The term “capital absorption” is not well-known or easily understood. But it’s critical in the local economic development world, and I recently heard an analogy I think can help people understand it.

Picture an irrigation system designed to direct the flow of money to the projects that need it most. Such a system frees communities from merely hoping that the unpredictable “rainfall” of funding falls in the right place. Instead, the system guarantees it gets there. That’s what capital absorption is.

It’s coordination that helps local places absorb capital investments in the kinds of projects that can literally change what these places look like – things like child care centers, or housing, or downtown building renovations. Reliable systems are established and run by prepared partners to accept the funding when it appears and move it exactly where it’s needed, so the work can get done in ways that strengthen local economies.

All this aligns with the Fed’s goal of fostering a healthy economy that works for everyone. That’s because the better communities and partners attract and use the capital they receive, the more likely they are to grow, create jobs, and improve quality of life.

That unpredictable “bucket of money”

The irrigation system analogy for describing capital absorption comes courtesy of my Federal Reserve System colleague, Charlene “Charly” van Dijk, who works at the Miami branch of the Atlanta Fed. She recently appeared virtually at a webinar we hosted at the Boston Fed and which is posted in its entirety above.

Our purpose was to emphasize this: To make the most of the capital available for community investments, leaders based in those places need to collaborate across sectors – such as nonprofits, philanthropy, municipal government, and business. And they need to develop a capital absorption framework that can attract and maximize investments in their communities.

“You don't know when that bucket of money is going to show up, or if it's ever going to show up,” said speaker Marc Dohan, from the NewVue Communities neighborhood development organization in Fitchburg, Massachusetts. “But you need to be ready for it when it does.”

The first step? Agree on a vision

Dohan’s NewVue group is a leader of the “ReImagine North of Main” project, which was funded in part by a grant from the Boston Fed’s Working Cities Challenge community development initiative.

The North of Main project is a long-term effort to revitalize a downtown neighborhood in Fitchburg by making it a center for arts and culture. It involves, among other things, refurbishing the Fitchburg Theatre, renovating city hall, and building artist-preference housing at a former school.

The project is “multi-” in about every possible way: multi-year, multi-partner, multi-sector, and involving multiple other projects costing multi-millions of dollars. And Dohan told our group that the best first step the organizations involved took was agreeing on the vision that united them – improvement in the North of Main neighborhood.

Dohan said the process has demanded creative thinking at every stage, as well as “coopetition” (cooperation in a competitive environment) between the organizations involved.

Several organizations, including city government and Fitchburg State University, were developing their own capital projects as part of the initiative and vying for limited resources. But each acknowledged that funds were more likely to land in the city if leaders got behind one project at a time based on readiness and alignment with the funder’s priorities. So, projects would put aside their individual goals to present a unified front.

“Seeming like you have your act together really makes a difference for, particularly, public funders,” Dohan said. “They want to know that something's going to happen.”

What to do – and what not to do

My Boston Fed colleague Carmen Panacopoulos, a former banker, made a similar point when I asked her during the webinar what financial institutions want to see when they’re considering capital projects.

“For me, capital follows collaboration,” she said. “Financial institutions really want to invest where they see aligned leadership, shared priorities, and readiness.”

Panacopoulos also shared a helpful list of DOs and DON’Ts for leaders hoping to approach banks and other institutions for funding. Here are some of them:

• Do build a relationship before the funding request.

“Really foster (relationships with) the existing organizations,” she said. “Be specific about how the institution can help.”

• Do tie your goals to specific outcomes, like job growth, financial inclusion, or more housing.

• Don't treat prospective partners only as a source of money.

“They're a strategic partner, too.”

• Don't assume they know what the community needs. Bring them into conversations with residents and community leaders.

• Don't wait for the perfect moment to ask. Bring possible partners in early.

“The more transparent and inclusive you are, … the more likely financial institutions will engage deeply and stick around.”

Of course, our speakers added much more than I have space for here, please feel free to check it all out above. And here’s a report on capital absorption we at the Fed put together years ago that still holds up.