respond to the needs of low- and moderate-income customers. By thinking outside of the traditional underwriting box, banks have been able to build upon substantial public subsidies, grants from private foundations and investments by other nonprofit intermediaries to make lending more attractive and reduce risk. In New York, the competition to make loans and investments in places like Harlem or the South Bronx is so strong that the challenge now lies in continuing to identify new lending opportunities. In most cases, banks rely heavily on local partners to help identify opportunities, structure loans and investments and provide valuable technical assistance to borrowers, and manage projects through to completion.
The corporate sector in America has become increasingly involved in the neighborhood revitalization process. Initially, corporate involvement was mainly through their employees volunteering technical assistance to community organizations. While this is important and should be encouraged, U.S. corporations now also make substantial direct financial investments, sometimes spurred by tax incentives, to support the work of the local organizations implementing community development plans. Corporations also provide job training opportunities for local residents, an important pipeline for new employees in what has been a tight labor market.
The Role of the Central Bank
Where does the central bank come into this? Why are we involved in community development? As the central bank of the United States, the Federal Reserve is concerned with economic growth in all sectors of the economy. This includes all communities regardless of income. Historically, low- and moderate-income and minority communities have not prospered as well as others, often due to a lack of information about opportunities. At the Federal Reserve Bank of New York, through our Office of Regional and Community Affairs, we work with the private, non-profit and government sectors to furnish information about opportunities and conditions in disadvantaged neighborhoods. We get to know the local organizations and introduce new ideas and models to help address local issues. As a convenor, we bring together key players in neutral forums and act as a catalyst for the creation of new partnerships. Its also important that we, as the central bank, publicly recognize success stories and the very committed people and organizations that are involved in them. Let me give you some examples of our work in community development:
Your attendance at this conference today is evidence of your commitment, interest and willingness to participate in the rebuilding of your inner city communities. While much has been done, there is still so much more to do. I recognize how complex and difficult the issues are and that solutions arent solely a matter of good intentions. Permanent solutions involve putting together people and organizations of similar, but not necessarily overlapping, interests to create meaningful partnerships. While good intentions are an important element of this, there also must be sustained effort and commitment of resources to leverage the assets of inner city neighborhoods for the long-term benefit of the residents. I urge you to examine where you can do more and where your organizations can engage others in these efforts.
As I mentioned at the beginning of my remarks, weve been pleased to host visitors from the U.K. in New York. To date, representatives of the government and not-for-profit sectors have been involved in these trips. Today, I would like to invite corporate and banking leaders to come to see some of the progress thats been made. Arrangements can be made through our Office of Regional and Community Affairs. Were serious about this and I hope you are, too.