|Volume 4, Issue 1, 2004||Federal Reserve Bank of Dallas|
Receive e-mail announcing the latest
California CDFIs Fill Capital Gap
The "Momentum Texas" conference offered two examples of successful for-profit community development financial institutions (CDFIs), both from California. They were the Clearinghouse CDFI of Lake Forest and CEDLI (California Economic Development Lending Initiative) of Oakland.
Although similar in structure and mission, the two organizations are distinctive in their approach. Clearinghouse CDFI primarily provides direct loans for affordable housing, community development, small businesses and other qualified CRA activities such as construction and rehab, substandard housing, child care centers, churches and mobile home parks. Clearinghouse CDFI also offers equity investments and provides loan services to businesses that may qualify for benefit under the New Markets Tax Credit program.
CEDLI concentrates on small businesses, usually in colending arrangements with financial institutions. CEDLI also makes wholesale loans to CDFIs to fund smaller businesses in their communities and direct real estate loans to nonprofits for child care and health care facilities and the like. It does no affordable housing lending.
In 2003, Clearinghouse CDFI loaned more than $15.8 million. Over the past six years, it has extended 157 loans totaling more than $61 million, 73 percent of them to nonprofits and 70 percent in low-income communities. Its current loan portfolio exceeds $28 million.
CEDLI made $14.3 million in loans in fiscal year 2003—71 percent to member banks for colending purposes. CEDLI loaned $88 million in the eight years ending in June 2003 and had a $31.4 million portfolio on June 30, 2003. The majority of the funds (57 percent) go to businesses in low- and moderate-income communities.
Both CDFIs have suffered minimal loan losses—in the low single digits.
Clearinghouse CDFI was created in 1996 as a for-profit corporation to address unmet credit needs in Southern California. According to President and CEO Douglas Bystry, the CDFI's initial offering raised $10 million in loan funds and $1 million in equity from 21 regulated financial institutions. Equity investments ranged from $10,000 to $210,000, loan funds from $100,000 to $2.1 million. The CDFI now has about $53 million in assets, and all but two of the investors are regulated financial institutions.
The corporation consists of its investor/shareholders and a nonprofit community partner, which appoints a majority of the directors to ensure that the board never loses sight of its community roots. The CDFI shareholders elect the remaining board members, who then appoint the loan committee.
Being a for-profit corporation helps Clearinghouse attract capital, Bystry said. The CDFI does not compete with its investors, but rather provides added funds that assist them in making loans they might not otherwise have made. "If the loan benefits the community and we think we can get paid back, we can consider it," Bystry said.
"We are saying to our shareholders, 'this is important work, but making a profit is also important,'" he added. "Community development lending can and should be profitable."
CEDLI was organized in 1995 with $38 million in loan funds and $4 million in equity from 33 banks. Its mission, said President and CEO George Williamson, is "to provide access to capital for small businesses and community organizations to facilitate growth in employment as our primary vehicle for economic development." Today the multibank CDFI holds $63 million in loan funds and $7.1 million in equity from 42 bank and three corporate investors.
CEDLI helps its colending partners offer more flexible financial options to small businesses while spreading the risks. The loans, which require no collateral, are made as subordinated debt. Thus, the loans are treated as part of equity—a distinctive feature of the CEDLI program—allowing the businesses to leverage more senior debt from the banking community.
One way CEDLI measures success is by the number of small businesses that "graduate" from its lending program. "Out of all the borrowers we've served, 47 percent have paid us off and expanded their financing without the need for subordinated debt, so they're fully bankable clients," said Williamson.
The most significant measure, however, is the number of jobs created by businesses financed through CEDLI colenders. CEDLI estimates that its loans have helped create more than 2,700 new jobs and retain 13,000 others—an average of one job for every $27,000 in financing.
"That's a pretty efficient level of operation, and we are really pleased with this job creation impact," said Williamson.
"The formula of mezzanine financing is a very powerful one," he concluded. "It remains a pioneering area in terms of economic development lending."
e-Perspectives, Volume 4, Issue 1, 2004