The Limits of Intentions and Expectations: Reflections on Failure from the Restorative Economies Fund Team
By: Nwamaka Agbo, Lynne Hoey, Lina Shalabi, and Jocelyn Wong
What does it look like to be committed to non-extractive investment in a fundamentally extractive financial system?
This is a question that we are grappling with as the Restorative Economies Fund (REF), one of the Kataly Foundation’s three program areas. REF seeks to close the racial wealth gap and transform our financial system by strategically reinvesting resources into community-owned and governed projects that create shared prosperity, self-determination, and build collective political, economic, and cultural power.
A key part of REF’s model is our use of an integrated capital strategy, which means the Fund combines grants with non-extractive investments such as loans, loan guarantees, or lines of credit, as well as non-financial support, such as technical assistance or strategic advice. We remain steadfastly committed to prioritizing the impact on Black and brown communities over financial returns to ourselves as the funder.
The REF team is currently assessing the first two years of the Fund’s pilot, and how we want to engage in REF’s second iteration. Part of this assessment involves reflecting on when our commitments and intentions have come up against the bounds of our current financial system. Addressing these contradictions while remaining in honest and right relationship with our grantees is challenging, and in some instances we haven’t met the expectations we have set for ourselves.
One example arose in our support of Esther’s Orbit Room, led by the East Bay Permanent Real Estate Cooperative (EP PREC). This project is a community-centered development in West Oakland for the benefit of Black and brown Oakland artists, residents, and culture keepers.
In the process of making a loan to EB PREC for the acquisition of Esther’s Orbit Room, we initially issued a term sheet that indicated we would make the $1.7 million loan at a 0% interest rate over the full term of 10 years. This was one of the first term sheets we issued under the REF pilot, and it was the only term sheet we issued at a 0% interest rate for ten years. The term sheet was issued for discussion purposes, but we weren’t clear that the term sheet could be re-visited in the future as both Esther’s Orbit Room and REF’s pilot strategy solidified. We created an expectation that the initial terms would be the final terms, which was our first error.
About seven months passed between the initial term sheet and the loan documents being issued. When REF was drafting the loan documents, we did not refer to the original term sheet and drafted the interest payment clause in line with other loans, which had an interest free period and then a 1% interest rate. This was our second error.
When we were negotiating the final loan documents, EB PREC rightfully asked us about the interest rate. We initially explained that we had made a mistake in the original term sheet and that the terms in the loan agreement would stand. EB PREC shared with us that they had been talking about the 0% interest loan from Kataly to galvanize other investors to invest on similar terms. It became clear that the impact of our error was far-reaching beyond our initial conversations.
We examined whether we could commit to the interest rate named in our initial term sheet, and encountered a challenge related to an IRS rule that appeared to prevent us from moving forward with a 0% interest rate. By working with ImpactAssets, our donor advised fund platform, we found a solution that allowed us to honor our original commitment.
However, we didn’t share these ongoing attempts to find a solution with EB PREC until we had a clear path forward. In doing so, we left EB PREC in a very difficult situation, which was unnecessary. This was our third error; we could have named to EB PREC that we would look into what happened and come back to the team.
In the end, we were able to honor the first term sheet we issued. We appreciated EB PREC naming the impact changing the terms would have on them as an organization, both reputationally and to their budget. This moment also served as a reminder of the power we hold in the relationship as funders and how we have an obligation to be fair and mindful in utilizing that power. As funders, we should never put our partners in a position to have their integrity questioned, and not honoring the original terms could have led to this exact situation.
Going forward, we have learned that it’s important to:
- Name and own our mistakes, even if inadvertent.
- Check in about assumptions and expectations throughout the process, both as a team and with our movement partners.
- Remember that people use the terms we provide in multiple ways, so we should be clear and consistent in our communication of terms and conditions.
Through this process, we gained clarity about how we want to engage with movement partners, and also how we want to organize funders and philanthropy-serving organizations to provide non-extractive capital. We recognized that part of our role and responsibility is to challenge traditional financial systems that don’t work for our communities, and ultimately to shift and transform those systems.
The Restorative Economies Fund (REF) Team:
Nwamaka Agbo, CEO of the Kataly Foundation and Managing Director of REF
Lynne Hoey, Chief Investment Officer
Lina Shalabi, Executive Assistant to the CEO
Jocelyn Wong, Capacity Building Director and Analyst with REF
This blog post is a part of a series from the Kataly Foundation on failure and philanthropy. Read the first post here.
