How neighbors are replacing blight with thriving local businesses
Editor's Note: This article was produced by the Institute for Local Self-Reliance, as part of its Community-Scaled Economy Initiative, which produces research and partners with a range of allies to implement public policies that curb economic consolidation and strengthen locally owned enterprise.
The intersection of Central and Lowry Avenues in northeast Minneapolis is bustling. On the northwest corner is a trifecta of local businesses: A bike shop, a cooperative brewery and a bakery, in buildings with eye-catching exteriors of rough-hewn wood and silvery porcelain bricks. The neighborhood grocery co-op is one block up the street.
This commercial stretch didn’t always look like this. In 2011, where these three businesses sit, there were two vacant buildings. The empty space was not uncommon along Central Avenue, a long corridor that was created to be the Main Street of the neighborhood, but that had suffered from decades of disinvestment. While a few businesses dotted the avenue, many other storefronts were neglected.
“A lot of people looked at it as too big to tackle,” explains Leslie Watson, who lives nearby.
In 2011, a group of dedicated neighbors came together to change that. In November of that year, five of them, including Watson, became the founding board of the Northeast Investment Cooperative, a first-of-its-kind in the U.S. cooperative engaged in buying and developing real estate. NEIC created a structure where any Minnesota resident could join the co-op for $1,000, and invest more through the purchase of different classes of nonvoting stock. The group began spreading the word to prospective members, and started looking for a building to buy.
One year later, NEIC had enough members to buy the two buildings on Central Avenue for cash. The co-op quickly sold one of the buildings to project partner Recovery Bike Shop, and after a gut renovation, which it funded with a 2 percent loan from the city and a loan from local Northeast Bank, it leased the other building to two young businesses that had struggled to find workable space elsewhere, Fair State Brewing Cooperative and Aki’s BreadHaus.
Today, NEIC’s impact spreads beyond the intersection of Central and Lowry. It’s catalyzed the creation of new jobs, engaged its more than 200 members in reimagining their neighborhood, and given residents a way to put their capital to work in their local economy.
“Collectively, that wealth will stay in our community,” says Watson. “If you want to take the long view, that’s the goal.”
While NEIC is unique in the U.S., similar investment cooperatives are sprouting up in Canada, where they’re aided by programs designed to help them grow, as well as favorable policies. Though the model is new, and small, it holds outsize potential for the many communities struggling with northeast Minneapolis’s familiar set of problems, from business districts languishing half-vacant, to essential commercial spaces being controlled by faraway landlords or big retail chains with no regard for neighborhood needs.
In the vacuum left by both traditional economic development and Wall Street’s approach to finance, community real estate investment cooperatives offer a glimpse of a better way to channel capital, with benefits that include new jobs in the neighborhood, strong incentives for people to shop locally, local sources for key goods, closer ties with neighbors, and a return on investment.
And it represents a way for these communities to do it themselves.
Several years before northeast Minneapolis got together to form NEIC, a similar initiative was sprouting up more than 1,200 miles away, in the town of Sangudo.
In 2005, Sangudo found out that the school district was planning to close the local high school. The small hamlet in rural Alberta, Canada, had long been draining people and businesses—“for 30 or 40 years, it was dying a slow death,” says Dan Ohler — but the specter of losing a school launched the community into crisis.
Ohler, who’s lived in Sangudo for about 20 years, got together with a handful of neighbors to begin looking at what they could do. Armed with a $50,000 grant from the Alberta Community and Cooperative Association, they began exploring different cooperative models, and soon realized that their vision was bigger than a single business.
“Sangudo was short of just about every product and service that you can imagine,” recalls Jeff Senger, a resident of Sangudo, in a video. “So we started asking ourselves the question, is there a way to create a cooperative that would be in the business of creating more cooperatives?”
To answer that question, Sangudo had to draw up its own blueprints. Alberta is rich in cooperatives, and Sangudo had some nearby references, like a town that had recently gotten together to purchase its own grain elevator. But the thing that they had in mind was different.
“We saw that what we could do was be the financial arm, or financial support, in a way that the bank can’t,” explains Ohler.
In May 2010, 22 founding members incorporated the Sangudo Opportunity Development Cooperative, with a basic structure of the one-member-one-vote cooperative principle, a membership share costing up to $1,000, and the option of additional investment up to $10,000. With this model, SODC raised $220,000 in member capital in its first day. Today, the co-op has grown to 29 members.
For its first project, SODC looked to what its town already had. The owner of the meatpacker in town had been trying to sell and retire, but struggling to find a buyer. SODC stepped in to buy the building, and two SODC members with butchering knowledge took over the business. The next year, the cooperative purchased a second building for project two, and helped a new business, a coffee shop, start up there.
For its third project, SODC raised capital to help Sangudo Custom Meat Packers match two government grants for an expansion. Today, the meat shop has purchased its building from the cooperative, grown from two employees under the previous owner to 14, and become an essential piece of the rural economy, processing animals from a wide surrounding area and selling the local meat to top restaurants in Edmonton. Now, four-and-a-half years after SODC incorporated, it’s purchased three lots to begin project four.
Support helps the model spread
While the SODC has been growing Sangudo, it’s also inspired a new initiative dedicated to starting similar cooperatives throughout Alberta. After giving Sangudo its $50,000 seed grant, the Alberta Community and Cooperative Association kept its eyes on the town as it formed the SODC. Two years later, struck by Sangudo’s new model, the ACCA decided to launch a program, “Unleashing Local Capital,” to help other communities do the same thing.
Using a $1.26 million grant from the Alberta government’s Rural Alberta Development Fund, and $440,000 in investment from other sources, the ACCA invested in legal and accounting guidance to draft professional templates for the model, developed a guide to train communities interested in starting investment cooperatives of their own, and then helped those communities launch pilot projects.
“We realized that this was something pretty important for saving our rural communities,” says Ohler, who became the face of the program.
As it looked into ways to grow the model, the ACCA hit upon a way to channel Albertans’ savings into their local economy: It realized that investment cooperatives were eligible to be an investment option for Albertans with a self-directed retirement plan, and that the credit union Concentra Financial and the Canadian Worker Co-op Federation already had programs to help cooperatives access these plans.
The ACCA now explicitly frames its Unleashing Local Capital program as a way to get Albertans’ investments in retirement plans out of the Toronto Stock Exchange and into their local community.
“There’s plenty of money,” says Paul Cabaj, who runs the program, citing a figure that Albertans are on track to have $5 billion invested in registered retirement plans. “But none of it comes back.”
Like in the United States, even though self-directed retirement plans are available, only a small portion of Albertans have historically used them. “Self-directed retirement plans have always been around, but the ones who have taken advantage of them, it’s been 3 to 5 percent of the population,” says Cabaj, and only the people who are already comfortable navigating the financial system. Part of Cabaj’s work now is raising awareness about the tool, for both the cooperatives and their members.
Today there are seven Opportunity Development Cooperatives in Alberta, and five more are in the process of incorporating. Crucially, 90 percent of the funds raised so far have been through investments from self-directed retirement plans, Cabaj says. The ODCs are engaged in a range of projects, from a bakery, to a mechanic, to senior housing. One group is talking about starting a medical clinic.
As the model moves through the province, it also chips away at one of the biggest barriers to having more investment cooperatives — it lets people know that this is possible.
“It’s like a barn-raising for the 21st century,” says Cabaj. “This is how communities used to perform, but now it’s like an atrophied muscle. It’s painful at first, but it will get easier.”
Grassroots approach has strengths and challenges
The Northeast Investment Cooperative and the Sangudo Opportunity Development Cooperative formed their models independent of the other, but the groups share a grassroots nature that has both aided their success and created its own hurdles. For both, a key strength has been the dual role that members play as not just investors but as customers, and a challenge has been the cooperatives’ reliance on the volunteer sweat of founding members.
For both investment cooperatives to get off the ground, the most essential resource wasn’t money. It was time.
Long before NEIC had purchased and rented out its buildings, it still had startup costs — the lawyer, the real estate broker, the architect — but the cooperative hadn’t been set up to pay for those things from the initial capital investment. In order to make it viable, the early members and the founding board pitched in their own skills for everything they could, from the website, to the project management, to the stacks of paperwork.
NEIC also got creative — some of the contractors who rehabbed the buildings became members of the coop, and were paid in nonvoting stock. Watson estimates that in the startup phase, there was always someone putting in 15 or 20 hours of volunteer work every week.
“I don’t think we could have done it differently, because we needed to say to people, ‘We’re not going to waste your money,” says Watson. “But for project two, we need to construct it so that there’s enough income from property number one. We can’t fund it forever on free labor.”
Ohler echoes her. In Sangudo, it took a close-knit group of dedicated neighbors to make SODC happen, and Ohler says that the same mix has been essential in other Alberta communities that have created active ODCs of their own. “You need a small, core group willing to put in the time, energy, and trust to get this going,” he says.
The flip side of being grassroots, though, is the sheer number of people involved in the cooperative, and the symbiotic relationship that forms between being an investor and being a customer. When the cooperative invests in a business, that business also gets a built-in group of regulars.
In Sangudo, that relationship was reinforced by the terms of the leases that the cooperative arranged with the businesses renting from it. With the meatpacker, for instance, the two agreed on a low monthly rent — “low enough that they could make it even in slow times,” says Ohler — plus a percentage of gross sales. With this set up, “The more we could support them, the more they would make, the more they could pay back to SODC,” explains Ohler. In giving themselves a financial stake in the meatpacker’s success, the cooperative members also gave the meatpacker loyal customers and marketers.
In Minneapolis, the three businesses in the two buildings that were first purchased by NEIC have all become successful on their own, but they count their 200-some landlords among their loyal following.
Watson was at one of the businesses, Aki’s BreadHaus, on opening day, and recalls that out of every 10 customers, eight were members of NEIC. “You run into very familiar faces,” she says. “Everybody just takes a lot of pride in what happened, and I know they go to the buildings in part because of that.”
Policy to help investment co-ops spread
While the investment cooperatives that have formed in northeast Minneapolis and in Sangudo have relied primarily on the resources of the communities starting them, both initiatives have also benefited from favorable state and provincial policies. Building on these policies, and expanding them to other states, could open the way for this model to scale up and spread.
One of these is a securities exemption for cooperatives. In the laws of both Minnesota and Alberta, there’s an exemption that allows cooperatives to raise capital directly from their members, above and beyond the purchase of membership shares, without having to go through the complex and prohibitively expensive process of registering a securities offering.
In the United States, about half of states have laws allowing these exemptions for cooperatives that are raising money from members within the state, but the laws vary widely. Minnesota’s is among the most liberal, and is partly responsible for the state’s thriving cooperative sector, including the existence of the Northeast Investment Cooperative.
In Canada, the policy support goes even further. First, the ACCA provides essential technical assistance, and was able to build up its “Unleashing Local Capital” program through a government grant. Second, the country’s laws allow much broader access to self-directed retirement funds, both for investors to open that type of account and for them to then steer their savings toward local investment opportunities. Federal laws govern the retirement savings plans known as RRSPs, which are comparable to the U.S.’s IRAs, and they allow investors to hold within the RRSP several kinds of private capital investment, including funds for small business corporations, as long as the businesses are operating only in Canada.
In some Canadian provinces, notably Nova Scotia, the support goes even further through investment tax credits. Nova Scotia has created a program called the Community Economic Development Investment Funds, or CEDIF, that couples the self-directed RRSP option with a substantial tax credit of 35 percent for investment in local businesses, which is capped at $17,500 annually on a $50,000 investment. The program allows individuals to form pools of capital that they can then use to operate or invest in local for-profit businesses. Between 2000 and 2014, the program enabled Nova Scotians to invest $64 million in local businesses.
Though such a tax credit is generous, similar investment tax credits in fact already exist in several U.S. states. The difference is that those in the U.S. are designed mainly to benefit large companies in select sectors. Maine, for instance, grants a tax credit of 40 percent for wealthy accredited investors who put money into biotech and other advanced manufacturing businesses. It's time that states reconfigure these credits to benefit middle- and low-income people and steer capital to growing locally owned businesses, particularly in economically marginalized communities.
To help the investment cooperative model spread, we need to do three pieces of the heavy lifting. First, more states should look at adopting securities exemptions for member investment in cooperatives, like Minnesota’s.
Second, coop organizations can look to the role played by the ACCA in Alberta, and provide training and support for this particular kind of cooperative, such as a library of legal and tax templates that investment coops can use to help them avoid having to reinvent the wheel on their own.
Third, policymakers and community leaders need to explore ways to steer more capital to these kinds of cooperatives. This could include making self-directed retirement plans more accessible, offering tax credits for local investments, and, in poor communities particularly, adding investment dollars from sources like public pension funds and community foundations.
While Minneapolis and Sangudo think about how their model can grow, they’re seeing the cooperatives build wealth in their communities through both direct and indirect returns on investment.
From the beginning, NEIC and SODC have both carefully considered the balance between achieving their community aims, and offering investors a return on their capital. This question is motivated as much by their individual projects as it is by questions about how to scale up, and how to turn their model into one of the building blocks of a new economy.
“You have to offer a return to people,” says Watson. “If we’re going to say, ‘We’re building an alternative economy, and here’s a different way to invest your money—but by the way, you’d be better off leaving it in a savings account at 0.2 percent interest,’ then you’re not going to get enough capital.”
As it focuses on expanding, NEIC has not yet paid a dividend, but it has structures in place to do so, as well as structures in place so that owners can capture a percentage of the properties’ appreciating value. For NEIC owners who have invested beyond their voting share, the coop aims to offer more, and to pay out those dividends first. “That’s a long-term strategy to make it a place not just for 600 people to come in at $1,000 each, but for people to do more,” says Watson. “We have to be able to prove that hypothesis before we can expect people to do it at scale.”
At the same time, NEIC is able to operate in a way that’s different from a corporation driven solely by profit, and that flexibility is a critical piece of what it brings to the neighborhood. When the cooperative’s board first looked at the buildings that they ended up buying, they ran some quick calculations to see what they’d be able to offer as a return. “The only thing that seemed to make it work was 2 percent, and our real estate broker just started laughing,” Watson remembers. “But we said, ‘Yeah, we’re OK with that.’”
In Sangudo, the SODC’s first two years brought with it strong returns; at the end of year one, Sangudo Custom Meat Packers generated a 6.3 percent return for the cooperative. Over the past two years, however, the co-op has restructured in order to become an option for self-directed retirement plans, and professional fees to lawyers and accountants have resulted in lower returns.
“That hurts, but we need to look at this in a much bigger way,” says Ohler. “It’s not an investment for the next year, or two years. This is a legacy, an investment for the next 20 years.”
That legacy is one aspect of the investment cooperatives’ indirect returns. In Sangudo, the meat shop has created a dozen new jobs, and the restaurant has hired at least five. The restaurant has become a hub of the community, where 40 people gather at breakfast time. The meatpacker serves farmers who come from miles around to process their livestock. While they’re in town, they pick up some stamps, or refill on gas.
In Minneapolis, many NEIC members are themselves business owners, and see NEIC as a force catalyzing a stronger commercial district that will also drive more business to them. The homeowners who are members know that the healthier the commercial corridor is, the more their homes are worth.
“I think when you work in social justice and economic justice, it’s not your first thought that you want to benefit the small business community, but actually the small business community is so important,” says Watson. “Any structure we can put in place that helps them be stronger and more resilient is good for all of us.”
Both cooperatives are looking ahead to what’s next in their communities. In Sangudo, SODC has purchased three plots of land for its next project, and is considering taking on new capacity to build affordable housing units on the property. In northeast Minneapolis, after a period to catch its breath, NEIC has hired a property manager, and is actively raising membership and capital so that it can buy another building and begin its next project.
Both also believe that the model they’ve created can populate out.
“Someday, 10 years from now, we want to have a convention of community investment cooperatives,” says Watson. “Right now, we’d be the only ones there.”