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Community Developments Investments (August 2012)

The California FreshWorks Fund: Bringing Food to the Community

Scott Sporte, Chief Lending Officer, and Catherine Howard, Senior Program Manager, NCB Capital Impact

Northgate Gonzalez Market brings fresh produce to a largely Hispanic community in the City Heights neighborhood of San Diego, Calif. the store provides fresh fruits, vegetables, and meats, Spanish-language labeling and specialty items such as cactus.
California FreshWorks Fund/NCB Capital Impact
The Northgate Gonzalez Market brings fresh produce to a largely Hispanic community in the City Heights neighborhood of San Diego, Calif. Along with fresh fruits, vegetables, and meats, the store provides Spanish-language labeling and specialty items such as cactus that meet customer needs.

In some parts of the United States, healthy food is hard to find. In many low-income neighborhoods, families confront a daily challenge of buying fresh, healthy food close to home. This is a growing national concern, and it is creating dietary and health risks for too many American youths. Urban neighborhoods, rural communities, and older suburbs are most likely to have limited access to healthy foods, with low-income neighborhoods and communities of color being particularly affected. A 2009 study by the U.S. Department of Agriculture showed that 23.5 million people in low-income communities have no supermarket or large grocery store within a mile of their homes. This lack of easy access to healthy foods has consequences: A study published by the American Medical Association shows that children from poor families are twice as likely to be overweight as those from higher-income families.

Yet getting healthy food to more Americans is difficult, especially in low-income urban and rural communities. As described in “A Look Inside”  and “The Reinvestment Fund: A Healthy-Food Financing Leader,”  supermarkets and other healthy-food retailers have believed that these communities are challenging markets with high barriers to entry. Flexible financing tools that help grocers overcome obstacles and support innovative approaches to food retail can aid in changing that mindset.

NCB Capital Impact (Capital Impact) has financed healthy-food retail establishments throughout its nearly 30-year history, lending to dozens of independent grocers and natural food cooperatives throughout the country. As a national nonprofit organization and a certified community development financial institution (CDFI), Capital Impact improves access to high-quality health and elder care, healthy foods, housing, and education in low-income communities. Capital Impact’s experience working with food retailers indicates that a lack of flexible financing is one of the greatest obstacles to the creation of healthy-food retail outlets in underserved communities. Since being named administrator of the California FreshWorks Fund in late 2010, Capital Impact has focused on developing a multifaceted loan and grant fund to provide a variety of financing tools to support the development of healthy-food projects.

Take, for example, the City Heights neighborhood of San Diego, Calif., a low- to moderate-income area with a mixed racial-ethnic population and few grocery retailers. It is estimated that the residents of City Heights spend 89 percent of their grocery budgets at stores outside of the immediate neighborhood. Yet, because City Heights is a fully built-out, established urban neighborhood, opportunities for land assembly and new construction there are very limited. Northgate Gonzalez, an independent grocery that operates 33 markets in Southern California, however, identified the potential for the adaptive reuse of a big-box shell that was partially vacant. An innovative deal has been arranged through the California FreshWorks Fund: a $264 million loan and grant fund conceived by the California Endowment and managed by Capital Impact. The innovations allowed Northgate to finance the build-out and start-up costs of a 42,625-square-foot, full-service supermarket on a major commercial thoroughfare.

This is just one example of how banks, nonprofit organizations, and mission-driven investors are helping to bring healthy food to low-access communities, with the goal of improving food choices and health, and spurring economic development through new investment and job creation.

The Challenge: Accessing Healthy Food

Transportation inequities exacerbate food access challenges. For more than a million people in California, access to fresh produce is more than a 20-minute drive from home, and lower-income households have lower car-ownership rates than higher-income households. To buy fresh foods, many low-income people must use multiple forms of transportation or take taxis, increasing both the cost of food and the time it takes to shop. Studies have shown that transportation costs can account for as much as 20 percent of a low-income household’s grocery budget. Residents of low-income communities in the San Francisco Bay Area who use public transit to shop at a grocery store report spending on average about an hour commuting to and from the store. These circumstances are similar in rural areas, where public transit is scarce and access to fresh foods is limited.

With many communities unable to access healthy foods, the costs associated with preventable, diet-related chronic diseases continue to climb. Improving food access is one step toward reversing these sobering health trends. Supporting the development of supermarkets, healthy-food retailers, and farmers markets and increasing the healthy-food offerings of corner stores and other small neighborhood markets in underserved neighborhoods will improve choices for families striving to eat healthily in their communities.

Financing as a Tool to Improve Food Access

Inspired by the success of the Pennsylvania Fresh Food Financing Initiative, the California Endowment committed $33 million to create a financing program to support the development of healthy-food retail in low-access neighborhoods throughout the state. The California FreshWorks Fund launched in July 2011 with a goal of funding at least 10 supermarket or other retail projects in its first year. Capital Impact was selected to develop and administer the program.

Leveraging the California Endowment’s $33 million commitment, Capital Impact has attracted more than $220 million in public and private investment to the program. To date, the California FreshWorks Fund has provided more than $8.7 million in funding to six projects throughout the state and has an active pipeline of more than $50 million. A $125 million syndicated loan pool accounts for almost half of the fund’s assets (see “How the California FreshWorks Fund Loan Pool Is Structured”), with investments from banks that are interested in working in the healthy-food arena, as well as private, mission-driven investors from the health-care and community development fields. The pool is led by JPMorgan Chase, with senior investments committed by Bank of America, Morgan Stanley, Capital Impact, Citibank, Charles Schwab Bank, and MetLife; and subordinate investments from the California Endowment, Catholic Healthcare West, Capital Impact, the Opportunity Finance Network, and the Calvert Foundation. A grant from the CDFI Fund’s Healthy Food Financing Initiative (HFFI) anchors a credit enhancement pool. Inventory, equipment, property acquisition, and all stages of project development can be financed through the loan pool, with loans of up to $8 million.

By building the pool with senior capital from banks and supporting that capital with subordinate investments from unregulated, mission-driven investors, Capital Impact was able to expand underwriting standards beyond those offered by the traditional capital market. In doing so, it addressed the needs of healthy-food retailers that are considering opening locations in underserved communities by offering loan terms that include high loan-to-value ratios, low debt service coverage ratio requirements, and competitive market pricing.

The California FreshWorks Fund also offers small grants funded by Kaiser Permanente and the California Endowment. Because grocery retail projects in underserved urban neighborhoods typically have higher predevelopment costs than new markets in suburban settings, grant funds can be accessed during predevelopment to pay for items such as appraisals, environmental reports, or market analyses. In support of the fund’s goal to spur economic development and job creation, grants also can be used to pay for costs related to local hiring, such as partnering with local workforce development programs or job training for inexperienced local hires. Grant funds also can be used to support innovative ideas beyond supermarket development that increase access to fresh foods, such as healthy corner store conversions, farmers markets, mobile food vendors, and food distribution hubs.

Finally, the fund offers large project financing through the New Markets Tax Credit (NMTC) Program. Working with allocations received by Capital Impact and other partners, NMTCs can provide low-cost financing with an equity return that makes large new supermarket projects in high-cost areas economically feasible for developers and operators. Capital Impact has obtained commitments from JPMorgan Chase and the U.S. Bancorp Community Development Corporation for NMTC equity for grocery projects and anticipates working with investors in the loan pool to obtain leveraged loans.

Early Successes

In City Heights, Capital Impact has provided $8.19 million in NMTC financing through the fund, and JPMorgan Chase provided tax credit equity for the transaction. NMTC financing gives Northgate a low-cost loan during the tax-credit compliance period, while the equity benefits of the transaction at the end of the compliance period make the City Heights location an attractive market opportunity for Northgate, despite a higher-than-typical lease cost. With the store’s opening, residents of City Heights now have access to a full-service grocery store and the fresh fruits, vegetables, dairy products, and meat that compose a more nutritious diet. Furthermore, the store created 122 new jobs and will bring additional economic growth to the neighborhood.


Although access to healthy and affordable foods is a significant challenge for many people in the United States, there are solutions. Banks and other private sector investors can collaborate to create flexible financing tools that help bring grocery retailers and other fresh-food options to neighborhoods in the greatest need of access to healthy foods, particularly low-income urban and rural communities. In doing so, we can help build healthier families and neighborhoods—and ultimately help improve the health of the whole nation.

For more information, Scott Sporte can be reached at (510) 496-2233 or; Catherine Howard can be reached at (510) 496-2235 or

How the California FreshWorks Fund Loan Pool Is Structured 

The Northgate Gonzalez Market, funded by the California FreshWorks Fund, includes handmade tortillas among its healthy food choices. The market provides affordable fresh food to a former “food desert” in San Diego, Calif.
California FreshWorks Fund/NCB Capital Impact
The Northgate Gonzalez Market, funded by the California FreshWorks Fund, includes handmade tortillas among its healthy food choices. The market provides affordable fresh food to a former “food desert” in San Diego, Calif.

Limits on financing often can act as a barrier for grocery store operators considering entry into an underserved market. Typically, a grocer looking to purchase or build a new store can obtain acquisition and construction financing totaling no more than 60 percent of the building’s value. In high-cost urban markets, this 40 percent equity requirement frequently makes new stores financially unattractive or infeasible. By structuring its loan pool with a loan loss reserve and a subordinate debt tranche, the California FreshWorks Fund can offer a grocery project loans up to 90 percent of the project’s value, while providing adequate security to its bank investors.

A $125 million loan pool is the primary lending vehicle for the California FreshWorks Fund. The loan pool is structured with three sources of capital: a senior debt primarily comprising investments from regulated banks and thrifts; a subordinate debt composed of investments from unregulated, mission-driven investors; and a loan loss reserve, funded with grants raised by NCB Capital Impact (Capital Impact) to anchor the pool. The syndicated pool structure creates an attractive investment opportunity that allows both regulated and unregulated entities to participate in the financing of healthy-food projects by leveraging small amounts of risk-based capital with larger commitments of senior debt and offers flexible financing to food retailers.

  Graphic illustrating Syndicated Loan pool

A $7.5 million loan loss reserve gives the senior investors a cushion that lowers the risk of loss from each transaction. The loss reserve was capitalized with grants from the JPMorgan Chase Foundation, the California Endowment, and the Healthy Food Financing Initiative of the U.S. Department of the Treasury’s Community Development Financial Institutions Fund. This reserve serves as a first stop-loss for any individual transaction. If there is a loan default, the loss reserve absorbs the full loss related to the loan.

Unregulated, mission-driven investors, including foundations, health-care systems, Capital Impact, and community development organizations, agreed to invest in a subordinate tranche of the pool. The subordinate tranche represents 20 percent of each transaction. In the event of a loan default, losses exceeding the $7.5 million loan loss reserve would be absorbed by the subordinate investors. The subordinate investors agreed to take on this risk position because they are unregulated and have mission-driven motivations for their investments.

The combination of the loan loss reserve and the subordinate tranche allowed Capital Impact to expand underwriting standards for the fund beyond those offered by traditional capital markets, including high loan-to-value ratio requirements and below-market debt service coverage ratios, while still providing security for the regulated investors.

Capital from banks and the California Endowment makes up the senior tranche of the loan pool, which represents 80 percent of each transaction. Senior investors take comfort in a structure that creates a cushion against losses from the combination of loan loss reserve and subordinate investors, while spreading the remaining loan risk among several senior investors.

The loan pool is administered by JPMorgan Chase, which served in a similar role for the highly successful Pennsylvania Fresh Food Financing Initiative. As the pool administrator, Chase is responsible for funding each FreshWorks Fund loan, placing capital calls to the investors, and providing loan administration services.

There has been strong bank interest in participating in the FreshWorks Fund loan pool because the fund’s structure controls risk for senior investors while providing an opportunity to finance important community development work throughout California.

“The California FreshWorks Fund allows bank investors to put their capital to work in low-income communities, creating fresh food retailers and improving health outcomes,” said Dudley Benoit, Senior Vice President at JPMorgan Chase. “The fund structure allows Capital Impact to offer flexible loan products that can help grocers enter markets that have traditionally been underserved, while also giving regulated investors the comfort they need to participate in the fund.”