After its fourth round of grants, Chicago’s Neighborhood Opportunity Fund (NOF) is getting attention for the way it supports underserved communities. The program aims to help South and West side business owners and is funded by money the city makes from major downtown developments.
Some researchers say the financing model represents a compelling, innovative way to support people who historically have lacked access to capital. Other cities could benefit from replicating the program, according to a new study from the Washington, D.C.-based Urban Institute.
As a grant, it offers equity that some business owners or nonprofits need in the early stages. Participants get money but also project support and access to networks that other successful entrepreneurs might already have. Plus, unlike Opportunity Zones, the businesses don’t have to dilute their ownership to get capital.
Surprisingly, there aren’t other cities with programs that are as well-rounded, which is why the social and economic policy think tank wanted to take a deeper look, said the report’s lead author Brett Theodos.
How the fund works
The fund launched in 2016 under the Emanuel administration at a time when downtown development was booming and the city was on a building spree. Taking advantage of that momentum and to quiet criticism that Emanuel ignored struggling neighborhoods, the former mayor created a way to share the wealth.
Essentially, developers that have projects in a specific area, like the West Loop, can apply for a “floor-area bonus” which lets them build bigger and taller projects. If the city approves, they contribute a calculated amount to the fund. For example, based on the square footage of The 78 megadevelopment, Related Midwest will pay out $26.3 million. Developers told researchers they see the program as “win-win.”
Eighty percent of that goes into the NOF which is then distributed to small business owners, property owners, landlords, and nonprofits in corridors on the South and West sides. The city vets applicants, and looks for projects that are actionable and beneficial to the neighborhood. Typically, grants are awarded in $250,000 increments, but can be bigger, and cover 30 to 50 percent of a project.
Why the comprehensive approach is important
Local organizations that support economic growth aren’t special—but Chicago’s method creates an entirely new source of funding and deeply supports the fund’s participants. It’s a particularly smart solution for cities in debt or with limited budgets, said Theodos.
“Its funding does not require the city to participate in a win-lose proposition in which it moves money from one neighborhood to another, or from one critical priority to another,” the study said.
Businesses in areas where unemployment and poverty are high are awarded grants. The projects are required to improve spaces that provide valuable neighborhood amenities like coffee shops, grocery stores, or performing arts venues. Applicants have “skin the game,” too, as they must be able to cover a percentage of the cost on their own. But they aren’t left alone to navigate the process of building permits, loans, and city applications.
Help goes beyond the grant, and the support is robust and comprehensive, said Theodos. The city facilitates connections with agencies that are knowledgeable about building regulations and licenses. Grantees are encouraged to attend groups, meetings, and other events to develop relationships or share resources with one another.
We're in Austin celebrating the opening of the Kehrein Center for the Arts, a 1,000-seat auditorium built by Circle Rock School at 5608 W. Washington. Supported by a $1 million #ChicagoNOF grant, the performance venue will serve the school and other neighborhood organizations pic.twitter.com/TaVQC5qYfT
— Chicago DPD (@ChicagoDPD) May 22, 2019
We’re at Chase Tower this afternoon for an orientation with the third round of #ChicagoNOF winners. City agencies, lending coaches and technical advisers are on hand to help make these projects a reality for the South and West sides. Learn more at https://t.co/SNuZOZGX0y. pic.twitter.com/39pDfUFCIG
— Chicago DPD (@ChicagoDPD) June 7, 2019
There’s still room for improvement
After interviewing participants and the city, researchers found that communication was one of the biggest challenges.
“It’s an important program and meaningful for people, but still not huge in total number of businesses getting touched,” said Theodos.
In four rounds, the city received 1,426 applications and approved $23.3 million in grants to 174 small businesses (although 10 applicants representing $1.5 million withdrew from the program). While the impact isn’t massive, there is potential to grow with so much development in the pipeline.
Another issue during the first round of funding was that very few applications were received from the largely Hispanic neighborhood Little Village, despite it having the second-highest grossing shopping district in the city. After increasing outreach efforts, the city learned many immigrant communities were hesitant to work with city government and didn’t trust the support offered. Since then, applications from Little Village have increased but it’s clear that officials must go beyond offering assistance, and actively repair trust in some communities.
Other hurdles included learning how to work with participants that were in early development stages (more than half of the grantees are start-ups). Both participants and the city were frequently frustrated by project logistics, paperwork, and financial planning.
For example, some grantees had problems with projects due to decades-old fees or taxes owed to the city in connection to their property. The city’s record keeping isn’t up to date, so many owners said they had to address debts that were already paid or contested.
“One grantee put the challenge starkly: ‘The money we were able to collect ended up not being enough because of so many unexpected costs. We are very indebted right now,’” according to the study.
Through each iteration, the project evolved. There are now lending coaches, lists of vetted construction managers, and grantees are held accountable to their timeline. Plus, support materials like mock contracts and best practices are more accessible online.
There’s a lot that other cities can learn from Chicago’s improvements and, after studying the Neighborhood Opportunity Fund, researchers put together a list of best practices for cities interested in creating the same type of support. Their first piece of advice: Prioritize equality and impact.
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