While the larger economy has been booming, many of the nation's most distressed communities remain impoverished and isolated from economic opportunity. Community development finance is underdeveloped and disconnected to the private capital markets. The question of how to connect emerging communities to capital markets is propelling the community development field to seek a better understanding of the workings of the U.S. financial system in such places. The resulting trend toward more market-based approaches to community development is producing creative spins on traditional equity and debt instruments. Among the new generation of financial instruments for nonprofit community development is the Equity Equivalent Investment, or EQ2, an instrument that is part equity, part debt. It is a loan to nonprofit community development and lending organizations that behaves like equity but is actually deeply subordinated debt. This article examines the Equity Equivalent Investment.

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