Community development funds in D.C. area scrape for cash

Community development funds in D.C. area scrape for cash

In the area’s toughest neighborhoods, the most visible lenders are often the sort who deal in used guitars, well-worn jewelry and firearms. But amid the neon pawn signs are dozens of quiet lenders known as community development financial institutions.

Their loans help build schools, small businesses and shops, breathing life into long-suffering areas.

CDFIs are banks, credit unions, loan funds and venture capital funds that lend to businesses in areas neglected by traditional banks. The CDFI designation means they are certified by the Treasury Department to compete for federal grants and low-interest loans meant to support community development.

Like many organizations serving those on the margins of society, CDFIs have taken hits during the downturn, whipsawed by a simultaneous spike in demand and a reduction in funding. Now hundreds of local projects that rely on CDFIs may lose that money.

Take Silver Spring’s outdoor Fenton Street Market, which opened sporadically last year. For a few Saturdays, at least, the market transformed a vacant lot into a bustling hub of commerce.

This spring, the market was supposed to become a regular weekend event. But its future is in question, as Montgomery County officials contemplate slashing 40 percent of the funding the county has been giving the market’s key financial benefactor, D.C.-based Latino Economic Development Corp.

The Latino Economic Development Corp. is a CDFI that provides small business loans, training and foreclosure counseling to Latinos and other underserved groups. It gets about 9 percent of its budget from Montgomery County and 39 percent from the District, which also made deep cuts in its CDFI funding last year, said Manny Hidalgo, LEDC’s executive director.

Local governments, Hidalgo said, are being “penny wise and pound foolish — the value of what we do is irrefutable.”

A community development hotbed

With its huge swaths of poverty and blight, the Washington area is a relative hotbed of community development. There are some 25 local CDFIs that, like LEDC, have helped fund scores of important local businesses and projects in previously neglected neighborhoods.

In 2005, City First Bank of D.C. invested $14.4 million in the Tivoli Square project in Columbia Heights. That seed spawned a major neighborhood revitalization that brought high-end condominiums, cafes and a retail center anchored by Target and Best Buy.

In 2006, the riot-ravaged Atlas Performing Arts Center reopened on H Street NE, birthing the thumping, pulsating nightclub scene that many refer to as “The Atlas District.”

Other CDFI-funded projects include The Town Hall Education, Arts & Recreation Campus (Thearc), which is a $27 million facility east of the Anacostia River, and the E.L. Haynes Public Charter School in Petworth.

To finance these developments, CDFIs often partner with traditional banks. The CDFI takes the riskier subordinated debt portion of the deal — meaning that if the borrower hits hard times, the CDFI gets paid after the bank. Such arrangements help lure in banks that otherwise might not have the stomach for community development projects.

The Treasury Department provides about 7 percent of all CDFI funding, and its budget actually increased this year. The rest comes mostly from county governments, corporations, foundations and traditional banks, all of which have reduced funding dramatically during the downturn.

There is scant current financial information available for most local CDFIs, so it’s difficult to say exactly what shape they are in. But by the end of last year, two-thirds of CDFIs nationwide expected they would lack either the capital or the liquidity to meet the demand for loans in the first quarter of 2010, according to a survey by a CDFI industry group, Opportunity Finance Network.

That is precisely the situation facing District-based Washington Area Community Investment Fund Inc., which supports small businesses, affordable housing development and child care providers.

“We’re struggling every day to find money and resources,” said Donna Grigsby, the fund’s executive director.

Most of her organization’s funding comes from financial institutions, which have pulled away from CDFIs. With little money to hand out, the organization is now focusing on providing technical assistance, like training and consulting. To save on expenses, it also cut more than half its staff two years ago.

District-based Partners for the Common Good also is feeling the pinch from skittish banks. In partnership with banks and other traditional lenders, the organization lends to other CDFIs.

For every $1 that Partners for the Common Good puts into a deal, traditional lenders typically put in $7 to $8, said Partners’ executive director, Jeannine Jacokes. But in 2009, traditional lenders would only cough up $2 for every $1 the organization put in.

“That’s huge,” Jacokes said. “It’s going to take quite a while to get even close to where it was before.”

Competing for dollars

There’s also a crowded field of local organizations all competing for the same shrinking pots of money. Aside from the CDFIs, at least 50 other unofficial, noncertified local community development groups are vying for the same funds.

Grigsby thinks many would do better if they merged with another organization that has a similar mission.

“It can’t play out any other way,” she said. “If you want to survive and still provide services to communities that aren’t being reached by current lenders, you may need to consolidate into a regional entity.”

So far, there just hasn’t been much consolidation among local CDFIs, according to industry insiders.

As an added challenge, while the demand for CDFI loans is up, the quality of borrowers is down, in part because the most credit-worthy borrowers are often hesitant to take on debt in a down economy.

Smart businesses don’t expand when so many other storefronts are going dark, said Marie Bibbs, executive vice president of community development finance at City First Bank of D.C. “That’s what people are not talking about in terms of this credit crisis.”

Fighting for funds

With the pressure building, CDFIs are fighting back.

Hidalgo vowed to go the mattresses to lobby Montgomery County to restore funding for Latino Economic Development Corp.

With that money gone, Hidalgo argued, LEDC would be forced to discontinue its support of the Fenton Street Market, eliminate its small business consultant and cut one of its full-time foreclosure counselors.

“These are not modest cuts,” he said. “We’ll be mounting an all-out offensive to get as much of it restored as we can.”

LEDC, which has avoided layoffs thus far, also will make a push to get new revenue from individual donors and other private sources, Hidalgo said.

Dorothy Bridges, CEO of City First Bank of D.C., also is taking to the stump. She spoke in March at a House Financial Services Committee hearing about CDFIs, reminding the committee of the impact that City First and the Tivoli Theatre have had on Columbia Heights.

“Our lending has a ripple effect throughout the community far beyond our direct customers,” she said at the hearing. “When we make loans to build and renovate housing or commercial development so that people have a decent place to live, work and shop, it sparks further revitalization.”

City First has reduced its staff by 32 percent since the third quarter of 2008. Although the bank was profitable in 2009, it cut back on lending by almost 30 percent from the previous year as the quality of borrowers declined. In response, City First had to become more cautious about its own capital and liquidity levels.

“For the last few years, demand has outstripped resources,” Bridges said in an interview.

Cash from a rich “Uncle”

Federal support has been a bright spot for CDFIs, and it was a key reason City First was profitable last year. Congress increased the Treasury Department’s CDFI Fund dramatically in 2010 — to $247 million, an increase from $107 million in 2009. Some in the industry are asking for $300 million next year.

CDFIs received an additional $100 million from last year’s stimulus package, and in February the Obama administration moved to give them a $1 billion slice of the $700 billion Troubled Asset Relief Program. That money would be lent to CDFIs at 2 percent interest, much lower than the 5 percent interest paid by traditional banks that got TARP money.

The CDFIs that make Small Business Administration loans also got a boost last year when the SBA eliminated fees on two types of loans and promised to guarantee up to 90 percent of the value of SBA-backed loans, up from 85 percent.

Additionally, Goldman Sachs Group Inc. vowed in November to invest $300 million in CDFIs as part of its “10,000 Small Businesses” initiative, though it’s not clear if any of that will come to the Washington area.

The cash influx may mean the situation for CDFIs is not as dire as many feared it would be, said Mark Pinsky, CEO of Opportunity Finance network.

“It is more challenging than it’s ever been — no doubt about it,” Pinsky said. “But we expected much worse.”

What is a CDFI?

Community development financial institutions are organizations the Treasury Department has certified to compete for federal dollars for economic and community development in areas underserved by traditional banks.

CDFIs can be banks, credit unions, loan funds, venture capital funds or microlending funds. The CDFI designation was created in 1994 through the Riegle Community Development and Regulatory Improvement Act, which set up the CDFI Fund to provide money and technical assistance to community development organizations.

A CDFI is usually required to at least match any federal dollars with nonfederal funds. Only 7 percent of a CDFIs’ capital comes from the federal government, though that money is instrumental in attracting private sector support.

In 1995, CDFIs got a boost from revisions to the Community Reinvestment Act, which requires banks to make a portion of their loans in low-income and moderate-income neighborhoods. The revision gave banks CRA credits for making loans and investments in CDFIs. As a result, large banks have become key funders of CDFIs.

This article appeared in the Washington Business Journal, April 19, 2010

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