03 Apr Financing Dreams: CDFI 101
More than one in four households in Greenville County have zero or negative net worth. Almost 20% of households are underbanked (using pawn shops, payday loans, or non-bank money orders to get by). It would take 228 years for black families to accumulate the same amount of wealth as whites. If our community is serious about promoting economic mobility, addressing this wealth disparity is fundamental.
Community Development Financial Institutions (CDFIs) are central to narrowing or eliminating this gap, but many philanthropic funders and individual investors aren’t familiar with the work and the potential they hold. In March 2019, GPP began a special series on local impact investing, beginning with this session on CDFIs. Attendees had a strong positive response to the potential of this tool.
As a reminder, the January 2019 GPP meeting looked at how funders can invest into local companies, organizations and funds with the intention to generate measurable community benefit alongside financial returns. Most foundations use just the IRS-required 5% of their assets to make grants to impact community, and they invest the rest in a portfolio of equities and fixed income investments. But if foundations put even another 5% of their assets to work for the community through impact investments – which still remain an asset of the foundation – they can exponentially increase the difference they make. Deborah McKetty, outgoing President and CEO of CommunityWorks and incoming Vice President of Community Impact at United Way of Greenville County, presented.
CDFIs were born of the urban renewal efforts (and failures) and civil rights movement of the 1960s. CDFIs are private mission-driven financial institutions that provide capital and development services to low-income individuals and low-income communities.
Community development loans do the following:
- Provide affordable housing (single family and multi-family)
- Provide community services
- Provide financing for small businesses or farms with gross annual revenues equal to or less than $1 million
- Provide financing to revitalize or stabilize distressed areas, disaster areas, or underserved metropolitan areas
- Provide products and services for underserved markets
There are four types of CDFIs:
- Community development banks, which provide capital to rebuild economically distressed communities through targeted lending and investing
- Community development credit unions, which promote ownership of assets and savings and provide affordable credit and retail financial services to low-income people, often with special outreach to minority communities
- Community development loan funds, which provide financing and development services to businesses, organizations, and individuals in low-income communities
- Community development venture capital funds, which provide equity and debt-with-equity-features for small and medium-sized businesses in distressed communities.
CommunityWorks is a nonprofit loan fund, specializing in affordable housing properties, small businesses, nonprofits, and other individual/community needs. CommunityWorks recruited Self Help Credit Union, one of the largest credit unions in the country and also a CDFI, to serve as their credit union partner to offer consumer products such as down payment assistance, home loans, bank and savings accounts, and more. There are two other CDFI credit unions – Carolina Foothills Credit Union and Upstate Federal Credit Union – and no venture capital funds in the Upstate.
In 2017, CDFIs nationwide invested or made loans of more than $5 billion to over 120,000 parties. The average size of each loan was just over $40,000. As one example of impact, in just this one year, these investments supported nearly 30,000 new units of affordable housing.
Deborah presented several local examples of CDFI investments. CommunityWorks provided $175,000 loan to Soteria to purchase a 16 bed facility for men re-entering society after incarceration and has provided other support for cash flow. It also made a $500,000 loan to the Greenville Housing Authority to develop the Preserve at Logan Park, which will create 193 units of affordable housing for seniors and veterans. In 2016, CommunityWorks made a loan of just over $11,000 to a dentist who started New Age Mobile Dental Care, which targets HeadStart centers. Since, the dentist has added a bricks and mortar location.
CDFIs are a great tool for foundations and individuals who want the impact of direct investment in local businesses and facilities but don’t have or want to build the capacity to deliver loans and manage loan risk. CDFIs are re-certified annually by the US Treasury and CommunityWorks is subject to a rigorous third party Wall Street rating. CDFIs pool capital from multiple investors to make community impact loans, which reduces financial risk for investors because CDFIs spread their dollars over diversified portfolio of loans. They also form close community relationships to identify a community’s strengths and form local partnerships, resulting in direct impact in communities – particularly in overlooked and undercapitalized communities.
Meeting attendees were impressed by the capacity of CommunityWorks. Jennifer Derryberry, CFO of CommunityWorks, explained that they are staffed with loan officers and have the systems needed to market and manage a loan portfolio. They monitor and manage risk and hold loan loss reserves. Furthermore, they offer technical assistance and development services to their clients.
There are a number of ways local investors can put their money to work at a CDFI. They can put money on deposit at Self Help CDFI Credit Union, where they can earn 2.75% on deposits made for three years or more. Up to $250,000 is federally insured. This lets our underbanked community members have access to the same wealth building tools as traditional bank customers. Individuals, banks, and foundations can make investments from five to ten years or more with varying interest rates and interest payment terms. This can help build affordable housing, support local entrepreneurs, and more. Most importantly, it provides the patient capital needed to accomplish significant deals that our community needs. AND the funds are still an asset for the foundation, bank, or individual.
Of course, grants are still important and beneficial in the local impact investing ecosystem. Grants help CommunityWorks market to investors and clients. They allow CDFIs to hire more staff and add new services. Many local and regional funders have already invested in CommunityWorks for impact, including: Mary Reynolds Babcock Foundation, Bon Secours St. Francis Health Foundation, the Jolley Foundation, Hollingsworth Funds, South State Bank, Capital Bank, Wells Fargo, Pinnacle Financial Partners, United Way of Greenville County, and Community Foundation of Greenville.
If members are interested in learning more about working with CDFIs, they can contact Jennifer Derryberry.