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BankBoston launches subsidiary to take stake in inner city

April 3, 1997

BOSTON (AP) _ Committing $100 million to urban businesses over the next four years, BankBoston is tying its fortunes in part to those of the inner city.

A new subsidiary called BankBoston Development Co. will target businesses in Massachusetts, Rhode Island, Connecticut, New Hampshire and Florida. Its approach is unusual because of an emphasis on equity investments _ higher-risk loans that usually aren’t repaid until a company becomes profitable.

By taking equity stake in companies that provide jobs and services, as opposed to just providing housing loans, the bank believes its money can do more good. It’s also betting that the loans will be profitable.

``Regular banking can only go so far when there’s a serious lack of development in economic infrastructure in the inner city,″ Grady Hedgespeth, the new investment company’s president, said Wednesday. ``We actually want to be partners with our businesses.″

More than 100 bank-owned community development corporations exist in the United States, and those in the Northeast have invested $1.1 billion in the last two years, according to Comptroller of the Currency Eugene Ludwig.

But Ludwig, whose federal office oversees the banks, said BankBoston’s venture was innovative because of its equity component.

``It’s true that actions speak louder than words, and no action says more than what you’re doing _ taking a stake in the success of Boston’s small businesses and its communities,″ Ludwig said at a ceremony in the city’s largely black and Hispanic Roxbury section.

The bank said its money would go toward providing direct equity in companies doing $500,000 a year or more in business, making loans of $5,000 to $5 million for smaller companies, and gaining technical expertise.

Hedgespeth said he expected the bank’s $100 million to generate four times that amount in additional resources.

For its first venture, it has taken a $6.5 million equity stake in Long Bay Management Co., a real estate developer and manager that will use the money to rehabilitate 227 units of low- and moderate-income housing. The entire project will cost $15 million.

Most of the company’s 86 employees come from the inner city, and most of its supplies are bought locally. Ninety percent of the 150-200 people working on the rehabilitation project are expected to be inner-city residents.

``If we can convince the people who are in power, the financial people, that you can do good business in the inner city, others are going to follow,″ Long Bay general partner Ken Guscott said.

Guscott and his brothers left successful careers _ he is a nuclear engineer _ to found the company in 1968 after watching riots in Roxbury and other black neighborhoods after the assassination of the Rev. Martin Luther King Jr.

``These people were rioting because of a lack of housing. We didn’t own anything,″ he said.

But Hedgespeth stressed that unlike other bank-owned community development corporations, the BBDC was looking beyond housing loans for its clients.

That’s welcome news to John Taylor, who heads a Washington-based trade group for organizations that invest money in underserved areas.

More successful businesses keep money circulating longer in the inner city, where cash often goes directly from paychecks to rental property owned by outsiders and large discounters operating in the suburbs.

While housing programs have increased the number of minorities who own homes, they too often fall short, said Taylor, president and chief executive officer of the National Community Reinvestment Coalition.

``Without a strategy that develops the local economy, you’re going to have to have some kind of subsidy for home ownership: either there’s a livable wage or there’s a subsidy,″ he said.

The approach is not unique: A group of New York banks pooled their resources to form the New York Community Investment Corp., said Merton Corn, who runs the Community Capital Bank. Corn’s company, based in Brooklyn, is a for-profit bank run by not-for-profit companies.

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