Top officials from the Los Angeles Community Development Bank, including bank President and Chief Executive Linda Griego, are scheduled to meet this week with an East Coast group interested in making equity investments in inner-city L.A. companies.
The meeting is significant because, while debt financing has been available to inner-city businesses through the CDB and other institutions, many such businesses have been unable to qualify for the loans due to a lack of collateral.
Many believe that for inner-city businesses to expand and prosper, what's really needed are equity investments that can then be used as collateral to secure loans.
"This fund would be one more tool that the community badly needs," said Griego. "It is a vehicle to bring equity into the neighborhoods, and it will be particularly important for companies that can't borrow money to have a place we can refer them to for an equity investment."
The East Coast group, Enterprise Social Investment Corp. of Columbia, Md., is proposing to provide equity in the form of up-front cash in exchange for L.A. companies agreeing to transfer their federal and state tax credits to ESIC.
As of Jan. 1, any L.A. company located within the federal empowerment zone is eligible to receive tax credits of $3,000 a year for each zone-area resident it employs.
The Los Angeles Empowerment Zone is a 19-square-mile patchwork of the poorest areas of L.A., including Pacoima, a portion of eastern downtown, Boyle Heights, and a number of communities in South Central. The zone is home to 198,702 Angelenos and an estimated 13,000 businesses.
In addition to the new federal tax credits, ESIC is interested in getting companies already existing state tax credits for hiring residents of the state-designated enterprise zones.
It's a formula that ESIC is already using to channel corporate investments into low-income housing developments. In exchange for future tax credits, the ESIC has been providing equity financing for non-profit developers to buy land and cover the start-up costs for housing construction in low-income neighborhoods.
"The new fund is not far afield from what we've been doing so far," said Alan Greenlee, director of public policy with the Enterprise Foundation, a non-profit organization that is the parent of ESIC. "Through our low-income housing tax credit program, we've raised about $3 billion in equity."
Greenlee says that ESIC's investors are predominantly large financial institutions, like Fannie Mae and Bank of America Corp., which can count their investments in ESIC programs toward meeting their Community Reinvestment Act commitments. These investors are not necessarily expecting to make a profit on their investments, but hope to at least break even.
A preliminary draft of EISC's new fund indicates that it will look to make equity investments of between $100,000 and $5 million in each selected company. Only zone-area companies that employ at least 30 zone residents, and preferably more than 100, will be considered.
Some local economic development experts expressed concern upon learning of those parameters, pointing out that they would exclude all but a small portion of zone companies.
"Many of our borrowers don't have that many employees," said Griego of the L.A. Community Development Bank, which provides financial assistance to businesses in the empowerment zone and its surrounding buffer zone that do not qualify for conventional bank loans. "We hope that they will change that requirement so that smaller firms will also be able to benefit from the program."
David Eder, program coordinator with the city's Empowerment Zone and Enterprise Community Program, confirmed that "you will find proportionally fewer large companies in the empowerment zone than there are in L.A. County."
And while zone-specific statistics are not available on the size of employers, those for L.A. County as a whole indicate that large companies are indeed a vanishing breed.
According to the 1997 Business Census, 97.6 percent of businesses in L.A. County had fewer than 100 employees, and 85.5 percent had fewer than 20. (The census did not break out businesses with fewer than 30 employees, the minimum being considered by EISC.)
Another possible obstacle for the ESIC program is that, according to a recent study by the U.S. General Accounting Office, a mere 6 percent of qualifying zone businesses nationwide have made use of the employment tax credits.
To explain why, businesses owners asserted that the process is too complicated and that owners' family members living in the zone do not qualify for the tax credit. Given that many of L.A.'s zone-area businesses are family owned and operated, that might pose a problem.
Nonetheless, Eder of L.A.'s empowerment zone program remains optimistic.
"I expect us to have a higher rate of participation (in EISC's program) than other cities," he said. "We have a very strong marketing team at the Community Development Department, as well as at the Business Team."
For reprint and licensing requests for this article, CLICK HERE.