A financial bright spot during troubled times

Frank Altman
Courtesy of Community Reinvestment Fund
Frank Altman

Amid a year of bleak financial news, nonprofit and public community developers still can point to a few bright spots. Some working in economically challenged areas have tapped capital for small business loans.

That’s thanks in part to the Minneapolis-based nonprofit Community Reinvestment Fund (CRF)— a behind-the-scenes player that successfully bundles small business loans into a package that attracts big-time investors. CRF markets a double bottom line, competitive rates of return and the social benefit of community development.

CRF recently pooled 153 small business loans made by 37 different community development lenders across 35 states. In June, it successfully sold the $62 million security, its 19th and largest yet, quite a success given the market.

President and Chief Executive Officer Frank Altman said CRF is one of few organizations nationally that has sold asset-backed securities since August 2007. “I think there are probably five or six that have been done and ours was one of them,” he said.

That package include $2.9 million in loans to five area businesses: a fresh food operator in St. Paul, a Waconia-based day care operator, a West St. Paul bowling alley, a Maple Grove restaurant and a Northwood Young America garden center. (Company names are confidential, CRF says.)

Also worth noting, CRF hit a significant organizational milestone this summer; it topped the $1 billion mark in loans funded since its1988 inception.

This is not to say the financial mess hasn’t affected CRF. Altman says the loan pace has slowed, and “in this marketplace, I don’t want to go too fast.”

Last year, CRF had planned to buy $200 million worth of loans and package them. It ended up buying only $130 million. In part, that was because economics kept it out of affordable housing deals. “That was probably $40 million volume that we were planning on that we didn’t have,” Altman said.

I sat down to talk with Altman Sept. 15 (just after Lehman Bros. tanked and before AIG tanked.)

A brief history
CRF started in a period of economic development turmoil in the late 1980s. Altman was Assistant Commissioner for Financial Management at the Minnesota Department of Energy and Economic Development. He recalled that the feds were cutting the economic development tools cities and the state relied on: Community Development Block Grants, Industrial Revenue Bonds and the Urban Development Action Grants.

He and others looked for ways to “increase the velocity” of the shrinking dollars remaining. Those talks eventually led to CRF, a kind of gas pedal.

Here’s how CRF accelerates money. Say a small business wants a building and equipment loan but the bank won’t approve the full amount. A public or nonprofit community developer who sees the project as a community benefit could step in with a second loan, called gap financing. However, that gap-financing loan effectively ties up those dollars for years, until the business slowly repays it.

Here’s where CRF steps up. It buys the loans. Right away, that returns money to the public or nonprofit community development agency so they can do the next loan. No waiting.

CRF then pools many small loans to build one large security, big enough to interest banks, foundations and other institutional investors. CRF also assures buyers that the loans are solid. It has built investor confidence by underwriting every loan and keeping some skin in the game.

CRF typically holds 12 to 18 percent of a deal and takes the highest risk position, Altman said. “If everything works well, we get paid,” he said.

So far, it’s worked. CRF has an aggregate loan loss ratio of less than half a percent.

Squeezed
The nonprofit Minnesota Community Capital Fund, is one of CRF’s highest-volume state partners. It includes cities and counties in Greater Minnesota, a few utilities and nonprofit economic development organizations, more than 70 total. CRF buys several million dollars of the Fund’s loans each year, Altman said.

The Minnesota Community Capital Fund has provided gap funding for 100 projects since it started in 2003. (Examples include a $2.5 million loan for the Cloquet Community Hospital expansion, a $64,000 loan for a Red Wing nonprofit childcare center and a $109,2000 loan for Dostal Electric’s new Dodge Center building.)

Scott Martin, president and executive director of Minnesota Community Capital Fund and the newer Twin Cities Community Capital Fund, said: “We don’t put money at risk. We sell the loan to CRF within 24 hours.”

A small city contributing $50,000 to the fund could make individual gap loans up to $500,000 – with no limit on the number of loans – as long as they meet CRF’s underwriting criteria.

But Martin said CRF’s underwriting criteria have become stricter in the past months. Interest rates have gone up. In some cases qualified borrowers are declining loans because of high rates.

The calls are more frequently about refinancing existing debt rather than investing in new equipment and real estate, Martin said.

More with less
Altman is aware of Martin’s concerns and said they are tied to the larger credit market problems. “We can’t keep the price low and lose money,” he said.

CRF’s long-term vision is to transform the system. That is, have public or nonprofit community development agencies focus on what they do best, originating loans, rather than the back-end work of managing loans. Organization such as CRF could do that for them.

“People look at this and say, ‘My God I can’t believe you have done $1 billion.’ ” Altman said. “I look at this and say, ‘We should be at much higher volumes at this point, considering everyone talks about wanting to do more with less.’ “

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