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Food Systems & Development Finance

What is Development Finance?

Development finance is the efforts of local communities to support, encourage and catalyze expansion through public and private investment in physical development, redevelopment and/or business and industry. It is the act of contributing to a project or deal that causes that project or deal to materialize in a manner that benefits the long-term health of the community

Development finance requires programs and solutions to challenges that the local business, industry, real estate and environment creates. As examples, we need unique financing approaches to address environmentally contaminated land and specific solutions to unlocking capital access in underserved markets and industries. Each of the problems that we seek to solve in development require unique and targeted solutions.

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) can be either public or quasi-public/private authorities that provide or otherwise support economic development through various direct and indirect financing programs. DFAs may issue tax-exempt and taxable bonds, provide credit enhancement programs, and offer direct lending, equity investments, or a broad range of access to capital financing mechanisms. DFAs can be formed at the state, county, township, borough or municipal level and often times 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

There is a correlation between how the renewable energy sector emerged and how the food sector is emerging today. Over a decade ago, the clean energy/energy efficiency sector was characterized as risky, volatile, fragmented and poorly defined. Measuring the relative reward versus the reciprocal risk of investing in clean energy/energy efficiency was difficult due to a lack of data, impact metrics and portfolio performance. Fast forward to 2017 and the clean energy/energy efficiency sector has been redefined and is now one of the most sought out investment classes in the development finance space. Through collaboration and the development of risk reducers, metrics and performing investments, the clean energy/energy efficiency space has blossomed into one of the nation’s strongest investment asset class. This did not happen by accident.

Instead of seeing clean energy/energy efficiency as group of fragmented partners, players, projects and potential investors, the sector collaborated to build general consensus and strong performance measurements to prove that an investment in clean energy/energy efficiency is as solid as an investment in traditional projects such as municipal bonds for infrastructure, loans for small businesses, or tax credits for community development. Instead of fighting as individual sectors – renewables, weatherization, generation, technology, markets, institutions, etc. – the industry deliberately coordinated to send a message that in its totality, clean energy/energy efficiency is not only safe but is a reliable and return driven investment opportunity.

Relationship to the Food System

Much of the lessons learned through the emergence of clean energy/energy efficiency finance can be directed at the similar challenges facing food system finance efforts. For starters, like energy, the food system is critical to a healthy and resilient community. Second, the food system is an absolute economic engine, analogous to economic output derived from the energy sector. Today, investors see a mixed and poorly organized system of financing myriad food related endeavors. In its totality, the food system does not perform as an asset class that is easily digested by traditional or institutional investors. Today’s investment in the loosely defined food system is largely focused on philanthropy (grants), subsidy (government), limited investor development (tax credits), and limited lending (high risk loan funds). Little traditional development finance tools, such as bonds, tax increment finance, revolving loan funds, etc. are utilized in this space.

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 the broadly defined food system components outlined above, the next step is to consider how traditional development finance tools can be deployed to define and prove the viability of a food system asset class. This is where the connection between development finance and the food system presents its greatest potential. Although traditionally, these two sectors have not collaborated in any significant fashion, food systems can be brought into coordination with public finance in order to bring capital to the system as a whole.

To date DFAs have not been fully integrated into the healthy food community, despite frequently overlapping goals and methods. Yet opportunities for collaboration with DFAs are increasing, given changing economic environments in which DFAs work, and post-crisis changes to their business models which include expanding products and services in places where private finance is not always readily available.

DFAs across the country – like everyone else – report that access to low-cost, affordable capital is very difficult, and sometimes impossible, for the businesses in their communities to acquire; and that the lack of financing for the real economy hampers local job creation and economic development efforts. Giving DFAs and food system participants a forum to collaborate can open up the possibilities for increasing issuances, unlocking capital, and addressing social goals.

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
  • Ballard Spahr LLP
  • BNY Mellon
  • Bricker & Eckler LLP
  • Bryan Cave LLP
  • Business Oregon
  • CohnReznick
  • FBT Project Finance Advisors LLC
  • Frost Brown Todd, LLC
  • Hawkins Delafield & Wood LLP
  • Ice Miller LLP
  • KeyBanc Capital Markets
  • Kutak Rock LLP
  • MB Financial Bank, NA
  • McCarter & English, LLP
  • McGuireWoods
  • Miles & Stockbridge P.C.
  • NW Financial Group, LLC
  • SB Friedman Development Advisors
  • Squire Patton Boggs
  • Stern Brothers & Co.
  • Stifel Nicolaus
  • U.S. Bank
  • Wells Fargo Securities
  • Wilmington Trust
  • Z. The Bond Buyer
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