This post is the second in a series about the results of the Partnerships for Raising Opportunity in Neighborhoods program (PRO Neighborhoods), a grant program of JPMorgan Chase & Co. that provides grants to support collaboration among groups of community development financial institutions (CDFIs). See previous post and our recently released progress report.
Early results of the PRO Neighborhoods program suggest that new ways of deploying capital can help improve the lives of Americans who live in low-income communities.
For more than two decades, community development financial institutions (CDFIs) have been lending money to improve social conditions in America’s disadvantaged neighborhoods. Despite their growing importance, however, CDFIs generally have been unable to raise enough capital to meet the potential demand in their underserved markets. The small size of most CDFIs (the average loan fund holds only $7 million in assets) and the risky appearance of their loans (due to the nature of their borrowers and locations) often scare off large institutional lenders and capital market buyers.
To encourage CDFIs to expand their lending capacity through collaborations, in 2014 JPMorgan Chase initiated the PRO Neighborhoods program. In the first year, JPMorgan Chase awarded $33 million to seven groups made up of 26 CDFIs with less than $75 million in net assets. In a new progress report, we found that awardees devised a variety of creative strategies to meet their need for additional capital.
Some of the awardees increased funding to community development projects through leverage or partnerships. In the Adelante Phoenix! collaboration, Raza Development Fund (RDF), committed its own funds to finance the riskiest portion of redevelopment projects (including site acquisition and predevelopment for multifamily housing and commercial space in industrial South Phoenix). By taking the riskiest position, RDF set the stage for other lenders (including traditional lenders) to fund the less risky phases of redevelopment. Several of RDF’s community redevelopment projects would not have been built if RDF had not provided the early financing.
The Expanding Resident Owned Communities collaboration helps residents of mobile-home parks to buy the land they live on. Through this collaboration, ROC USA expanded their community outreach to new areas, and combined their lending power with Mercy Loan Fund and Leviticus Fund. By collaborating on these large and unique loans, the group is able to make more loans while reducing the risk to each group member, thus increasing their ability to preserve this often overlooked source of affordable housing.
One way to raise capital is to sell loans on the secondary market – a method employed by many financial institutions. As a part of the NALCAB Network collaboration, Affordable Homes of South Texas shared its first-mortgage product and its secondary market buyer with its partner Colorado Housing Enterprises (CHE). Now that it can sell mortgages, CHE has increased the velocity and volume with which it acquires capital and makes loans.
Another collaboration executes a more direct means of raising capital. The Calvert Foundation, one of the emerging Small and Medium Enterprises (SME) partners, sells a bond-like debt security directly to investors and uses the proceeds to fund loans to other CDFIs. Calvert markets these “Community Investment Notes” as a way to get competitive returns while supporting community development and social enterprises. The current interest rate on Calvert’s 10-year note is comparable to current rates for investment-grade corporate bonds. So far, Calvert has raised $3.8 million for its SME partners through the sale of Community Investment Notes.
The SME lending partners also obtain capital by selling portions of their loans on the secondary market. They are able to do so in part because they make Small Business Administration (SBA) loans, which are partially guaranteed by the federal government. By selling the guaranteed portions of the SBA loans, the SME partners obtain new capital that they can lend to low- and moderate-income income borrowers. In addition, the SME partners have shortened the time it takes to originate SBA loans by adopting a shared technology platform for SBA loan compliance and origination.
Taken together, the PRO Neighborhoods collaborations demonstrate a wide range of strategies to increase the flow of capital to underserved communities. The early results of their efforts offer promising evidence that collaboration can help CDFIs access capital, expand their lending, and do more to support low-income communities and their residents.
Four important lessons emerge from this work:
- Know your markets. This means not only identifying and reaching potential borrowers, but also learning about the competition for those borrowers. According to Kate Barr, chief executive officer of NAF, MNLA’s leaders initially thought they could target nonprofits that fell just short of traditional banks’ credit standards. But in the first year of the partnership, they discovered “that strata doesn’t exist.” Instead, the partners found clients who needed funding for unique (but financially viable) transactions that traditional banks would not finance, like converting an abandoned grocery store into a community space. Armed with this knowledge, MNLA aimed an intensive outreach campaign at community organizations and professional networks and created a viable market niche.
- Some worthy nonprofits require non-standard loans. Underwriting these types of loans requires a deep knowledge of the prospective borrowers’ finances, operations, and goals, which allows lenders to match the needs and financial resources of their customers. Making a loan to Cincinnati’s Bi-Okoto Drum and Dance Theater, recalls CDF president and CEO Jeanne Golliher, “took a lot of sitting down, rolling up sleeves, and getting comfortable with the realities behind their financial statements.” Although such personalized loans are time consuming, they provide needed credit to agencies that otherwise might now have been able to receive it.
- CDFIs may find fruitful collaborations with unexpected partners. Different areas of expertise may offer the possibility of complementary business lines. Although CDF’s small staff regularly approved loans for affordable housing projects built by nonprofit entities, the expertise and familiarity needed to make facility loans was, Golliher observes, “beyond our capacity.” Within the MNLA umbrella, however, the lead organization, IFF, not only provided training in underwriting such loans, but also the capital to fund them.
- Partner organizations should seek common understanding of key terms, concepts, and practices. Lending practices are complex, and lending practitioners use shorthand to refer to different aspects of their work. So it is that key officials in organizations, even in CDFIs with similar missions, often use different language, approaches, and practices when crafting loan packages. Therefore, groups working together need to make sure that they agree on the meaning of the many terms and actions involved in the lending process. Particularly in the early stages of a collaborative venture like MNLA, explains Joe Neri, CEO of IFF, “you really cannot overdo” the time and attention paid to defining terms and practices.