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Food Systems & Development Finance

What is Development Finance?

Development finance is used by local communities to encourage, support, and catalyze the physical development, redevelopment, or expansion of a business or industry. This is done through both public and private investment in projects that benefit the long-term health of a community. Development finance is used to solve challenges experienced by local businesses, industries, real estate markets, and the environment. Many of these issues can be addressed by taking advantage of specific, targeted solutions that are available through development finance. For example, dealing with the problem of environmentally contaminated land generates a unique set of solutions to connect underserved markets and industries with access to capital.

There are dozens of terms within the development finance industry including debt, equity, loans, bonds, credits, liabilities, remediation, guarantees, collateral, credit enhancement, venture/seed capital, angels, short-term, long-term, incentives, and gap financing. Ultimately, development finance aims to establish proactive approaches that leverage public resources to solve the needs of business, industry, developers and investors. To learn more, review CDFA’s extensive curriculum dedicated to understanding development finance.

What is a Development Finance Agency?

Development finance agencies (DFAs) are either public or quasi-public/private authorities that provide support for economic development through various direct and indirect financing programs. DFAs are able to issue tax-exempt and taxable bonds; provide credit enhancement programs; and offer direct lending, equity investments, or many other access to capital financing mechanisms. DFAs can be formed at the state, county, township, borough, or municipal level. Frequently, DFAs have the authority to provide development finance programs across multi-jurisdictional boundaries.To learn more, read CDFA’s DFA industry overview.

How Does Development Finance Relate to the Food System?

The Analogue: Clean Energy/Energy Efficiency & Food Systems Finance

Over a decade ago the clean energy and energy efficiency sectors were characterized as risky, fragmented, and ill-defined. Measuring the reciprocal risk in relation to the relative reward of investing in this sector was difficult due to a lack of data, impact metrics, and portfolio performance. Investors viewed this as a questionable investment and avoided the clean energy sector, contributing to a lack of overall investment in the industry.

Today, the clean energy sector has been redefined as one of the most sought-out investment classes in the development finance spectrum. This industry has blossomed into one of the nation’s strongest investment asset class, as a result of collaboration and the development of risk reducers, metrics and performing investments.

So, what changed?

Instead of continuing as a group of fragmented partners, players, projects, and potential investors, the sector united to build general consensus and strong performance measurements. This action demonstrated that an investment in clean energy is as lucrative an investment as other traditional projects, such as municipal bonds for infrastructure, loans for small businesses, or tax credits for community development. Instead of acting as isolated sectors – renewables, weatherization, generation, technology, markets, institutions, etc. – the industry came together and proved that clean energy offers safe, reliable, and return-driven investment opportunities.

Relationship to the Food System

Lessons learned through the emergence of clean energy finance can be applied to the challenges currently facing food system finance efforts. As with the energy sector, the food system is critical to a healthy, resilient community and it is also an economic engine, comparable to the economic output of the energy sector.

Investors perceive the food system as loosely defined and poorly organized, encompassing a multitude of disconnected food-related endeavors. As a result, traditional and institutional investors have a difficult time financing the food system and therefore it is not currently viewed as an asset class. Today’s existing investment in the food system is focused on philanthropic grants, government subsidies, investor tax credits, and limited lending with high-risk loan funds. Traditional development finance tools, such as bonds, tax increment finance, and revolving loan funds, are seldom used in food system finance despite the opportunity to do so.

Through research, and for the overarching goal of creating a broad food asset class, six distinct and highly important areas of financing within the food system have been identified. In order to understand this perspective, individual actors within the food system will need to take a step back and look at the whole of the system.
Social Enterprise (addressing scarcity) – Within the food system, an organization or initiative that works to support social objectives such as increasing access to healthy affordable food, sustainable food, or other socially beneficial food objectives.

Agriculture (rural & urban) – Within the food system, all of the steps and systems which include the cultivation and harvesting of primary consumable food products (plants, animals and their byproducts). The acquisition and management of agricultural land, research & development, production, support, operations, etc. regardless of physical location or scale are part of the agricultural sector.

Entrepreneurs – Individuals who create and operate businesses in the food system, such as creating or expanding capacity in culinary, technology, distribution, agriculture or processing businesses, in order to meet market needs and gain profits from the business.

Industry – In the food system, industry is the broad range of actors who contribute to/facilitate the process of food production and distribution to consumers. This may include food retailers, food service, processors, packagers, distributors, producers of related inputs, and more.

Institutional Buyers – Public or private institutions, such as schools, universities, hospitals, prisons, etc., that purchase (often wholesale), prepare, and serve large amounts of food to meet internal demand within the food system.

Infrastructure – Within the food system, infrastructure is the physical facilities and organizational, technological, and relationship networks that allow for the production, processing, storage, distribution, transportation, transfer, and retail of food.

* Research assistance provided by The Ohio State University, Knowlton School, City & Regional Planning 5890 course of spring 2017.

Connecting Development Finance & the Food System

With these broad food system components outlined, it is possible to explore how traditional development finance tools can be employed to prove the viability of a food system asset class. This is where development finance in connection with the food system presents groundbreaking potential.

DFAs target specific social and environmental benefits on a greater scale than the work of local level food systems efforts and they share many goals and methods with the food community. Though DFAs have not been fully integrated into the food community, opportunities for collaboration are increasing because of changing economic environments in which DFAs succeed by expanding products and services in places where private finance is not always readily available.

There is great potential for a broadly defined food system to become a desired and performance driven asset class. Through collaboration between food system participants and development finance agencies, new investments can be catalyzed that will drive the creation of this asset class. The opportunity to link food and development finance has vast potential, including using traditional financing tools such as bonds for non-profits, food hubs, and farm expansions, as well as tax increment finance for food industry industrial parks, neighborhood revitalization, or early stage financing models for entrepreneurs and food technology based businesses.

Listed are some examples of how development finance tools are already being used to finance food system development:

Bedrock Tools

  • Industrial Development Bonds – Thousands of industrial development bonds (IDBs) have been issued for small food industry related manufacturers over the past several decades. IDBs are authorized in every state and provided low-costs tax-exempt financing for small to mid-sized manufacturers. The California Enterprise Development Authority (CEDA) uses industrial development bonds to finance food processers and wineries

  • 501(c)3 Bonds – Development finance agencies regularly issue bonds on behalf of 501(c)3s for infrastructure related to their operations. Hospitals, YMCAs, museums, cultural centers and community centers prime examples. A handful of 501(C)3 bonds have been issued for food related operations such as community kitchens, food pantries and other social enterprise related food access efforts.

  • Aggie Bonds – Over 20 states operate First Time Farmer Aggie Bond programs which provided tax-exempt financing to support investments in new and beginning farmers. The program has been in existence for decades and is heavily used in agriculture driven states like Minnesota, Iowa, Montana, South Dakota, North Dakota and Kentucky.

Targeted Tools

  • Tax Increment Finance – A dozen plus tax increment finance (TIF) districts have been established to help finance food access related projects such as grocery stores in food deserts and food/entertainment driven economic development projects. In addition, a number of communities have used TIF to fund industrial parks that house food related enterprises. In Cleveland, TIF funds have been used to fund a mixed-use development that included a local grocery store.

  • Special Assessment – Nearly every state has one or more special assessment tool in place to facilitate development. Several communities have used this tool to drive targeted food/entertainment district development. In Ohio, agriculture districts are used to preserve valuable farm land.

Investment Tools

  • Tax Credits – Hundreds of projects with a food system component have been financed using the New Markets Tax Credits program. In addition, a few noteworthy projects have utilized Historic Tax Credits to revitalize old buildings into restaurants and grocery stores. NMTCs have been used to fund culinary training buildings, healthy food hubs, and grocery stores.

Access to Capital Tools

  • Revolving Loan Funds – Development finance agencies operate thousands of revolving loan funds (RLFs) nationwide covering a wide range of qualified borrowers. However, very few exist that specifically address food entrepreneurs and small businesses. The shining examples of RLFs dedicated to food systems, such as the Colorado Fresh Food Financing Fund, Michigan Good Food Fund and the California FreshWorks Fund have all shown great promise as a driver of the lending component of creating a food system asset class.

Getting Engaged

CDFA is actively looking for partners, stakeholders and collaborators to continue this cutting-edge research. Over the next several years we plan to conduct pilot programs between DFAs and local foundations interested in seeding this potential. In addition, new research, case studies and data will continue to be populated as this market expands. Contact CDFA to get engaged.

CDFA National Sponsors

  • Alaska Industrial Development and Export Authority
  • Baker Tilly Virchow Krause
  • BNY Mellon
  • Bricker & Eckler LLP
  • Bryan Cave Leighton Paisner LLP
  • Business Oregon
  • CohnReznick
  • FBT Project Finance Advisors LLC
  • Fifth Third Bank
  • Frost Brown Todd, LLC
  • Hawkins Delafield & Wood LLP
  • Ice Miller LLP
  • KeyBanc Capital Markets
  • Kutak Rock LLP
  • McCarter & English, LLP
  • McGuireWoods
  • MuniCap, Inc.
  • NW Financial Group, LLC
  • SB Friedman Development Advisors
  • Stern Brothers
  • Stifel Nicolaus
  • U.S. Bank
  • Wells Fargo Securities
  • Wilmington Trust
  • Z. The Bond Buyer
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