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Targeting Investment in the Arts: Part 4

Topic CDFIs

Artists value the process of remaking space and help reveal the potential for recovery inherent in many urban neighborhoods. In both the redevelopment of discrete buildings and incremental renewal of large districts, they provide entrepreneurial energy to the task of preserving something old through the development of something new.

In Baltimore, Reinvestment Fund is developing a strategy to target investment in the arts to low-income communities in Central Baltimore, where it can catalyze and build on other complementary efforts. For one year, our Creative Placemaking Fellow, Rebecca Chan, was charged with the task of developing best practices for financing the arts in distressed neighborhoods in ways that build community among both new and existing residents. Her case study is Baltimore and what follows is the third in a four-part series on her work. This work is supported by The Kresge and Surdna Foundations’ Catalyzing Culture and Community through CDFIs, or C4, a joint initiative intended to help support and expand CDFIs involvement in creative placemaking.

Part 1: Understanding Baltimore’s art scene. Read it here.

Part 2: Developing a strategy around arts and culture investment. Read it here.

Part 3: Shifting Policies and Program to better support the cultural ecosystem. Read it here.

Part 4: Investing in arts and culture infrastructure

The last post presented five areas in need of policy and programmatic shifts that would potentially strengthen the cultural ecosystem within Baltimore. Not an exhaustive list by any means, the recommendations are targeted at supporting existing arts and culture spaces in their various forms, and, perhaps more importantly, the artists and organizations that are animating these spaces. Unfortunately, policy change can take years to accomplish, and is also subject to changes in administration and other external factors. With an unknown timeline on these policy changes, what immediate strategies can community development practitioners implement to better support cultural ecosystems and align this support with broader neighborhood revitalization efforts?

In this fourth part, we hone in on strategies for investing in the physical spaces–arts and cultural infrastructure–that serve as sites for arts and cultural activity, and ideally build on and complement broader community development efforts in a neighborhood. Like the previous posts, these strategies will be specific to Baltimore, but will have applicability to cities operating in analogous urban environments.

So, how do we go from an individual artist to a multi-million dollar facility dedicated to the arts? What does the arts and culture community development pipeline look like? We have seen aspects of the necessary pieces throughout these posts. Broadly speaking, an arts and culture pipeline can develop according to the following trajectory, each stage increasing in complexity and permanency:

Overall, the sample of artists and cultural organizations I spoke with saw Baltimore’s many vacant properties as an opportunity to invest in permanent space for arts or other culture-based use. This was especially true of community-based organizations working in disinvested neighborhoods and/or where there were opportunities to buy city-owned vacant or underutilized property.As this chart would suggest, a robust community of artists and cultural producers, as well as arts and cultural organizations should be present to precipitate the need for the development of arts-specific space.

What is stopping these groups and individuals from pursuing real estate strategies? The following barriers were identified:

  1. Lack of capital: Real estate development and the ongoing operation of a building is an expensive undertaking. Most of the groups and individuals I spoke with are grant funded or work several jobs to support their art, and lack the savings or regular income to purchase, develop and operate a building. Leadership from organizations cited a lack of sustainable sources for operating funds, and knowing that existing arts and cultural spaces often struggle to make ends meet as a deterrent to starting new arts and cultural spaces
  2. Viewing the real estate development process as too difficult: Many individuals found the real estate development process overly complicated and were unclear about the steps necessary to buy, develop, and operate a building.
  3. Lack of credit: In several instances, individuals identified the difficulty of not having the credit to get a mortgage, sometimes due to the financial implications of being an adjunct professor, being a free-lance artist, or working on commission.
  4. Lack of capacity: Many individuals felt unprepared for the ongoing challenges of renting or owning space, particularly in the area of developing businesses models and sustainable operating budgets.

As demonstrated by this list, there is a huge need for professional development and technical assistance around financial and business planning for artists and arts organizations, much of which needs to take place before a real estate project enters the picture.

How can we tailor the tools available to a CDFI or CDC to position these individuals or groups for success? Here is a set of four questions to ask a prospective borrower when considering an arts and culture infrastructure project, coupled with strategies the savvy CDFI professional can deploy to assist in the process:

1) What existing cultural assets are already in place in your community? An arts infrastructure project should build on a neighborhood’s existing cultural assets. Despite varying MVA ratings and other factors that change from neighborhood to neighborhood, successful projects tend to build on existing neighborhood assets and momentum, whether creative or otherwise, rather than trying to create an arts-based project in an area that lacks the buy-in of the surrounding community and elected officials.

In a similar vein, investments should prioritize the sustainability of existing art and creative spaces. The development of new art space is exciting, but it is best to stabilize existing art spaces, and work towards their sustainability before encouraging new art spaces to materialize in that same neighborhood. Building on existing assets will help ensure that the project is culturally relevant to its surrounding neighborhood.

2) Who is driving the project? Like any other community-based project, getting a sense of the project lead and understanding the relationship between the project partners will be a good indicator of future success. Generally speaking, the impetus for an arts infrastructure project can come from two sources, each requiring a different approach. The first scenario is a project driven by artists or a small arts organization. These groups may have a specific building in mind, or are looking for a space that satisfies their specific needs. Additionally, they often bring a lot of energy and passion to the project, and not a lot of real estate development expertise.

A second scenario is a real estate developer attempting to integrate an arts and culture component into their real estate project, whether in the form of facilities for arts and culture (i.e. a rentable gallery, studio spaces, etc.), or as a part of their tenant mix (i.e. a theatre group renting a storefront in a larger, mixed-use development project). Real estate developers bring technical experience to a project but should be advised that including an arts and culture component in their project can have community impact but will not likely yield a high-profit margin.

A third possible scenario is a large cultural or other anchor institution that wants to develop new or expanded facilities. For example, an art museum that wants to add a new auditorium, a university that wants to develop offsite studio space for its art department, or a commercial music venue that wants to expand its operations to a new city. These groups are often capable of running their own capital campaigns to secure funding for their projects, and can secure the real estate development expertise to do a project, but often run the risk of being viewed as a gentrifying force, or not being responsive to local environments.

3) What are the project’s scale and budget?  Potential arts and culture infrastructure projects often fall into one of two broad groups: those requiring an investment of $500,000 and less, and those requiring investments greater than $500,000.

Small-scale projects (< $500,000)

Small-scale projects, those that cost less than $500,000, are typically going to have smaller footprints and fewer organizations and individuals that will operate out of these spaces. However, as we learned from parts 1 and 2 of this series, these sites often host organizations and individuals that occupy an important niche within their neighborhood, offering activities that caters most intensely to the specific needs of the community that falls within a few block radius of the site.

The strategy for these kinds of projects is comprised of four parts:The smaller size of these community-facing organizations can also provide a challenge when it comes to real estate and other longer-term investments. All too often, individuals or organizations’ staff lack the experience and capacity to take on the additional project management and fundraising that is required of a successful real estate development project. Furthermore, most small- to medium-sized arts and cultural organizations rely on grant funding and operate on lean budgets, resulting in limited financial capacity to devote to real estate investment. These smaller-scale projects and the organizations that drive them are often high risk, and demonstrate an acute need for technical assistance and financial subsidy.

  • Capital campaigns. For nonprofit organizations seeking to develop a building, a successful capital campaign will enable the small organizations and/or individuals to lower the amount of debt incurred over the course of a project and in the years following its completion.
  • Pairing organizations with appropriate technical assistance. Across the board, in interviews with small arts organizations, individual artists, makers, and collectives, the need for technical assistance in real estate project management both during the pre-development and development phases of a project was identified. For many, the pivot from renting space to developing and owning property would also require technical assistance and capacity building in the areas of business planning and/or nonprofit management. An advisor that can also investigate models for cross-subsidizing a project by introducing non-arts or otherwise appropriate market-rate uses can also make a significant impact on the feasibility of a project.
  • Pursuing local, state, and in some cases, federal subsidies or tax incentives where applicable to make financing as manageable as possible for the borrower, such as historic tax credits or facade improvement programs. For projects occurring in Baltimore, these programs could include existing incentives at the state level such as the Small Commercial Tax Credit administered by the Maryland Historical Trust or Neighborhood Business Works financing for projects in Sustainable Communities and at the local level, applying for facade improvements grants or other neighborhood-based programs. Relating back to the need for technical assistance, having a project manager or advisor with extensive knowledge of these programs, experience using them, and the ability to see how an arts project might meet community development goals is absolutely vital in creating this kind of sophisticated financing package.
  • Particularly for small nonprofits pursuing real estate projects, providing planning grants for organizations before, during, and after the project is underway to help organizational leadership to accommodate for the additional strain that developing, owning, and managing property might cause for an organization. Undergoing a planning process would ideally help an organization identify the immediate challenges that will be faced by taking on a real estate project and forecast potential pressure points for the organization (i.e. the need to build board capacity, adjust scheduled programming, engage different audiences etc.).

Large-scale projects ($500,000+)

 With their physically larger footprints, large-scale projects are also more likely to be spearheaded by projects teams that include real estate developers (both for profit and nonprofit) who have partnered with or cater to artists and arts organizations. The impact on the cultural ecology of a city as well as the capital intensive nature of these projects will result in few projects of this size in a financing pipeline.

Development teams managing large-scale projects with significant arts components should also consider cross-subsidizing their projects by mixing nonprofit or small business tenants, those that are a good fit from a mission perspective but perhaps lack a significant financial track record, with larger for-profit or institutional tenants that have a more established credit history. Cross subsidizing a project in this way can be helpful in the underwriting process, and also help stabilize rents at more attainable levels for respective tenants in the long run.Considering these factors, a strategy for large-scale projects, those requiring an investment of more than $500,000, calls for potential financing tools to become more sophisticated and for the projects to be less reliant on intense levels of outside technical assistance to reach completion.  Similar to the strategy for small-scale projects, these projects typically follow the pattern of a capital campaign run in parallel to the pursuit of available financing mechanisms. Financing tools that include low-interest pre-development and development loans will be key, as well as the pursuit of state and federal subsidies, such as New Markets Tax Credits and state and federal historic tax credits where applicable. Also similar to the strategy for smaller-scale projects, having a member of the project team that has the ability to see how an arts project might meet community development goals is a necessary part of a successful project.

4) Who is your project manager? Arts infrastructure projects often require complicated partnerships to successfully execute. It is vital that project leadership includes a project manager who:

  • Has experience using community development financing tools (i.e. New Markets Tax Credits, applicable local, state and/or federal historic tax credits, LIHTC, etc.).
  • Has knowledge of the local philanthropic environment to help find project subsidies in the form of grants if necessary.
  • Can mitigate the (at times opposing) perspectives of artists, developers, government officials and others involved with the development process.
  • Can translate community development jargon and the demands of managing a real estate project to artists and other project partners.
  • Can advocate for artists as an integral part of community development efforts to non-arts partners, government officials, community organizations etc.
  • Has the network to make connections and build symbiotic communities of tenants when necessary.

In conclusion

Over the course of this series we have explored Baltimore’s cultural ecosystem–the individual artists, cultural producers and organizations that are positively influencing their communities, the physical spaces in which they operate, and the policy and development environment that can both help and hinder the overall cultural life of the city. Where do CDFIs fit within this? With their mission driven approach to community development, ability to make investments in physical infrastructure, and expertise in pooling both financial resources and social capital, CDFIs are uniquely poised to play a role in a thriving arts and cultural ecosystem. By building these cross-sector partnerships between artists and cultural producers looking to create change, knowledgeable real estate development practitioners, and CDFI leadership, we can craft strategies around arts infrastructure projects that can be a win for local arts and cultural communities, their surrounding neighborhoods and their cities.

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