L.A. to Get Infusion of Federal Funding : Aid: In lieu of ‘empowerment zone’ status, U.S. will award $400 million for a nonprofit community development bank.

Vice President Al Gore is set to announce today the award of more than $400 million to capitalize an innovative nonprofit community development bank created as part of a consolation prize for Los Angeles after it was passed over for designation as a federal “empowerment zone.”

The bank, which will make modestly risky loans to business ventures in the city’s most disadvantaged areas, was created after Los Angeles lost its bid to qualify for hefty tax credits and $100 million in grants as part of the Clinton Administration’s big urban initiative, the empowerment zone program.

Mayor Richard Riordan is expected to appear today with Gore at a news conference in South-Central Los Angeles to announce the federal infusion of funds, which grew out of an economic development program cobbled together in Washington. On Tuesday, Deputy Mayor Mary Leslie said the alternative funds were better than winning the designation that was originally sought. “This is no longer the consolation prize--it’s the first prize of economic development,” Leslie said.

“Nothing is better to a business owner than capital, real working capital,” Leslie continued. “Tax credits have merit, but they tend to benefit only larger, established businesses, not entrepreneurs or locally owned businesses.”

Even so, the city is still seeking special federal legislation that would also give local businesses federal tax credits. That measure faces an uncertain fate in the Republican-controlled Congress.

Initially, the federal government offered Los Angeles only about $250 million for the bank. “But we said that was not good enough,” Leslie said. After “big negotiations” with the Clinton Administration, which has a big electoral stake in California, the Riordan team squeezed $180 million more for its bank, Leslie said. The team also obtained approval to invest the extra money in any area where at least 20% of the residents fall below the poverty line. An additional $20 million in federal funds will be made available for programs in Los Angeles County, Leslie said.

At the news conference, Gore is expected to announce that the U.S. Department of Housing and Urban Development has agreed to make a total of $450 million in grants and loan guarantees.

The announcement is a boon to Riordan, who was criticized by some after Los Angeles failed to win the empowerment designation.

The Los Angeles Community Development Bank, which is scheduled to be in business by fall, 1995, will be the vehicle for making the federally funded program work to create business and job opportunities in a 170-square-mile area that includes Downtown L.A., Watts, Compton, Inglewood, parts of East Hollywood and East Los Angeles and a smattering of areas in the San Fernando Valley.

The bank will be a wholesale lending institution, making the majority of its loans to intermediaries, including other banks and nonprofit economic development organizations, which will then make the final loans to customers, Leslie said.

“We’ll make only a handful of retail loans each year in the magnitude of $500,000 or more,” she said.

More frequently, the bank will assist conventional banks to make loans such institutions could not otherwise make to business customers seeking to establish new ventures or expand old ones in the city’s poorest areas.

This assistance could be in the form of interest rate or loan fee subsidies, or in providing loan loss reserve funds to banks. Such moves broaden the ability of existing financial institutions to loan.

John Thomas, head of Saybrook Capital, a private financial institution that has been key to conceptualizing the project, said: “This is not an institution that will be funding every project that comes in the door, but its (lending criteria) will be somewhat more lenient and customer friendly.”

A number of nonprofit economic development organizations, such as First African Methodist Episcopal Church’s Renaissance program, are expected to qualify.

FAME Renaissance loans $1,000 to $25,000 to entrepreneurs in South-Central Los Angeles.

With loans from the community development bank, FAME would be able to provide more of these loans, which, for example, could help a street vendor buy his first pushcart, Leslie said.

Likewise, if Founders Bank, a black-owned financial institution, is unable to make loans because it has reached its loan loss reserve capacity, the community development bank could lend it money to supplement that reserve, city officials said.

Under the program, the city must show the federal government that at least one job is created for every $35,000 loaned, Leslie said.

Attorney Gil Ray, who also has helped draft the bank’s operating agreement with the city, said the institution will be established to keep it free of political interference from City Hall while keeping its public roots and purpose.

The South Shore Bank in Chicago is the prototype for the community development bank, but the Los Angeles enterprise will be much more ambitious, Leslie said. The South Shore institution has an investment portfolio of only about $40 million to $60 million, while the city’s bank will have nearly 10 times more in lending power.

Four private banks have also agreed to put their money into the enterprise. First Interstate Bank has agreed to invest up to $75 million in the bank, Wells Fargo and Bank of America will put in $50 million each, and Union Bank will invest $35 million.