Organization: Denver Mayor’s Office
Location: Denver, Colorado
The convergence of the private, public, and nonprofit sectors is a hot topic in today’s world of social enterprise as a means to begin solving complicated social and business problems. I had the opportunity to see this trend first-hand this past summer during my internship as a Social Enterprise Fellow in the Denver Mayor’s Office.
I wanted an internship position that could blend my four years of nonprofit work prior to business school, with the skills learned during my first year at HBS. I was also intrigued by the new mayor in my hometown, John Hickenlooper, who was selected as one of the country’s top five mayors by Time Magazine in less than two years of holding office. He was voted into the position after a successful 25-year career as an entrepreneur in Denver and is an illustration of the sector convergence I wanted to explore. Mayor Hickenlooper was immediately trusted by the business community, and he charged his staff with leveraging the power and leadership of the private and nonprofit sectors to better the city on all accounts.
I quickly understood the difference between the theoretical benefits of public-private partnerships and the reality of their practicality and effectiveness. For example, last spring the Mayor’s Office, in partnership with the quasi-public Colorado Housing and Finance Authority (CHFA) and a local nonprofit community development financial institution (CDFI), was awarded a $40 million allocation of a New Markets Tax Credit from the Federal Treasury. This program was created by Congress in December 2000 to encourage private investment in low-income communities by giving federal tax credits to investors equal to 39% of their capital over a seven-year period. By 2007, Congress will have stimulated $15 billion in low-income community development through this six-year program.
The mechanics of utilizing the tax credits automatically create interdependent relationships within the public, nonprofit, and private sectors. Once Denver received its allocation from the federal government, we were allowed to “sell” the tax credits to commercial banks and lenders in exchange for an equity investment. The process of choosing our investors for the $40 million was highly competitive. Over a dozen institutions such as GMAC, Wells Fargo, First Bank and other lenders with a Colorado presence had already committed to invest during the application process and were now positioning themselves to be one of the chosen two or three.
Determining which investors were best suited to purchase the tax credits was a two-way value proposition. The institutions were evaluating our office’s pipeline of potential real estate development projects in qualified census-tracts that could meet their expected returns (investors could receive additional returns beyond the tax credits if the portfolio of projects was profitable). Simultaneously, the city wanted to choose the best possible investor based on its required equity return and governance stipulations (i.e.: the number of seats required on our board and/or investment committee) and the timeline for converting their equity positions in our projects to cash down the road.
Although I completed my internship during the implementation planning period of this partnership, I was able to see the mutually beneficial outcomes that each party expected. For the city, it was an opportunity to channel private dollars into targeted low-income communities while ensuring the metrics for affordable housing units, job creation and neighborhood preservation were met. The housing and finance authority and community development lender gained access to equity that could provide lower-interest gap financing to real estate developers for projects on a much larger scale than previously feasible. The institutional investors are able to lock-in a 39% return over seven years and their investment can boost their national Community Redevelopment Act ratings (not to mention being the equity investor in $40 million of development in the city). Finally, the real estate developers in the pipeline will be able to lower their cost of capital and begin developing mixed-use space in neighborhoods that were not previously financially worthwhile.
In addition to having an amazing opportunity to work with a great civic leader like Mayor Hickenlooper and to be part of a unique public finance deal, I learned two very important lessons during my Social Enterprise Fellowship that I believe will stay with me throughout my career. First, the concepts and skills we learn at HBS are absolutely applicable across sector lines and second, converging the knowledge, capital, and capabilities from each sector can create a sum that is, in fact, greater than its parts.