Banking on a New Strategy

In the midst of a crisis with its largest loan ever, the Los Angeles Community Development Bank is turning to a new strategy to strengthen key industries instead of merely financing isolated and often-troubled inner-city companies.

The shift in approach--unveiled last month--comes at a time when the federally funded bank’s $10-million loan to a South Los Angeles dairy teeters on the brink of default. The souring of the Copeland Beverage Group deal highlights the bank’s vulnerability and what critics have called a near-futile approach to economic development. The deal represents nearly 10% of the bank’s capital.

The new strategy aims to upgrade and unite key industries so they can remain competitive and offer higher-wage jobs. The bank launched the approach with the apparel industry and plans to follow up this fall with similar projects for the food- and metal-processing industries.

“The [strategy] makes sense, particularly if you can strengthen businesses in clusters and link them to others throughout the region,” said urban planner J. Eugene Grigsby, director of the Advanced Policy Institute of UCLA.

“What doesn’t make sense is taking a single firm and trying to salvage that firm at the last minute without there being a big safety net around it,” he said. “Any time you speculate on one deal you’re crap-shooting.”

The bank, the U.S. government’s largest inner-city lending effort, will continue making some loans outside the targeted industries. But the new strategy represents a philosophical shift that officials hope will create better jobs in the city’s poorest areas, designated a federal empowerment zone.

The strategy could also help salvage the bank’s bruised reputation, earned for an initially slow lending pace and an unfocused approach.

Chief Executive C. Robert Kemp said the bank had always planned to be more proactive but spent its first few years responding to pressure to finance some of the city’s riskiest deals long shunned by conventional lenders.

“There was a great deal of expectation that the bank would be a panacea for the economic problems of L.A.,” Kemp said. “The first couple of years we were just reacting to what was coming in the door.”

The new strategy identifies key industries in the empowerment zone that “have the potential for expansion or modernization that will result in increased employment and improved equipment operation,” he said.

The apparel proposals are due in September. Among the projects sought are an incubator for high-tech design and production training. The bank will also provide commercial real estate loans, venture capital for start-ups and loans to companies seeking to upgrade their technology--key to establishing the local industry as high-end while low-end jobs flow to Mexico, said Steve Valenzuela, the bank’s chief operating officer.

Plans for the food- and metal-processing projects are likely to stress upgraded technology, worker training and the creation of industrial parks where entrepreneurs could share regulatory burdens, marketing and warehousing.

The approach coincides with efforts at collaboration in those industries. Projects to launch high-tech training incubators for the apparel industry are in early stages, as are attempts to organize metals processors in clusters throughout Los Angeles. And a group of South Park businesses and commercial and residential property owners is working to establish a food products incubator.

Encouraging collaboration and technological upgrading in key sectors will give the bank “more bang for the buck,” said Jack Kyser, chief economist with the Los Angeles Economic Development Corp. Apparel generates 153,000 county jobs; metal fabrication, 87,000; and food products, 50,000, he said. All three are key employers in the empowerment zone, with apparel leading the pack.

The idea is not new. Targeting industry clusters became the mantra of RLA, launched after the 1992 riots, and forms the philosophical heart of the Community Development Technologies Center, a nonprofit organization that manages L.A. Prosper Partners, which took over RLA’s projects last year. The bank used the groups’ research to develop its approach.

The strategy also is central to Mayor Richard Riordan’s Business Team, which has worked to bolster such sectors as biomedical, multimedia and high-tech manufacturing--channeling companies in these areas to the bank for loans.

“From the very beginning we talked to them about focusing on where the growth is,” said Rocky Delgadillo, deputy mayor of economic development.

The bank was established in 1995 to ease the sting when the city failed to win a federal empowerment zone. Instead, the federal Department of Housing and Urban Development pledged $115 million in grants and $315 million in loan guarantees to create the bank, a 10-year business loan program in parts of the Eastside, Pacoima, Central and South Los Angeles. Those areas make up the empowerment zone that ultimately was awarded last February, offering tax and other benefits to businesses that locate and hire there.

So far this year, the bank has made more than $40.4 million in loans. But 1997 loans totaled only $25 million and 1996 loans a paltry $2.3 million--showings bank officials attributed to growing pains.

The idea for the new strategy came from bank Chairman Antonio Gonzalez.

“We could see that a lot of people coming to [the Community Development Bank for money], they weren’t going to make it, because they were in uncompetitive niches,” Gonzalez said. “They were producing the wrong thing or had antiquated production processes or [very] low-wage workers. This is a more strategic approach.”

The collaborative approach is essential to the apparel industry, where small, family-owned businesses often have little time to seek out financing or new technology, said Jean Gipe, director of the Apparel Technology & Research Center at Cal Poly Pomona. The center and Los Angeles Trade Technical College are both planning high-tech incubators.

For Edward Moya Jr., the bank’s new strategy couldn’t have been timed better. His father opened Park Pleating Co. on South Main Street 35 years ago and built it into one of the city’s most successful pleating and novelty stitching companies. About a year and a half ago, Moya Jr. launched the neighboring Nexus Dimension, which transfers computer-generated graphics onto garments.

Now he is pursuing Community Development Bank financing to help him parlay the family business into a computer-assisted training center and design service. The facility would partner with trade schools such as Trade Tech to offer training in computer-assisted design and pattern making. It would also offer rental use of the equipment to manufacturers who can’t afford to buy it.

Moya’s goal: to offer his son a better job than the one he inherited from his father.

“I would really like to do something to move us into the future,” Moya said.