Investing for Total Returns

Money can be made. But to make money, most communities will have to spend it.

Urban Wood Use Action Guide Phase:

Novel financing strategies

Many ventures simply can’t raise capital in the usual way: bank loans, angel investors, stock sales. It’s a familiar challenge for enterprises that aim to produce “social goods.”

Pay for success

Different pathways have opened. Many communities support these enterprises through direct grants, or guaranteed government purchases. But startup costs can be high. Baltimore considered one innovative approach — “pay-for-success” investing. Though Baltimore ultimately chose a different path, this model is growing rapidly and has been used in communities throughout the nation.

How it works

A private investor or grantmaker [or a public entity] provides an initial loan. Under the pay-for-success model, the involved parties agree on a set of performance goals that dictates how much money the investor must be paid back. The private investor assumes all of the risk of the project. If the project does not meet the performance goals (as evaluated by a third party), the investor never earns back the initial investment. However, if the project performs well, the investor earns back their investment, with dividends.

Baltimore, like almost all social ventures, required start-up capital — in their case, an innovation grant from the City.

In-the-beginningUsed equipment may be significantly cheaper.

Wealth, not waste

Camp Small has been Baltimore’s wood dump for more than a century.

Twenty-year-old mulch and other waste had been piled on three of the site’s 5+ acres. To clear space, the new yardmaster, Shaun Preston, rented a screener and spent four months processing it into quality compost.

Instead of paying $60,000 a year to periodically clear the pile, the Department of Parks and Natural Resources used one-fourth of the material for its own projects; the remainder was offered for sale. And sold.

Harvesting in the city

After sorting material, most operators — like Camp Small — recognize that the selling logs represents the “highest and best use” of some of the material they collect. In Baltimore’s case, the added value of logs for lumber would add at least $75,000 to the revenue stream.

This mock-up shows the proposed interior of the Cahill center. Note the wall panels crafted from recovered wood.

For a major Baltimore park project, GWWO architects were excited at the prospect of using reclaimed wood, so logs were sent to a local sawmill and processed. The project yielded 17,000 board feet of interior wall cladding (mostly walnut), saved the city $100,000 in materials cost, and led to a blanket contract for future processing at the sawmill.

Think lumber, not just chips or firewood

These products are valuable too. But city crews and contractors can learn to figure the highest and best use for the wood they’re cutting. In Baltimore, with the state DNR, the Camp Small team trained field crews to assess trees in the field, and harvest in eight-foot lengths to maximize value.

Check out this case study on Camp Small.

The not-quite bottom line

Urban wood use and reuse operations can make money. Many do, but not all. In most cases, some years will go by before a program generates a net cash flow. That’s why social impact investment and pay-for-success funding has become so important to nonprofit, mission-driven organizations. In fact, Quantified Ventures conducted an in-depth analysis and determined that it would take fifteen years for Camp Small to throw off positive cash flow from wood product sales alone.

 

While that may discomfit traditional investors, it’s something that social impact investors understand well.

 

Related Resources
Urban Wood Use Action Guide