As our foundation has worked for the last several years to revitalize a struggling neighborhood, I’ve been vividly reminded that the plight of our inner cities is not pretty. Our inner cities seem impervious to all manner of initiatives and palliatives from government and private institutions. After hundreds of billions of dollars spent in the War on Poverty, Rebuild L.A., and other major projects, the problems of these blighted neighborhoods are still with us. The Roundtable will be leading a site visit to Market Creek Plaza on November 13 as part of our Annual Meeting in San Diego. Check here for more information on the program.
One reason is that people on both sides of the political spectrum have failed to define the problem correctly. Thinkers on the conservative side have tended to say the inner cities should be left alone to change themselves. Caricatured as a “let them eat cake” approach, this view assumes that it’s the residents’ responsibility to pull themselves up by their bootstraps. Liberal thinkers have taken an entirely different view. Put baldly, they assume that the objects of their concern are incompetent, unable to function effectively as individuals or in groups. They are to be pitied, helped, and condescended to, and the only question is how best to deliver services to these needy clients. And then, when what is sent does not have the desired effect, how to deliver ever more resources.
But though the billions of dollars that have been spent on inner-city communities haven’t been totally wasted, the persistence and magnitude of the problems provide eloquent testimony that the obstacle to progress is not simply a lack of financial capital. Money is important, and promising private initiatives like John Bryant’s Project Hope bring needed capital to people in the inner city. But experience shows that money is a necessary but not sufficient factor in transforming the lives of our fellow citizens who live in these neighborhoods.
The chief problem is a lack of human capital-the skills and knowledge that allow persons and groups to advance themselves. In healthy communities, development proceeds organically as citizens take charge of their lives and the problems in their neighborhoods. That typically doesn’t happen in the inner cities, which are drenched in apathy, powerlessness, and despair. Until that changes, spending money will do nothing of lasting consequence.
One sad thing about these communities is that when people in the inner city become successful, they move out. In a poignant Catch 22, only a revitalizing of these neighborhoods can persuade the very people who are essential to the revitalization effort to stay.
The other problem is the burden of bad policy ideas. The reigning paradigm is that inner-city folks are incapable of running their lives and communities, and so someone outside has to do it for them. This results in a bureaucratic attitude that treats the citizens of these communities as clients-passive recipients of benefits and services instead of actors in their own betterment. And in a poisonous marriage, the compassionate condescension of the bureaucrats who hand out aid breeds passivity among the recipients. Add to this the turmoil of politics and a racial and ethnic spoils system, and one sees the effort to increase these neighborhoods’ human capital suffer a mortal blow.
Our foundation doesn’t begin to have all the answers, but we’ve gained six years’ worth of hard-earned lessons about community development from our efforts to establish Market Creek Plaza, a 20-acre commercial and cultural center in San Diego’s “Diamond” neighborhoods. To carry out the project, the Jacobs Family Foundation expanded its operating foundation, the Jacobs Center for Neighborhood Innovation, run by Jennifer Vanica.
The guiding principle of the Jacobs Center is that the residents of these communities must be treated with dignity as citizens, not clients, as agents in their own improvement and not passive recipients of help.
A second principle that follows from the first is the need to concentrate on the strengths of the community as assets to build on, rather than just to bemoan the problems and weaknesses. Successful military units and businesses strengthen themselves by recognizing their outstanding performers, and a community likewise must focus on its outstanding people and the “little platoons” that are oftentimes making heroic efforts to hold neighborhoods together.
These principles informed the Jacobs Center’s work when we began this commercial development in southeastern San Diego in hopes it would be a catalyst for broad community development. Board members and staff quickly found that the reigning paradigm was comfortable for the politicians and bureaucrats, but left the citizens feeling frustrated and powerless. We soon realized that every part of the effort was tied to every other part, and that things which were routine in healthy communities were real challenges in this context, because of the scarcity of human capital and ineffective tools.
Difficult though it has been in every respect, the experience has been gratifying because we have seen that, when people are liberated from their old expectations, they respond in positive ways. Leaders emerge, residents band together to grapple with issues that concern them, and we all end up growing in ways never thought possible. Out of this citizen-led problem-solving comes a newfound self-respect and pride in change that is meaningful because it’s self-generated. This change is at the heart of what may be a new synthesis between liberal concern with the plight of these residents and conservative concern with self-reliance and individual initiative.
In addition to the human dimension of the community development problem, the Jacobs Center’s experience has uncovered serious structural difficulties in the way work gets done in these communities. Philanthropists, community organizers, nonprofits, and for-profit developers each use a different model in their work. These ways of doing the work are not complementary and are often at cross-purposes. We have come to believe that until the strengths of these models can be coordinated and combined, development will only occur piecemeal.
In developing our approach we focused on these four models of community revitalization-the philanthropic model, the organizing model, the nonprofit model, and the for-profit model. Each has unique strengths and limitations, and we have tried to devise strategies that utilize the best of each model. We have been able, with varying degrees of success, to marshal the most appropriate parts of each model and coordinate them as we move forward.
Four Models of Development
The philanthropic model represents the attempt by philanthropic organizations to alleviate the plight of inner cities. This model typically uses one tool, a cash grant, and is mostly carried out within narrow “areas of interest.” Because of the nature of foundations, this approach operates once removed from the object of its largesse and cannot easily partner with other groups or experiment with other roles. The focus is usually on the short term (one to three years) and because of this, usually treats symptoms not causes. Foundations and other philanthropies are also risk averse and often least inclined to fund the grassroots organizations that know the people best and need resources the most.
In the organizing model, community organizers convene meetings of residents and facilitate efforts to address neighborhood issues and conflicts. While this model gives community residents a voice, it doesn’t enable them to control assets or develop properties, and most important, it does not place them in decision-making roles over the issues that most concern them. It makes them supplicants to the power structure-again, clients or adversaries of the bureaucratic state.
The nonprofit development model involves the work of neighborhood agencies such as Community Development Corporations. CDCs are neighborhood nonprofit corporations supported by public and private funds. They can seek tax credits and other government subsidies. Eminent domain, tax remittances, and other tools give governmental agencies working with CDCs the power to affect land-use planning and spur development. The use of local contractors and other measures to benefit the community can be required, but CDCs rarely have assets and are severely constrained by the difficulty in accessing capital. Development is slow and piecemeal. Additionally, it cannot be assumed CDCs’ first priority is giving residents a voice in decision-making.
In the fourth or for-profit model, developers have their own money and survival at stake and are understandably leery of working in areas that need the kind of community development we’re discussing. While commercial developers know how to build, lease, and operate projects, the imperative of their bottom line leaves them little time or interest in listening to residents. Consequently, the residents’ interests are not addressed, most often residents don’t receive any direct benefits, and unwanted and counterproductive land uses often occur. And of course, since for-profit development doesn’t involve residents, human capital in the neighborhood isn’t built up and the original residents are often moved out.
Finding a Successful Model
All these problems and more faced the Jacobs Family Foundation as we purchased 20 acres in hopes of learning about community development. First we moved our headquarters to the community. We hired local residents to begin a survey of community desires for the property. We expanded our operating foundation so it could become the developer, and this Jacobs Center in turn began mobilizing residents and identifying local nonprofits in the neighborhood, to which we made small capacity-building grants. The Jacobs Center offices became the meeting place where these residents and organizations could organize, talk, network, and get advice and “tea and sympathy” from Jacobs Center staff. The resident surveyors soon became the nucleus of new neighborhood self-help groups, which tried to reach across cultural and ethnic lines for new understanding and solidarity. In all this the Jacobs Center played the role of listener and facilitator, a sort of support staff with advice and resources. The focus was on helping the community strengthen its sinews. We decided to merge all four models, intending to let the community lead as the development moved forward.
To that end, a conscious decision was made to treat every facet of this commercial enterprise-envisioned as a shopping center anchored by a national grocery store-as an opportunity to involve community members, training them and building their capabilities. Teams of residents were formed to help guide the project. An art and design team was instrumental in tossing out the standard shopping center look and creating a unique design that reflects the multicultural neighborhood. The team selected neighborhood “heroes” whose pictures were painted on murals by local artists for permanent exhibit at the plaza. Local students under the supervision of a local college professor told these heroes’ stories in print and video. The construction team vetted and trained workers and prospective subcontractors for bidding on the work so that in the first phase of construction over 65 percent of the work was done by people and companies from the neighborhood. An employment team negotiated with the prospective anchor tenant so that over 90 percent of the jobs created went to neighborhood residents. Graffiti artists also formed a team, were trained by local artists, and now have a graphic arts business that employs their artistic talents. Leasing teams interviewed local businesses to find suitable fits for tenants. In all, ten teams involving over 1,000 community residents have formed to help the Center ensure that every part of the project reflects the imprint of the community.
Other decisions were made to stimulate community involvement. When the local redevelopment agency tried to gain approval for an unwanted use on a parcel in the community, residents found out and staged a successful protest. The residents leading that effort organized a grassroots planning body. The Jacobs Center later provided resources in the form of urban planners who helped train them, and now our work is guided by their input as we buy and develop other land in the neighborhood.
One of the dreams of the Jacobs Center is to enable residents to have a chance to literally own the commercial development. Accordingly, an ownership team was formed and the legal work begun to build a structure whereby local residents would have the opportunity to purchase shares of preferred stock in the enterprise. In preparation for that day, enthusiastically received financial literacy classes, organized by residents and supported by the Center, have been conducted for adults and children to help them prepare to make informed decisions about investing.
An Education in Finance and Politics
The limitations of the for-profit development model soon became evident. After extensive discussions with several grocery chains we realized they would only consider the risk of locating in the neighborhood because the foundation had already made a large financial commitment by purchasing the land. Other potential lessees expressed little interest in the site for all the standard reasons associated with underserved neighborhoods. After herculean efforts and the necessary financial guarantee, a national grocery chain (Food4Less) finally agreed to open a store. In the two years it has operated, it’s become one of the best performers in the county, justifying the risk we and the company took. As the site has proven itself, a parade of national tenants has expressed serious interest in locating here, along with local entrepreneurs who plan to operate restaurants and stores.
Our experience with financial institutions was similarly challenging. After protracted negotiations with numerous banks, we found that no bank would ever agree to finance the construction project, at least at an interest rate low enough to make the project feasible given its high infrastructure requirements. In the end, the foundation’s founder, Joseph Jacobs, pledged personal assets as collateral for a line of credit to complete the initial stage of the project, and the foundation has now gone on to make loans-a program-related investment or PRI-to continue the work. This last involves considerable risk for the foundation but also an imaginative use of our assets. Instead of using only 5 percent of our corpus for grants, our PRI lets us leverage up to 19 times that amount.
As our CEO, Jennifer Vanica, says, “We had to find a financing strategy to bring interest rates down, since the cost of capital was the highest cost we faced. Though we were approached by groups offering community development loan funds, government-secured loans, and private equity, the rates were still too high. Having the foundation leverage its assets into a PRI, or low-interest loan, was invaluable. We could never have accomplished the impact this project has had through grants. As foundations, we always ask why businesses don’t invest in our inner cities, but we don’t take that risk either. PRIs are a great way to change that.”
We’ve even gone on to design a new tool called a “PRI-Plus,” in which a regular PRI loan (70 percent of the tool) is combined with a participating fund (30 percent of the tool) that works like equity and pays a return based on the actual performance of the project. It enables foundation partners to invest in a relatively safe vehicle (the loan), while at the same time taking a risk along side the neighborhood residents (the participating fund). Project costs for Phase I are estimated at $23.5 million. Until the final take-out financing is in place, the Jacobs Center has a $15 million low-interest loan plus approximately $6.5 million in equity, which is shared with other foundation investors. The remaining $2 million is being raised by the residents to establish their ownership share through a public offering and a neighborhood-controlled community foundation they have formed. The blended rate of return on the equity is projected to be 7.5 percent-not bad these days.
While all the affected politicians were enthusiastic about our efforts , and there were endless ceremonies and civic accolades, our relationships in the political world were also challenging. Our intense effort to build broad civic participation caused residents to challenge the leadership and speak out for public improvements and services other neighborhoods take for granted. In addition, the time, money, and resources expended in dealing with permits, inspections, and the constant changing of requirements of the modern regulatory state had our CEO swearing the process was turning her into a stern libertarian. Our dealings with local politicos often made us feel we were an interloper and competitor, rather than an organization trying to help the community. On a more optimistic note, recent changes in the power structure, as well as six years of trust-building in the neighborhood, hold out hope of a more positive working relationship in this sphere.
Success and Frustration
We’re proud of the commercial progress Market Creek Plaza has made so far. The anchor store is the first major grocery to open in the area for the last three decades; it continues to be one of the best performing stores in the region, besting its parent company’s sales projections and serving over 2 million customers in its first two years. Two resident-owned businesses are open: Snapper’s Fish & Chips and a Curves franchise. A 100-seat Cajun eatery run by a famed San Diego restauranteur who is also a neighborhood resident is scheduled to open by Thanksgiving, as are a Mexican restaurant and a cultural gift shop. Regional tenants include a San Diego Gas & Electric service center, a Starbucks, and a Wells Fargo Bank branch. When complete, Phase One, which will also include a 75,000-square-foot office building, will translate into 650 new jobs in the neighborhood with payrolls of $22 million, a property tax increment of $165,000 annually, and new sales taxes of $300,000 annually-all of which will benefit the neighborhood and the broader region.
Still, no commercial developer would think of undertaking this project. This kind of organic development in run-down neighborhoods can’t begin without the prospect of a huge financial reward commensurate with the risks faced by hardy individuals or developers who contemplate taking the first step. In business parlance, this project was too “green” to be viable. Additionally, this project took much longer and cost more than a “normal” project. Yet the extra time and expense we spent in listening, organizing, training, and capacity building-all unnecessary and expensive distractions for a commercial developer-were the major reason for our being there. Mr. Jacobs, the founder of the foundation and a chemical engineer by trade, has always looked upon this project as a “pilot plant,” a way to test out his theories of how to develop human worth and dignity in people who are all too often left out of our capitalist system.
So far, the endeavor has been difficult, but very rewarding. In trying to combine the best of each of the development models, we have had successes and frustrations and learned greatly from all of them. With the help of our neighborhood partners and the experience our work has brought us, we approach the end of the beginning with a sense of cautious pride and optimism.
Norman F. Hapke Jr. serves on the board of directors of the Jacobs Family Foundation and the Jacobs Center for Neighborhood Innovation.