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Innovative Funding Models: A New Approach to Urban Blight

Can innovative funding models help communities overcome urban blight? Recent research by the Urban Institute [1] explores how new ways of financing can engage new partners and investors and provide local communities with funding sources to address the immediate and long-term impacts of blighted properties.

Calling for an effective "blight remediation strategy" to be flexible, the researchers said it would need to "include various approaches depending on the individual property and the neighborhood's needs and opportunities."

Apart from preventive strategies and those that infuse money into communities impacted by blight, the research explored an innovative financing and contracting model called Pay for Success (PFS) that could help nonprofits and governments that are working towards eradicating blight in communities.

Under this model, researchers at the Urban Institute found that investors would provide the up-front capital for others, typically nonprofit service providers, to carry out a program, while being repaid—with interest—only if the project achieves certain predefined outcomes.

"These outcomes are selected based on the improvements that governments want to see and should be based on the evidence base for the intervention and population being served," the researchers said.

Making a case for why PFS would be an ideal method to help fund the removal of urban blight, the study said that with vacancy and abandonment, access to up-front capital could be worth "the additional costs for many cities."

The researchers gave an example of Flint, Michigan to prove the point.

Citing a report by Imagine Flint, the researchers said that the city "has funds to pay for only 20% of the cost to rehabilitate almost 20,000 properties.  But because PFS taps into investor capital, it could be used to address some of this capital shortfall, though the government would still need to repay the investors at the end of the project.

While PFS has many benefits, the study said that there were some important considerations that investors and nonprofits should bear in mind before using this model to tackle blight. They include:

The study concluded that PFS was the best solution for cities where there's a mismatch between the area's resources to address the problem of urban blight and finance for developers to carry out strategic demolition and rehabilitation projects.

"PFS allows cities to tap into investor capital to carry out a project to make up for a lack of resources. And because the model focuses on paying for outcomes achieved, cities repay only after the project is successful, which is, in theory, after they have begun to realize the program’s benefits," the researchers concluded. "Although no project is foolproof, PFS is designed to shift the risk of project failure."

Click here [2] to read the full report.