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Ninth District

January 1987


About This Issue
In the September 1986 issue of Cornmunity, we introduced the concept of
the bank- or holding company-owned
community development corporation
(CDC). In this issue, we take a closer
look at the CDC, and in particular,
at two successful CDCs.
The CDC is notable for its adaptabil
ity to a variety of community needs.
Its scale can also vary according to
community needs and resources. In
the following articles we examine
some of the choices that CDC origi
nators must make when they set out
to design a development corporation.

How is a Bank Holding
Company CDC Established?
To form a CDC, a bank holding
company applies to its Federal
Reserve Bank using the nonbank
ing (FR Y-4) bank holding cornpany application form. The processing period for such filing is
normally 30 days or less. (See
Processing Flow Chart on page 4.)
Prefiling conferences are often
desirable to ensure that the appli
cation is informationally complete.
The application usually contains
the following information:
. A complete description of the
proposed activity.
a The major objectives of the proposed CDC and how it will meet
these objections.
. The amount of the capitalization
and the expected funding needs
of the CDC.
I A profile of the CDC’s immediate
target area (neighborhood) as
well as the general area of its proposed operation. Most CDCs have
Continued on page 4

Volume 2, Number 1

Community Development Corporations:
Designing aCDC
A Public Purpose

Bank-owned and bank holding company-owned community development
corporations are characterized by a high degree of flexibility that enables
the parent organization to tailor a CDC. to meet a particular need. This
flexibility makes the CDC difficult to describe in generic terms.
Nevertheless, CDCs do share some common characteristics, and there are
questions that nearly everyone contemplating formation of a CDC will
have to answer.
The one thing that all CDCs have in common is a public purpose. This is
central to the CDC’s existence and must be stressed. The flexibility and
powers granted to a CDC are premised on the understanding that they
will be used to benefit the public. The Federal Reserve, for example,
defines this public benefit to mean that the activities of the CDC are
expected to benefit directly low- and moderate-income groups. Since the
needs of a particular community or group of ppie will vary widely, the
CDC is designed to give the parent organization an opportunity to exercise
greater initiative and creativity in meeting unique community investment
needs. Experience shows that the final structure of the CDC derives
largely from the nature of the project to be undertaken.
Designing Program Focus

The first task, then, is to define the project as completely as possible under
given circumstances. This will include identifying a target group, program, or geographic area and the specific needs to be addressed. There
may be a community need for housing development, for example. It might
be for the elderly, for families or for people with a special need, such as
the homeless. Or it might be for central city housing.
Charlotte, North Carolina’s North Carolina National Bank CDC (NCNB
CDC) developed housing to rebuild residential areas near the central city.
Minneapolis-based First Bank System CDC (FBS CDC) focuses on programs and has developed housing for low-income students, for families,
and for very low-income women with children.
The need may be for commercial development. FBS CDC’s first venture
was to develop a small shopping center in a minority neighborhood. In
Charlotte, NCNB CDC now sees a need for development combining hous
ing, office and retail, and is beginning its first such mixed-use project.
Designing a Structure

Once the project is identified and defined, the parent organization must
consider what structure will best enable it to manage and complete that
project. The CDC will probably be set up as either a national bank subsid
iary or a bank holding company subsidiary. In the former case, originat
ors will work with the Comptroller of the Currency (0CC); in the latter,
with the Federal Reserve (Fed). In some states, state-chartered banks can
own or invest in CDCs.
Continued on page 4
Produced by the Federal Reserve Bank of Minneapolis

First Bank System Community Development Corporation
FBS CDC: An Outline
First Bank System Community
Development Corporation (FBS
CDC) is a for profit, nonbanking
subsidiary of First Bank System,
a six-state regional bank holding
company based in Minneapolis,
Minnesota. FBS CDC is governed
by a board of directors with one
standing committee, an investment
committee. Holding company
senior management approves the
CDC budget.

The CDC is managed by FBS CDC
Vice President Charles E. (Chuck)
Riesenberg. Chuck receives support
from the urban development staffs
at First Bank Minneapolis and
First Bank St. Paul, as well as from
special advisers in the holding com
pany. FBS CDC’s original funding
was in the form of an equity investment by the holding company.
FBS CDC’s purpose is to invest
in projects designed primarily
to promote community welfare
through housing and commercial
rehabilitation in low-income areas.
The CDC always works with a nonprofit partner who represents the
project’s beneficiaries, and CDC
involvement must be at the invita
tion of the nonprofit agency. While
many proposals come directly from
the nonprofit sector, others origi
nate with both CDC and affiliate
bank staff. In addition, CDC offi
cers review local government priorities for areas of concern that coincide with CDC priorities. In each
case, the CDC looks for projects in
the initiation stage.
The CDC’s investment committee
examines each potential project for
consistency with community and
CDC goals and policy. If these are
consistent, Chuck does a basic feasi
bility study. This may take up to six
months and involves determining
community social and political
support as well as financial feasi
bility. If the result is positive, the
investment committee recommends
the project to the board of directors,
which must approve each project.
FBS CDC does two or three small,
community-based projects a year.
In a given year, the CDC will re

view perhaps 10 to 20 projects. The
CDC works with each from the
beginning. Perhaps two will prove
financially feasible for CDC
investment. About one in six
proposals examined is financially
feasible. However, in many cases
where a CDC investment is not
feasible, the CDC acts as technical
adviser and resource.
Although the CDC can do either
housing or commercial
development, its main concern is
housing. Each year, CDC management sets housing needs priorities
and selects a program focus. In
1984 and 1985, the focus was
(Above right) FBS CDC Vice President C’huek Riesenbery talks about the successful
partnership with the St. Paul YWCA to rehab a 20-unit apartment building
(below) for women in transition.


women’s housing needs related to
domestic violence. In 1986 and
1987, the focus is homelessness. The
CDC proposes to acquire and rehab
one single room occupancy housing
project in each Minneapolis, St.
Paul and Duluth. Chuck has studied the feasibility of several projects and a Duluth project shows
particular promise.
When FBS CDC does invest in a
project, it limits its role to making
equity investments and/or acting
as developer. Any necessary debt
financing is handled by combining
loans from public and private
Chuck believes that the need and
market for the CDC development

approach is great and probably
growing, in particular because of
cuts in certain federal programs.
The CDC is often instrumental in
achieving a variety of community
initiatives. Moreover, it can be an
important way for a bank or
holding company to build relationships within the community. It also
offers to banking organizations a
unique opportunity to act as a
developer by initiating projects and
making equity investments.
For more information, contact:
Charles E. (Chuck) Riesenberg
Vice President
P.O. Box 522
Minneapolis, MN 55480

A Case Study
By the mid 1970s, Charlotte, North
Carolina’s central city had seen
serious reversals. Few residential
structures remained in adjacent
urban redevelopment areas. There
had been an increase in crime. But
the city, a group of banks, and interested citizens were committed to
bringing back the “uptown.” Their
plan was to create a vital, 24-hour a
day city by rebuilding the Fourth
Ward, a nearly depopulated residen
tial area adjacent to uptown, and
encouraging people to move back to
the central city.

and consortium weren’t able to interest commercial developers in the
project, one of the banks, NCNB,
stepped in and took the lead. Working with the Comptroller of the
Currency (0CC), NCNB established
a national bank subsidiary CDC
whose first venture was to rehabil
itate and rebuild Fourth Ward
CDCs must have a public purpose,
and the Fourth Ward project met
this standard. As it has in all its

Although local banks and the
city had devised a below-market
mortgage loan program, development was slow in starting. Then
Dennis Rash, currently president of
North Carolina National Bank
CDC, (NCNB CDC) saw an Amen
can Banken article describing a
west coast CDC. The notion of an
NCNB development corporation
was born.

This newsletter is designed primarily to assist
financial institutions in the Ninth Federal Reserve
District in developing credative responses to consumer issues and to the goals of the Community
Reinvestment Act.
COMMUNiTY is produced under the direction of
Richard K. Einan, assistant vice president and
community affairs officer, and Carolyn P. Line,
community affairs coordinator.
COMMUNITY is available without charge from the
Office of Public Information, Federal Reserve Bank
of Minneapolis, Minneapolis, Minnesota 55480
(telephone 612-340-2048).
Articles may be reprinted if the source is credited
and the Federal Reserve Bank of Minneapolis is
provided with copies of reprints.

The decision to establish a bank
subsidiary (under 0CC rules) and
not a holding company subsidiary
(under Federal Reserve rules) was
made in part because at the time,
the bank was more highly capitalized than the holding company.
Since permissible investment is
related to capital and surplus (the
0CC has specific maximums; the
Fed considers investment levels
case by case), an NCNB subsidiary
could be capitalized at a level more
in accordance with projected needs
than could a holding company
Equally important, the particular
managerial resources necessary to
operate a CDC were concentrated
in the bank. Moreover, the origi
nators felt that although 0CC and
Federal Reserve guidelines for
CDCs differ only slightly, 0CC
guidelineswere more coincident
with their goals.

Private Developers
Weren’t Interested

As part of Charlotte’s plan to bring
housing back to the Fourth Ward,
a consortium of banks made a loan
to the city for recycling as belowmarket mortgage loans available
for people who would build or re
locate in the area. When the city

rection, and its new mixed-use
development project adjacent to the
Fourth Ward is an example of re
sponding to community needs.

Dennis Rash, president, North
Carolina National Bank CDC.

subsequent projects, NCNB CDC
worked within a designated poverty
area (as defined by North Carolina
law). To further ensure that its
project would benefit the public
good, management also chose to become involved where local government had an overall development
plan. This, too, has become a standard procedure for NCNB CDC. It
ensures that the CDC will be part
of locally approved development.
The CDC Focused on Housing

Initially, because the aim of the
Fourth Ward project was to bring
residential development back to the
central city, NCNB CDC became involved strictly with housing. It has
continued to work in housing devel
opment as it has expanded into
other cities. But the CDC is geared
to having the needs of the commu
nity help determine its program di-

After discussions with the 0CC,
NCNB elected to form a nonprofit
subsidiary. The 0CC requires
that a CDC’s board of directors
include neighborhood representa
tion. Since there was, in effect, no
Fourth Ward neighborhood, the
0CC permitted board representa
tion by people “associated with” the
area. One third of the board must
be “associated with,” and 51 percent must be from outside the bank.
Risks and Rewards

Dennis Rash says that the original
decision to form a CDC was risky.
The bank CDC movement was new,
and there was only a scant track
record. Even though there are now
more CDCs that have proven suc
cessful, he believes that operating a
CDC is fundamentally an entrepre
neurial venture that some bankers
might find uncomfortable. And he
cautions that banks must be aware
of and willing to take the risks and
deal with the difficulties that they
will face. “If you get involved in
a designated redevelopment area,
for example, you know that you’re
Continued on page 4

NCNB CDC continuedfrom page 3

dealing with problems that haven’t
proved easily solvable,” he
But Dennis believes that the bank
CDC is a potentially strong force,
and there have been notable suc
cesses. For example, since it broke
ground on its first project in 1979,
NCNB CDC has done $30 million of
development both on its own and in
joint ventures. Their involvement
has spurred an additional $54 mu
lion of housing development and
has increased the value of fringe
commercial areas, even though no
actual development has taken place
there. By 1984, assessed property
values in the Fourth Ward core
area had gone up 40.72 times.

Establishing a BHC CDC continuedfrom page 1

found the easiest way to succeed
is by starting small—for exampie, by focusing on a neighborhood. However, the applicant
should indicate if it intends to
function in larger geographic
areas such as a city, county, or

S A brief discussion of any other

agency or community activity in
the target area.
S A description of specific projects
B A description of how and by
whom the CDC would be

Processing Flow Chart



Draft Received
10 Buoineoo Days
Draft Returned
Formal Application
10 Business Days
AddI Information

Some Principles Have Emerged

Experience has led Dennis to
identify principles that he believes
are applicable to all areas of the
country. First, a successful venture
requires a partnership among interested citizens, private developers
and local government. Each has a
different role, and each is necessary
to make things happen. Second,
there must be creativity. “Remem
ber that you’re in there because
others decided to invest elsewhere,”
Dennis says. Third, the revitaliza
tion must be approached as a busi
ness proposition as much as a good
will gesture. The CDC’s work promotes good community relations,
but it also makes good business
sense to put an area back on its feet
financially. For example, and happily for NCNB, it has gotten the
largest share of the new residential
construction market that the CDC
created in the Fourth Ward.
Finally, there must be courage
on the part of all the partners—
courage to tackle, and invest in, a
difficult situation. It took tremen
dous courage to build our nation,
Dennis observes. “We need to re
capture some of that same courage
in resettling our abandoned


5 Business Days
Review Completed

Accepted for
Defegafed Acfion


30 Calendar Doyo

60 Calendar Days


Reserve Bank


30 Calendar Days
(Does not apply to
4 (c( (B( applications)
Jostice Waiting
Period Ends
31 -90 Calendar Days






















Designing a CDC continuedfrom page 1

Whether to form a bank or holding company CDC depends on several
factors. One important consideration is where the appropriate management resources are located. Another is whether one entity or the other is
more highly capitalized.
Other imperatives will also come into play. For example, if the project is
conditioned on the use of grant money, the CDC will be set up as a nonprofit. Or the guidelines established by the Fed may be more aligned with
a particular project than the OCC’s. (Fed and 0CC guidelines for CDCs
are substantially the same, though there is some variation in specifics.)
Management will have to answer questions that include but are not neces
sarily limited to, the following.
U Will the CDC be for profit or nonprofit?
. Will the CDC be a bank or bank holding company subsidiary?
U Will the banking organization fully or partially own the CDC?
I Will the banking organization make debt or equity investment in the
I Will that investment be large or small?
While a well-run CDC need not entail any undue risk to the parent organi
zation, the parent must be aware of the type of risks that are involved
with the CDC’s activities. The bank or holding company must, therefore,
carefully scrutinize the nature of the risk it intends to assume. Both in the
management and financial sense, the CDC and banking organization must
have risk-taking ability commensurate with thi nature of the risk to the