great ideas - social investments supporting human services

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Great Ideas:

Social Investments Supporting Human Services

November, 2002

Produced by Francie Brody, Brody Weiser Burns

Through Subcontract with the Alliance for Children and FamiliesWith Support from the Annie E. Casey Foundation


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Great Ideas:

Social Investments Supporting Human Services

November, 2002

Produced and Edited by Francie BrodyBrody Weiser Burns

Contributing Writers

Nancy Andrews, Low Income Housing FundRachel Bluestein, Seedco

Francie Brody, Brody Weiser BurnsMarlowe Greenberg, Foothold Technology

Debbie Gruenstein, The Finance ProjectBrian Langdon and Abby Anderson, Family Services Woodfield

Andy Lewandowski, Brody Weiser BurnsGreg Ratliff, Aspen Institute (former MacArthur Foundation)

Michael Schaaf, Community Investment Associates

Thanks also to the human services agencies, community development financeinstitutions, and the social purpose businesses featured in these case. In somecases they provided documents that were used to help write these cases. More

importantly, they provided many of the great ideas in this document.


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Introduction

By Francie Brody, Brody Weiser Burns

Great Ideas is a compilation of innovative social investments that supporthuman services. We were asked to compile these stories in preparation for aDecember, 2002 meeting about social investment in support of human services.This meeting was organized and hosted by the Alliance for Children and Families,with support from the Annie E. Casey Foundation.

Great Ideas features many types of social investments supporting humanservices, particularly those offering innovations that move past barriers tofinancing in order to address difficult social problems. If successful, Great Ideaswill inspire more social investments to support human services. It also willstimulate new ideas and creative thinking about how to use capital to address

important human service challenges.

The 22 great ideas in this document are organized into three major clusters,according to the uses of the social investments dollars:

1. Working capital needs of human service organizations,2. Facilities development and financing to create them, and3. Social purpose business venture development and expansion.

Working Capital for Human Service Organizations

Examples of social investment for working capital were the most difficult ones tofind. This was somewhat surprising in light of increasing agency reliance oncontract financing and third party fees, payable after services have been provided.When organizations must pay the cost of delivering services weeks or evenmonths before receiving reimbursement, they need to accrue unrestricted andliquid net assets equivalent to at least several months of their annual budgets.

Yet the majority of organizations do not have such permanent cash reserves,adding stress and uncertainty about management issues as basic as timely deliveryof payroll checks to staff. Although some organizations manage this problem withbank lines of credit, many find that bank lines either are not available to them orare insufficient to meet their need. Without large capital/endowment grants orsubstantial annual profits, at least part of the solution must come from new formsof financing.

Great Ideas: Investments Supporting Human Services November, 2002Alliance for Children and Families & Annie E. Casey Foundation Page 1Produced by Francie Brody


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The cases in the working capital section of this paper are drawn fromintermediaries that have begun developing loan structures and programs to addressworking capital needs.

Facilities Development

The second chapter offers a series of examples of innovations in socialinvestments for facilities development. Although still offering many challenges,facilities development is the most mature segment of human service socialinvesting, both to support service delivery space and also for enriched specialneeds housing. This financing typically involves a combination of more than onetype of financing, including charitable dollars, public sector funding, bank financing and such private sector investments through such vehicles as publicbonds and tax credit programs.

Although the facilities examples in this paper feature both direct service providersand financial intermediaries, most of these great ideas address the challenge of expanding and replicating facilities development strategies that have beensuccessful on a small scale. Some of the great ideas also feature efforts tointegrate business and organization development with the development of expanded facilities.

Financing for Social Purpose Business Ventures

Social purpose business ventures are emerging in many industries and sectors.

The vast majority of these ventures find it extremely difficult to raise financing,both during the early stages of the businesses and when they wish to expand.Most of these ventures live with an ongoing tension between financial goals andprogram goals. Some of them define success as generating earned income tosupport a portion of their expenses, improving overall sustainability.

Other social purpose business ventures are profitable or anticipate becomingprofitable once they grow large enough to operate at an efficient scale. Thesebusinesses often need flexible, patient investment dollars, but will not need grantdollars once they pass the breakeven point. The major exception may be futureresearch and development in some cases. There are many barriers to providingsuch financing, even though these ventures are or will be profitable, most oftenthat the anticipated profits will not be sufficient to support R&D, growth andinvestor returns simultaeously.

Traditional venture capital is unlikely to take an interest because these venturesusually are too small. In addition, they often either project more modest profitsthan traditional venture capital seeks, or they intend to use a substantial portion of Great Ideas: Investments Supporting Human Services November, 2002Alliance for Children and Families & Annie E. Casey Foundation Page 2Produced by Francie Brody


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the profits to subsidize the parent nonprofit. Community development venturecapital intermediaries and some angels and other social investors do invest infor-profit social purpose businesses, but do not yet have the capacity to fund alarge number of them. Most of these special purpose venture capital funds areregional in nature, may only be comfortable investing in for-profit companies andare likely to seek relatively high potential returns. This makes financing evenmore scarce for nonprofit social ventures. Only a few CDFIs and foundationsprovide this type of financing, though that number is increasing.

Most of the great ideas in this paper involve social purpose businesses directly,with two examples of financing intermediaries developing programs to addressthis need. Many, but not all of them have nonprofit legal structures or remain aprogram of a nonprofit human service agency. The section also includes twofinancial intermediaries.



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Table of Contents

Introduction

Section I: Working Capital

Rubicon Ways to Work, Inc. Missouri State Tax Credit Proposal Community Organization Financial Assistance Program Lower Manhattan Small Business and Workforce Program

Section II: Facilities

A. Human Services Fremont Family Resource Center Using New Markets Tax Credit Oyster School The Doe Fund

B. Financial Intermediaries Illinois Facilities Fund ABCD Initiative Low Income Housing Fund

C. Home Ownership Worcester Homeownership Initiative Asset Protection Initiative Fannie Mae Predatory Lending Program

Section III: Social Purpose Business Ventures

A. Business Ventures Childrens Home and Aid Society Community Sign Language Services Foothold Technology Working Today Educational Products

B. Intermediaries Coastal Enterprises Nonprofit Venture Network



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Rubicon Programs: A Case Study in Capital InnovationPrepared by Nancy Andrews, Low Income Housing Fund, October, 2002

I. Project Description

Need/Background : Twenty-five years ago, community development was seen asupgrading the physical infrastructure of communities and engineering economic reversalsof distressed areas. The human service providers down the block - the job trainingagency, community health care provider or child care provider - were considered less apart of community development and more rooted in the original War on Poverty.

Now, however, leading community developers recognize that no single strategy willresolve the problems of poverty and neighborhood disinvestment. They have begun toseek comprehensive solutions, with multiple program thrusts. Community developers areoften focused on childcare centers, health services, learning centers, after school

programs and workforce development programs. High performing organizations havebecome complex, multi-dimensional enterprises, with many projects being managedsimultaneously. This contrasts sharply with the realities even a decade ago, whencommunity developers generally worked on one project at a time. As a result, theircapital needs have changed.

Today, project by project financing no longer serves the needs of high performingcommunity development entities. Such financing tools are loaded with brain damage for the community developer, who must organize and manage multiple financing sourcesfor multiple projects to the community development financial institution, who mustoversee detailed requests for each draw of funds.

For high performing, well established organizations, this way of acquiring capital isoverkill. Rather, their track record suggests that they can be trusted to self-manage and toundertake multiple projects in a professional manner. Such organizations need (anddeserve) something more akin to equity or corporate financing: flexible, patient capitalfor their overall operations, working capital needs and the multiple projects under theirmanagement. The solution? Equity, but with a twist: patient investments in highperforming social institutions, where return is measured in a double bottom line - adecent financial return combined with a social yield, measured in the improvedproductivity and output of the organization.

At present, the CDFI field has been capitalized with relatively short-term funds, and

therefore, can only make loans with shorter terms. This source of capital cannot fullyserve the needs of the high performing social service organizations that have emerged inthe past decade. Rubicon Programs in Richmond, California, is a case in point.

Borrower Summary : Rubicon Programs is a 27-year-old organization helping thehomeless and other at-risk populations achieve employment, long-term stability andeconomic independence. Rubicon provides three main types of services:



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Integrated counseling services, including mental health counseling, substanceabuse counseling, and others

Transitional and permanent housing

Job training and placement services

Rubicon serves 3,000 people annually, operates three businesses, manages nearly 100housing units and provides integrated counseling services to over 1,000 individualsannually. Rubicon's three programs combine to make a measurable and real difference inthe lives of the hardest to serve. Rubicon's record of success is one of the strongest in theUS, with between 70 and 80 percent of its workforce trainees remaining employed oneyear later.

Rubicon operates a $14 million annual budget and employs 275 individuals. It hasevolved into a complex medium scale business operation. Yet, the nature of its activitiesmeans that it will operate on a break-even basis, with net operating margins averagingtwo to three percent, rather than a highly profitable basis. Even in the best of years, itsnet operating margin might reach a high of five percent. This means that Rubicon has notbeen building up much in net worth or internally generated working capital. The result isthat as Rubicon has grown, it has become cash starved. In the recent past, Rubiconoperated a $14 million annual budget with less than $150,000 of cash in hand, or theequivalent of four days of breathing room. Cash flow was the issue of the hour andexpansion capital was the issue of the day.

II. Social Investment Technique

A for-profit enterprise would seek investors to provide the working capital needed tosupport growth. However, Rubicon could not be successful in this strategy, because itssocial impact creates returns that are unattractive even to socially motivated businessinvestors. The CDFI industry offers short-term loans, which lack the patience or theequity-style features to fuel Rubicon's future success. Yet, the situation Rubicon faces is

financible . Rubicon can repay invested capital at a reasonable rate. It does not need torely strictly on grants or even recoverable grants.

In the last two years, the Low Income Housing Fund (soon to be re-named the LowIncome Investment Fund) has experimented with "equity with a twist" with an investmentin Rubicon Programs. The investment was a $500,000 revolving, medium-term workingcapital loan, bearing an interest rate of 7.5%. Like most working capital lines of credit, itwould be unsecured; however, draws would not be closely underwritten or monitored.Moreover, the loan would have a three-year repayment term, rather than a one-year term.Low Income Housing Fund (LIHF) also has made working capital loans with terms up to10 years, with self-amortizing structures. Over several years, Rubicon drew upon andrepaid more than $1 million, using this revolving structure.



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III. Financial Benefits and Risks

These are unusual capital structures that go beyond the boundaries of traditional capitaltools. They serve a purpose unique to the nonprofit nature of the community

development and human service fields, and do not have immediate analogues in privatecapital markets. The payback is measured not only financially, but also and moreimportantly in unlocking the potential of high performing social entrepreneurs, likeRubicon.

Managing a $14 million budget on $150,000 in cash is a feat worthy of the most talentedCEO. It is distracting to the organization and impedes achieving the social mission. Thegoal of this investment is to allow Rubicon and other social agencies to reach theirperformance potential, serving as many low income clients as possible. The risks aresignificant, because like any equity or risk-capital instrument, repayment hinges uponsuccess. And, success is not guaranteed.

IV. Lessons and Policy Implications

Yet, the need for innovation in this area is emerging with force. Capital products likethese are necessarily limited to organizations with a strong and reliable track record.They depend on financial performance covenants agreed to by the lender and theborrower. Capital instruments like the one described above - and many variations on thisapproach - are needed to take successful community developers to the next stage in theirevolution.

To do this, experimental programs are needed to test new products and to develop

reliable underwriting parameters and performance metrics. Moreover, experimentationand testing are needed to determine appropriate pricing and yield levels, as well as socialimpact "returns." However, after a reasonable period of development and trials, a newapproach to capital and a new calculus for measuring social return could be available tocommunity developers. The result could be a second revolution in communitydevelopment and anti-poverty programs.



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Ways to Work, Inc.

Prepared by Andy Lewandowski, Brody Weiser Burns, from Ways to Work documentsWith assistance from Dan Magnuson, Ways to Work, Inc.

I.

Project Description Emergency loans to individuals Despite working hard, low-income families teeter on the brink of poverty. Unexpectedexpenses, such as car repairs, often disrupt the lives of low-income families that aretrying to become economically independent and threaten their ability to support theirchildren. Most families in this situation are unable to secure credit from banks, and thusan event, which many would consider an annoyance, becomes a severe setback for thesefamilies, jeopardizing the ability of breadwinners to maintain their jobs.

Ways to Work, Inc., loan program, is a national intermediary that provides access to low-interest debt capital and technical assistance to member organizations of the nationalassociation, Alliance for Children and Families, which want to start the Ways to Work loan program. The loan program was originally established in 1984 as the Family LoanProgram by The McKnight Foundation in Minnesota. Loans are available for automobilepurchase or repair, mortgage or housing expenses, childcare, and other purposes.

To be eligible for loans, borrowers must be either employed or pursuing post-high schooleducation that will lead to employment, have exhausted other loan sources, havesufficient disposable income, be the parent of a dependent child, and have a householdincome that does not exceed 80 percent of the areas median income.

There are Ways to Work program sites in 35 communities across the United States. Thisprogram has assisted more than 18,000 families with more than $23 million in loans sinceits inception in 1984. The Collective Default Rate among Alliance sites has beenapproximately 14%.

II. Social Investment Technique IntermediaryGuarantee program

Ways to Work, Inc., a national intermediary : Ways to Work, Inc, a federally certifiedCommunity Development Financial Institution (CDFI), has established a source of morethan $10 million in low-interest capital that is available to the Alliance for Children andFamilies member organizations. The Ways to Work national intermediary provides loansto member organizations for 5-year terms at an interest rate of 2.5%. Each Alliancemember is eligible to receive up to $310,000. To receive capital from Ways to Work,local loan programs must be capable of distributing at least 60 loans per year, and showthat they can raise the $90,000 per year that it typically costs to fund operations, whichprimarily consist of a full-time loan coordinator and a loss reserve.

Ways to Work, Inc. has received support in the form of grants (~ $9 million) and low-interest debt (~ $8 million) to establish this investment fund. The availability of thiscapital reduces the amount of money and time that Alliance members must spend onGreat Ideas: Investments Supporting Human Services November, 2002Alliance for Children and Families & Annie E. Casey Foundation Page 8Produced by Francie Brody


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fundraising. In addition, the usage of debt brings with it a disciplined approach torunning the loan program. 1 Institutions that supported the creation of this fund are: TheMcKnight Foundation, the US Department of Treasurys CDFI Fund, Bank of America,the John S. and James L. Knight Foundation, and US Bank.

Local Alliance member loan programs : The local loan programs use the capital fromthe Ways to Work CDFI to provide loans ranging from $500 to $4,000 to low-incomefamilies in need of funds to cover specific, emergency expenses, so that they can retain a

job or continue an educational program.

The Alliance member organizations use the capital from Ways to Work, Inc. to create aguarantee pool for a local bank that distributes the loans to individuals. The bank partnerbenefits from this relationship, because it helps the bank meet the credit needs of thecommunity it serves, gaining lending credit towards the Community Reinvestment Actrequirements.

Each individual borrower must make monthly payments including modest interest (8%maximum rate), and must fully repay the bank loan within two years. The participatingbank utilizes funds from the guarantee pool only in the event that a particular borrowersloan becomes 60 to 90 days past due. In this case, the Alliance member uses theguarantee pool to make the bank whole and assumes the collection process. The Alliancemember also is responsible for raising funds for a loss reserve of $30,000. In the eventthat this Loss Reserve is fully depleted in the course of a year, then the capital from Waysto Work, Inc. is available to make the bank whole. In addition, Ways to Work, Inc. willassume 50% of any defaults beyond 15% but less than 35%.


Ways to Work, Inc. wants to provide Alliance members with the technical and financialresources, so that they can run sustainable and effective loan programs.

The benefits of the current $10 million plus capital fund are that it Provides a source of low-cost capital; Decreases fundraising required to start a local program; Increases financial discipline of Alliance members, reducing default rates; Allows for a more rapid expansion of the loan program.

The risks of the program are

Maintaining program quality as the number of Alliance members forming a loanprogram increases; Balancing the volume of loans provided with the need to contain default rates 2;

1 For programs started since the inception of this $10 million fund, the default rate is approximately 8%.For some of the earliest local loan programs that were funded solely by grants, default rates were in the30% range.


2 The organization is currently exploring different ways to address this issue, as the focus on reducing thedefault rate has led to a decreasing volume in activity in some programs.


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Financial risk associated with absorption of excessive default rates; Inefficiency: there often is a significant educational component to persuade

nonprofit human services providers to finance a program with debt.

IV. Policy Implications

Ways to Work, and its predecessor the family loan program, have assisted more than18,000 families with small loans. This program can serve as a catalyst to help familiesincrease their income, reduce dependence on government programs for low-incomepeople, and expand economic opportunity by improving credit ratings.

Role of intermediary : The role of an intermediary has been essential in helping to movethis field to use a new kind of financing strategy: debt capital. This intermediaryprogram offers many of the benefits of a franchise, with program structures and supportsthat make it possible for less experienced staff to manage local loan programs. Anintermediary can reduce the risk to investors by pooling their resources and spreading the

risk among different investments. At the same time, an intermediary has establishedrelationships with organizations in the field that enable it to allocate resources in anefficient and cost-effective manner. The national intermediary also can engage inongoing programs to reduce losses and develop local capacity.

Persistence: The other learning from this effort is that persistence is necessary. WhenWays to Work first went to Washington, the Department of Transportation told them thatthey were a welfare agency. The Department of Transportation also was lukewarm totheir program, because it promoted cars rather than public transportation. When theyapproached the Department of Labor, the response was that they were a transportation-focused agency. In the end, Ways to Work was able to establish a relationship with the

Department of Transportation and change the way that it perceived car usage. Implementation Strategies : The final policy implication is that strategies changebehavior. In the case of this program, debt capital has provided a high level of disciplinefor Alliance members. This has been beneficial, as default rates have decreased. Thiscould indicate that the programs are becoming more sustainable. However, it also couldmean that the programs are reducing the volume of their loans and playing it safe. Inorder to safeguard against decreasing default rates at the expense of loan volume andsupport local programs in their ongoing fundraising efforts, Ways to Work recentlyestablished a four-year, $1 million initiative that will award local loan programs thatachieve national default and loan volume benchmarks.



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Missouri State Tax Credit for Services to Children and Families

Extracted from agency memo, October, 2002

I. Project Description Proposed State Tax Credit Background: The State of Missouri has creatively utilized state tax credits to supportsocial services. For example, the Youth Opportunity Tax Program extends a 30% or a50% state tax credit to businesses or individuals contributing to an intern or apprenticeless than 20 years of age who is participating in an approved employment program. TheSponsorship and Mentoring Tax Credit provides state tax credits to businesses orindividuals contributing property or funds to approved projects designed to help youthgrow complete secondary education, enroll in and complete post-secondary education,and enter meaningful employment.

Social service advocates in Missouri are proposing the expansion of this strategy of utilizing tax credits to leverage private funding for social services. The proposal involvesthe Missouri Department of Social Services (MDSS) receiving a tax credit allocationwithin its budget. MDSS would then distribute the tax credit to encourage individualsand business to financially support services for children and families.

`

PurposeThe tax credit for services to Children and Families will be used to leverage theavailable funds within the state budget guidelines to make more fore funds availablefor services to children and families.

II. Social Investment Technique Proposed State Tax Credit

The social investment technique is a proposal to create a new state tax credit, whichwould be used as an incentive to encourage individuals and companies to invest inexpanded funding for human services.

Role of State Government through the Department of Social Services Defines the eligibility of participating agencies within existing guidelines and

requirements Defines the specific services that the tax credit supports Defines the results (outcomes) that are to be measured Defines the level of support that an agency/service would receive

Role of Agencies Measure outcomes Remain accountable Respond to local community interest and concerns Promote the use of the tax credit



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The Services to Children and Families Tax Credit is still in its embryonic stages. Inaddition to the hurdle of formal adoption by the Missouri legislature and governor, the

tax credit program requires substantial definition, including definition of administeringagencies, the services eligible for tax credit support, the anticipated outcomes, andadministrative procedures.

Benefits to:State Government Neutral budget impact Allows the State and local agencies to leverage existing dollars to provide greater

services

Agencies Creates private funding streams Increases community participation Allows organizations to focus on programs that are effective.

IV. Learning and Policy Implications

The strategy of utilizing tax credits is appealing to the State and its taxpayers. Taxcredits can have a neutral budget impact, allowing administering agencies to leverageexisting dollars to provide greater services. Tax credits create private funding streams,increase community participation of contributors, and focuses attention on the mosteffective programs.

At the same time, tax credits have limitations. Dependent on the appetite of privatecontributors, the tax credit funding may not match social service needs. Then too, thetiming of the outcome of social service investments may exceed contributors short termhorizons. Missouris existing social service tax credit programs support services thatportend tangible results in a few years. They appeal particularly to employers withsufficient enlightened self-interest to fund programs that strengthen the labor poolsupplying the employers work force. Other social services, despite their effectiveness,may be unable to match contributors needs for results and direct impact on contributorseconomic interests.



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The Community Organization Financial Assistance Program

SeedcoInnovations in Community Development

Prepared by Rachel Bluestein, Seedco, October, 2002

I. Project Description: Intermediary, TA for nonprofits

Overview : The Community Organization Financial Assistance Program (COFAP) is afinancial and technical assistance strategy launched by Seedco in partnership with theUnited Way of New York City (UWNYC). COFAP targets New York City-basednonprofit organizations that are experiencing financial difficulty. The Program buildsupon Seedcos lending experience and Performance Measurement and ManagementSM(PM&M) technical assistance program. Seedco recently received a CDFI award of $850,000 to help launch the program.

Over the five-year period of COFAP, we anticipate that approximately 225 nonprofitorganizations will receive group technical assistance, 150 will receive intensive one-on-one technical assistance, 100 will receive short-term loans and at least 20 will receivelong-term loans.

Need : Over the past year, Seedco has witnessed a significant increase in the demand forbelow-market loans to finance nonprofits working capital needs that result fromdecreases in fundraising revenue and difficulties in managing government contracts. Todate, we have made working capital loans to organizations including: Bowery ResidentsCommittee, the Womens Housing and Economic Development Corporation(WHEDCO), St. Nicholas Neighborhood Preservation Corporation, Safe Space, and theBedford Stuyvesant Restoration Company. We have also made 30 emergency cash flowloans to nonprofits impacted by September 11th, of which 20 have been totally orpartially repaid.

II. Social investment technique: Partnership Loans and TA

Together with the CDFI funds, $4.5 million has been committed to the program. Seedcoand the UWNYC have committed to raising an additional $5 million in order to bringCOFAP to a financing level of $9.5 million. This budget will allow us to make thefollowing products and service available to New York City-based nonprofitorganizations:

A. Loan Products

Through COFAP, distinct lending products will be made available with different lengthterms, each for different purposes:



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1. Short-term (less than one year) cash flow loans of up to $25,000 with either zeroor below-market interest rates. These loans will enable community organizationsto manage periods of severe cash flow shortfall due to accumulations in accountsreceivables and fluctuations in fundraising revenue.

2. Mid-length term loans (3 to 5 years) of up to $200,000 for special financial needscreated by funding shortfalls.

3. Longer-term loans of up to $500,000 with below-market interest rates and maximum terms of up to 10 years for organizational strengthening and programimprovements. These below-market loans will enable community organizations toenhance organizational capacity to deliver quality services as well as increasetheir ability to take on serious programmatic expansion where appropriate.Funding from the CDFI Fund will provide an initial investment in this loan pool.It is anticipated that, in certain cases, the United Way will provide loan guaranteesas it has done on several occasions in the past.

B. Workout Plans and Technical Assistance in Financial Management

As part of COFAP, Seedco and the United Way are creating a financial managementcomponent to help organizations proactively plan their financing and mitigate futurefinancial hardship. This aspect of the project will consist of workshops, intensive one-on-one technical assistance, and a mentoring network. We estimate that 225 nonprofitorganizations will receive group technical assistance, and 150 will receive intensive one-on-one technical assistance. A significant portion of the technical assistance will bedevoted to helping organizations that are experiencing severe financial stress develop andexecute workout plans.



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SeedcoInnovations in Community Development

Lower Manhattan Small Business and Workforce Retention Project

Prepared by Rachel Bluestein, Seedco, October, 2002

I. Project Description: Small Business Intermediary

Need : In late September 2001, Seedco was asked by the Ford Foundation and The NewYork Times Foundation to develop an emergency program to assist small businesses andtheir low-wage workers in Lower Manhattan that had been so devastated by theSeptember 11th attacks. Seedco and the Alliance for Downtown New York, workingwith several community partners, mounted a comprehensive effort to retain and sustainsmall businesses and low-wage workers put at risk by the attacks. The Lower ManhattanSmall Business and Workforce Retention Project was launched on October 23, 2001,with $7.5 million in funding from the Ford Foundation, the New York Times CompanyFoundation 9/11 Neediest Fund, the New York State Department of Labor, and Seedcosfunds.

Emergency supports for businesses include low-interest loans, grants, technicalassistance, wage subsidies, and area-wide services. The Downtown Alliance helpsidentify needy businesses in the area, directs appropriate resources to them, andadvocates on their behalf. Seedco oversees distribution of the loan and grant funds,manages the wage subsidy component, and provides technical assistance.

Small Retail and Manufacturing Business Program: Eligible organizations initiallyincluded more than 1,000 small retail and manufacturing businesses on or below CanalStreet with fewer than 50 employees that had been directly affected by the World TradeCenter attacks. Employing thousands of workers, many of them low-wage, thesebusinesses needed immediate assistance in order to survive. Businesses such as cleaners,repair shops, video stores, restaurants and boutiques received assistance. The projectevolved to include two additional industry-specific components:

Small Grocer Initiative - Lower Manhattan is home to an estimated 300 smallgrocers employing over 2,700 workers. This initiative is designed to assistbodegas, delis, convenience stores, candy stands, etc., and was initiated with agrant from the PepsiCo Foundation.

Small Garment Manufacturing Initiative - Of the 60,000 garment workers in

the city, approximately 15,000 work in Chinatown, only a dozen blocks awayfrom the former World Trade Center complex. With support from UNITE,this initiative assists small garment manufacturing factories and theiremployees.

Professional Service Firm Program - In the summer of 2002, Seedco and theAlliance for Downtown New York established a component targeted toservice businesses with ten or fewer employees. The program, initiated withsupport from the September 11th Fund, is aimed at assisting professional,



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equipment repair, employment and other non-retail businesses. It includes aspecial initiative targeting the World Trade Center and Frozen Zonebusinesses that are attempting to reopen in Lower Manhattan.

II. Social investment technique: Low-Interest Loans with Grants and TA

Types of Assistance Offered Loans : Low-interest loans of up to $100,000 with terms between six months

and three years are being offered to ensure access to capital for rebuilding.Loans can be used for working capital including payroll, rent, and utilities, orto bridge the gap before receipt of funding from other sources.

Grants : Grants of up to $25,000 are available for one-time costs not coveredby insurance policies to help offset the physical losses directly attributable toSeptember 11th. A special program providing grants of up to $50,000 hasbeen established for firms that were located in the World Trade Center or theFrozen Zone. Eligible costs include repairs, equipment replacement,relocation within lower Manhattan, and rent, payroll, or utility expensesincurred during business interruptions .

Employment Retention/Wage Subsidies : Offered through Seedcossubsidiary, the EarnFair LLC, wage subsidies are used to enable smallbusinesses to meet payroll, retain workers who might otherwise be laid off, orto rehire workers already laid off. These subsidies are available for up tothree months to cover 50% of wages and benefits for full-time workersearning $12 per hour or less. For former World Trade Center tenants, thesesubsidies are available for up to $25 per hour.

Business Support Services : Small businesses are eligible for free technicalassistance to help businesses cope with the disaster and plan for an uncertain

future. Services include help with financial, real estate and budgetary issues,legal counseling, business planning, insurance assessment, and systemsanalysis. Many of these services are provided pro bono by associations suchas the Bar association, the Real Estate Board, and the Woman BusinessOwners Association. Businesses also are eligible for no cost area-wideservices that include public relations and marketing, and assistancenegotiating the reduction of fixed costs such as rent and utilities.


Current Status: Through Seedcos Lower Manhattan Small Business and Workforce

Retention Project, more than $19 million in financial and technical assistance has beencommitted to over 500 small businesses in Lower Manhattan. As of August 31, 2002, thefollowing aid had been committed:

Loans: $6.6 million to 194 businesses Grants: $5.3 million to 512 businesses Wage Subsidies: Approximately 750 full-time workers and 225 small

businesses received subsidies, with a value of approximately $3.3 million.



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Seedco WTC Small Business Fund: Responding to the expressed needs of the smallbusinesses in the area directly affected by the attacks and to the desire on the part of many individuals and entities to contribute to this community, Seedco established theWTC Small Business Fund. During the year since the disaster, Seedco has received $25

million from generous corporations, foundations, government agencies and individuals,with about 90% of this funding coming from private sources. We were recentlyinformed that the Empire State Development Corporation had awarded Seedco $19million to expand the loan fund program to cover the area up to 14th Street, and to addnon-profits and other small businesses in New York City directly affected by the attacks.



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Fremont Family Resource Center

Prepared by Debbie Gruenstein, The Finance Project, October, 2002

I. Project Description Social Services Facility

Fremont, California is located at the base of Mission Peak on the eastern shore of SanFrancisco Bay. During the mid-1990s, the City of Fremont hosted a series of dreamingsessions for representatives of the citys social service agencies. 3 During these sessions,representatives from several public and nonprofit agencies began discussing the need tocoordinate Fremonts social services through the development of a one-stop familyresource center. The concept was to provide comprehensive support services fromdozens of public and nonprofit health and social service providers in one location.Services would include:

Adult & youth employment; Income assistance;

Child care information and referral services; Counseling, health care and mental health services; Housing information; Educational programs;

4 Immigration services.Real estate prices in the Bay Area were daunting, however, and co-locating these serviceswould require several millions of dollars for purchasing or building an appropriatefacility. Not wanting to issue a municipal bond, the City of Fremont used a creativelease-purchase arrangement to acquire and renovate a facility for the family resourcecenter.

II.

Social investment technique Long-term lease-to-buy Using Certificates of Participation funds, the City of Fremont financed the acquisitionand renovation of two office buildings for conversion into a resource center. Certificatesof Participation (COPs) are long-term lease-to-buy arrangements often used by localgovernments to finance capital improvement projects without having to issue municipalbonds. Typically, the local government entity, known as the lessee purchases propertyfrom a trustee, or lessor, which holds the asset and raises funds through the sale of COPs to investors. 5 The lessee pays yearly lease payments (principal and interest) to thetrustee, who remits the payments to the certificate holders, until the full amount is repaid.A portion of the interest payment also goes to the trustee. At the end of the term,

ownership of the asset is transferred to the lessee.6

The city used $3 million in CDBG funds to prepay long-term leases for CDBG eligiblenonprofit agencies, enabling these agencies to rent prime office space at below-market

3 http://www.hud.gov/bestpractices/2000/prog_ca.html

4 http://www.ci.fremont.ca.us/Community/FamilyResourceCenter/default.htm

5 http://www.nationalcorrections.com/financing.html

6 http://www.naco.org/pubs/research/briefs/cops.cfm



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rates. In addition, a significant amount of office space was rented at market rates. Therents paid by the tenants at the Family Resource Center are sufficient to cover the cost odebt service on the Certificates of Participation, maintenance and janitorial costs, andsalaries for two staff members who facilitate collaboration and service integration amongthe agencies located at the center.

III. Financial benefits and r

f

isks

ificate holders receive principal plus tax-exempt interest. The leasesd through appropriations from the citys general revenue.

,

Ris

he investment for the certificate holders.of a government

IV. Policy

cess CDBG funds from the Freemont City

Council, the city also had to gain approval from HUD to pre-allocate future

lots,

ngements usually do not require referenda.

n

Benefits:Certare pai

Like municipal bonds, COPs usually receive ratings from ratings agencieswhich allows investors to appropriately assess risk. 7

COP interest is exempt from federal income taxes (and some state taxes). 8 ks:

Variable interest rate leads to some uncertainty about the financial return

on t In order for a lease-purchase arrangement to be tax-exempt, the contractmust meet the federal governments definitionobligation. However, most COP arrangements include clauses that allowthe lessee to terminate the lease if there appropriations are insufficient in agiven year. Therefore, the repayment pledge for a COP may not be asbinding as that of a general obligation bond. 9

implications and lessons

Aside from getting approval to ac

years CDBG allocations. As part of the proposal, project leaders had to showthat they would lease at least 51 percent of the space to nonprofits providingservices to lower income families, as defined by CDBG regulations.Lease-purchase arrangements are not limited to facilities financing and maybe used for other physical capital, such as hospital equipment, parkingand computers to name a few.Local governments often prefer COP arrangements to bond financing. First,unlike bond issuance, COP arraThis may allow funding for unpopular but important projects (e.g. prisons).Second, COP issuance usually is not affected by statutory debt limits, since

the lessee appropriates money annually and the agreements can usually becanceled. However, COPs usually carry higher interest rates that are betwee20 and 100 basis points higher than those they would have paid on generalobligation bonds. 10

7 www.naco.org/pubs/research/briefs/cops.cfmxexempt/default.htm8 www.financing-solutions.com/web/services/ta

9 ibid.


10 ibid.


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Using N

Prepared by Michael Schaaf, Community Investment Associates, October, 2002

Effective provision of social services requires an appropriate physical base of operationsand coordination of services to address the multiple needs affecting clients, enablingthem to tangibly improve their condition. An innovative project using the recentlylaunched New Markets Tax Credit (NMTC) program provides both a home for socialservice providers and an inclusive array of services. (The NMTC program providesfederal tax credits to for-profit, certified entities that invest capital in businesses ornonprofit organizations in designated distressed communities.)

I. Project Description: Social Services Facility and Job Creation

Similar to many communities of comparable size and age, a distressed neighborhood in amedium size Midwestern city was beset with multiple problems: high rates of povertyand unemployment, abandoned buildings blighting commercial and residential areas, andperhaps most difficult to addressa lack of hope. A continuing influx of previouslyincarcerated individuals exacerbated these and other problems emblematic of distressedinner city neighborhoods. Due in part to the deteriorated physical conditions, thecommunity was under-served by social services.

A regional nonprofit with a successful track record in community economic developmentand net assets of less than $300,000 accepted the challenge of assembling projectsresponding to these manifold problems. The nonprofit defined provision of jobs, re-useof blighted buildings, reduction in crime, and expansion of social services as itsobjectives. To accomplish these, the nonprofit developer would need considerablecapital to renovate buildings, create or expand employment, and entice service agencies

into the community. The nonprofit had extensive experience in raising funds fromgovernment, banks, and foundations but little experience with the investment sector.

The nonprofit assembled its capital to address defined needs it had identified: 3 existing businesses that would expand to the distressed target community and

provide jobs open to clients with limited skills, with appropriate financing; Social services and related providers that agreed to expand operations to the

distressed community if suitable space were provided; and A large, abandoned commercial building that, if redeveloped, could provide suitable

space for the 3 businesses and the social service providers, and uplift uses in the area.

The nonprofit negotiated with select social service providers to ascertain their spaceneeds. Providers included health care, counseling, credit management, GED andcomputer education, child care, youth activities, and meal and transportation services, allorganized within one umbrella Skill Center. The nonprofit negotiated with the threebusinesses to plan space needs and structure joint community/business owned venturesthat would be substantially equity financed. The nonprofit determined the content andcosts for rehabilitation to accommodate the tenants needs. The nonprofit then devised a

ew Markets Tax Credit Program to Address Social Service Needs



23/62

coinvestment capital supported by an allocation of NM tax credits.

date

stagere than half of the real

ate t lessines ner Tax

project are significant: new jobs,

tive,

.

e

um

launching a new free-standing entity.

mprehensive financial plan consisting of grant funding for unrecoverable costs, and

II. Social Investment Technique: Federal New Markets Tax Credits

The NMTC element includes a multiple million investment from area banks andcorporations. The nonprofit will utilize the proceeds from the NMTC investment toprovide equity sufficient to enable the real estate and business projects to obtain needeconventional debt. Considered start-ups due to the new site and joint community/privfor-profit ownership structure, the businesses need substantial equity typical for this

f business evolution. The NMTC investments will comprise mooest otal development cost and than half of the initial financing for the three

us ses. The nonprofit will ge ate the balance of the financing through HistoricbCredits, conventional debt, and grants. Upon termination of the 7 years of tax credits, thenonprofit intends to refinance the real estate and the expanding businesses receiving theNMTC investments to repay the capital to these investors. The total cost of the project,

including operating funds, exceeds $100 million.

III. Risks and Benefits

Benefits : The anticipated benefits of thisextension of previously unavailable social services, and redevelopment of blighted real estate. The nonprofit believes that together these accomplishmentswill demonstrate that the community can improve its conditions.

Risks : The nonprofit developer has a capable governing board and developmentteam. Nonetheless, this is a complex, demanding project fraught with risks.Many parties must perform well for the project to succeed. The rental income

from the three expanding business tenants must be considered tenuous from theoutset. Moreover, the nonprofit occupies the sometimes conflicting position of both business investor and business landlord. The nonprofit realistically assessedits uses of funds to assemble the capital it needs to carry out this innovachallenging project.

IV Policy Implications and Lessons

use of NM tax credits offers potential wide applicability toTh social investment inhuman services. In this case, it contributed to a financing package that provided a site for

an service providers in an under-served community. The NMTC investment in thehthree businesses located on this same site also provides a model for human serviceproviders establishing businesses that generate net income to fund their core humanservice activities, or provide ancillary supportive activities, such as job training or jobs.The key factor in utilizing NM tax credits is the willingness of private entities to investand their related confidence in the project. In this case, the nonprofit built thatconfidence through its previous track record, a well crafted plan, and minimizing risks,especially by working with existing businesses to undertake expansions in the distressedcommunity. Expansion of an existing, profitable business is generally less risky than



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James F. Oyster School

Prepared by: Debbie Gruenstein, The Finance Project, October, 2002

I. iption: School Facility

40 D.C. public schools to beonsidered for closure or consolidation. Mobilized by the threat of closing, the Oysterek creative solutions to their facilities needs.

The 21 vingurban s statewas anthe ups ay station, zoo,and ssectorsSuppor

conduca partne

II. ty

resented with the feasibility study, the D.C. Board of Education approved movingInc., a Maryland-based developer, was

wto

l

Project Descr

In the early 1990s, The James F. Oyster School, a public bilingual elementary schoollocated in Northwest Washington D.C., was in desperate need of capital investment. Thefacility, built in 1926, was crumbling and one quarter of the schools 350 students werehoused in portable classrooms that were 10 to 20 years old and deteriorating. In addition,the school did not have adequate science or physical education facilities, the roof leaked,after-school activities were held in converted closets, and the school was not incompliance with the Americans with Disabilities Act. 11

Like many urban school districts, the District of Columbia Public School System had nomoney for school construction or renovation. In fact, the District was in the midst of a

fiscal crisis and the Oyster School was on a list of cschool community began to se

st Century School Fund, a local nonprofit organization that dedicated to improchool facilities, recognized that the Oyster Schools location on prime real easset that might attract private investors. The school sat on 1.67 acres of land incale Woodley Park neighborhood of D.C. and was close to a subw

re taurants. The fund played an intermediary role between the public and privateand engaged the school and surrounding community in a planning effort.ted by a planning grant from the Ford Foundation, the 21 st Century School Fund

ted a feasibility and market study that determined that financing a school throughrship with a private developer was, in fact, feasible.

Social investment technique: Trade of Land for NewFacili

Pforward with a request for proposals. LCOR,s


elected as the private partner. Through an innovative arrangement, LCOR, INC. agreedto design a new school facility and repay a 35-year $11 million revenue bond packageissued by the District of Columbia to finance its construction. In exchange, LCOR wouldreceive the deed to half of the schools property on which it could build an apartment

building and the District would forgive property taxes on the new residentialdevelopment through an arrangement known as a PILOT (Payment in Lieu of Taxes).

In 2001, the new 47,000 square foot state-of-the-art school was completed. The neschool includes a computer lab, library, gym and classrooms specifically designedaccommodate the schools bilingual program. In addition, there is space for after-schooprograms and other community activities. LCOR, Inc. and the District of Columbia 11 www.21csf.org/csf-home/Oyster-oyster_brief.htm.


25/62

Public Schools received the Partnership Award from thenternational Economic Development Council (IEDC) in recognition of their innovative

deal.

. ris

Risks : The financial risk of a low vacancy rate in the apartment complex was small, given

d, whereas the annualamount needed to service the debt is fixed for the term of the bond, property taxes are

cipal gov dannual that increases with property values.

2002 Economic DevelopmentI

III Financial benefits and ks

Benefits : The project allowed LCOR, Inc. to build a 211-unit apartment building on itsnew land in Woodley Park, a neighborhood with rapidly increasing property values.Rents in its new development range from $1440 for a studio apartment to $2855 for a 2-bedroom unit. 12 In addition, although LCOR has to pay $804,000 annually to service themunicipal bond, it will pay no taxes on this residential property for 35 years, regardlessof how much the property appreciates in value.

the tight housing market in Washington DC in general and Woodley Park in particular.The more significant risk was of the deal falling apart due to bureaucratic and political

challenges in a disorganized and racially-charged city government.

IV. Policy implications and lessons

Lesson : Many states and municipalities have under-utilized assets, often in the form of real estate. In fact, public real estate in the U.S. is estimated at about $4.5 trillion. 13 Public-private partnerships can create innovative ways to unlock these assets, leading tocapital investment for community development initiatives.

Policy : There are two major fiscal implications that need to be considered whenevaluating the appropriateness of PILOT arrangements. First, by agreeing to waive taxes

in exchange for debt repayment, the municipality essentially agrees to divert funds fromgeneral revenue to a specific project for several years. Secon

tied to property value. Therefore, the muni ernment is agreeing to accept a fixepayment instead of one

12 http://www.lcor.com/residential1.html


13 www.lcor.com/profile.html


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The Doe Fund

Prepared by Nancy Andrews, Low Income Housing Fund, October, 2002

Special Needs residence facility

Work crews made up of formerlyhomeless participants sweep streets, bag garbage, clear gutters, remove graffiti, etc. In

0 programparticipa eals, training, job placement, and supportive services until

nd outside employment and housing. In1990, the Doe Fund opened its first housing residence in Bedford-Stuyvesant, Brooklyn.

a

the upper east side of Manhattan, a 74 unit SRO for formerly homeless working adults, and a 44 unit permanent

elphia

sing

s and corporations.he Doe Fund also holds contracts with the Department of Labor for welfare to work ctivities and with the Department of Justice for programs for ex-offenders.

II. Social Investment Technique: Long-term loan participation with pension fund

The Low Income Housing Fund (LIHF) served as the lead underwriter in a $23,987,592loan commitment issued in participation with the General Board of Pension and HealthBenefits of the Untied Methodist Church (UMC) to the Doe Fund to provide thepermanent financing for the Porter Avenue Project. When completed, this building willdouble the agencys residential capacity. The loan commitment made by LIHF and UMCwill provide permanent financing for the acquisition and renovation of two adjacent four-story factory buildings located at 89-111 Porter Avenue, Brooklyn, New York providing

ousing and job training services as part of the New


The Doe Fund is a 15-year-old organization dedicated to helping the homeless becomeproductive working citizens by giving them a meaningful chance. The Doe FundsReady, Willing & Able (RWA) Program empowers formerly homeless individuals to re-enter the social and economic mainstream through a comprehensive program centered onwork. The RWA program provides street cleaning services to commercial areas inManhattan, Brooklyn, Queens and Jersey City.

addition to providing paid work for trainees, this program helps change the perceptions of homelessness and the participants perceptions of themselves.

The Doe Fund operates several residential facilities housing over 40nts who also receive m

they graduate from the program and have fou

In 1995 the Doe Fund took over and adapted to the RWA program a 150 person NewYork City shelter facility in Harlem. The Fund also developed and currently manages70 bed transitional residence at 520 Gates Avenue in Brooklyn, a 28 unit supportivehousing facility for formerly homeless people with AIDS on

housing project for families. It has also recently set up new project sites in Philadand in Jersey City, New Jersey.

The Doe Fund operates Back Office of New York, Inc. a direct mail and data procesbusiness, operating out of a warehouse in the South Bronx. RWA participants work inthis business processing bulk mailings and other clerical activities. Back Office hascontracts with Toyota, Help USA, the West Side Y and other agencieTa

400 units of transitional homeless h



27/62

York City shelter system. Under co York City Department of Homeless Services (DHS), the Porter Avenu of the Doe Fund, willacquire and rgan

hase will be the construction lender.

. ce

ng for

00 individuals residing at

an

e,

ces

ntract with the Newe HDFC, an affiliate

renovate the facility and operate it for a period of 20 years. J.P. MoC

II Financial Benefits and RisksI Benefits : The loan to Porter Avenue is uniquely structured, because its repayment souris contract funds from the City of New York. The City is under court order to provideshelter beds for the homeless. The Porter Avenue facility is critically important becausethe City intends to close an 800 bed shelter adjacent to Bellevue Hospital and must findan alternative facility. LIHF was asked to consider providing the permanent financithe Doe Fund project when the New York City Pension Funds declined to do so. Itshould be noted that the Doe Fund does far more than just provide beds, since it willexpand the RWA Program to serve a significant portion of the 4

e facility.th

Risks : LIHF and the United Methodist Pension Fund are taking significant risks with theproject because of the uncertainty of future subsidy streams, which make the facility lopossible. Both LIHF and the Methodist nearly fully discount the value of the property,and even given the current appraisal, the loan-to-value ratio is far higher than 100percent. LIHF and the Methodist Pension Fund are depending entirely on the contract thDoe Fund has negotiated with the City of New York in support of the facility. Howeverthe compelling need for housing for the homeless and workforce development servimake the project a risk worth taking.



28/62

Illinois Facility Fund

Prepared by Greg Ratliff, October, 2002


ry, Human Service Agency Facilities

ilable

hildren, respite facilities for the aged or chronically ill, treatment facilities for substance

e Community Asset Builder program. Ineveloping the program, the Fund recognized that many nonprofits that develop facilities

to better serve their constituencies, are ill-equipped for the job. In particular:

Most lack experience managing the challenges of real estate development. Senior management attention and resources are often diverted from day to day

organizational issues during construction. Nonprofits rarely have the capital to invest enough equity to satisfy the loan-to-value

standards of commercial lenders. Fundraising campaigns to raise the required equity are inefficient and delays in

capital campaign fundraising oftentimes result in lost development opportunities. All of the above is especially true of nonprofit human service organizations operating

in areas of concentrated poverty.

The Fund designed the Community Asset Builder program to provide bridge loans for therequired amount of equity, strengthen nonprofit boards fund raising abilities and derivemaximum use of its own expertise in efficient facility development. Through theproposed Community Asset Builder program, supported by both a grant and a program-related investment, the Fund will act as developer, lender, and fundraising consultant. Itwill offer financial products and technical assistance to nonprofits, shifting the focus of the nonprofit from facilities development to fundraising for future financial stability.

Intermedia The Illinois Facilities Fund (IFF) was created in 1988 through an initiative of the ChicagoCommunity Trust to help non-profit human service agencies obtain long-term financingfor facilities and equipment. Since such organizations typically rely on comparativelyshort-term government contracts for operating expenses, conventional lenders considerthe agencies too risky for standard commercial loans. As a result, nonprofits are oftenunable to secure long-term facility financing unless a substantial fund balance is avato pledge as collateral.

The borrowers in IFFs portfolio include specialized foster homes for abused or neglectedcabusers, emergency shelters for victims of domestic violence, and 18 child care facilitiesfor low income families. Since 1988, the IFF has made 144 loans totaling $24 million tomore than 100 Illinois nonprofits. Through these loans the Illinois Facilities Fund hasestablished working relationships with numerous state agencies, including theDepartments of Children and Family Services, Alcohol and Substance Abuse, MentalHealth, Public Aid, and Corrections.

Community Asset Builder Program : More recently, the Fund received $2.5 million inederal funds for its newest initiative, thf

d



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Applicants can request up to $500,000 (not to exceed 40% of total project costs) in lowinterest (4%), unsecured b s equity in order to

cure loans from commercial lenders. Applicants undergo a rigorous scoring processed o unity d the capacity of the organization. Following

selection, organizations are pa ithenior management and the board to develop a detailed fundraising campaign. The goal

on provided a $1,000,000 program-related investment in the

II. Financial Benefits and Risks

ns that

gramsImproved fund raising skills and broader acceptance of responsibility among board

primary source of take out for loans

V. Policy Implications

e

ridge loans from the Fund to function asebas n the need of the comm an

ired with a fundraising consultant or firm that works wsis to increase the likelihood of a capital campaigns success and to enhance fundraisingcapacity through increased board participation. In parallel, the Fund assumes the role of developer, from acquisition through construction, on the nonprofits behalf.

II. Social Investment Technique Long-term PRI Loan to Intermediary

The MacArthur FoundatiIllinois Facilities Fund, in the form of a loan with interest at 3% for a term of 10 years.A PRI into the revolving fund for the bridge investments successfully leverages $2.5

million in federal funds. In addition, the IFF committed $1 million from its existingpermanent capital to the Community Asset Builder program, which will protect thefoundation PRI from potential losses. The recommended grant of $400,000 over fiveyears supports the provision of technical assistance and training in fundraising tocommunity-based organizations. The primary source of takeout for the loan is fundsraised from the capital campaign.

I

The financial and programmatic benefits are greatest to the nonprofit organizatioapply for support during the development of a facility, and take the form of: High quality, new facility space from which to continue delivering core pro

members for fund raising Reasonable financial cushion to maintain facility over time

Financial risk is greatest to the Fund due to:Reliance on capital campaign as the

Unsuccessful capital campaigns require longer term workout of loan obligationProvision of technical assistance is costly and may not lead to an actual loan on thebooks which is where the real money is made

I The Funds demonstrated successes not only has helped the organization support thecreation of seven childcare centers that together serve 1,400 children in low-incomneighborhoods, as well as a host of other facilities, but also has changed views on theviability of nonprofit borrowers. Eventually the long term commitment of governmentfunding to reliable social service agencies may lead to a broader range of financingoptions for such organizations.



30/62

ABCD Initiative

new childare financing pool of approximately $30-$50 million. This financing package will result

aces in ten years.

ing

tate

vetive.

tution

is mission through the provision of high-volumending and technical assistance to nonprofit organizations working in low income

b n lending to low income housing projects, andince 1998, has also provided capital to child care projects. Since then, LIHF has

ly

of l d at 886,871 spaces in more than 40,000 child cares.14 The needs of the

stimated 2,275,458 California children in poverty are particularly acute. There are morelists for subsidized child care. 15

. ans

T eun tion. In addition, LIHF is working to

at lated investments from financial institutions and otherte Packard Foundation is expected to provide $10 million in

ve

Prepared by Nancy Andrews, LIHF, October, 2002

I. Project description Regional Childcare Initiative

In 2003 the David and Lucile Packard Foundation and its partners will launch theCalifornia Affordable Buildings for Childrens Development (ABCD) Initiative with themission of building a comprehensive and sustainable financing system for quality childcare facility development in California. The Packard investment will create acin financing of nearly 10,000 child care sp

In 2002, the Packard Foundation invited LIHF to become the lead entity for the financcomponent of the ABCD Initiative which includes a $14 million PRI $10 million to beused as a pool for lending to child care providers and community development real es

organizations focusing on developing child care facilities, and a $4 million PRI to seras credit enhancement for LIHF and to induce private investors into the ABCD Initia

Borrower summary : LIHF is a national Community Development Financial Insti(CDFI) working to promote economic advancement and self-sufficiency for the verypoor. LIHF works to accomplish thleneigh orhoods. LIHF has a long history issupported nearly 7,000 slots of child care in California and New York.

Need for Capital : There is a significant need for a stable and efficient source of capitato finance the development of child care facilities in California. In California, the suppl

icensed child care, estimatebusinesses, meets only 22% of the demand from working parentethan 280,000 low income children on waiting

II Social investment techniques Intermediary, PRI Lo

h Program-Related Investment described above is being provided by a privatedation, the David and Lucile Packard Foundafo

gener e additional program-reriva sector institutions. Thep


senior debt and the remaining $4 million in unsecured, non-recourse debt that will seras credit enhancement for other capital invested in the ABCD pool of funds.

14 California Child Care Resource and Referral Network, Child Care Portfolio, 2001. The California ChildCare Resource and Referral Network created this Child Care Portfolio, a bi-annual report analyzing tsupply and demand for child care by cou15

he

nty in the state of California.This is the widely accepted estimate from the State and child care advocates.


31/62

The proposed Program Related Investment from Packard is structured in the followingmanner:

ed to make direct loa

$20 million will be used for high impact, high risk predevelopment loans (these t

ve; $1.7 million in top loss capital or guarantees, attracting other private investors to

0

der partners.

esources allocated by the Packard Foundation will be matched at a ratio of at least 1:1

ACT,

p, Fannieae, Freddie Mac and JP Morgan Chase have expressed interest and in some cases made

imi bebuild further support the Initiative.

Investors will see child care center financing as an attractive community

$10 million PRI to be us ns for facilities; $1 million of this

unsecured three percent deferred interest loans will be precursors to larger, direcloans for new facilities);

$1 million in risk-reserve capital for LIHF to stretch its underwriting standardsand take potentially higher risks for the child care sector;

$1 million in credit enhancement, leveraging up to $15 million in New MarketsTax Credit investments, capitalizing the ABCD Initiati

the projects supported by the ABCD Initiative.

LIHF has requested the $10 million PRI at 1% interest with a 10 year term and the $4

million PRI for security enhancement at 0%, also with a 10 year term, but unsecured andnon-recourse.

Repayment/recovery source for capital: LIHF plans to repay the $10 million PRIinvestment to the Packard Foundation by structuring loans that will be repaid within 1years. The $4 million PRI will be repaid in the amount remaining after capital losseshave been accounted for.

Partners and roles: The Packard Foundation has committed $2 million in grants anprogram-related investments to ABCD as a catalyst to investment by othR

for grant monies and 1:3 for debt. Foundations that have expressed interest in sharingleadership in this effort include the California Community Foundation, the Keck Foundation and the Miriam and Peter Haas Fund. Within the insurance sector, IMPan investment consortium of California-based insurance companies, has indicated astrong interest in investing nearly $20 million in the financing component. Union Bank,Washington Mutual, Wells Fargo, Bank of America, Bank of the West, CitigrouMprel nary commitments. Discussion has gun with the states First Five Commissionto III. Financial benefits and risks

Desired outcomes Facilities housing 10,000 slots of new child care. Financing for childcare centers will be available and affordable.

development initiative.



32/62

LIHF: A Case Study in Capital Innovation

Need/Bhelped hundreds of community development organizations and child care centers servingthe titechnic the nation. LIHFsassi n an im ess to approximately$100 masset o n is in off-balance sheet capital,

r which LIHF is the sole adm

e housing, 75% of which serve the very poor

n 1998, LIHFs lending volume totaled $10 million; at the end of fiscal 2002, LIHFs

s a

g

volving Loan Fund (RLF), is currently fundedrom 110 sources: 53 percent from financial institutions, 21 percent from foundations

funds and other sources.

Pro mrece e rivate

Prepared by Nancy Andrews, Low Income Housing Fund, October, 2002


ackground : Over the past 18 years, LIHFs lending and technical assistance has

na ons hardest-to-reach populations. To date, LIHF has provided capital andal assistance totaling over $313 million in 35 states across

sta ce, in turn, has leveraged investments in poor communities of almost $1.9 billionpressive six to one leveraging ratio. 16 Today, LIHF has accillion in capital for community development projects: $80 million comprises

s n our balance sheet and the remaining $27 millioinistrator. fo

Over its history, LIHF has provided capital and technical assistance support for:

40,000 units of low incom 7,000 spaces of child care 800 spaces for school children in educational facilities more than one million square feet of commercial space

Iapproval volume was $60 million. This tremendous increase in demand for LIHFscapital resources has placed a huge demand on the organization to raise new capital. Aconsequence, LIHF has more than doubled in size in just four years, growing from $36

million in assets in 1998 to $80 million today.However, it has been essential that LIHF grow its net worth or equity base in tandemwith its total assets, create a strong financial cushion for the risk it takes in its lendinactivities. LIHF has managed this growth prudently, maintaining a strong ratio of netassets to total assets. Net assets have grown from $1.4 million in 1988 to nearly $20million today, maintaining the targeted ratio of 20 percent.

LIHFs primary lending vehicle, its Ref and the balance from individuals, public

II. Social Investment Technique


gra Related Investments from foundations formed the earliest capital LIHFiv d, providing a base for growth and for attracting private capital from the p

16 By leveraged, LIHF means that its financing has supported projects with total development costs of $1.9billion, which have been covered by a combination of private and public sector financing, and philanthropicsupport.


33/62

sector. Even mor tributed toLIHFs equ itmentsfrom the pr

undation has invested $5 million in 2% and 3%, ten year

Program Related Investments with LIHF over the past decade. In 2002, the Foundation

g

l equity to fuel future growth is very scarce.

undations play an important role to CDFIs when the term is long. The MacArthurFou a rs, fromthe v Lon te ent and human service

rganizations. CRA-motivated banks generally provide very short-term capital resources

he MacArthur Foundation PRIs are unsecured and therefore, highly flexible in use, asng

d inuency rate in LIHFs

volving loan fund stood at 0.3% on September 30, 2002. Over 18 years of operations,

, p Arthur Foundation or private sector investorslending funds to LIHF and working with LIHF

e importantly, however, some foundations also have conity base or net worth, allowing LIHF to leverage much larger commivate sector.

For example, the MacArthur Fo

took the historic and leading edge step of converting $1 million of these funds from debtinto equity, providing additional strength to LIHFs growth. Without this debt to equityconversion, LIHF could not have continued to grow its assets to respond to growinborrower demand.

The MacArthur Foundations debt-to-equity conversion provided the scarcest but mostvaluable resource possible to a CDFI. While debt is relatively plentiful to highlycapacitied CDFIs thanks largely to the Community Reinvestment Act (CRA) pressurebanks and private financial institutions fee

In addition to this innovative step taken by the MacArthur Foundation, PRIs fromfond tion agreed also to lengthen the term of its remaining $4 million to 15 yeapre ious 10 years.

g- rm capital is in highest demand by community developmo three years or less. Foundations are uniquely positioned to fill a gap that is untouchedby other sources, namely long-term capital.


Twell as administratively efficient for LIHF. The foundation depends upon LIHFs strofinancial management and its strong net worth base for its protection. LIHF has nevermissed a payment, never defaulted on an investor and takes a great deal of pride in itsfinancial management, the strength of oversight provided by its Board of Directors anthe quality of LIHFs loan portfolio. For example, the delinqreLIHF has declared default on $2 million in loans but experienced only $192,000 incapital losses. This is a cumulative historic loss rate of 0.14 percent a statistic thatearns the respect of most private financial institutions.

Thus hilanthropic investors like the Maclike the Bank of America feel quite safe into support their community development and social service program interests.



34/62

The Worcester Homeownership Center:Services to Gain & Maintain Homeownership

Prepared by Michael Schaaf, Community Investment Associates

e

ercester was built prior to 1960. Only 43% of households in

orcester own their home, in contrast to the national rate of 67%. Purchasing a home is.

es

tion

A data are revealing regarding the availability of residential

tion,

ns

construction. Expensive,bprime lenders are active in Worcester.

ons havestablished the Worcester Homeownership Center (WHOC) located on the edge of owntown. WHOC services supplement the private market, enabling clients to rely

substantially on the private sector for the financing and services existing and potential

Applications Applications

Located about 38 miles west of Boston, Worcester is an older, industrial city with a stablpopulation of 172,648, 15% of whom live in poverty. For many residents, obtainingaffordable, quality housing is a persistent problem, especially for residents of lessermeans. The housing is old, requiring repairs to maintain and modernize, as 68% of thhousing stock in WoWincreasing available to upper income groups as prices increased 26% from 1997 to 2001Retaining a home is also a challenge as unemployment rises, the aged stock requirinvestment, and population continues to grow older, relying increasingly on fixedincomes.

I. Project Description Homeownership Asset building & reten Residential financing is difficult to obtain in Worcester, especially in a 15 census tractarea with more severe poverty, less household income, and substantially lower home-

wnership rates. HMDofinancing in this Target area:

AreaApplications per

1,000 People% Originations per % Denials per

15 Tract Area 29 41.4% 31.0%

Metropolitan Area 56 57.1% 19.6%

The low rate of applications implies that residents are unprepared to approach a financialinstitution. The low rate of successful originations underscores this lack of preparaas well as implying inability to satisfy conventional lenders underwriting criteria.HMDA data indicate that the most frequent reasons for denying mortgage applicatioconcerned poor credit history, and inadequate income. For home improvement loans,another obstacle is demonstrating the ability to manage

State of Mass. 50 58.0% 20.0%

Nation 68 48.5% 27.9%

su Three community organizations and the City of Worcester have joined efforts to enhanceresidents ability to acquire and retain their home. The collaborating organizatied



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homeowners need. designed toovercome the ba

Pre-pur , includingFirst-Time Homebuyer Classes and One-on-One Counseling. Of the 900

and

ch or in the W

,

that expanded and strengthened homeownership is goodusiness for them.

II. Social Investment Techniques:

great ideas - social investments supporting human services

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