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Creating institutions that work

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.
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On November 14-16, we held a “soft” launch of the Nowak Metro Finance Lab at Drexel University with a several-day hands-on working session among a high-level group of reflective U.S. and European practitioners.

Our workshop was organized around a clear thesis. With the public sector at all levels facing enormous political and fiscal constraints, the financing of critical urban investments like infrastructure or workforce housing must increasingly come from an unprecedented collaboration between the public, private and civic sectors and a new set of institutions that enable cities to spur transformative redevelopment, capture value for reinvestment and drive inclusive growth.

This thesis seems fairly obvious. But the urban field tends to focus on either perfecting the diagnostic of city challenges or teasing out policy reforms and programmatic initiatives by higher levels of government to address these challenges. Little focus, if any, is placed on how best to capture and codify proven institutional models — the boring stuff of enabling features, governance structures and financing mechanisms — in the hopes that we can speed their replication and adaptation.

To that end, the workshop focused on deconstructing four exceptional institutions that use public and private assets to drive large scale urban regeneration, particularly around former industrial waterfronts and downtown areas.

Two of the institutional models — Copenhagen’s City & Port and Hamburg’s HafenCity — are European. These two publicly owned/privately managed corporations have used the disposition of publicly owned lands and buildings in ways that spur large scale urban transformation, particularly around historic harbors and downtowns, and use the revenue from such regeneration to fund infrastructure, affordable housing and other societal benefits. The model depends on several factors that could be transferred to U.S. cities: (a) transparency (ensuring that government entities know what they own and the value of their ownership); (b) independence (shielding the disposition of assets from political interference); and (c) institutional innovation (perfecting a publicly owned/professionally managed entity rather than just a public/private transaction).

Two of the institutional models — the Philadelphia Industrial Development Corporation’s transformation of the Philadelphia Navy Yard and Cincinnati’s Center City Development Corporation (“3CDC”) — are American grown.  PIDC is effective because it is a hybrid institution, able to combine public/private oversight and public and private financing tools and credibility in a singular organization. Its regeneration of the Navy Yard as a world-class business campus with the potential for future mixed-use growth has quickly become a best-in-class U.S. example.

Cincinnati’s 3CDC, unlike the other three featured institutions, is a private institution with a board composed almost exclusively of corporate CEOs. It has become a conduit for smart, market-oriented investment by companies, philanthropies and individuals throughout the Cincinnati region to spur development in the long distressed Over-the-Rhine community, located in the literal shadow of downtown.

3CDC has become a go-to-example for corporate, civic and university leaders in the United States who have the means to capitalize privately led development corporations for targeted sub-geographies of their cities. Our workshop featured Erie, PA, which has become an early adapter of the 3CDC model with the establishment of the Erie Downtown Development Corporation.

Two quick takeaways from our time together.

First, urban institutions are generally created or re-purposed due to deep crisis or external stimuli. Copenhagen City & Port emerged in the early 1990s as a response to that city’s economic collapse and resulting fiscal crisis.  Cincinnati’s 3CDC was created after the civil disturbances following a police shooting. By contrast, PIDC was created to enable Philadelphia to carry out the federal urban renewal initiative in a deliberate and strategic way.

Interestingly, the federal Opportunity Zones tax incentive may act as both an external stimulus as well as an identifier of deep crisis. On one hand, realizing the full economic and social impact of the tax incentive will come only if cities act with real agency; a capable and well-resourced institution like PIDC or 3CDC makes that more likely to happen. At the same time, the designation of Opportunity Zones revealed thousands of census tracts that have not seen substantial private investment for decades. Providing capital gains relief will not suddenly steer private capital to low-income neighborhoods; that will only happen if a sophisticated intermediary can find the right blend of debt, subsidy and equity to make hard but worthy deals pencil out.

Second, creating modern institutions will require a new set of market tools and processes that makes the difficult possible. The Opportunity Zone Investment Prospectus is one such tool, helping cities communicate their competitive advantages, trigger local partnerships and identify sound projects that are ready for public, private and civic capital. Perhaps we can also create “on-the-ground” Finance Charrettes to stimulate creative thinking on organizational and financing alternatives and spur real action.

The Financing Charrettes could be modeled on the Urban Land Institute’s successful place-making interventions — which subject a defined part of a city (e.g., downtown) to an intense period of design or planning activity. Imagine if we held such Charrettes in disadvantaged neighborhoods and didn’t leave the room until we sorted out how to use the Opportunity Zones to finance local necessities like high quality grocery stores or workforce housing. And imagine further if we used these Charrettes to construct a new form of community development enterprise with the capacity, capital and cooperative ownership to make inclusive development the norm rather than the exception.

All this is to say: the growth and prosperity of cities requires the evolution of urban institutions that can harness large pools of capital and deploy innovative mechanisms for creating and capturing value. Every city needs to ask the fundamental question: are your institutions oriented towards the future or rooted in the past?