How CDFIs Can Help Raise Opportunity Zone Capital, with Equity Squared

What is a Community Development Financial Institution, or CDFI? And how can Opportunity Zone fund sponsors, real estate developers, and QOZB business owners leverage their local CDFIs as a capital raising resource?

Ruben Alonso is president of AltCap, a CDFI headquartered in Kansas City. Emily Lecuyer is managing director of Equity², an affiliate of AltCap.

Click the play button below to listen to my conversation with Ruben and Emily.

Episode Highlights

  • What a Community Development Financial Institution does.
  • How Opportunity Zones are a great tool to opening the door to impact investors.
  • How the track record of CDFIs can help Opportunity Zones reach their full potential.
  • How Opportunity Zone fund sponsors, real estate developers, and QOZB business owners can leverage their local CDFIs as a capital raising resource.
  • Legal compliance and fund administration support that Equity² can supply to other CDFIs.
  • The biggest challenges regarding education and community distrust around Opportunity Zones.
  • The biggest takeaways from Emily’s meetings with Senator Scott’s and Senator Booker’s offices.

Featured on This Episode

Industry Spotlight: Equity²

Equity Squared

Headquartered in Kansas City and an affiliate of local CDFI AltCap, Equity² is an impact investment firm committed to deploying capital in inclusive and equitable ways. Equity² leverages AltCap’s experience and track record in seeking to deploy equity capital to increase economic equity and community benefits in designated Opportunity Zones.

Learn More About AltCap and Equity²

About the Opportunity Zones Podcast

Hosted by founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. And today I’m joined by Ruben Alonso and Emily Lecuyer. Ruben is president of AltCap, a Community Development Financial Institution (CDFI) headquartered in Kansas City, Missouri. And Emily is managing director of Equity Squared, a mission-driven impact investment firm, also headquartered in Kansas City. Ruben and Emily, welcome to the show.

Ruben: Thank you.

Emily: Thank you.

Jimmy: Thanks for being here with me today. So, today’s episode, I wanna focus on the role that CDFIs or community development financial institutions can play in helping Opportunity Zones reach their full potential. But first, Ruben I’ll pose this question to you for our listeners out there who may not know and for myself included what is a CDFI exactly?

Ruben: Yeah, CDFI like you said stands for community development financial institutions and they…CDFIs private-sector financial institutions with a mission purpose to increase the deployment of capital to what are considered low income or moderate…or low to moderate-income communities. CDFIs come in various forms, they could be a bank, a credit union, a loan fund, which is what AltCap is, we’re 501(c)(4) loan fund, but they’re also venture capital funds as well. So, we at AltCap primarily focus on bringing capital to underserved communities and small businesses, providing them a very flexible patient debt financing, to support investments, development of the business, but also real estate financing for real estate developers and real estate development projects, and even some nonprofits.

Jimmy: And there’s quite a bit of overlap between the new markets tax credit program and the opportunity zones incentive. And you can actually, in some cases, combine the two or kind of stack those two incentives. Is that right?

Ruben: Yeah, I mean, they’re both very place-based incentives and tools to really stimulate investment in again, low income or economically distressed communities. New Markets Tax Credits — which is a program that we use at AltCap to bring capital to communities that we serve — is more of a debt financing product and most CDFIs work with kind of debt financing tools to support investments in communities, whereas opportunity zones is an equity-based financing tool.

Jimmy: Right. So, I kind of understand how you bring the debt financing in on the NMTC side, but on the opportunity zone side how are you achieving that? How are you bringing in equity to these opportunity zone funds?

Ruben: Yeah. Well, I’ll start off by saying that we created Equity Squared to do just that and I’ll let Emily kind of talk about how she’s using the opportunity zone tool to bring equity financing to the community that we’re looking to stimulate investment in.

Emily: Sure. Yeah. Well, definitely building on AltCap success helps since we are a new firm we launched in July of this year. And so, really having the suite of services that allows us to expand what AltCap has been doing, and otherwise overlooked markets is super helpful to us. And opportunity zones are a great tool for opening the door to impact investors, right? A lot of people are interested in them as a tax incentive, but maybe they’re not as familiar with CDFIs or for the work that they’ve historically been doing and impact investing in general. So, opportunity zones are a really good way to start those conversations.

So, what we’re finding is that a lot of potential opportunity zones investors that we’re talking to are very interested in, like Ruben said, a place-based investment. So, these are people who perhaps have had successful businesses of their own and are interested in now that they don’t…now that they’ve sold their business or they retired or doing something else, they’re interested in still investing in a community where they’ve seen the power of job creation. So, operating business is a huge piece of our strategy. And real estate is also a component but on the operating business side, opportunity zones really speak to a place-based legacy building mindset.

And so, by targeting impact investors who care about those things, we’re really able to open the door on conversations about what we want our communities to look like and what thoughtful investment looks like. And by working with other community organizations because of AltCap’s long-standing role in our community, we have a great network with neighborhood leaders and civic organization, elected officials and really just small business owners and overlooked communities.

So, really kind of pulling all those different pieces together allows us to have a very real conversation with investors about what their dollars are doing on the ground. And it removes the abstract piece of this, it makes it very tangible when we’re talking about investing in people and what that means and their daily lives.

Jimmy: Good. So, I wanna back up a minute and ask the big overarching question that I kind of want to focus on during the course of this episode, which is and you’ve hinted at this a little bit, both of you, but what role can CDFIs play in really helping opportunities zones reach their full potential?

Ruben: I’ll start by answering that. AltCap for the last 10 years we’ve been actively identifying opportunities to bring capital to the communities or businesses in what are essentially…have been opportunities zones, they just didn’t…weren’t officially called opportunity zones. And I mentioned the new markets tax credit program, that’s a federal tax credit program that we’ve started out using to finance businesses, finance real estate development projects.

So, that 10-year history, that 10-year track record of identifying these opportunities, finding businesses, and finding ways to finance businesses really, I feel gives us a strong track record, strong expertise, to essentially continue to find ways, find businesses, find projects that we can bring equity financing to support those investments. So, AltCap as a CDFI, with New Markets Tax Credits we financed close to $250 million in investments in Kansas City, Missouri. These are all job-creating businesses, catalytic real estate development projects, even some nonprofits that provide critical goods and services to the communities that we serve.

So, that’s just a great kind of foundation to start with and to use to figure out, okay how can equity financing increase our ability to bring capital or to what can make investments in low-income communities, economically distressed communities. And do it in a way that we haven’t been able to do with New Markets Tax Credits or any of our other kind of CDFI lending activities.

Emily: Yeah, and I will build on that by just highlighting that AltCap track record works in both directions for Equity Squared, right? So, on one hand, it lends credibility to investors who are familiar with AltCap or can look at their $250 million portfolio and see the success of those projects with less than 1% default rates and feel confident in deploying capital. But on the other hand, it also really worked in building trust with small business owners, right? So, for the businesses that I’m talking to who are making up the majority of our pipeline they’ve worked with AltCap before and they know where our heart is, and they can trust us. So, I think that really, on both sides of the equation, AltCap’s track record or CDFI’s track record could be beneficial in this way.

Ruben: That’s a great point that Emily makes, because for her company that’s just starting out, we represent a really valuable pipeline of potential projects or businesses that she can immediately consider and we can find ways to bring her into potential transactions where debt financing could be a part of the overall capital stack. But also equity financing through Equity Squared could be just as critical and just as valuable in terms of closing those financing gaps or providing that patient capital to that business that’s looking to make some sort of significant CapEx investment in their business or some sort of, going through some sort of growth stage where they need that kind of patient capital.

Emily: Well, and in terms of being mission-driven or not a profit-maximizing firm, just an overall sharing of physical as well as intangible assets is super helpful, right? So, I don’t need to buy a printer and find my own office space, I can put my resources towards impact because I have AltCap and all those associated resources.

Jimmy: Right. So, AltCap sounds like, I think what you’re getting at is that they have already laid a lot of this infrastructure in place and they already have the relationships with a lot of the community leaders that are going to drive these impactful investments. Correct me if I’m wrong, I believe there are approximately 1,000 CDFIs nationwide. Do you suspect that other CDFIs are getting into the opportunity zone space in similar fashion?

Emily: Well, we were at the Opportunity Finance Network national conference two weeks ago in Washington DC. It’s a great organization, and there were pretty much all the CDFIs were in attendance. Ruben, correct me if I’m wrong. But there were a lot of CDFIs in attendance. We spoke on an opportunity zone panel. There were two other CDFIs represented on the panel. And quite a bit of interest in what we are talking about. We had really good attendance, despite being on the very last day at the very last session of the three-day conference. And so, I think there’s certainly interest but the fact that there were only three CDFIs speaking on this panel out of that huge number in attendance, really, I think gets at how this is kind of a new model and what we’re doing is pretty unusual in the space.

Jimmy: So, talk to me about what you’re doing exactly and why it’s unusual. Have the two of you partnered to set up a qualified opportunity fund and what does that look like exactly? What is the structure of that?

Emily: Sure. So, we are about to launch and structurally, Equity Squared is a subsidiary of AltCap but more importantly, AltCap can invest alongside or any CDFI, for example, with new markets tax credits could invest alongside QOF and a QOZB. And that’s a really productive structure, especially if they’re already…those entities are already mission-aligned and sharing other resources.

Ruben: Yeah, I think there’s definitely interest for AltCap to potentially invest in some funds that Equity Squared would create. I mean, surely we’re trying to leverage the relationship that AltCap has with investors to bring them into these opportunities with Equity Squared, and AltCap — we’ve been increasingly looking to source capital from various investors. So, we’ve got some relationships that we’re starting to develop that can easily be leveraged to support a fund that Equity Squared would be creating to invest in businesses or real estate projects.

Jimmy: Right. Do you suppose this is something that opportunity zone fund sponsors, or real estate developers, or business owners of QOZBs may be able to tap into as a resource, these local CDFIs, CDFIs that are local to them in their communities in their cities and counties? Is that something that you would advise people potentially looking for capital possibly turning to their local CDFI?

Emily: Wholeheartedly.

Ruben: Yeah, I think so. I mean, there’s a certain level of trust here especially how the incentive has been kind of rolled out with not all the guidance and kind of everything being kind of tightened up from I think just kind of a regulatory framework. But so I think there’s a significant amount of trust and that’s something that we wanted to tap into, is kind of that local market, not just from identifying investors and sourcing investment capital, but I think it just plays into, again, our local expertise, local understanding of these markets, that are essentially now designated as opportunity zones. Really understanding the different opportunities that exist, whether it’s a business or a real estate investment.

Emily: And building on that, I think CDFIs and they’re all very different, but overwhelmingly CDFIs have underwriting criteria that really favors looking at a wide variety of deals that maybe traditional lending institutions wouldn’t look at. And so, for that reason, I think any QOZB would benefit from reaching out to their local CDFI.

Jimmy: No, that’s a good point. You know, I’ve heard that oftentimes, the traditional, at least in real estate and possibly in business as well, I think the traditional financing model kind of the rules kind of…the rules kind of get thrown out the window, so to speak, when you put a business or a real estate project in an economically distressed community, a lot of the numbers don’t oftentimes work. So, possibly, that’s where the CDFI can fill in that gap. Is that fair to say?

Ruben: Yeah, I mean, we are very comfortable and used to and have a track record of structuring very complex financing structures and capital stacks with different forms of capital. And I think that all will serve as well in terms of now trying to expand our financing options and capabilities to now include equity financing through the opportunities or incentive.

Jimmy: Excellent. Emily, turn to you now for a moment. Part of what Equity Squared does is to fill in that equity financing gap to some of these opportunity zone projects and other investments. What other services do you provide? We were speaking earlier about how you provide fund administration and compliance services, can you talk a little bit about that and who you’re potentially servicing?

Emily: Sure. Well, so because we were formed as an affiliate of a CDFI we were very thoughtful in how we structured our services to complement what AltCap is already doing. So, that makes it really easy for us to just provide essentially some back-office support to other CDFIs looking to do something similar.

So, your audience knows very well that in the opportunity zone space, all of the portfolio reporting and periodic diligence to ensure opportunity zone qualifications are met, and all of that ongoing standard compliance and record-keeping that could be really burdensome to a lot of CDFIs. And so, because we already have all of our backoffice structures in place in terms of legal and compliance, it’s really easy for us to just step in and provide fund administration.

So, if the CDFI, for example, had projects and they wanted to do something in the opportunity zone space and launch a fund, they wouldn’t have to reinvent the wheel. We could step in and provide that piece, they could match local investors and we could help them with some of that outreach, but really just take care of all of that not sexy back-office stuff that can get really expensive really quickly. So, we do that along with the funds that we launch, which are both single and multi-asset funds and have a variety of structures.

Jimmy: Great. And to both of you now I’ll pose this question, what have been some of your biggest challenges in the opportunity zone space so far?

Emily: I’ll start, I think there is some ambiguity but there’s also a lot more perceived ambiguity around the legislation than actual. So, I think getting investors who see the benefits of the tax incentives but maybe are waiting for some final guidance and finalized regulations to come out. I think that ambiguity has not served us well as a market. So, just addressing that and being very transparent with potential investors and in how we see that and really valuing the input from our legal and compliance teams and relying heavily on them. And another piece that’s been interesting is when we were in DC at that conference we met with Senator Tim Scott and Cory Booker’s offices to talk about this. And so now, like, having conversations with the folks who drafted the legislation, it’s super helpful to run questions by them. And so, I think that that actually has addressed a lot of those concerns.

Jimmy: And Ruben, what about you? What have been some of the biggest challenges that you faced so far in this space?

Ruben: Yeah, I think just the way the legislation, the tool has been kind of rolled out, just not having that immediate clarity with some of the aspects of incentive. I think we’re still in a good position. I think really just kind of differentiating Equity Squared and what we’re offering with the opportunity zone but also just from an impact investment perspective to potential investors is…to me is the biggest challenge. But I think there’s just a certain learning curve and certain education and that’s just required with presenting this type of new investment options to potential investors here in our market.

Jimmy: Yeah, definitely been a learning curve. Go ahead, Emily.

Emily: If I just may add one other kind of piece of this that Ruben and I were actually just speaking about earlier today. You know, I think that there’s because of how the legislation was maybe rolled out or some of the initial projects that we’re seeing in the market, which were perhaps in the pipeline already, and they’re not prioritizing impact, and this commentary around a lack of guardrails on the legislation, there’s a lot of community distrust around opportunity zones. And so, in some ways it’s seen as kind of a cure for everything, as opposed to one more arrow in the quiver and one more, just incentive. But really using opportunity zone funds and not being associated with perhaps some of the more extractive investments is something that we’re working hard on in terms of working with communities where we’re investing.

Jimmy: No, I think you’re right on about that. This is just one more tool in the toolbox, one more arrow in the quiver as you say, it’s not the be-all-end-all solution to all of our nation’s problems, right? Emily, I wanna hear a little bit more about your meetings with Senator Scott’s and Senator Booker’s offices. What were your big takeaways from the meeting with those folks?

Emily: Yeah. So, that was my first time in an advocacy role on Capitol Hill. So, I really didn’t know what to expect and, surprise, surprise, people are just people, right? We had a very honest conversation about some of the challenges we’re seeing and they were very responsive. And they wanted to know, how we were actually implementing this and what our hurdles were. So, they were both very real conversations and I left very impressed by their legislative aides and feeling like they really wanna get this right. You know? They wanna do good with the legislation and be thoughtful with it.

So, that was great, and I was there with representatives from other CDFIs in the senator’s districts. So, it was interesting because they were there advocating for CDFIs and various allocations. But I was there advocating for CDFIs as an avenue for really implementing this opportunity zone legislation to its full potential. So, it was interesting to hear what CDFIs and their jurisdictions were doing as well.

Jimmy: Yeah, that’s great. That must have been…that’s interesting to hear that they were so responsive. And I hope they do continue to refine this incentive so it ends up working out. It’s It’s good that they have open ears and they’re listening to folks like you and others around the country who are actually putting this into practice. It’s one thing to write a sweeping tax policy bill, it’s another thing to actually see it in action and it can take some work to iron out all the kinks. So, we’re still in the early days here as I like to say.

Emily: Yeah, they both just made it really clear that getting the legislation passed was a great first step but that’s not the end, to your point. That’s exactly what they articulated.

Jimmy: Yes, absolutely I couldn’t agree more. Well, Ruben and Emily, this has been great. Thanks for coming on the show today. I really appreciate your time and thanks for sharing your expertise and your experiences with us. Before we go, where can our listeners go to learn more about AltCap and Equity Squared?

Ruben: Yeah, AltCap, And then Equity Squared website is, Emily?

Emily: And that’s also our Twitter handle if you wanna follow us there.

Jimmy: Excellent. All right. Well, for our listeners out there I’ll have show notes on the Opportunity Zones database website for today’s episode. You can find those show notes at, and you’ll find links to all of the resources that Emily, Ruben and I discussed on today’s show. Emily and Ruben again, thank you.

Emily: Thank you.

Ruben: Thanks for having us.