Minneapolis-based Community Reinvestment Fund (CRF) has launched a $500 million program through a partnership with Wall Street's Morgan Stanley that will enable the 22-year-old nonprofit community development institution to buy, pool and sell more U.S. Small Business Administration loans.
The loans are collateralized by commercial real estate in inner-city neighborhoods and small towns. CRF supports community development agencies often working with banks and municipalities to finance higher-risk loans that otherwise wouldn't get financed entirely by commercial lenders. It says it has injected more than $1.1 billion into low-income neighborhoods nationally, helping to retain or create 43,000 jobs since 1988.
CRF buys loans made by community lenders, pools them and sells them to institutional investors. That frees up capital to get more deals done. The Morgan Stanley partnership is designed to help community banks lend to small businesses through the SBA 504 program. Frank Altman is CRF's longtime CEO.
Q What's a tangible example of what CRF does? Let's start with an abandoned gas station at 2646 Cedar Av. S. in Minneapolis that was transformed into Phillips Garden, a landscaping company that employs about 20 people.
A We partnered with the city and the Metropolitan Consortium of Community Developers that focused on acquisition and rehabilitation of buildings along the corridor between E. Franklin Avenue and E. Lake Street, and along W. Broadway in north Minneapolis, where capital wasn't flowing. It was a "gap" program that created a second lien, secured by real estate, that was going to be occupied by the owner. We have now financed 90 loans over the last decade in some low-income neighborhoods.
Ed Burke, the owner of Phillips Garden had worked out of his house in the neighborhood for years. That old gas station was a site of some drug dealing. Ed saw the opportunity to transform that old building from an abandoned community detriment to a working asset. Franklin Bank could not make the entire loan on its own. The capital gap was filled by a community development agency and we bought the loan. The long-term financing helped them get through the recession of 2008-09. They have created jobs, grown, improved and beautified the neighborhood.
Q How do you raise capital?
A We get money donated by foundations and institutions. We also use market-rate capital from pension funds and financial institutions. We get debt capital from socially motivated investors at below-market rate, including foundations and high-net worth individuals. And contributors. That's about 20 percent of the capital we raise.
We get the other 80 percent of capital from the capital markets by issuing Standard & Poor's-rated, asset-backed securities. We've issued three series of business loan securities and one [for] affordable housing. We've raised about $600 million that way. We also have raised about $675 million through the issuance of Federal New Markets Tax Credits [used by institutions to offset tax liabilities]. We've raised about $1.275 million [to underwrite] loans.
Q How did you survive the recession?
A Going into early 2009, our [default rate] was less than 0.5 percent losses. We focused our attention on our portfolio. We took some significant losses in what we were holding in portfolio and the market value of what we had sold. But we survived. We continued to purchase loans during the 2009 period through today. And some of our [Wall Street] investors, who had to close the door, have reopened the door. And that's allowed us to bring more liquidity also to affordable housing groups.
Q What's the Morgan Stanley program?
A Morgan Stanley has a commitment to do up to $500 million in loans with us over several years and one other partner in California. We're building a pipeline [of small business-real estate loans] and we'll start that program in July. CRF does all the underwriting and due diligence with our lending partners. This will 'unstick' a lot of capital for our lending partners.
Q Don't tax credits play a role in some of your deals?
A We were among the largest 'allocatees' for the latest round of Federal New Markets Tax Credits in January. It's $77 million. That will be used by the end of August. We're buying a lot of small loans in pools [of] $5 to $20 million. That includes a development on the east side of St. Paul that meant a new plant for 120-year-old Baldinger Bakery. [That $19 million deal was arranged by the St. Paul Port Authority and U.S. Bank]. That's 129 jobs and expansion and cleaning up a 'brownfield.' Those are the kinds of projects we're doing.
Q How do those tax credits work?
A An institutional investor with federal tax liability can offset liability that's equal to 39 percent of taxes owed over seven years. In return, the investor must invest in community development entities that are in the business of providing loans to qualifying businesses in disadvantaged areas. We for example, invested $10 million in the Midtown Exchange and the Global Market on E. Lake Street several years ago. That's a high-impact project. There are a lot of loans on E. Lake and E. Franklin funded by Federal New Markets Tax Credit money.
Q What's next?
A CRF is the only community development organization that has an S&P-rated loan servicing department. We're taking this capacity and growing it as a resource for community development organizations that are investing in the neighborhoods.
We are partners with Dayton's Bluff in St. Paul and the Greater Metropolitan Housing Corp. on their sustainable homeownership programs. They take foreclosed houses, rehab and sell them on contract-for-deed to qualified buyers. We're making our high-touch, low-volume servicing available to them. In three to five years, those buyers should qualify for a traditional mortgage. The Ford Foundation in January made a $500,000 grant to help us ramp up our servicing in connection with residential foreclosure remediation. We're working with about 30 clients, including the city of Hopkins. Every city in this country is under siege to do things more efficiently.
