Robert Kemp
Los Angeles’ Community Development Bank grew out of the ruins of a major city embarrassment in 1994: the failure to land a federally funded empowerment zone. Almost as a consolation prize, the federal government pledged $115 million in grants and $315 million in loan guarantees for a community bank that would lend money to businesses to encourage them to employ poor Los Angeles residents. The target area included impoverished neighborhoods from South Central L.A. to Pacoima. Private banks pledged more than $210 million in loans.
The Community Development Bank is not a commercial institution. It’s sole mission is to find businesses that have been unable to obtain loans through normal banking channels, help buttress them and encourage local banks to help out. The businesses have to meet strict criteria; for example, more than half of new hires must be from the empowerment zone.
C. Robert Kemp runs the bank from its headquarters in a somewhat unsightly pink stucco walkup at 54th Street and Vermont Avenue. But he is proud of it: The site had been abandoned, the original building torched during the 1992 riots.
Kemp is a big man with a thoughtful, avuncular manner. He and his wife, Wilbertean, have four children. At 63, his confident boardroom style comes through in his greeting: a broad grin and a bone-crunching handshake. “You look out over these neighborhoods,” he says from his office window, “and you see well-kept homes, clean streets. This is a good neighborhood.”
Kemp has learned to be flexible. At Wayne State University, he wanted to be quarterback on the football team. He played in the marching band. In the Air Force during the Korean War, Kemp wanted to be a fighter jock. He wound up an electronics expert.
When the Watts riots erupted in 1965, Kemp was at work on an ignition system in the Apollo space program. But he decided to devote his life to the problems that ignited so many inner cities in the late 1960s, including his hometown, Detroit. His mantra: empowerment, economic development and dignity through a decent job.
With a degree in business administration from UCLA, Kemp headed the Economic Resources Corp., which was formed after the Watts riots. That work led to the creation of the Watts Industrial Park. In the late ‘70s, Kemp was a special assistant in the Commerce Department. For 17 years, he also ran the Opportunity Funding Corps, in Los Angeles and Washington.
Today, back in Los Angeles, Kemp is essentially running a pilot project “to determine whether a capital intervention strategy” can nurture and retain jobs in the inner city. He has weathered considerable criticism from many who feel the loans are being made so infrequently and in such small amounts that little has been accomplished to date. But, now, he has even more to work with: The city recently received empowerment-zone status--and an additional $600 million in federal tax credits.
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Question: Let’s get to the raw numbers first. How many loans have been handed out? What’s the monetary value?
Answer: You have to start at the top in terms of the number of loans and investment applications that we have really processed. Since June of 1996, we’ve looked at more than $400 million in loan and investment applications made to the bank, and there are a number of challenges that the bank is confronted with with respect to making those loans. I’ll come back to those so that you understand the gap between the volume of loan applications we have looked at and the dollar amount of the loans that have actually been approved. We have approved more than $40 million in loans--which works out to about 20% of that total volume of loan applications. We have closed $25 million in loans. We have obligated the bank’s funds in that amount.
Q: How many businesses are we talking about?
A: That $25 million represents about 60 businesses, the largest of which is an $8-million loan for the acquisition of a Santee dairy business. We have issued commitment letters to the borrowers [for the other $15 million]. In that commitment letter are a number of terms and conditions that have to be satisfied before we can close the loan.
Q: Now, people are concerned about the amount of time that has gone by versus the amount of money that has been loaned out. What’s the problem?
A: Actually, there is no problem. If you think about the actual time line that the bank went through. The agreements between the bank, the city, the county and [the Department of] Housing and Urban Development were not completed until November of 1995, at which time the [bank’s] board was selected. . . . Between November and April of 1996, the board was engaged in an executive search to find a CEO, as well as beginning to develop some programs and policies for the bank. In the first quarter of ‘96, the board received the first disbursement of funds from [HUD], with which they were able to pay or begin to pay for some of the development costs associated with getting the bank formed and started.
When I assumed the [CEO] position in June of 1996, a group of temporary loan agents were beginning to look at some deals, so we were able to fund the first deal in July 1996. But the charge to me was to hire a staff, put systems and policies in place, generate business and loan production and, at the same time, find a headquarters for the bank. All of that takes time.
Here we were, seven months after the CEO was hired, we were operating, had recruited a staff and had identified a headquarters. While we only made $2 million in loans in the seven months of 1996, we accelerated the process considerably in 1997--by approving $40 million and closing $25 million. When we reach the 24-month mark, in June 1998, we expect to be well on our way to our target of $60 million in loans for 1998.
The general criticism has been that this bank was created to address the problems of the inner city. Why haven’t they been solved? Those kinds of problems didn’t occur overnight, or in four or five years, why would they expect them to be corrected in four or five years? Even if we could address all of them.
Q: There’s some uneasiness because, at first, there seemed to be a lot of interest from the banking community to come through with a significant amount of loan money--some $210 million. But, as of this past week, the big three banks--Wells Fargo, Bank of America, Union Bank--have not contributed. You’re getting some $32 million from smaller banks and lenders. But you were already depending on them. What’s the problem with the big banks? They must have realized more risks would be involved.
A: Probably the reason why the banks have not performed to date is the nature of what they pledged in the first place. They pledged the $210 million in participation, provided that loan applicants met their underlying standards.
Q: That wasn’t a surprise to you?
A: No. That statement was in the [banks’] letters. That being the case, you understand the challenges that the [Community Development] bank is confronted with. We’re not permitted to loan to any borrower that a commercial bank would loan to. So, we need the [L.A. area] banks to say to us, “with help from the Community Development Bank, we could make this loan.” To date, we have not been able to get our heads together on that aspect of things.
Q: So, whose responsibility is it to convince these banks to participate?
A: It’s both parties’ responsibility. It’s certainly our responsibility to come to the table with an articulated way for the banks to participate with us. But it’s also the commercial banks’ responsibility to come to the table with a commitment to participate with us on a reasonable basis.
Q: I understand they say that the risks are too high, but some suggest that you have also failed to standardize the loan program. What do they mean by that?
A: I’m not sure I know what they mean. One of the interpretations that I’ve heard from the banks is they would really like to have a guaranteed loan.
Q: Let’s say you did that, guaranteed the banks against losses. How would that affect your ability to loan money?
A: To date, the banks have said that they wanted a funded guarantee. If we have to place on deposit the funds equivalent to the loan amount, in effect we’re loaning our money alone to the borrower, and not the commercial banks’ money.
Q: So they pretty much want you to take all of the risks.
A: Pretty much, yes. At the outset, we said very clearly that we’re prepared to loan and participate on a 50-50 basis with commercial banks, and that they would be paid first in the event of a default. Outside of those parameters, we’re open to negotiation.
Q: South and Central L.A. has a substantial manufacturing base. It’s almost the hub of the city in that regard--thousands of businesses, more than 300,000 employees work here. Are we making a mistake in characterizing this area as a kind of urban wasteland?
A: It’s more like an industrial compound. It’s in operation eight hours a day, and then it’s deserted after that because all of the employees and managers leave the compound. Low-income residents live here. Those are the residents we’re trying to address because they’re not the ones who hold the jobs.
Q: It seems the standards for success in these geographical recovery areas are really pretty low, in terms of what is accomplished. How do we measure your success? You spoke early on about 20,000 jobs in 10 years. Will people look at more than $700 million in funding for this and consider that a success?
A: Honestly, I don’t know. I do know that circumstances will be improved over what they were before the $700 million was found. Many people underestimate the amount of capital investment that is required to cause a community to be fully recovered. Think about the infrastructure commitments to places like San Fernando Valley that have enabled it to become an economic powerhouse. That’s on the order of billions of dollars, not millions; and that over a period of three or four decades, not five years. With government initiated programs, people often say that it’s a failure because it didn’t work in one or two years. This is a marathon, not a sprint, and there have to be improvements in educational resources, transportation and other public services.
Q: During this process, there have been businesses that were looking to take advantage of the development bank and found they could not wait and have moved. Are we missing out because of the businesses that have left?
A: That’s a fair question. Our fastest turnaround time on a loan would be 30 days. Our credit committee meets once a month. Our board meets once every other month. If everything was set when the applicant came to us, we’d have to run it through a screen of the HUD eligibility check list. Then we have to perform due diligence to ensure that all of the things that the company has put forth are valid. Then, we issue a commitment letter. Then, we have to run it through the HUD compliance check list to make sure that we have met all of the requirements. Then, we can fund the loan.
Q: Tell me something. You’re out there in charge of this. Your neck’s in the guillotine. . A: Right. No question.
Q: What should everyone else do? Like the City Council, for example?
A: The best kinds of things that the City Council and others could be doing is helping people to become knowledgeable. Residents in low income areas are really not that familiar with the kinds of opportunities that are available to them. Recent immigrants are not conversant with the culture here. They’re not aware of what’s available. We have to spend a lot of time going out to residents and telling them about what’s available through the empowerment zone.
Q: The city now has empowerment zone status. Will that speed things along?
A: That makes available wage tax credits to the employer. For every employee that they hire, they get a credit toward the wage cost of that employee. It’s a big inducement. Secondly, the city’s business tax holiday for five years will be another subsidy for businesses located in the empowerment zone.
Q: Can you use this now as leverage with the larger banks?
A: Yes, definitely.
Q: Have you tried to do that yet?
A: No. It hasn’t been passed yet. The five-year business tax part has not been passed by the City Council and the wage tax credit doesn’t become effective until the year 2000, or hopefully 1999.
Q: Give me a prediction. Tell me where you’re going to be next year, in two years.
A: I predict that we’ll be at least in the $60-million to $70-million range by this summer, and that a year hence, mid-1999, we will have broken the $100-million mark in loans.
