Richmond looks to social impact bonds to clean up blight (San Jose Mercury News)

By Karina Ioffee

RICHMOND -- Abandoned properties continue to plague the city, requiring it to spend an estimated $1.7 million, or about $7,000 per home, just to keep them shuttered, squatters out and the grass mowed.

But next week, Richmond will take a big step toward addressing the problem when it sells its first round of social impact bonds in exchange for $3 million. The money will be used to acquire and repair abandoned homes, which today number around 800.

In doing so, Richmond will join a growing number of cities using social impact bonds to fix housing, improve student grades and fight recidivism with money not always available in the general fund.

"This is an opportunity for cities to think about how they deal with social problems differently," said Jim Becker, president and CEO of Richmond Community Foundation, which is overseeing the sale. "It goes back to thinking about the role of government. In my mind, that's to help facilitate things that make the city better. All cities could do this if they wanted to."

Under the plan, once the bonds are sold, the Richmond Community Foundation will manage the funds, using the money to acquire and rehab properties. Several institutional investors, mostly banks, are already waiting in the wings, although Becker declined to divulge names.

After the sale of the bonds, which is expected to occur in June, the foundation will begin purchasing homes -- 10 initially, although the number will increase in the coming months. Once a deed is secured, Turner Construction, a Richmond company, will begin refurbishing the homes and use graduates of Richmond Build, a city-run training program, to perform some of the work. 

Home Depot has also partnered with the city to offer discounted supplies for the crews.

One reason many cities have held back on using social impact bonds is that returns are now lower than in traditional investments. They also require a leap of faith by investors who are willing to fund projects that don't always have a long track record of accomplishment. For example, investors only come out ahead if the properties are sold at a profit. But whatever happens, the city of Richmond won't be on the hook.

Becker said his group has couched the risk by going after institutional investors who are required by the Community Reinvestment Act, a federal law passed in 1977, to invest a certain amount into community programs.

"So even if it tanks, which we don't think it will because of the Bay Area's tight housing market, no individual investors will lose, only banks, who still get to satisfy the CRA requirement."

Homes acquired with social impact bonds will be available first to graduates of SparkPoint, a financial-literacy program run by the United Way. That will help ensure that Richmond residents don't get outbid by other buyers, as has often happened, said Betty Geishirt Cantrell, director of SparkPoint Contra Costa.

"The bidding wars have pushed the price of homes beyond many of our clients' reach. But now they will be able to find out about a place going on the market ahead of time, drive by and make an offer.

"It's a great opportunity for them to achieve the American dream of owning their own home."

In recent years, social impact bonds have been used to lower recidivism rates for inmates in New York City, fight asthma in Fresno and increase school readiness among preschoolers in Utah. But the bonds are also complex, have high transaction fees and require investor confidence that their investment will pay off, said Ben Mangan, executive director and lecturer at the Center for Social Sector Leadership at UC Berkeley's Haas School of Business.

"There's great promise for social impact bonds, but they don't work everywhere," Mangan said. "The silver lining in all of Richmond's blighted properties is that they're in one of the most expensive housing markets in the world, where the market is raging. But it wouldn't necessarily work in Detroit, because people don't want to live there."

Another challenge is bringing community groups, investors and local governments together and developing trust among different groups. The Richmond Community Foundation operated for 13 years before it even sat down with the city to discuss issuing bonds to fund social programs.

Now city officials appear fully onboard, in December even amending the municipal code to allow the sale of social impact bonds to fund youth, senior, educational and various other programs.

Contact Karina Ioffee at 510-262-2726. Follow her at Twitter.com/kioffee.