COLUMN-Community loan funds mix charity with social capitalism

Fri Nov 23, 2012 11:13am EST

By John Wasik

CHICAGO, November 23 (Reuters) - When you are deciding how to allocate your charity dollars before the end of this year, you might want to consider investing in a community development financial institution (CDFI).

There are nearly 1,000 private-sector community development financial institutions that operate in all 50 states, according to the CDFI Coalition. They range from local credit unions to community loan funds and they perform a variety of roles from providing venture capital to funding affordable housing.

What's compelling about CDFIs is that they can combine innovative social missions with service to low-income communities. They are community partners that provide financing for projects that have social value or may be neglected by larger institutions. They can target underserved neighborhoods and even develop sub-specialties such as sustainable development and green businesses that have environmental missions.

When you put money into a CDFI as an individual, your contributions are tax deductible, as most are registered 503(c) organizations. Like a conventional charity, your money is pooled with other donations and capital. The difference is that the money is then lent out, usually to organizations within distressed communities.

In the case of a community loan fund, you receive a small return on investment. The institution does the screening and tracking of the recipients. You don't get to cherry-pick specific projects you want your dollars to fund since the money comes out of a pool, but you can pick institutions that specialize in funding projects in defined geographic areas.

Larger institutions work with CDFIs in part because they fulfill their requirements under the Community Reinvestment Act, which requires that banks lend a portion of their loan portfolio to local communities. CDFIs, like conventional lenders, cover their costs through loan interest, closing costs and other fees.

The Chicago Community Loan Fund (CCLF), for example, tackles projects that are often deemed too risky by conventional banks.

It pools money from individual donors, foundations and capital from mainstream banks like Bank of America and PNC Bank, then lends it out to community organizations and social entrepreneurs.

Investors receive a return on investment ranging from 1 to 3 percent annually. Over the past two decades, it's made more than 270 loans totaling $72 million in 60 communities. It has financed projects such as affordable housing units, transitional living for abused teenage boys and myriad family services organizations. In the process, it has created or preserved more than 1,200 jobs and about 1.6 million square feet in commercial, retail or community space.

"We usually work along the lines of affordable housing, including many cooperatives; innovated social enterprises; community facilities and a growing number of commercial/retail real estate to provide more economic development opportunities," says Calvin Holmes, president of Chicago's chapter.

WHAT TO LOOK FOR

The best way to find a CDFI in your own community is through the Opportunity Finance Network, a group that represents these institutions. Their website () offers a locator tool that allows you to search by state, community, organization and lending type. Then ask yourself how you'd like to invest to target your funds.

Here's how investors would work with a fund such as the CCLF: You would accept a below-market return--typically 0 to 3 percent--in exchange for a 'social dividend.' The spread between the below-market rate and what CCLF earns on community investments helps to offset operating costs. Investment terms range from one to 15 years, and interest is typically paid semiannually.

Investments range from a minimum of $1,500 to $4 million or more, yet donations are accepted in smaller amounts.

Before you start your search, though, focus on what kind of activity you'd like to support and find an organization that aligns with your goals. Are you interested in affordable housing? Micro-enterprise loans? Creating jobs in underserved areas? Many CDFIs have specialties, but you'll have to do some homework by reading their annual reports or website to see what kinds of loans they make.

Also check to see if the CDFI you're interested in has submitted audited financial statements. Like most banks, they should keep sufficient reserves to cover bad loans. While this isn't a foolproof document, it gives you some idea of how they receive and spend their capital.

Another important component is fundraising and administrative expenses. If non-program expenses are more than 20 percent of their income, that's a sign that they're inefficient or not spending enough money on their mission.

If you invest in a CDFI, remember that it doesn't operate like a bank under the aegis of the Federal Deposit Insurance Corporation. Your donation is not an insured bank deposit and your money is at risk just like any other investment. Some of their loans will go sour and involve "charge offs," which should be indicated in their financial statements. High charge-off rates can be troublesome, so this is a number to watch carefully.

Since your donation is an investment in a specific underserved area or range of projects, the financials may not matter as much as if you're buying a stock or other vehicle. Your main concern is how the CDFI operates and if it's getting to the people who need their support the most.