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How does a $245,000 loan to restore 65 acres of pastureland to its original salt marsh condition help build a regional economy?

"Our job is to do proof of concept early on and open flows of capital once they demonstrate up," says John Berdes, president and CEO of Craft3 (assets: $170 million), the revolving loan fund and community development finance institution, or CDFI, that made that loan in 1998. Craft3 aims to build regional resilience by concentrating investments in rural and urban centers in Oregon and Washington, and in Indian country.

Although the pastureland had economic value, it poured contaminants into Willapa Bay, the second largest estuary on the Pacific Coast--and the top shellfish producer in the west. As restored wetlands, it filters water, providing the necessary infrastructure for a healthy shellfishery.

From a lender's perspective, though, the salt marsh had no collateral value. Craft3 ended up collateralizing "something that did not exist," Berdes says--"transferable mitigation rights that were not yet created, might not be created, but if created, would be available for sale."

Five years later, in 2003, the loan was repaid after those rights were sold and used to create the first mitigation bank in the state of Washington. Mitigation banks are offsets against habitat damage and loss caused by development, and involve restoration and the protection of additional lands. The largest purchaser was the state's transportation department, and mitigation banks are no longer exotic investments.

Since l995, Craft3 (formerly Enterprise Cascadia) has made loans to over 750 small businesses and community organizations, used its New Markets Tax Credits (NMTCs) authority to finance things like a wellness center for the Shoalwater Bay Indian Tribe, and participated in loans with smaller Native CDFIs. With support from the Gates and Russell Family Foundations and the state of Washington, it also offers consumers loans to replace septic systems near Willapa Bay and Hood Canal, which produce 40% of the country's oysters.

Recent investors include the Paul G. Allen Foundation, Meyer Memorial Trust, and the Weyerhaeuser Family Foundation. Accredited investors can participate in the fund, which pays 2% per annum for 3 to 5 years. It is rated AAA-2 by CDFI Assessment and Ratings Systems (www.carsratingsystems.net), or CARS.

Sharing the Campfire

Co-founded by Berdes and EVP Mike Dickerson, Craft3 was born in the midst of a culture war: jobs versus the environment. The idea, says Berdes, was to "bring development and conservation to the same campfire." It was controversial at the time--and un-tested. Capitalized with $2.5 million, the fund opened for business in a converted fish cannery on the Ilwaco, Washington waterfront in l995. It began as a skunk-works.

"There were lots of experiments," Berdes recalls. "That's when we learned that falling flat on your face qualifies as moving forward."

But while Craft3 did lots of transactions during its first five years, it did not affect change.

"We spread the butter very, very thin, and we did not link those opportunities to each other," Berdes says, explaining why, in 2000, the fund switched from being "opportunistic" to "strategic." With a new focus on "density of outcomes," the idea was that impact compounds if investments are concentrated--geographically. Craft3 chose Astoria, Oregon, the center of the regional rural economy.

"You strengthen centers so markets can function," he says. "If you concentrate outcomes, they connect---and they amplify. Centers draw people in, and while people engage in economic activity, they also engage in civic activity."

Compounding Impact

A small coastal town at the mouth of the Columbia River that separates Oregon and Washington, Astoria was the first white settlement west of the Mississippi--a fur trading post established in 1811 by John Jacob Aster of New York. In the mid-1990s, it was home to the worst brown-field site in the state: 17 acres of greasy, dead pond, the remains of a plywood mill. The state offered matching funds to clean it up, but no bank would touch the deal. In 1996, Craft3 had jumped in, risking the equivalent of 30% of its start-up capital.

"We ended up helping the City position and market the site to the ultimate (and amazing) developer Art DeMuro of Venerable Properties, " Berdes says, explaining how the CDFI recovered its cash 18 months later.

It was the beginning of Astoria's remarkable revitalization.

How did Craft3's strategic focus play out? It meant that rather than investing in a 2-year college in neighboring Pacific County, in Washington state, where there is not enough population to support it, it provided the financing to Clatsop Community College in Astoria. Students living in Pacific County can get in-state tuition.

In Astoria, Craft3 also financed specialty medical offices, a bigger public radio station, Mary Todd's Workers Tavern and the Fort George Brewery. The list goes on and on, but these investments did not include displacing the town's heritage and traditions with tourist town superficiality.

"Astoria is authentic and not Disney," Berdes says. "This revitalization honors the balance between pretty and gritty. A cruise ship with 2000 passengers will dock amidst a log yard and sit next to an ocean going log carrier."

Moving Beyond Red-Blue

Its work in Astoria convinced Craft3 that triple bottom line impact happens as a "process, not an event"--the result of "iterative transactions in a defined place," Berdes says. But by 2005, it faced a crossroads: Should it hunker down in the lower Columbia and remain a small niche organization forever--or should it take its triple bottom line mission, strategy and tactics to scale?

In l934, the Rural Electrification Act had brought electricity from urban centers to rural America. But in an era of peak resources, resilience requires sending clean energy the other way. As a part of its soul-searching, Craft3 realized that "urban needs rural, and rural needs urban."

"Rural America is not red," Berdes says, explaining there are places that see the environment as opportunity. "We believe the low carbon-based economy is the way to get through red-blue, and we can't be a region without reconciliation."

In 2006, as a stepping off point for its new rural-urban compact, Craft3 merged with the Cascadia Revolving Fund, a Seattle-based CDFI. It also targeted Indian country, which often represents the highest pockets of poverty in Oregon and Washington and is a central part of the Pacific Northwest. And between 2006 and 2012, assets mushroomed fourteen-fold from $12 million in 2006 to $170 million.

Redefining Resilience

Linking renewable energy to economic opportunity usually connotes green jobs. But Craft3 has played a pivotal role in taking that to the next level--by providing financing to a community owned wind farm in Grayland, Washington. The project cost $15.1 million, and Craft3 contributed over $8 million in NMTCs, plus debt, equity and a bridge loan.

Owned by the Coastal Community Action Program (CCAP), a locally owned nonprofit social services agency in nearby Aberdeen, Washingon, the 6 Megawatt (4 turbine) wind farm sits on 29 acres of clear-cut land overlooking cranberry fields a mile from the ocean. It powers 1000 homes--and produces $450,000 in annual cash flow, which CCAP uses to help finance its services to the very poor.

"They are mining that renewable energy in ways that stick to the community that the energy is emanating from," says Berdes, whose enthusiasm is contagious. "They don't own the wind, but they own the value-add.

"It's a closed loop," he adds, "and it is completely replicable."



A former investment banker, Ellie Winninghoff is a writer and consultant specializing in impact investing. Her writing about impact investing is linked at: DoGoodCapitalist.com, and she can be contacted at ellie.winninghoff (at) gmail (dot) com.

Editorial Notes: Author Ellie Winninghoff writes: "Craft3 is one of the coolest "community development financial institutions" in the country. It's based here in the Pacific Northwest, and is focused on building local resilience. It's been at this for 20 years, and so has put lots of thought into its strategy." -BA

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