Community Dividend

Bank CDCs: Building partnerships for community development

Bank CDCs are tools for promoting economic and community development that have gained popularity in communities across the country.

Published December 1, 1997  | December 1997 issue

What community development tool is (1) a potential source of untapped private equity capital in many communities; (2) may result in Community Reinvestment Act (CRA) credit for lenders; and (3) has a history of success in economic development, small business creation and affordable housing development in both rural and urban areas?

The answer is the bank community development corporation, known as the bank CDC. A bank CDC is a tool for promoting economic and community development that has gained popularity in communities across the country. Although the use of bank CDCs has expanded in the past several years, many banks still hesitate to pursue forming and investing in a CDC because of perceptions about complexity and cost.

Although there are costs and risks associated with a bank CDC, this type of organization can offer many benefits to a community with unmet credit and investment needs. For example, the bank CDC structure allows banks and holding companies to make equity investments in community development projects. These equity investments are subject to limits specified by the bank's regulator. Bank CDCs can also develop innovative debt instruments or provide near-equity investments tailored to the development needs of the community as well as to the financial and marketing needs of the bank.

Detailed below are the major considerations involved in the formation of a bank CDC. They include who should be involved in a bank CDC, why it makes sense to form a bank CDC, how a bank CDC might be organized, what the challenges are and how to get started.

Who should be involved

Banks with an interest in new opportunities for community development lending and with resources to invest should consider involvement in a bank CDC. Bank CDC investors can begin with debt-financing or equity-investment instruments, depending on the needs of CDC partners and the goals of the organization. Many bank CDCs offer a combination of debt and equity instruments to balance risk and return, as well as to meet the needs of the prospective clients. Banks do not have to be large or have substantial staff and resources to become involved in a bank CDC; they can choose their level of involvement in a bank CDC based on available resources.

Reasons to form a bank CDC

Banks, communities and local businesses have several reasons to work together to form a bank CDC. One of the most important reasons is that it is good business. There have been many success stories of profitable and effective bank CDCs in the areas of housing, small business creation and economic development. For example, equity contributions from the First Bank System CDC, based in Minneapolis, have assisted in the creation of many units of affordable housing in communities across the First Bank System service area. For example, the First Bank CDC has provided $2.7 million in equity to a Dakota County project to build 30 units of affordable housing in Eagan, Minn., and $2.3 million to help build 48 units of senior affordable housing in Hibbing, Minn.

Another important feature of the bank CDC model is that it works well in both distressed urban centers and struggling rural communities and for a wide range of community development projects. For example, Minnesota's Community Development Corporation (MCDC) is a multi-investor CDC in Park Rapids, Minn., a city of 2,800 people in northwestern Minnesota. MCDC completed construction of a 12-unit affordable rental townhouse project in Menagha, Minn., that is fully leased and has a waiting list. MCDC is also building a single-family home in Badger, Minn., and hopes to build more affordable homes in MCDC investor communities. In economic development, MCDC participated in financing the purchase of a large snack food company that preserved more than 250 jobs for the local area.

For many investor banks, the bank CDC is an important component of their obligation to address unmet community credit needs under CRA. Bank CDC lending and investments in low- and moderate-income geographies are viewed favorably under CRA, especially to the extent that the investments are complex or innovative in addressing the credit needs of the target businesses and communities. Although investors should not enter into a bank CDC for the sole purpose of obtaining CRA credit, bank CDC investments can serve as evidence of the bank's commitment to meeting its obligation under CRA.

CitiHousing, Inc., a CDC of Citibank (South Dakota), N.A., is an example of another success in this arena. It has formed three equity pools that have made $20 million available to purchase tax credits for affordable housing development in South Dakota during the past four years. By October 1997, CitiHousing, Inc., made equity investments in three projects that helped provide 128 units of affordable multifamily housing. In all, the three equity pools have made equity investments in eight projects that helped provide 359 units of affordable multifamily housing across South Dakota.

According to Gene Rowenhorst, CitiHousing, Inc.'s senior vice president, "Tax credits provide a good return to investors and provide quality, affordable housing to South Dakota communities."

Investment in a bank CDC also offers banks a unique opportunity to highlight their commitment to the community and attract new customers. The marketing benefits of CDC participation can be significant. Bank investors are often positively associated with community development, and new customers may be attracted to the participating banks. Increased visibility in low- and moderate-income geographies may result in penetration into new markets and an expanded customer base.

How bank CDCs are organized

Bank CDCs may be structured in a variety of ways, depending on the needs of the investors and communities they serve. The costs and benefits of each organizational structure are evaluated by possible investors. Items potential investors consider include start-up and operational costs, amount of control over loans and investments, level of risk and expected return.

A CDC may be structured as a subsidiary corporation of a bank or it may be managed by a parent bank holding company. For example, the Anoka/Sherburne County Capital Fund (highlighted in the Summer 1997 issue of Community Dividend) is structured as a subsidiary of Norwest Bank Minnesota, N.A., although Norwest is only one of several bank and private investors in the CDC. Southern Development Bancorporation, Arkadelphia, Ark., well known for its success in rural economic development in Arkansas, is structured as a bank holding company that invests in not-for-profit and for-profit corporations.

A bank CDC can be wholly owned by a single bank or it can be structured as a multibank CDC with several bank investors. Like MCDC, it can also be structured as a multi-investor bank CDC, which brings utility companies, governmental entities, local corporations and others in partnership with lending institutions. Creating a consortium of investors in a multi-investor or multibank CDC can be an effective strategy for smaller banks or communities. This organizational form allows all investors to share the costs of establishing and staffing the CDC, and the CDC will have access to more resources than if it had been funded by only one investor.

The challenges

Although CDCs can create positive opportunities for lenders and communities, there are costs and challenges that should be carefully considered before beginning a CDC. Starting and operating a CDC can be time- and resource-intensive. If the CDC will be involved in purchasing tax credits, legal and tax advisors must be hired, which can be quite expensive.

Staffing the CDC can be another substantial expense, even if the costs are shared among several investors. Some CDCs are run by a volunteer board to reduce staff and operating expenses, but the board members may lack time to meet all the needs of the organization. One example of a board-run CDC is the Rapid City CDC, Rapid City, S.D., which has six investors but no paid staff. Board members are fully responsible for the operation of the CDC.

According to Bonnie Hughes, Rapid City CDC chair, the organization has been able to assist in the development of several units of affordable housing in Rapid City. However, board members' limited time makes it difficult to expand the activities of the CDC in new directions and consider other opportunities for the organization.

How to get started


Begin the process with an assessment of your area's economic and community development needs as well as the demand for loans and equity investments in local projects. Talk with the local economic development association, small-business owners and your customers about needs and opportunities in the community. Consider the loan requests that have crossed your desk that could not be approved under traditional underwriting standards, but which you believe have a community development purpose and good potential for success. Consider your financial position and the resources you would be willing to commit to a CDC. Analyze your relative interest in making equity investments versus offering debt financing and the levels of risk and return you expect. If you are interested in forming a CDC but would like partners, talk with other bankers, utility companies, local corporations and other potential investors in your community about getting involved.

Finally, discuss your plans with your federal banking regulator to be certain your activities will meet regulatory guidelines. The common thread among all bank CDCs is that their investments must have a community development purpose. Requirements for meeting this standard vary somewhat by regulator, but all regulators require some type of public, civic, community or economic development purpose before the CDC will be permitted under banking laws and regulations. Common eligible purposes include the creation of jobs and affordable housing for low- and moderate-income individuals and lending and investment for small business creation and expansion.

Economic development associations

Recognize that a CDC can be an important new source of funding to address unmet credit and investment needs in your community. To show the potential value of a CDC to the community, develop an assessment of the area's financial needs from the perspectives of a wide range of community members. Gather bankers to discuss the CDC and why you think it would work in your community. Make an effort to commit some resources to get the project started. Economic development association support—especially technical assistance—during the initial phases of the project can be a valuable contribution to the success of the bank CDC. Finally, consider ongoing involvement in the CDC, depending on the needs of the investors.


Bank CDCs offer communities and banks an important opportunity to build partnerships and use scarce resources for local development more effectively. Although it is not a solution for all community development needs, a bank CDC is worth investigation for those bankers and other partners committed to improving their communities through increased access to lending and investment.