By John Wasik
CHICAGO, November 23 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
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
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
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.