Great Ideas - Social Investments Supporting Human Services

Great Ideas: Social Investments Supporting Human Services
November, 2002
Produced by Francie Brody, Brody Weiser Burns

Through Subcontract with the Alliance for Children and Families With Support from the Annie E. Casey Foundation
Great Ideas: Social Investments Supporting Human Services
November, 2002 Produced and Edited by Francie Brody
Brody Weiser Burns
Contributing Writers
Nancy Andrews, Low Income Housing Fund Rachel Bluestein, Seedco Francie Brody, Brody Weiser Burns Marlowe Greenberg, Foothold Technology Debbie Gruenstein, The Finance Project Brian Langdon and Abby Anderson, Family Services Woodfield Andy Lewandowski, Brody Weiser Burns Greg Ratliff, Aspen Institute (former MacArthur Foundation) Michael Schaaf, Community Investment Associates
Thanks also to the human services agencies, community development finance institutions, and the social purpose businesses featured in these case. In some cases they provided documents that were used to help write these cases. More importantly, they provided many of the great ideas in this document.
Introduction
By Francie Brody, Brody Weiser Burns Great Ideas is a compilation of innovative social investments that support human services. We were asked to compile these stories in preparation for a December, 2002 meeting about social investment in support of human services. This meeting was organized and hosted by the Alliance for Children and Families, with support from the Annie E. Casey Foundation. Great Ideas features many types of social investments supporting human services, particularly those offering innovations that move past barriers to financing in order to address difficult social problems. If successful, Great Ideas will inspire more social investments to support human services. It also will stimulate new ideas and creative thinking about how to use capital to address important human service challenges. The 22 great ideas in this document are organized into three major clusters, according to the uses of the social investments dollars: 1. Working capital needs of human service organizations, 2. Facilities development and financing to create them, and 3. Social purpose business venture development and expansion. Working Capital for Human Service Organizations Examples of social investment for working capital were the most difficult ones to find. This was somewhat surprising in light of increasing agency reliance on contract financing and third party fees, payable after services have been provided. When organizations must pay the cost of delivering services weeks or even months before receiving reimbursement, they need to accrue unrestricted and liquid net assets equivalent to at least several months of their annual budgets. Yet the majority of organizations do not have such permanent cash reserves, adding stress and uncertainty about management issues as basic as timely delivery of payroll checks to staff. Although some organizations manage this problem with bank lines of credit, many find that bank lines either are not available to them or are insufficient to meet their need. Without large capital/endowment grants or substantial annual profits, at least part of the solution must come from new forms of financing.
Great Ideas: Investments Supporting Human Services Alliance for Children and Families & Annie E. Casey Foundation Produced by Francie Brody
November, 2002 Page 1
The cases in the working capital section of this paper are drawn from intermediaries that have begun developing loan structures and programs to address working capital needs. Facilities Development The second chapter offers a series of examples of innovations in social investments for facilities development. Although still offering many challenges, facilities development is the most mature segment of human service social investing, both to support service delivery space and also for enriched special needs housing. This financing typically involves a combination of more than one type of financing, including charitable dollars, public sector funding, bank financing and such private sector investments through such vehicles as public bonds and tax credit programs. Although the facilities examples in this paper feature both direct service providers and financial intermediaries, most of these great ideas address the challenge of expanding and replicating facilities development strategies that have been successful on a small scale. Some of the great ideas also feature efforts to integrate business and organization development with the development of expanded facilities. Financing for Social Purpose Business Ventures Social purpose business ventures are emerging in many industries and sectors. The vast majority of these ventures find it extremely difficult to raise financing, both during the early stages of the businesses and when they wish to expand. Most of these ventures live with an ongoing tension between financial goals and program goals. Some of them define success as generating earned income to support a portion of their expenses, improving overall sustainability. Other social purpose business ventures are profitable or anticipate becoming profitable once they grow large enough to operate at an efficient scale. These businesses often need flexible, patient investment dollars, but will not need grant dollars once they pass the breakeven point. The major exception may be future research and development in some cases. There are many barriers to providing such financing, even though these ventures are or will be profitable, most often that the anticipated profits will not be sufficient to support R&D, growth and investor returns simultaeously. Traditional venture capital is unlikely to take an interest because these ventures usually are too small. In addition, they often either project more modest profits than traditional venture capital seeks, or they intend to use a substantial portion of
Great Ideas: Investments Supporting Human Services Alliance for Children and Families & Annie E. Casey Foundation Produced by Francie Brody November, 2002 Page 2
the profits to subsidize the parent nonprofit. Community development venture capital intermediaries and some angels and other social investors do invest in for-profit social purpose businesses, but do not yet have the capacity to fund a large number of them. Most of these special purpose venture capital funds are regional in nature, may only be comfortable investing in for-profit companies and are likely to seek relatively high potential returns. This makes financing even more scarce for nonprofit social ventures. Only a few CDFIs and foundations provide this type of financing, though that number is increasing. Most of the great ideas in this paper involve social purpose businesses directly, with two examples of financing intermediaries developing programs to address this need. Many, but not all of them have nonprofit legal structures or remain a program of a nonprofit human service agency. The section also includes two financial intermediaries.
Table of Contents
Introduction Section I: Working Capital
Rubicon Ways to Work, Inc. Missouri State Tax Credit Proposal Community Organization Financial Assistance Program Lower Manhattan Small Business and Workforce Program
Section II: Facilities A. Human Services

Fremont Family Resource Center Using New Markets Tax Credit Oyster School The Doe Fund
B. Financial Intermediaries
Illinois Facilities Fund ABCD Initiative Low Income Housing Fund
C. Home Ownership
Worcester Homeownership Initiative Asset Protection Initiative Fannie Mae Predatory Lending Program
Section III: Social Purpose Business Ventures A. Business Ventures

Childrens Home and Aid Society Community Sign Language Services Foothold Technology Working Today Educational Products
B. Intermediaries
Coastal Enterprises Nonprofit Venture Network
Rubicon Programs: A Case Study in Capital Innovation

Prepared by Nancy Andrews, Low Income Housing Fund, October, 2002
I.
Project Description
Need/Background: Twenty-five years ago, community development was seen as upgrading the physical infrastructure of communities and engineering economic reversals of distressed areas. The human service providers down the block - the job training agency, community health care provider or child care provider - were considered less a part of community development and more rooted in the original War on Poverty. Now, however, leading community developers recognize that no single strategy will resolve the problems of poverty and neighborhood disinvestment. They have begun to seek comprehensive solutions, with multiple program thrusts. Community developers are often focused on childcare centers, health services, learning centers, after school programs and workforce development programs. High performing organizations have become complex, multi-dimensional enterprises, with many projects being managed simultaneously. This contrasts sharply with the realities even a decade ago, when community developers generally worked on one project at a time. As a result, their capital needs have changed. Today, project by project financing no longer serves the needs of high performing community development entities. Such financing tools are loaded with brain damage for the community developer, who must organize and manage multiple financing sources for multiple projects to the community development financial institution, who must oversee detailed requests for each draw of funds. For high performing, well established organizations, this way of acquiring capital is overkill. Rather, their track record suggests that they can be trusted to self-manage and to undertake multiple projects in a professional manner. Such organizations need (and deserve) something more akin to equity or corporate financing: flexible, patient capital for their overall operations, working capital needs and the multiple projects under their management. The solution? Equity, but with a twist: patient investments in high performing social institutions, where return is measured in a double bottom line - a decent financial return combined with a social yield, measured in the improved productivity and output of the organization. At present, the CDFI field has been capitalized with relatively short-term funds, and therefore, can only make loans with shorter terms. This source of capital cannot fully serve the needs of the high performing social service organizations that have emerged in the past decade. Rubicon Programs in Richmond, California, is a case in point. Borrower Summary: Rubicon Programs is a 27-year-old organization helping the homeless and other at-risk populations achieve employment, long-term stability and economic independence. Rubicon provides three main types of services:
Integrated counseling services, including mental health counseling, substance abuse counseling, and others Transitional and permanent housing Job training and placement services
Rubicon serves 3,000 people annually, operates three businesses, manages nearly 100 housing units and provides integrated counseling services to over 1,000 individuals annually. Rubicon's three programs combine to make a measurable and real difference in the lives of the hardest to serve. Rubicon's record of success is one of the strongest in the US, with between 70 and 80 percent of its workforce trainees remaining employed one year later. Rubicon operates a $14 million annual budget and employs 275 individuals. It has evolved into a complex medium scale business operation. Yet, the nature of its activities means that it will operate on a break-even basis, with net operating margins averaging two to three percent, rather than a highly profitable basis. Even in the best of years, its net operating margin might reach a high of five percent. This means that Rubicon has not been building up much in net worth or internally generated working capital. The result is that as Rubicon has grown, it has become cash starved. In the recent past, Rubicon operated a $14 million annual budget with less than $150,000 of cash in hand, or the equivalent of four days of breathing room. Cash flow was the issue of the hour and expansion capital was the issue of the day.
II.
Social Investment Technique
A for-profit enterprise would seek investors to provide the working capital needed to support growth. However, Rubicon could not be successful in this strategy, because its social impact creates returns that are unattractive even to socially motivated business investors. The CDFI industry offers short-term loans, which lack the patience or the equity-style features to fuel Rubicon's future success. Yet, the situation Rubicon faces is financible. Rubicon can repay invested capital at a reasonable rate. It does not need to rely strictly on grants or even recoverable grants. In the last two years, the Low Income Housing Fund (soon to be re-named the Low Income Investment Fund) has experimented with "equity with a twist" with an investment in Rubicon Programs. The investment was a $500,000 revolving, medium-term working capital loan, bearing an interest rate of 7.5%. Like most working capital lines of credit, it would be unsecured; however, draws would not be closely underwritten or monitored. Moreover, the loan would have a three-year repayment term, rather than a one-year term. Low Income Housing Fund (LIHF) also has made working capital loans with terms up to 10 years, with self-amortizing structures. Over several years, Rubicon drew upon and repaid more than $1 million, using this revolving structure.
III.
Financial Benefits and Risks
These are unusual capital structures that go beyond the boundaries of traditional capital tools. They serve a purpose unique to the nonprofit nature of the community development and human service fields, and do not have immediate analogues in private capital markets. The payback is measured not only financially, but also and more importantly in unlocking the potential of high performing social entrepreneurs, like Rubicon. Managing a $14 million budget on $150,000 in cash is a feat worthy of the most talented CEO. It is distracting to the organization and impedes achieving the social mission. The goal of this investment is to allow Rubicon and other social agencies to reach their performance potential, serving as many low income clients as possible. The risks are significant, because like any equity or risk-capital instrument, repayment hinges upon success. And, success is not guaranteed.
IV.
Lessons and Policy Implications
Yet, the need for innovation in this area is emerging with force. Capital products like these are necessarily limited to organizations with a strong and reliable track record. They depend on financial performance covenants agreed to by the lender and the borrower. Capital instruments like the one described above - and many variations on this approach - are needed to take successful community developers to the next stage in their evolution. To do this, experimental programs are needed to test new products and to develop reliable underwriting parameters and performance metrics. Moreover, experimentation and testing are needed to determine appropriate pricing and yield levels, as well as social impact "returns." However, after a reasonable period of development and trials, a new approach to capital and a new calculus for measuring social return could be available to community developers. The result could be a second revolution in community development and anti-poverty programs.
Ways to Work, Inc.

Prepared by Andy Lewandowski, Brody Weiser Burns, from Ways to Work documents With assistance from Dan Magnuson, Ways to Work, Inc.
I.
Project Description
Emergency loans to individuals
Despite working hard, low-income families teeter on the brink of poverty. Unexpected expenses, such as car repairs, often disrupt the lives of low-income families that are trying to become economically independent and threaten their ability to support their children. Most families in this situation are unable to secure credit from banks, and thus an event, which many would consider an annoyance, becomes a severe setback for these families, jeopardizing the ability of breadwinners to maintain their jobs. Ways to Work, Inc., loan program, is a national intermediary that provides access to lowinterest debt capital and technical assistance to member organizations of the national association, Alliance for Children and Families, which want to start the Ways to Work loan program. The loan program was originally established in 1984 as the Family Loan Program by The McKnight Foundation in Minnesota. Loans are available for automobile purchase or repair, mortgage or housing expenses, childcare, and other purposes. To be eligible for loans, borrowers must be either employed or pursuing post-high school education that will lead to employment, have exhausted other loan sources, have sufficient disposable income, be the parent of a dependent child, and have a household income that does not exceed 80 percent of the areas median income. There are Ways to Work program sites in 35 communities across the United States. This program has assisted more than 18,000 families with more than $23 million in loans since its inception in 1984. The Collective Default Rate among Alliance sites has been approximately 14%.
II.
Intermediary Guarantee program
Ways to Work, Inc., a national intermediary: Ways to Work, Inc, a federally certified Community Development Financial Institution (CDFI), has established a source of more than $10 million in low-interest capital that is available to the Alliance for Children and Families member organizations. The Ways to Work national intermediary provides loans to member organizations for 5-year terms at an interest rate of 2.5%. Each Alliance member is eligible to receive up to $310,000. To receive capital from Ways to Work, local loan programs must be capable of distributing at least 60 loans per year, and show that they can raise the $90,000 per year that it typically costs to fund operations, which primarily consist of a full-time loan coordinator and a loss reserve. Ways to Work, Inc. has received support in the form of grants (~ $9 million) and lowinterest debt (~ $8 million) to establish this investment fund. The availability of this capital reduces the amount of money and time that Alliance members must spend on
fundraising. In addition, the usage of debt brings with it a disciplined approach to running the loan program.1 Institutions that supported the creation of this fund are: The McKnight Foundation, the US Department of Treasurys CDFI Fund, Bank of America, the John S. and James L. Knight Foundation, and US Bank. Local Alliance member loan programs: The local loan programs use the capital from the Ways to Work CDFI to provide loans ranging from $500 to $4,000 to low-income families in need of funds to cover specific, emergency expenses, so that they can retain a job or continue an educational program. The Alliance member organizations use the capital from Ways to Work, Inc. to create a guarantee pool for a local bank that distributes the loans to individuals. The bank partner benefits from this relationship, because it helps the bank meet the credit needs of the community it serves, gaining lending credit towards the Community Reinvestment Act requirements. Each individual borrower must make monthly payments including modest interest (8% maximum rate), and must fully repay the bank loan within two years. The participating bank utilizes funds from the guarantee pool only in the event that a particular borrowers loan becomes 60 to 90 days past due. In this case, the Alliance member uses the guarantee pool to make the bank whole and assumes the collection process. The Alliance member also is responsible for raising funds for a loss reserve of $30,000. In the event that this Loss Reserve is fully depleted in the course of a year, then the capital from Ways to Work, Inc. is available to make the bank whole. In addition, Ways to Work, Inc. will assume 50% of any defaults beyond 15% but less than 35%.
III.
Ways to Work, Inc. wants to provide Alliance members with the technical and financial resources, so that they can run sustainable and effective loan programs. The benefits of the current $10 million plus capital fund are that it Provides a source of low-cost capital; Decreases fundraising required to start a local program; Increases financial discipline of Alliance members, reducing default rates; Allows for a more rapid expansion of the loan program. The risks of the program are Maintaining program quality as the number of Alliance members forming a loan program increases; Balancing the volume of loans provided with the need to contain default rates2;
For programs started since the inception of this $10 million fund, the default rate is approximately 8%. For some of the earliest local loan programs that were funded solely by grants, default rates were in the 30% range. 2 The organization is currently exploring different ways to address this issue, as the focus on reducing the default rate has led to a decreasing volume in activity in some programs. Great Ideas: Investments Supporting Human Services November, 2002 Alliance for Children and Families & Annie E. Casey Foundation Page 9 Produced by Francie Brody
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Financial risk associated with absorption of excessive default rates; Inefficiency: there often is a significant educational component to persuade nonprofit human services providers to finance a program with debt.
IV.
Policy Implications
Ways to Work, and its predecessor the family loan program, have assisted more than 18,000 families with small loans. This program can serve as a catalyst to help families increase their income, reduce dependence on government programs for low-income people, and expand economic opportunity by improving credit ratings. Role of intermediary: The role of an intermediary has been essential in helping to move this field to use a new kind of financing strategy: debt capital. This intermediary program offers many of the benefits of a franchise, with program structures and supports that make it possible for less experienced staff to manage local loan programs. An intermediary can reduce the risk to investors by pooling their resources and spreading the risk among different investments. At the same time, an intermediary has established relationships with organizations in the field that enable it to allocate resources in an efficient and cost-effective manner. The national intermediary also can engage in ongoing programs to reduce losses and develop local capacity. Persistence: The other learning from this effort is that persistence is necessary. When Ways to Work first went to Washington, the Department of Transportation told them that they were a welfare agency. The Department of Transportation also was lukewarm to their program, because it promoted cars rather than public transportation. When they approached the Department of Labor, the response was that they were a transportationfocused agency. In the end, Ways to Work was able to establish a relationship with the Department of Transportation and change the way that it perceived car usage. Implementation Strategies: The final policy implication is that strategies change behavior. In the case of this program, debt capital has provided a high level of discipline for Alliance members. This has been beneficial, as default rates have decreased. This could indicate that the programs are becoming more sustainable. However, it also could mean that the programs are reducing the volume of their loans and playing it safe. In order to safeguard against decreasing default rates at the expense of loan volume and support local programs in their ongoing fundraising efforts, Ways to Work recently established a four-year, $1 million initiative that will award local loan programs that achieve national default and loan volume benchmarks.
Missouri State Tax Credit for Services to Children and Families

Extracted from agency memo, October, 2002
I.
Project Description
Proposed State Tax Credit
Background: The State of Missouri has creatively utilized state tax credits to support social services. For example, the Youth Opportunity Tax Program extends a 30% or a 50% state tax credit to businesses or individuals contributing to an intern or apprentice less than 20 years of age who is participating in an approved employment program. The Sponsorship and Mentoring Tax Credit provides state tax credits to businesses or individuals contributing property or funds to approved projects designed to help youth grow complete secondary education, enroll in and complete post-secondary education, and enter meaningful employment. Social service advocates in Missouri are proposing the expansion of this strategy of utilizing tax credits to leverage private funding for social services. The proposal involves the Missouri Department of Social Services (MDSS) receiving a tax credit allocation within its budget. MDSS would then distribute the tax credit to encourage individuals and business to financially support services for children and families.
Purpose
The tax credit for services to Children and Families will be used to leverage the ` available funds within the state budget guidelines to make more fore funds available for services to children and families.
II.
Proposed State Tax Credit
The social investment technique is a proposal to create a new state tax credit, which would be used as an incentive to encourage individuals and companies to invest in expanded funding for human services. Role of State Government through the Department of Social Services Defines the eligibility of participating agencies within existing guidelines and requirements Defines the specific services that the tax credit supports Defines the results (outcomes) that are to be measured Defines the level of support that an agency/service would receive Role of Agencies Measure outcomes Remain accountable Respond to local community interest and concerns Promote the use of the tax credit
III.
The Services to Children and Families Tax Credit is still in its embryonic stages. In addition to the hurdle of formal adoption by the Missouri legislature and governor, the tax credit program requires substantial definition, including definition of administering agencies, the services eligible for tax credit support, the anticipated outcomes, and administrative procedures. Benefits to: State Government Neutral budget impact Allows the State and local agencies to leverage existing dollars to provide greater services Agencies Creates private funding streams Increases community participation Allows organizations to focus on programs that are effective.
IV.
Learning and Policy Implications
The strategy of utilizing tax credits is appealing to the State and its taxpayers. Tax credits can have a neutral budget impact, allowing administering agencies to leverage existing dollars to provide greater services. Tax credits create private funding streams, increase community participation of contributors, and focuses attention on the most effective programs. At the same time, tax credits have limitations. Dependent on the appetite of private contributors, the tax credit funding may not match social service needs. Then too, the timing of the outcome of social service investments may exceed contributors short term horizons. Missouris existing social service tax credit programs support services that portend tangible results in a few years. They appeal particularly to employers with sufficient enlightened self-interest to fund programs that strengthen the labor pool supplying the employers work force. Other social services, despite their effectiveness, may be unable to match contributors needs for results and direct impact on contributors economic interests.
Seedco
Innovations in Community Development
The Community Organization Financial Assistance Program

Prepared by Rachel Bluestein, Seedco, October, 2002
I.
Project Description:
Intermediary, TA for nonprofits
Overview: The Community Organization Financial Assistance Program (COFAP) is a financial and technical assistance strategy launched by Seedco in partnership with the United Way of New York City (UWNYC). COFAP targets New York City-based nonprofit organizations that are experiencing financial difficulty. The Program builds upon Seedcos lending experience and Performance Measurement and ManagementSM (PM&M) technical assistance program. Seedco recently received a CDFI award of $850,000 to help launch the program. Over the five-year period of COFAP, we anticipate that approximately 225 nonprofit organizations will receive group technical assistance, 150 will receive intensive one-onone technical assistance, 100 will receive short-term loans and at least 20 will receive long-term loans. Need: Over the past year, Seedco has witnessed a significant increase in the demand for below-market loans to finance nonprofits working capital needs that result from decreases in fundraising revenue and difficulties in managing government contracts. To date, we have made working capital loans to organizations including: Bowery Residents Committee, the Womens Housing and Economic Development Corporation (WHEDCO), St. Nicholas Neighborhood Preservation Corporation, Safe Space, and the Bedford Stuyvesant Restoration Company. We have also made 30 emergency cash flow loans to nonprofits impacted by September 11th, of which 20 have been totally or partially repaid.
II.
Social investment technique:
Partnership Loans and TA
Together with the CDFI funds, $4.5 million has been committed to the program. Seedco and the UWNYC have committed to raising an additional $5 million in order to bring COFAP to a financing level of $9.5 million. This budget will allow us to make the following products and service available to New York City-based nonprofit organizations: A. Loan Products Through COFAP, distinct lending products will be made available with different length terms, each for different purposes:
1. Short-term (less than one year) cash flow loans of up to $25,000 with either zero or below-market interest rates. These loans will enable community organizations to manage periods of severe cash flow shortfall due to accumulations in accounts receivables and fluctuations in fundraising revenue. 2. Mid-length term loans (3 to 5 years) of up to $200,000 for special financial needs created by funding shortfalls. 3. Longer-term loans of up to $500,000 with below-market interest rates and maximum terms of up to 10 years for organizational strengthening and program improvements. These below-market loans will enable community organizations to enhance organizational capacity to deliver quality services as well as increase their ability to take on serious programmatic expansion where appropriate. Funding from the CDFI Fund will provide an initial investment in this loan pool. It is anticipated that, in certain cases, the United Way will provide loan guarantees as it has done on several occasions in the past. B. Workout Plans and Technical Assistance in Financial Management As part of COFAP, Seedco and the United Way are creating a financial management component to help organizations proactively plan their financing and mitigate future financial hardship. This aspect of the project will consist of workshops, intensive oneon-one technical assistance, and a mentoring network. We estimate that 225 nonprofit organizations will receive group technical assistance, and 150 will receive intensive oneon-one technical assistance. A significant portion of the technical assistance will be devoted to helping organizations that are experiencing severe financial stress develop and execute workout plans.
Seedco
Lower Manhattan Small Business and Workforce Retention Project

I.
Small Business Intermediary
Need: In late September 2001, Seedco was asked by the Ford Foundation and The New York Times Foundation to develop an emergency program to assist small businesses and their low-wage workers in Lower Manhattan that had been so devastated by the September 11th attacks. Seedco and the Alliance for Downtown New York, working with several community partners, mounted a comprehensive effort to retain and sustain small businesses and low-wage workers put at risk by the attacks. The Lower Manhattan Small Business and Workforce Retention Project was launched on October 23, 2001, with $7.5 million in funding from the Ford Foundation, the New York Times Company Foundation 9/11 Neediest Fund, the New York State Department of Labor, and Seedcos funds. Emergency supports for businesses include low-interest loans, grants, technical assistance, wage subsidies, and area-wide services. The Downtown Alliance helps identify needy businesses in the area, directs appropriate resources to them, and advocates on their behalf. Seedco oversees distribution of the loan and grant funds, manages the wage subsidy component, and provides technical assistance. Small Retail and Manufacturing Business Program: Eligible organizations initially included more than 1,000 small retail and manufacturing businesses on or below Canal Street with fewer than 50 employees that had been directly affected by the World Trade Center attacks. Employing thousands of workers, many of them low-wage, these businesses needed immediate assistance in order to survive. Businesses such as cleaners, repair shops, video stores, restaurants and boutiques received assistance. The project evolved to include two additional industry-specific components: Small Grocer Initiative - Lower Manhattan is home to an estimated 300 small grocers employing over 2,700 workers. This initiative is designed to assist bodegas, delis, convenience stores, candy stands, etc., and was initiated with a grant from the PepsiCo Foundation. Small Garment Manufacturing Initiative - Of the 60,000 garment workers in the city, approximately 15,000 work in Chinatown, only a dozen blocks away from the former World Trade Center complex. With support from UNITE, this initiative assists small garment manufacturing factories and their employees. Professional Service Firm Program - In the summer of 2002, Seedco and the Alliance for Downtown New York established a component targeted to service businesses with ten or fewer employees. The program, initiated with support from the September 11th Fund, is aimed at assisting professional,
equipment repair, employment and other non-retail businesses. It includes a special initiative targeting the World Trade Center and Frozen Zone businesses that are attempting to reopen in Lower Manhattan.
II.
Low-Interest Loans with Grants and TA
Types of Assistance Offered Loans: Low-interest loans of up to $100,000 with terms between six months and three years are being offered to ensure access to capital for rebuilding. Loans can be used for working capital including payroll, rent, and utilities, or to bridge the gap before receipt of funding from other sources. Grants: Grants of up to $25,000 are available for one-time costs not covered by insurance policies to help offset the physical losses directly attributable to September 11th. A special program providing grants of up to $50,000 has been established for firms that were located in the World Trade Center or the Frozen Zone. Eligible costs include repairs, equipment replacement, relocation within lower Manhattan, and rent, payroll, or utility expenses incurred during business interruptions. Employment Retention/Wage Subsidies: Offered through Seedcos subsidiary, the EarnFair LLC, wage subsidies are used to enable small businesses to meet payroll, retain workers who might otherwise be laid off, or to rehire workers already laid off. These subsidies are available for up to three months to cover 50% of wages and benefits for full-time workers earning $12 per hour or less. For former World Trade Center tenants, these subsidies are available for up to $25 per hour. Business Support Services: Small businesses are eligible for free technical assistance to help businesses cope with the disaster and plan for an uncertain future. Services include help with financial, real estate and budgetary issues, legal counseling, business planning, insurance assessment, and systems analysis. Many of these services are provided pro bono by associations such as the Bar association, the Real Estate Board, and the Woman Business Owners Association. Businesses also are eligible for no cost area-wide services that include public relations and marketing, and assistance negotiating the reduction of fixed costs such as rent and utilities.
III.
Current Status: Through Seedcos Lower Manhattan Small Business and Workforce Retention Project, more than $19 million in financial and technical assistance has been committed to over 500 small businesses in Lower Manhattan. As of August 31, 2002, the following aid had been committed: Loans: $6.6 million to 194 businesses Grants: $5.3 million to 512 businesses Wage Subsidies: Approximately 750 full-time workers and 225 small businesses received subsidies, with a value of approximately $3.3 million.
Seedco WTC Small Business Fund: Responding to the expressed needs of the small businesses in the area directly affected by the attacks and to the desire on the part of many individuals and entities to contribute to this community, Seedco established the WTC Small Business Fund. During the year since the disaster, Seedco has received $25 million from generous corporations, foundations, government agencies and individuals, with about 90% of this funding coming from private sources. We were recently informed that the Empire State Development Corporation had awarded Seedco $19 million to expand the loan fund program to cover the area up to 14th Street, and to add non-profits and other small businesses in New York City directly affected by the attacks.
Fremont Family Resource Center

Prepared by Debbie Gruenstein, The Finance Project, October, 2002
I.
Project Description
Social Services Facility
Fremont, California is located at the base of Mission Peak on the eastern shore of San Francisco Bay. During the mid-1990s, the City of Fremont hosted a series of dreaming sessions for representatives of the citys social service agencies.3 During these sessions, representatives from several public and nonprofit agencies began discussing the need to coordinate Fremonts social services through the development of a one-stop family resource center. The concept was to provide comprehensive support services from dozens of public and nonprofit health and social service providers in one location. Services would include: Adult & youth employment; Income assistance; Child care information and referral services; Counseling, health care and mental health services; Housing information; Educational programs; 4 Immigration services. Real estate prices in the Bay Area were daunting, however, and co-locating these services would require several millions of dollars for purchasing or building an appropriate facility. Not wanting to issue a municipal bond, the City of Fremont used a creative lease-purchase arrangement to acquire and renovate a facility for the family resource center.
II.
Social investment technique
Long-term lease-to-buy
Using Certificates of Participation funds, the City of Fremont financed the acquisition and renovation of two office buildings for conversion into a resource center. Certificates of Participation (COPs) are long-term lease-to-buy arrangements often used by local governments to finance capital improvement projects without having to issue municipal bonds. Typically, the local government entity, known as the lessee purchases property from a trustee, or lessor, which holds the asset and raises funds through the sale of COPs to investors.5 The lessee pays yearly lease payments (principal and interest) to the trustee, who remits the payments to the certificate holders, until the full amount is repaid. A portion of the interest payment also goes to the trustee. At the end of the term, ownership of the asset is transferred to the lessee.6 The city used $3 million in CDBG funds to prepay long-term leases for CDBG eligible nonprofit agencies, enabling these agencies to rent prime office space at below-market
3 http://www.hud.gov/bestpractices/2000/prog_ca.html 4 http://www.ci.fremont.ca.us/Community/FamilyResourceCenter/default.htm 5 http://www.nationalcorrections.com/financing.html 6 http://www.naco.org/pubs/research/briefs/cops.cfm
rates. In addition, a significant amount of office space was rented at market rates. The rents paid by the tenants at the Family Resource Center are sufficient to cover the cost of debt service on the Certificates of Participation, maintenance and janitorial costs, and salaries for two staff members who facilitate collaboration and service integration among the agencies located at the center.
III.
Financial benefits and risks
Benefits: Certificate holders receive principal plus tax-exempt interest. The leases are paid through appropriations from the citys general revenue. Like municipal bonds, COPs usually receive ratings from ratings agencies, which allows investors to appropriately assess risk.7 COP interest is exempt from federal income taxes (and some state taxes).8 Risks: Variable interest rate leads to some uncertainty about the financial return on the investment for the certificate holders. In order for a lease-purchase arrangement to be tax-exempt, the contract must meet the federal governments definition of a government obligation. However, most COP arrangements include clauses that allow the lessee to terminate the lease if there appropriations are insufficient in a given year. Therefore, the repayment pledge for a COP may not be as binding as that of a general obligation bond.9
IV.
Policy implications and lessons
Aside from getting approval to access CDBG funds from the Freemont City Council, the city also had to gain approval from HUD to pre-allocate future years CDBG allocations. As part of the proposal, project leaders had to show that they would lease at least 51 percent of the space to nonprofits providing services to lower income families, as defined by CDBG regulations. Lease-purchase arrangements are not limited to facilities financing and may be used for other physical capital, such as hospital equipment, parking lots, and computers to name a few. Local governments often prefer COP arrangements to bond financing. First, unlike bond issuance, COP arrangements usually do not require referenda. This may allow funding for unpopular but important projects (e.g. prisons). Second, COP issuance usually is not affected by statutory debt limits, since the lessee appropriates money annually and the agreements can usually be canceled. However, COPs usually carry higher interest rates that are between 20 and 100 basis points higher than those they would have paid on general obligation bonds.10
7 8
www.naco.org/pubs/research/briefs/cops.cfm www.financing-solutions.com/web/services/taxexempt/default.htm 9 ibid. 10 ibid. Great Ideas: Investments Supporting Human Services Alliance for Children and Families & Annie E. Casey Foundation Produced by Francie Brody
Using New Markets Tax Credit Program to Address Social Service Needs
Prepared by Michael Schaaf, Community Investment Associates, October, 2002
Effective provision of social services requires an appropriate physical base of operations and coordination of services to address the multiple needs affecting clients, enabling them to tangibly improve their condition. An innovative project using the recently launched New Markets Tax Credit (NMTC) program provides both a home for social service providers and an inclusive array of services. (The NMTC program provides federal tax credits to for-profit, certified entities that invest capital in businesses or nonprofit organizations in designated distressed communities.)
I.
Social Services Facility and Job Creation
Similar to many communities of comparable size and age, a distressed neighborhood in a medium size Midwestern city was beset with multiple problems: high rates of poverty and unemployment, abandoned buildings blighting commercial and residential areas, and perhaps most difficult to addressa lack of hope. A continuing influx of previously incarcerated individuals exacerbated these and other problems emblematic of distressed inner city neighborhoods. Due in part to the deteriorated physical conditions, the community was under-served by social services. A regional nonprofit with a successful track record in community economic development and net assets of less than $300,000 accepted the challenge of assembling projects responding to these manifold problems. The nonprofit defined provision of jobs, re-use of blighted buildings, reduction in crime, and expansion of social services as its objectives. To accomplish these, the nonprofit developer would need considerable capital to renovate buildings, create or expand employment, and entice service agencies into the community. The nonprofit had extensive experience in raising funds from government, banks, and foundations but little experience with the investment sector. The nonprofit assembled its capital to address defined needs it had identified: 3 existing businesses that would expand to the distressed target community and provide jobs open to clients with limited skills, with appropriate financing; Social services and related providers that agreed to expand operations to the distressed community if suitable space were provided; and A large, abandoned commercial building that, if redeveloped, could provide suitable space for the 3 businesses and the social service providers, and uplift uses in the area. The nonprofit negotiated with select social service providers to ascertain their space needs. Providers included health care, counseling, credit management, GED and computer education, child care, youth activities, and meal and transportation services, all organized within one umbrella Skill Center. The nonprofit negotiated with the three businesses to plan space needs and structure joint community/business owned ventures that would be substantially equity financed. The nonprofit determined the content and costs for rehabilitation to accommodate the tenants needs. The nonprofit then devised a
comprehensive financial plan consisting of grant funding for unrecoverable costs, and investment capital supported by an allocation of NM tax credits.
II.
Social Investment Technique:
Federal New Markets Tax Credits
The NMTC element includes a multiple million investment from area banks and corporations. The nonprofit will utilize the proceeds from the NMTC investment to provide equity sufficient to enable the real estate and business projects to obtain needed conventional debt. Considered start-ups due to the new site and joint community/private for-profit ownership structure, the businesses need substantial equity typical for this stage of business evolution. The NMTC investments will comprise more than half of the real estate total development cost and less than half of the initial financing for the three businesses. The nonprofit will generate the balance of the financing through Historic Tax Credits, conventional debt, and grants. Upon termination of the 7 years of tax credits, the nonprofit intends to refinance the real estate and the expanding businesses receiving the NMTC investments to repay the capital to these investors. The total cost of the project, including operating funds, exceeds $100 million.
III.
Risks and Benefits

Benefits: The anticipated benefits of this project are significant: new jobs, extension of previously unavailable social services, and redevelopment of blighted real estate. The nonprofit believes that together these accomplishments will demonstrate that the community can improve its conditions. Risks: The nonprofit developer has a capable governing board and development team. Nonetheless, this is a complex, demanding project fraught with risks. Many parties must perform well for the project to succeed. The rental income from the three expanding business tenants must be considered tenuous from the outset. Moreover, the nonprofit occupies the sometimes conflicting position of both business investor and business landlord. The nonprofit realistically assessed its uses of funds to assemble the capital it needs to carry out this innovative, challenging project.
IV.
Policy Implications and Lessons
The use of NM tax credits offers potential wide applicability to social investment in human services. In this case, it contributed to a financing package that provided a site for human service providers in an under-served community. The NMTC investment in the three businesses located on this same site also provides a model for human service providers establishing businesses that generate net income to fund their core human service activities, or provide ancillary supportive activities, such as job training or jobs. The key factor in utilizing NM tax credits is the willingness of private entities to invest and their related confidence in the project. In this case, the nonprofit built that confidence through its previous track record, a well crafted plan, and minimizing risks, especially by working with existing businesses to undertake expansions in the distressed community. Expansion of an existing, profitable business is generally less risky than launching a new free-standing entity.
James F. Oyster School

Prepared by: Debbie Gruenstein, The Finance Project, October, 2002
I.
School Facility
In the early 1990s, The James F. Oyster School, a public bilingual elementary school located in Northwest Washington D.C., was in desperate need of capital investment. The facility, built in 1926, was crumbling and one quarter of the schools 350 students were housed in portable classrooms that were 10 to 20 years old and deteriorating. In addition, the school did not have adequate science or physical education facilities, the roof leaked, after-school activities were held in converted closets, and the school was not in compliance with the Americans with Disabilities Act.11 Like many urban school districts, the District of Columbia Public School System had no money for school construction or renovation. In fact, the District was in the midst of a fiscal crisis and the Oyster School was on a list of 40 D.C. public schools to be considered for closure or consolidation. Mobilized by the threat of closing, the Oyster school community began to seek creative solutions to their facilities needs. The 21st Century School Fund, a local nonprofit organization that dedicated to improving urban school facilities, recognized that the Oyster Schools location on prime real estate was an asset that might attract private investors. The school sat on 1.67 acres of land in the upscale Woodley Park neighborhood of D.C. and was close to a subway station, zoo, and restaurants. The fund played an intermediary role between the public and private sectors and engaged the school and surrounding community in a planning effort. Supported by a planning grant from the Ford Foundation, the 21st Century School Fund conducted a feasibility and market study that determined that financing a school through a partnership with a private developer was, in fact, feasible.
II.
Trade of Land for NewFacility
Presented with the feasibility study, the D.C. Board of Education approved moving forward with a request for proposals. LCOR, Inc., a Maryland-based developer, was selected as the private partner. Through an innovative arrangement, LCOR, INC. agreed to design a new school facility and repay a 35-year $11 million revenue bond package issued by the District of Columbia to finance its construction. In exchange, LCOR would receive the deed to half of the schools property on which it could build an apartment building and the District would forgive property taxes on the new residential development through an arrangement known as a PILOT (Payment in Lieu of Taxes). In 2001, the new 47,000 square foot state-of-the-art school was completed. The new school includes a computer lab, library, gym and classrooms specifically designed to accommodate the schools bilingual program. In addition, there is space for after-school programs and other community activities. LCOR, Inc. and the District of Columbia
11
www.21csf.org/csf-home/Oyster-oyster_brief.htm. Great Ideas: Investments Supporting Human Services Alliance for Children and Families & Annie E. Casey Foundation Produced by Francie Brody
Public Schools received the 2002 Economic Development Partnership Award from the International Economic Development Council (IEDC) in recognition of their innovative deal.
III.
Benefits: The project allowed LCOR, Inc. to build a 211-unit apartment building on its new land in Woodley Park, a neighborhood with rapidly increasing property values. Rents in its new development range from $1440 for a studio apartment to $2855 for a 2bedroom unit.12 In addition, although LCOR has to pay $804,000 annually to service the municipal bond, it will pay no taxes on this residential property for 35 years, regardless of how much the property appreciates in value. Risks: The financial risk of a low vacancy rate in the apartment complex was small, given the tight housing market in Washington DC in general and Woodley Park in particular. The more significant risk was of the deal falling apart due to bureaucratic and political challenges in a disorganized and racially-charged city government.
IV.
Lesson: Many states and municipalities have under-utilized assets, often in the form of real estate. In fact, public real estate in the U.S. is estimated at about $4.5 trillion.13 Public-private partnerships can create innovative ways to unlock these assets, leading to capital investment for community development initiatives. Policy: There are two major fiscal implications that need to be considered when evaluating the appropriateness of PILOT arrangements. First, by agreeing to waive taxes in exchange for debt repayment, the municipality essentially agrees to divert funds from general revenue to a specific project for several years. Second, whereas the annual amount needed to service the debt is fixed for the term of the bond, property taxes are tied to property value. Therefore, the municipal government is agreeing to accept a fixed annual payment instead of one that increases with property values.
12 13
http://www.lcor.com/residential1.html www.lcor.com/profile.html Great Ideas: Investments Supporting Human Services Alliance for Children and Families & Annie E. Casey Foundation Produced by Francie Brody
The Doe Fund

I.
Project Description
Special Needs residence facility
The Doe Fund is a 15-year-old organization dedicated to helping the homeless become productive working citizens by giving them a meaningful chance. The Doe Funds Ready, Willing & Able (RWA) Program empowers formerly homeless individuals to reenter the social and economic mainstream through a comprehensive program centered on work. The RWA program provides street cleaning services to commercial areas in Manhattan, Brooklyn, Queens and Jersey City. Work crews made up of formerly homeless participants sweep streets, bag garbage, clear gutters, remove graffiti, etc. In addition to providing paid work for trainees, this program helps change the perceptions of homelessness and the participants perceptions of themselves. The Doe Fund operates several residential facilities housing over 400 program participants who also receive meals, training, job placement, and supportive services until they graduate from the program and have found outside employment and housing. In 1990, the Doe Fund opened its first housing residence in Bedford-Stuyvesant, Brooklyn. In 1995 the Doe Fund took over and adapted to the RWA program a 150 person New York City shelter facility in Harlem. The Fund also developed and currently manages a 70 bed transitional residence at 520 Gates Avenue in Brooklyn, a 28 unit supportive housing facility for formerly homeless people with AIDS on the upper east side of Manhattan, a 74 unit SRO for formerly homeless working adults, and a 44 unit permanent housing project for families. It has also recently set up new project sites in Philadelphia and in Jersey City, New Jersey. The Doe Fund operates Back Office of New York, Inc. a direct mail and data processing business, operating out of a warehouse in the South Bronx. RWA participants work in this business processing bulk mailings and other clerical activities. Back Office has contracts with Toyota, Help USA, the West Side Y and other agencies and corporations. The Doe Fund also holds contracts with the Department of Labor for welfare to work activities and with the Department of Justice for programs for ex-offenders.
II.
Social Investment Technique: Long-term loan participation with pension fund
The Low Income Housing Fund (LIHF) served as the lead underwriter in a $23,987,592 loan commitment issued in participation with the General Board of Pension and Health Benefits of the Untied Methodist Church (UMC) to the Doe Fund to provide the permanent financing for the Porter Avenue Project. When completed, this building will double the agencys residential capacity. The loan commitment made by LIHF and UMC will provide permanent financing for the acquisition and renovation of two adjacent fourstory factory buildings located at 89-111 Porter Avenue, Brooklyn, New York providing 400 units of transitional homeless housing and job training services as part of the New
York City shelter system. Under contract with the New York City Department of Homeless Services (DHS), the Porter Avenue HDFC, an affiliate of the Doe Fund, will acquire and renovate the facility and operate it for a period of 20 years. J.P. Morgan Chase will be the construction lender.
III.
Benefits: The loan to Porter Avenue is uniquely structured, because its repayment source is contract funds from the City of New York. The City is under court order to provide shelter beds for the homeless. The Porter Avenue facility is critically important because the City intends to close an 800 bed shelter adjacent to Bellevue Hospital and must find an alternative facility. LIHF was asked to consider providing the permanent financing for the Doe Fund project when the New York City Pension Funds declined to do so. It should be noted that the Doe Fund does far more than just provide beds, since it will expand the RWA Program to serve a significant portion of the 400 individuals residing at the facility. Risks: LIHF and the United Methodist Pension Fund are taking significant risks with the project because of the uncertainty of future subsidy streams, which make the facility loan possible. Both LIHF and the Methodist nearly fully discount the value of the property, and even given the current appraisal, the loan-to-value ratio is far higher than 100 percent. LIHF and the Methodist Pension Fund are depending entirely on the contract the Doe Fund has negotiated with the City of New York in support of the facility. However, the compelling need for housing for the homeless and workforce development services make the project a risk worth taking.
Illinois Facility Fund

Prepared by Greg Ratliff, October, 2002
I.
Project Description Intermediary, Human Service Agency Facilities
The Illinois Facilities Fund (IFF) was created in 1988 through an initiative of the Chicago Community Trust to help non-profit human service agencies obtain long-term financing for facilities and equipment. Since such organizations typically rely on comparatively short-term government contracts for operating expenses, conventional lenders consider the agencies too risky for standard commercial loans. As a result, nonprofits are often unable to secure long-term facility financing unless a substantial fund balance is available to pledge as collateral. The borrowers in IFFs portfolio include specialized foster homes for abused or neglected children, respite facilities for the aged or chronically ill, treatment facilities for substance abusers, emergency shelters for victims of domestic violence, and 18 child care facilities for low income families. Since 1988, the IFF has made 144 loans totaling $24 million to more than 100 Illinois nonprofits. Through these loans the Illinois Facilities Fund has established working relationships with numerous state agencies, including the Departments of Children and Family Services, Alcohol and Substance Abuse, Mental Health, Public Aid, and Corrections. Community Asset Builder Program: More recently, the Fund received $2.5 million in federal funds for its newest initiative, the Community Asset Builder program. In developing the program, the Fund recognized that many nonprofits that develop facilities to better serve their constituencies, are ill-equipped for the job. In particular: Most lack experience managing the challenges of real estate development. Senior management attention and resources are often diverted from day to day organizational issues during construction. Nonprofits rarely have the capital to invest enough equity to satisfy the loan-to-value standards of commercial lenders. Fundraising campaigns to raise the required equity are inefficient and delays in capital campaign fundraising oftentimes result in lost development opportunities. All of the above is especially true of nonprofit human service organizations operating in areas of concentrated poverty.
The Fund designed the Community Asset Builder program to provide bridge loans for the required amount of equity, strengthen nonprofit boards fund raising abilities and derive maximum use of its own expertise in efficient facility development. Through the proposed Community Asset Builder program, supported by both a grant and a programrelated investment, the Fund will act as developer, lender, and fundraising consultant. It will offer financial products and technical assistance to nonprofits, shifting the focus of the nonprofit from facilities development to fundraising for future financial stability.
Applicants can request up to $500,000 (not to exceed 40% of total project costs) in low interest (4%), unsecured bridge loans from the Fund to function as equity in order to secure loans from commercial lenders. Applicants undergo a rigorous scoring process based on the need of the community and the capacity of the organization. Following selection, organizations are paired with a fundraising consultant or firm that works with senior management and the board to develop a detailed fundraising campaign. The goal is to increase the likelihood of a capital campaigns success and to enhance fundraising capacity through increased board participation. In parallel, the Fund assumes the role of developer, from acquisition through construction, on the nonprofits behalf.
II.
Long-term PRI Loan to Intermediary
The MacArthur Foundation provided a $1,000,000 program-related investment in the Illinois Facilities Fund, in the form of a loan with interest at 3% for a term of 10 years. A PRI into the revolving fund for the bridge investments successfully leverages $2.5 million in federal funds. In addition, the IFF committed $1 million from its existing permanent capital to the Community Asset Builder program, which will protect the foundation PRI from potential losses. The recommended grant of $400,000 over five years supports the provision of technical assistance and training in fundraising to community-based organizations. The primary source of takeout for the loan is funds raised from the capital campaign.
III.
The financial and programmatic benefits are greatest to the nonprofit organizations that apply for support during the development of a facility, and take the form of: High quality, new facility space from which to continue delivering core programs Improved fund raising skills and broader acceptance of responsibility among board members for fund raising Reasonable financial cushion to maintain facility over time Financial risk is greatest to the Fund due to: Reliance on capital campaign as the primary source of take out for loans Unsuccessful capital campaigns require longer term workout of loan obligation Provision of technical assistance is costly and may not lead to an actual loan on the books which is where the real money is made
IV.
Policy Implications
The Funds demonstrated successes not only has helped the organization support the creation of seven childcare centers that together serve 1,400 children in low-income neighborhoods, as well as a host of other facilities, but also has changed views on the viability of nonprofit borrowers. Eventually the long term commitment of government funding to reliable social service agencies may lead to a broader range of financing options for such organizations.
ABCD Initiative
Prepared by Nancy Andrews, LIHF, October, 2002
I.
Project description
Regional Childcare Initiative
In 2003 the David and Lucile Packard Foundation and its partners will launch the California Affordable Buildings for Childrens Development (ABCD) Initiative with the mission of building a comprehensive and sustainable financing system for quality child care facility development in California. The Packard investment will create a new child care financing pool of approximately $30-$50 million. This financing package will result in financing of nearly 10,000 child care spaces in ten years. In 2002, the Packard Foundation invited LIHF to become the lead entity for the financing component of the ABCD Initiative which includes a $14 million PRI $10 million to be used as a pool for lending to child care providers and community development real estate organizations focusing on developing child care facilities, and a $4 million PRI to serve as credit enhancement for LIHF and to induce private investors into the ABCD Initiative. Borrower summary: LIHF is a national Community Development Financial Institution (CDFI) working to promote economic advancement and self-sufficiency for the very poor. LIHF works to accomplish this mission through the provision of high-volume lending and technical assistance to nonprofit organizations working in low income neighborhoods. LIHF has a long history in lending to low income housing projects, and since 1998, has also provided capital to child care projects. Since then, LIHF has supported nearly 7,000 slots of child care in California and New York. Need for Capital: There is a significant need for a stable and efficient source of capital to finance the development of child care facilities in California. In California, the supply of licensed child care, estimated at 886,871 spaces in more than 40,000 child care businesses, meets only 22% of the demand from working parents.14 The needs of the estimated 2,275,458 California children in poverty are particularly acute. There are more than 280,000 low income children on waiting lists for subsidized child care.15
II.
Social investment techniques
Intermediary, PRI Loans
The Program-Related Investment described above is being provided by a private foundation, the David and Lucile Packard Foundation. In addition, LIHF is working to generate additional program-related investments from financial institutions and other private sector institutions. The Packard Foundation is expected to provide $10 million in senior debt and the remaining $4 million in unsecured, non-recourse debt that will serve as credit enhancement for other capital invested in the ABCD pool of funds.
14
California Child Care Resource and Referral Network, Child Care Portfolio, 2001. The California Child Care Resource and Referral Network created this Child Care Portfolio, a bi-annual report analyzing the supply and demand for child care by county in the state of California. 15 This is the widely accepted estimate from the State and child care advocates. Great Ideas: Investments Supporting Human Services November, 2002 Alliance for Children and Families & Annie E. Casey Foundation Page 28 Produced by Francie Brody
The proposed Program Related Investment from Packard is structured in the following manner: $10 million PRI to be used to make direct loans for facilities; $1 million of this $20 million will be used for high impact, high risk predevelopment loans (these unsecured three percent deferred interest loans will be precursors to larger, direct loans for new facilities); $1 million in risk-reserve capital for LIHF to stretch its underwriting standards and take potentially higher risks for the child care sector; $1 million in credit enhancement, leveraging up to $15 million in New Markets Tax Credit investments, capitalizing the ABCD Initiative; $1.7 million in top loss capital or guarantees, attracting other private investors to the projects supported by the ABCD Initiative.
LIHF has requested the $10 million PRI at 1% interest with a 10 year term and the $4 million PRI for security enhancement at 0%, also with a 10 year term, but unsecured and non-recourse. Repayment/recovery source for capital: LIHF plans to repay the $10 million PRI investment to the Packard Foundation by structuring loans that will be repaid within 10 years. The $4 million PRI will be repaid in the amount remaining after capital losses have been accounted for. Partners and roles: The Packard Foundation has committed $2 million in grants and program-related investments to ABCD as a catalyst to investment by other partners. Resources allocated by the Packard Foundation will be matched at a ratio of at least 1:1 for grant monies and 1:3 for debt. Foundations that have expressed interest in sharing leadership in this effort include the California Community Foundation, the Keck Foundation and the Miriam and Peter Haas Fund. Within the insurance sector, IMPACT, an investment consortium of California-based insurance companies, has indicated a strong interest in investing nearly $20 million in the financing component. Union Bank, Washington Mutual, Wells Fargo, Bank of America, Bank of the West, Citigroup, Fannie Mae, Freddie Mac and JP Morgan Chase have expressed interest and in some cases made preliminary commitments. Discussion has begun with the states First Five Commission to build further support the Initiative.
III.
Desired outcomes Facilities housing 10,000 slots of new child care. Financing for childcare centers will be available and affordable. Investors will see child care center financing as an attractive community development initiative.
LIHF: A Case Study in Capital Innovation

I.
Project Description
Need/Background: Over the past 18 years, LIHFs lending and technical assistance has helped hundreds of community development organizations and child care centers serving the nations hardest-to-reach populations. To date, LIHF has provided capital and technical assistance totaling over $313 million in 35 states across the nation. LIHFs assistance, in turn, has leveraged investments in poor communities of almost $1.9 billion an impressive six to one leveraging ratio.16 Today, LIHF has access to approximately $100 million in capital for community development projects: $80 million comprises assets on our balance sheet and the remaining $27 million is in off-balance sheet capital, for which LIHF is the sole administrator. Over its history, LIHF has provided capital and technical assistance support for: 40,000 units of low income housing, 75% of which serve the very poor 7,000 spaces of child care 800 spaces for school children in educational facilities more than one million square feet of commercial space
In 1998, LIHFs lending volume totaled $10 million; at the end of fiscal 2002, LIHFs approval volume was $60 million. This tremendous increase in demand for LIHFs capital resources has placed a huge demand on the organization to raise new capital. As a consequence, LIHF has more than doubled in size in just four years, growing from $36 million in assets in 1998 to $80 million today. However, it has been essential that LIHF grow its net worth or equity base in tandem with its total assets, create a strong financial cushion for the risk it takes in its lending activities. LIHF has managed this growth prudently, maintaining a strong ratio of net assets to total assets. Net assets have grown from $1.4 million in 1988 to nearly $20 million today, maintaining the targeted ratio of 20 percent. LIHFs primary lending vehicle, its Revolving Loan Fund (RLF), is currently funded from 110 sources: 53 percent from financial institutions, 21 percent from foundations and the balance from individuals, public funds and other sources.
II.
Program Related Investments from foundations formed the earliest capital LIHF received, providing a base for growth and for attracting private capital from the private
16
By leveraged, LIHF means that its financing has supported projects with total development costs of $1.9 billion, which have been covered by a combination of private and public sector financing, and philanthropic support. Great Ideas: Investments Supporting Human Services November, 2002 Alliance for Children and Families & Annie E. Casey Foundation Page 30 Produced by Francie Brody
sector. Even more importantly, however, some foundations also have contributed to LIHFs equity base or net worth, allowing LIHF to leverage much larger commitments from the private sector. For example, the MacArthur Foundation has invested $5 million in 2% and 3%, ten year Program Related Investments with LIHF over the past decade. In 2002, the Foundation took the historic and leading edge step of converting $1 million of these funds from debt into equity, providing additional strength to LIHFs growth. Without this debt to equity conversion, LIHF could not have continued to grow its assets to respond to growing borrower demand. The MacArthur Foundations debt-to-equity conversion provided the scarcest but most valuable resource possible to a CDFI. While debt is relatively plentiful to highly capacitied CDFIs thanks largely to the Community Reinvestment Act (CRA) pressure banks and private financial institutions feel equity to fuel future growth is very scarce. In addition to this innovative step taken by the MacArthur Foundation, PRIs from foundations play an important role to CDFIs when the term is long. The MacArthur Foundation agreed also to lengthen the term of its remaining $4 million to 15 years, from the previous 10 years. Long-term capital is in highest demand by community development and human service organizations. CRA-motivated banks generally provide very short-term capital resources three years or less. Foundations are uniquely positioned to fill a gap that is untouched by other sources, namely long-term capital.
III.
The MacArthur Foundation PRIs are unsecured and therefore, highly flexible in use, as well as administratively efficient for LIHF. The foundation depends upon LIHFs strong financial management and its strong net worth base for its protection. LIHF has never missed a payment, never defaulted on an investor and takes a great deal of pride in its financial management, the strength of oversight provided by its Board of Directors and in the quality of LIHFs loan portfolio. For example, the delinquency rate in LIHFs revolving loan fund stood at 0.3% on September 30, 2002. Over 18 years of operations, LIHF has declared default on $2 million in loans but experienced only $192,000 in capital losses. This is a cumulative historic loss rate of 0.14 percent a statistic that earns the respect of most private financial institutions. Thus, philanthropic investors like the MacArthur Foundation or private sector investors like the Bank of America feel quite safe in lending funds to LIHF and working with LIHF to support their community development and social service program interests.
The Worcester Homeownership Center: Services to Gain & Maintain Homeownership

Prepared by Michael Schaaf, Community Investment Associates
Located about 38 miles west of Boston, Worcester is an older, industrial city with a stable population of 172,648, 15% of whom live in poverty. For many residents, obtaining affordable, quality housing is a persistent problem, especially for residents of lesser means. The housing is old, requiring repairs to maintain and modernize, as 68% of the housing stock in Worcester was built prior to 1960. Only 43% of households in Worcester own their home, in contrast to the national rate of 67%. Purchasing a home is increasing available to upper income groups as prices increased 26% from 1997 to 2001. Retaining a home is also a challenge as unemployment rises, the aged stock requires investment, and population continues to grow older, relying increasingly on fixed incomes.
I.
Project Description
Homeownership Asset building & retention
Residential financing is difficult to obtain in Worcester, especially in a 15 census tract area with more severe poverty, less household income, and substantially lower homeownership rates. HMDA data are revealing regarding the availability of residential financing in this Target area:
Applications per 1,000 People 29 56 50 68 % Originations per Applications 41.4% 57.1% 58.0% 48.5% % Denials per Applications 31.0% 19.6% 20.0% 27.9%
Area 15 Tract Area Metropolitan Area State of Mass. Nation
The low rate of applications implies that residents are unprepared to approach a financial institution. The low rate of successful originations underscores this lack of preparation, as well as implying inability to satisfy conventional lenders underwriting criteria. HMDA data indicate that the most frequent reasons for denying mortgage applications concerned poor credit history, and inadequate income. For home improvement loans, another obstacle is demonstrating the ability to manage construction. Expensive, subprime lenders are active in Worcester. Three community organizations and the City of Worcester have joined efforts to enhance residents ability to acquire and retain their home. The collaborating organizations have established the Worcester Homeownership Center (WHOC) located on the edge of downtown. WHOC services supplement the private market, enabling clients to rely substantially on the private sector for the financing and services existing and potential
homeowners need. The WHOC provides numerous important services designed to overcome the barriers to retaining and expanding homeownership:
Pre-purchase Homebuyer Education, offered in Spanish and English, including First-Time Homebuyer Classes and One-on-One Counseling. Of the 900 households who participated in 2001, more than 60% were minorities, nearly 100% were
low/ moderate income; and more than 75% have purchased a two or three family home.
Post-Purchase Education, including Planning Home Maintenance and Repair, and Landlord Training; Residential Lending, including loans with flexible terms for DownPayment/Closing Costs, Acquisition, and Home Improvement, including lead removal; and Property Services, including Pre-purchase Inspections and Rehabilitation Services.
Each organization participating in the WHOC provides services reflective of its expertise, and independently obtains funding for its contributed services, using a variety of public, foundation, and corporate sources. With seed funding from the Neighborhood Reinvestment Corporation, WHOC management is funded by modest user fees, the City, and various private entities engaged in residential real estate, including financiers, brokers, and insurance companies. Taking a perspective of enlightened self-interest, these contributors understand that expanded and strengthened homeownership is good business for them.
II.
Social Investment Techniques: CDFI Packaging of multiple lenders
A participating community development finance institution primarily provides the residential financing. This entity has creatively assembled sources of capital from foundations, public grants, equity-like investments from local banks, and some 75 individual social investors who have invested low cost capital on 5 year notes. Usually subordinate to conventional financing, the CDFIs financing typically has a high loan-tovalue ratio and low debt service coverage. Borrowers, moreover, are vulnerable to job loss and financial reversals due to health or financial management issues. Nonetheless, the risky portfolio does not suffer a high loss rate, reflecting the principle, Know your borrower.
III.
Benefits and Risk Factors
During the 2003 to 2005 period, the WHOC anticipates the following outcomes: OUTCOME Homebuyer Training Graduates Number First Time Homebuyers Households Receiving Post-Purchase Homeowners Avoiding Foreclosure 1st Mortgage Loans Facilitated Improved Homes Volume of Improvement Loans Originated Volume of Downpayment Loans Originated YEAR 2003 950 50 200 5 $6.65M 20 $40,000 2004 950 75 200 10 $9.75M 30 $40,000 2005 950 100 200 15 $13.3M 40 $40,000 Total 2,850 225 600 30 $29.7M 90 $1,025,000 $120,000
$200,000 $350,000 $475,000
Risk factors include market variations affecting residential prices and financing, the difficulty in providing seamless services through several organizations, and governing the WHOC by committee.
IV.
Lessons
The combining and coordination of services is the critical factor for accomplishing these objectives.
Seedco
Combating Predatory Lending: A Multi-Site Asset Protection Initiative

I.
Project Description
Asset Building Intermediary
Overview/Need: Predatory lending has emerged as a growing concern due to its toll on the asset base of Seedcos target communities, and its corresponding impact on the availability and sustainability of affordable housing stock in those communities. In response to this issue, Seedco launched its model anti-predatory lending initiative. It is currently underway in three locations and we are exploring program starts in a number of others. The term predatory loan is used to refer generally to mortgages extended under terms that are more onerous to borrowers than if they were fully informed about the loans and/or had alternative financing options. Examples of such terms include: basing loan terms on the borrowers assets rather than on his/her ability to repay; and front-loading the loan with excessive and often hidden fees and charges such as single premium credit life insurance and unreasonable prepayment penalties. Predatory lending occurs primarily in the subprime lending market serving borrowers who have credit problems, no credit record, or are intimidated by dealing with mainstream institutions. For vulnerable populations, predatory loans often result in their inability to service the debt and subsequent loss of the property through foreclosure. Program: Key partners working with Seedco include local CBOs (community-based organizations), FBOs (faith-based organizations), CDFIs (community development financing institutions) and other financial institutions, local government entities, HUD, Fannie Mae, homeownership counseling and education agencies, and legal services groups. In each community, Seedco works closely with a lead entity (CBO, FBO and/or CDFI) to convene a network of community organizations and financial institutions as program partners, and to tailor the program model to fit local need and circumstance. To spur local match dollar investment, Seedco also provides the chosen lead entity with technical assistance grants and low-interest loan funds for program support. With variations adapted to local circumstances, the Seedco program consists of four main elements: 1. Marketing and Outreach. In each site, participating local partners focus on outreach and communications through key local institutions, including churches, community and senior centers, schools, medical centers, business outlets, chambers of commerce and others.
2. Homeownership Education and Financial Literacy Training. Selected CBOs/FBOs provide pre- and post-homeownership education and financial literacy training to the borrower participants of this program. Individualized counseling and credit repair assistance are also being made available to address any special needs. 3. Legal Services and Counseling. Legal services agencies and pro bono attorneys negotiate with predatory lenders (or the holders of predatory loans originated by other entities) to cooperate in debt restructuring and refinancing including forgiveness of a portion of the loans. If negotiation fails, formal legal action is an alternative. 4. Alternative Financing Options Low Interest Home Improvement Loans. In an effort to prevent predatory loans, the chosen lead site partner creates a loan fund in conjunction with Seedco and other participating lenders that may include local banks, CDFIs, and social investors such as foundations or religious institutions. The fund uses flexible underwriting guidelines and offers low-interest home improvement loans with an average size of $15,000, for terms up to 10 years. Refinancing. For the remediation of existing predatory loans, local financial institutions commit to refinancing predatory loans for creditworthy borrowers with affordable conventional fixed-rate loans for up to 30 years, using flexible underwriting guidelines. Fannie Mae plays an important role in its commitment to purchase the refinanced loans. In addition, sites may use grant funds for the write down of the first mortgage amount to be refinanced. The refinance loans may be originated by the chosen lead site partner or by participating banks.
II.
PRI Loans for Capital
All funds raised or allocated by Seedco are matched at least one-to-one by local sources such as financial institutions, government, and foundations. The chosen local lending partner will administer the resulting loan pool. At each site, Seedcos investment is up to $500,000 as initial capitalization of the Loan Fund at a favorable rate of interest for a term of up to 10 years. A grant for loan write-downs is also awarded. Additional national program grants are also provided and subject to the same 1:1 matching requirement, to cover the estimated first 3-year costs of Loan Fund administration, origination, and servicing; outreach, counseling and education; and legal intervention.
III.
Program Sites Seedco launched the program in Baltimore in May 2002 and in Memphis in July 2002 and is currently in the pre-operational phase of a third site in the Capital District of New York (Albany, Troy, and Schenectady). Seedco is also planning the expansion of the initiative to 6-8 additional sites before the end of 2004. Among the sites Seedco is exploring for program expansion are: Los Angeles, Chicago, St. Petersburg, Miami, Reno, Birmingham, New Orleans, Jersey City, New York City, and Yonkers.
Baltimore H.E.L.P. (Homeowners Emergency Loan Program)
In May 2002, Baltimore launched as the initiatives first site. The loan fund is administered by Baltimore Community Development Financing Corporation (a nonprofit CDFI) and offers home improvement and refinances loans designed to prevent and remedy predatory lending in Baltimore. St. Ambrose Housing Aid Center, which is currently the HUD-funded CBO clearinghouse for Baltimore homeownership programs including anti-predatory lending education activity, provides the community outreach, intake and screening of potential borrowers, as well as homeowner education and counseling. Civil Justice, Inc., a nonprofit network of attorneys dedicated to expanding access to the legal system for low and moderate income clients, has been identified as the legal services provider to be integrally involved with the program as negotiations and legal action are needed. The program was capitalized with commitments totaling $3.4 million over the programs 3year period. This includes a $250,000 Seedco 10-year loan and Seedco grants totaling $162,500 for a 3-year period. Partners contributing to the initiative in grants and/or loan fund dollars include: Citibank; Allfirst Bank; First Mariner Bank; Provident Bank; Suntrust Bank; Annie E. Casey Foundation; Solid Foundations; Citigroup Foundation; HUD; and Baltimore Department of Housing and Community Development. The Fannie Mae Partnership Office is using this site as a special demonstration project and has committed to purchasing up to $2 million of loans generated (included in the $3.4 total commitment amount), thereby providing a secondary market that will allow the funds to be re-loaned. HomeSAFE (Secure, Affordable, Financing & Education) Memphis In July 2002, HomeSAFE Memphis was capitalized at $3,825,000, which includes Seedcos 10-year loan of $250,000 and loans of $125,000 each from South Trust and Union Planters banks for the home improvement loan fund, and a Seedco 3-year grant of up to $162,500 for one-half the costs of loan fund administration, counseling, and write downs. The Neighborhood Reinvestment Corporation committed matching grant funds of $50,000, and the Plough Foundation, $112,500. The Tennessee Fannie Mae Partnership Office has committed to purchase from participating lenders up to $3,000,000 of refinanced loans originated through the program. This program is administered by the nonprofit United Housing Inc. (UHI), a Neighborhood Reinvestment Corporation affiliate, which will provide the homeownership training and counseling and underwrite, close, monitor and service the home improvement loans. UHI also underwrites refinance loans for the participating financial institutions, including Union Planters Bank, First Trust Bank, National Bank of Commerce, Bankcorp South, and First Tennessee. With HomeSAFE Memphis level of capitalization, the program is projected to produce 25 home improvement loans through the loan fund (assuming an average loan of $20,000) and 33 refinanced loans through the participating lenders (assuming an average loan of $90,000), over the programs 3-year period.
Refinancing Predatory Loans: Fannie Mae

Prepared by Debbie Gruenstein, The Finance Project, October, 2002
I.
Project Description
Retaining Assets of home ownership
Over the last decade, subprime lending for home purchases and refinancing has grown rapidly. The term subprime refers to loans that do not meet conventional underwriting criteria, usually due to a borrowers poor credit history or a high loan-to-value ratio. Though subprime lending has expanded borrowing opportunities for individuals without access to conventional financing, the growth of subprime lending has coincided with an increased level of mortgage scams and home-equity fraud in communities all over the country. These abusive, or predatory, lending practices involve unscrupulous lenders developing loan products with high fees, interest rates and/or other terms (e.g. balloon payments, prepayment penalties, negative amortization structures, etc.) that are in excess of what would be attributable to risk-based pricing. The terms of these loans place an unaffordable financial burden on the borrower, stripping them of their home equity. Predatory lenders often target low-income, elderly, and minority homeowners and the unmanageable terms of their loans frequently lead to foreclosure. Their impact on homeowners and their communities can be devastating. As part of its $2 trillion American Dream Commitment to help increase homeownership and strengthen communities, Fannie Mae, the nations largest source of home mortgage financing, has partnered with local groups in 15 cities across the country to develop pilot programs that help victims of predatory lending refinance their debt into market rate loans.17 Through these pilot programs, Fannie Mae, counseling groups, legal associations, and lenders develop loan products that meet the specific needs of the victims in each city. Fannie Mae then purchases these loans from the originating lenders.
II.
Social investment technique
Secondary market for refinancing loans
Fannie Mae has committed to purchasing $56 million of market-rate refinance loans made to victims of predatory lending. Two factors make these refinance loans possible:
Flexible Underwriting: These loans offer very flexible loan-to-value ratios, combined loan-to-value ratios and back-end ratios. The most critical underwriting flexibility and a significant variance from Fannie Maes standard underwriting practices is with regard to the borrowers credit profile. There is no minimum credit score requirement and current credit problems, even foreclosures and bankruptcies, are allowed (provided it can be demonstrated that
17
Atlanta, Baltimore, Central Illinois, Cook County (Illinois), Chicago, Denver, Des Moines, East Palo Alto and Menlo Park, Essex and Union Counties (New Jersey), Las Vegas, Memphis, Minneapolis, New Orleans, New York City, and Omaha. Great Ideas: Investments Supporting Human Services November, 2002 Alliance for Children and Families & Annie E. Casey Foundation Page 38 Produced by Francie Brody
these problems are attributable to the predatory loan). Pre- and post-closing financial counseling is required of the borrower.
Gap/Rehab Financing Strategy: Victims of predatory lending often fall behind on other obligations as they struggle to make their home loan payments. In addition, in cases where the abuse was in connection with a home improvement loan, repairs and improvements were never performed (or were performed poorly). In order to refinance consumers out of abusive loans into a new loan they can afford to repay, there is almost always a need to reduce the amount of overall debt the borrower owes and/or rehabilitate or repair to the property. The two main strategies for addressing this need are 1) Legal Assistance partners to negotiate with the original, abusive lender a reduction in the original loan balance, and 2) very low-interest or zero-interest second loans. Each local initiative involves a legal partner, either Legal Aid or pro bono attorneys. Availability of gap funding sources varies by location.
III.

Financial benefits: Fannie Mae earns interest on the loans it holds in portfolio. For those loans it securitizes and sells as mortgage-backed securities, it receives a guaranty fee.18 The financial benefits to the borrowers are considerable avoiding foreclosure, reducing overall debts, reducing monthly loan payments, increased awareness to financial management through required counseling, etc. Financial risks: The credit risk to Fannie Mae is greater on these loans, given the population served, than their standard loans. In addition, the time commitment on the part of Fannie Mae and its partners to develop and implement these initiatives is substantial.
IV.

Working with local partners is crucial to this type of anti-predatory lending refinance initiatives. The challenges faced by these borrowers require special loan underwriting, servicing and counseling. Furthermore, the nature of these challenges may differ from city to city. The table below summarizes the critical partners/components necessary for success. This case offers a model for a large-scale financing-based strategy to restore lowincome household assets that have been eliminated or threatened by predatory lending practices. Such strategies provide complement and may enhance efforts to implement government policies limiting predatory practices in lending.
18
Currently, Fannie Mae has only securitized remediation loans from the Minneapolis initiative. These securities were sold to local faith-based investors. Great Ideas: Investments Supporting Human Services November, 2002 Alliance for Children and Families & Annie E. Casey Foundation Page 39 Produced by Francie Brody
Roles Borrower in-take; obtain all data on financial condition of borrower; obtain and review credit report; research circumstances leading to predatory loan; assist borrower in preparing application; provide pre- and postpurchase education. Legal Aid Assess/document predatory practice; explore opportunity for write down; explores legal remedies; borrower legal representation at closing. Subsidy Dollars To be used for debt reduction and/or rehab/repair funds. Lender/Servicer Underwrite, originate, and service loans; identify closing attorney who can handle complicated transactions Fannie Mae Develop parameters for initiatives with partners; provide underwriting flexibilities, get approval for initiative; purchase loans from initiative; provide best practices information and guidance for initiative. Source: Fannie Mae, National Community Lending Center These types of initiatives offer several PRI opportunities. For example, PRI investors could: Provide funds to create a revolving pool of low- or zero-interest gap or rehab loan funds. This would enable existing local initiatives to serve more victims of predatory lending, and would stimulate the development of new local initiatives. Such a fund could also leverage capital from other investors and facilitate the creation of a national consumer rescue fund. Purchase asset-backed and/or mortgage-backed securities, at a belowmarket yield, with predatory lending remediation loans or other types of community development loans as the underlying assets.
Partners Counseling Groups
Childrens Home & Aid Society of Illinois

I.
Project Description
Social enterprise with earned income
Established in 1883 by the Reverend Martin Van Buren Van Arsdale, the Childrens Home & Aid Society of Illinois, a 501c3 organization, has provided quality services to children and families throughout the State for over a century. Through an array of programs and services that include foster care, adoption, residential and group home treatment, counseling, child day care, Head Start, advocacy, research, and professional training, the Society aids in excess of 10,000 children and families per year and has an annual operating budget of $30 million. In the fall of 1997, Childrens Home & Aid Society (CHASI) completed a strategic plan designed to take them into the next millennium. During the early 1990s the organization had doubled in size mostly from growing its foster care services. A new head of the Department of Children and Family Services, however, intended to cut the number of children in foster care in Illinois by half, which had serious implications for all child welfare organizations that derived significant revenue from foster care services. CHASI decided to reduce its reliance on government funding and outlined two paths to greater independence: improved donor fundraising efforts and increasing earned income through a range of business ventures. In 1998, CHASI created a wholly owned for profit subsidiary, ASK4 Staffing, Inc., to generate additional revenues that would be used to further the mission of the Society by supporting its programs. ASK4 Staffing is a company that provides staffing solutions to social service organizations. It places direct social service professionals (e.g., case workers, residential workers, therapists, etc.) on a temporary basis, temp to hire, and direct placement. In addition to satisfying CHASIs need to diversify and increase its sources of revenue, there is a compelling need in the marketplace for the services provided by ASK4. The social service industry faces tremendous difficulty in finding personnel with both the right qualifications and the right temperament for specific jobs. Finding the right fit, that will allow an organization to best meet its clients needs, can be very time consuming and expensive. Also, the industry experiences high levels of turnover. So when a position is vacant, it can take quite a bit of time, and money, to recruit and fill that position. In the meantime, standards of care (and sometimes governmental regulations) dictate that the position be covered. In addition to the challenge of finding the right staff, changes occurring in the states social service providers, are likely to increase the need for flexibility in staffing patterns. For example, the Illinois Department of Children and Family Services has instituted permanency goals for moving wards of the state from foster care to permanent living situations. Agencies that do not perform will lose caseloads, with future caseloads given to agencies that have been successful in finding permanent living situations for children.
The agency that loses its caseload(s) may have to lay off staff. These individuals represent potential staff for ASK4. The agency that was given the increased caseload may find itself short-staffed to handle these new caseloads. These agencies could bring in ASK4 staff to handle the new caseloads until they can add the appropriate long-term staff.
II.
Direct investment of equity and Debt Agency guarantee of bank debt
The original business plan called for breakeven in three years and required $1.2 million total capital of which the parent company provided $300,000 in equity. ASK4 attempted to raise PRI debt or grants from a broad foundation universe. They were largely unsuccessful (lack of program link typically cited). ASK4 attempted to raise debt from commercial banks (start up nature of business typically cited). ASK4 attempted to obtain SBA guarantee, but was unsuccessful (size of parent organization cited). The parent company ultimately chose to guarantee a $500k line of credit.
Type of Funding Equity Bank Debt ($400k drawn to date) PRIs Dakota Foundation Meyer Family Foundation Total PRIs Amount $300,000 500,000 Structure 100% ownership $100k line of credit; prime plus %; $330k term loan; prime plus %; payable years 4-7 of company accrue interest 4 yrs; interest only 3 years; principal due in 10 years; interest rate 3% accrue interest 4 yrs; interest only 3 years; principal due in 10 years; interest rate 3%
30,000 50,000 $80,000
PRIs were obtained through previous business contacts of CEO of ASK4. Neither ASK4 nor CHASI had any previous experience with PRIs. The original plan calls for repayment of the debt from business cash flow.
III.
Benefits: Increased earned income for CHASI and decreased reliance on state funds Enhanced ability to hire well trained professional staff among regional nonprofits Expanded range of options to assist nonprofits in managing staffing patterns Risks: Staffing business may not generate significant profit ASK4 Staffing services may not be competitive relative to other temp agencies ASK4 reached profitability ahead of schedule, using less than one half of the originally projected capital. In FY 2000, revenues were $1.0 million; FY 2001, revenues were $2.0 million. However, the business has suffered a severe downturn (as a result of
declining state revenues and other economic issues hurting the social service sector in Chicago), and expects revenues of $750k for FY 2002. The long term outlook is uncertain. There was strong demand for the service in its first three years, when the economy was strong, and staffing shortages were particularly acute in the human service industry. The company exceeded plan and expectations on most measures. Just after it reached a revenue level that would support consistent profitability, the economic conditions in the human service sector deteriorated rapidly. This took the company back into a loss position. Drastic expense reductions were implemented, bringing the company back to modest profitability. As the parent company is suffering from its worst financial results in over a century, the parent company is unable to bear the risk of future losses in its for-profit subsidiary. As such, it may be in a position where it needs to close the company, rather than bear the risk of continuing losses. This would cause CHASI to have to write off its entire investment, and make good on its guarantee on the bank debt. This could result in a loss in excess of $700k for CHASI (almost 5% of its 100 year old endowment).
IV.
Policy Implications
[None really, only institutional policy] The lack of availability of capital for enterprises such as this could result in the necessity of closing the company down. The lack of capital available at the outset caused the parent company to increase its exposure through guaranteeing the bank debt. This highlights the concern that without appropriate capital sources, nonprofit agencies may put other programs at risk when they develop social purpose business ventures and bring them to scale.
Family Services Woodfield Community Sign Language Service

Prepared by Family Services Woodfield, with financing discussion by Brody Weiser Burns October, 2002
I.
Project Description
Social Purpose Business Venture
Background: Family Services Woodfield (FSW) is a health and human services agency that has been active in the Bridgeport, CT area for over 150 years. Our programs address the full spectrum of social issues affecting the residents of the greater Bridgeport area. FSWs Deaf Outreach Services and Employee Assistance Programs serve individuals and public and private organizations throughout the state. In 1995, the Connecticut Hospital Association (CHA) received notification the Office of Protection and Advocacy for People with Disabilities (P&A) was threatening litigation against eleven Connecticut hospitals on behalf of several deaf individuals and the Connecticut Association of the Deaf. P&A claimed that these hospitals had violated the Americans with Disabilities Act by failing to provide effective communication for members of the deaf community. Community Sign Language Service: In 1998, FSW contracted with the CHA to begin the Community Sign Language Service (CSLS) program. The CHA awarded FSW $750,000 to capitalize CSLS. Through this program, FSW provided interpreters on an emergency basis for deaf and hard-of-hearing patients at all 31 acute care hospitals throughout the state. Qualified interpreters are available 24 hours a day, 7 days a week. CSLS interpreters currently respond to 95% of the calls we receive requesting interpreter services in less than an hour. The CSLS average response time is 25 minutes. FSW provided training to appropriate staff regarding all aspects of the program and assisted CHA with other implementation requirements. CHA will not be reimbursed any of the $750,000 capitalization costs of the program. However, the member hospitals received a discount on the hourly rate of the interpreters for the first three years of participation. FSW was able to leverage the original capitalization funds by creating the human and technology infrastructure to expand its interpreter services to other organizations statewide. Clients include major corporations, schools, and government offices. FSW has grown the CSLS program in to a million dollar, profitable aspect of the agency. Of the 80 interpreters CSLS employs throughout the state, 52 are nationally certified American Sign Language interpreters, available during hospital emergencies. The 28 other interpreters, all of whom have gone through accredited training, are available for schools, universities, and businesses who need assistance communicating with students, employees, or the public. CSLS provides interpreters with on-going, job-specific
training, prepares interpreters for the National Certification exam, and ensures that interpreters receive the Continuing Education Credits that are also required by the State.
II.
Expansion Capital
The success of CSLS, both for FSW and the member hospitals, has attracted attention from other states. Both Rhode Island and Vermont have asked about FSWs ability to serve their markets, provide training, or replicate the program. In order to expand our services to include this type of consulting and training, we would need to create a specialized division. Funds for the capital investment necessary to start up that division would have to be raised. The financing need for such an expansion would need to be flexible and patient in character. It could be provided through some combination of grants, recoverable grants, and/or flexible debt. In order to raise formal equity from venture capital funds and angel investors, Woodfield would need to spin off the venture as an affiliated for-profit company. However, investors can provide what often is called near equity by economic development agencies. This type of debt may be subordinated to other lenders, relatively long term, and allow for interest-only payments for the first one to three years of the loan.
III.
Providing financing for social purpose business ventures can generate high program impact by enabling a venture to grow in scale and numbers served until it needs little or no subsidy to continue. However, the nature of this type of financing is financially riskier than investing in intermediaries, and challenging for foundations to understand.
IV.
This type of financing is difficult to obtain. Few intermediaries provide such financing, and some of those that are not large enough to make investments at the scale needed by these ventures. Some national and regional intermediaries are testing their own ability to begin offering financing to such ventures. Those already making loans for facilities and cash flow may be able to develop this capacity, if they also have developed skills in underwriting and supporting businesses One of the key challenges involved in operating and investing in social purpose business ventures is the need to balance a tension between social impact and profitability. Some of these ventures, like Community Sign Language Service, can generate a profit for the parent agency, in additional to meeting multiple social goals (services to the deaf, job creation/job training). Others, such as many job training businesses for people with special needs, may simply succeed in supporting a portion of their budgets with earned revenue. The mix of subsidy and recoverable investment dollars needed varies greatly among social purpose enterprises.
Foothold Technology
Prepared by Marlowe Greenberg, Foothold Technology and Francie Brody, Brody Weiser Burns, October, 2002
I.
Project Description
Social Purpose Venture Expansion
A human service agency must keep meticulous track of hundreds of pieces of data for reporting purposes. Information must be kept for each service an agency offers to every disadvantaged person. This data is the basis from which agencies are reimbursed by governments and funders for the services they provide. In other words, this data is their revenue. Multiply these requirements by 20 or 30 different services from drug rehabilitation to psychiatric services to homeless services and it is easy to see how information management becomes an impediment to the efficient operation of these agencies. In fact, many Executive Directors express frustration at the thousands of staff hours spent tracking and reporting data that could be better spent actually serving the disadvantaged. Foothold Technology has developed an internet-based software approach to address this problem. AWARDS (Affordable Wide-Area Relational Database System) would be prohibitively expensive for nonprofits to develop or purchase individually because of its highly sophisticated functions, which include client tracking, fiscal/billing, HR, vacancy management, progress notes, time sheets, and internal auditing. Instead, Foothold delivers AWARDS as an Application Service Provider (ASP), which allows the company to rent the software to nonprofit agency clients at a small percentage of what it would cost them to develop and support the technology themselves. Value Proposition: The companys goal is to minimize the time required for clients administrative functions and provide reporting and data-collection standards so that nonprofits themselves, as well as their funders, can gauge their efficiency and effectiveness. By gathering real-time organizational data, Foothold represents a new way of operating for nonprofit managers and directors. By delivering automated, customizable reports, Foothold believes it represents a transformation for the funders and regulators who oversee nonprofits. The new system allows one-time data entry, from any Internet connection, freeing staff of nonprofits from many of the burdens of record keeping and allowing them to focus on their mission. The market and model: Foothold Technologys core market consists of nonprofits that provide the same services offered by the three agencies responsible for the development of AWARDS: supportive housing, mental health services, homeless services, drug and alcohol rehabilitation and employment and training services. The company expands AWARDS capabilities and therefore its market by allowing agencies or their funders to pay for developing new software modules and reports, and then offering that new functionality to all other clients at no additional charge. There are 300-500 human service agencies in NY State and 110,000 nationwide that meet Footholds criteria.
Footholds revenue is generated through a subscription-based model that requires minimum annual contracts of $24,000 from each client. During its start-up phase, AWARDS had been successful in securing and providing ongoing services to sixteen existing clients that together generate a revenue stream of $40,000 per month including customization.
II.
Social Investment Technique Equity Investment Bridge Loan, Strategic Partnerships
In December of 2000, Foothold successfully completed a $225,000 friends and family round of equity financing. In November of 2001, the company received a $100,000 bridge investment, from one of its original investors, to assist them in surviving the immediate effects of September 11. Management is now in the process of raising a second round investment of $500,000 to support the up-front marketing costs of expansion. In July of this year, Foothold accepted a $200,000 equity investment from an anonymous social investor. Additionally, in September of 2001 the Rockefeller Foundation provided a small grant that enabled Foothold to greatly expand its employment and training module and offer it, free of charge, to employment and training agencies. The company recently began working with Rockefeller Foundation to identify employment and training organizations that would benefit from the new module, and several Rockefeller grantees have become clients so far.
III.
Foothold Technology, Inc. is a C-Corporation incorporated in Delaware with Headquarters in New York City. The company was founded in September of 2000. In the software business environment, any well-capitalized company can enter a market and outspend its competitors. While the economic barriers for others are low, developing software that works effectively with this markets complex set of regulations and requirements is a task no one can do quickly. The most significant risks are those risks associated with marketing and sales. The structure of the organization is simple; the operations are straightforward. While management's experience is not deep, staff size is expected to grow slowly and the company functions primarily as a marketing and software support group. Company management believes that the software is nearly flawless. Overall, management believes that the most significant risk is the degree to which they can sell into this market (human service agencies) when it has never been tried before with software as comprehensive as this one. The company has been growing at a rate of 300% since it was founded, and projects continuing to grow at this rate well into year five.
IV.
This social purpose business addresses a problem created by the complex and varied reporting relationships required to bill third party payers for a host of different types human services. Devolution and the state autonomy in delivering federally funded services have added to the complexity. While coordination in reporting and billing requirements could reduce or eliminate this problem, it is unlikely to occur in the foreseeable future. A Social purpose business meeting the technical needs of complex nonprofit service agencies offers a new way of doing business. In this case, the potential benefit to the growing number of complex service agencies is the opportunity to upgrade their data management capabilities, bill all of the services they provide and improve operational efficiency, all at a predictable and reasonable annual cost. To provide high quality services at reasonable prices, such social purpose businesses need social venture capital to enable them to grow, first to self-sufficiency and then to an efficient scale. Few options exist to provide this type of financing, because it is risky, labor intensive and small in scale relative to traditional venture capital.
Working Today
Prepared by Andrew Lewandowski, Brody Weiser Burns*
I.
Project Description
Background: Changes in the economy and in the structure of the labor market are having a profound effect on rates of health coverage for U.S. workers and the way health care is provided. According to the Economic Policy Institute, approximately one-third of the work force, or 41.8 million people, find themselves in temporary, part-time, freelance, or other contingent arrangements. One-quarter to one-third of these people do not receive health insurance benefits, according to estimates by health insurance experts. Furthermore, a substantial proportion of this contingent workforce is comprised of lowincome people. The 1997 CPS Contingent Worker Supplement estimated that more than 47% of contingent female workers and 34% of contingent male workers earn povertylevel wages, more than twice the rate for their full-time counterparts. Concept: This diverse independent labor force is not well served by either the employerbased or the individual health insurance system. To address this problem, Working Today, in conjunction with Cornell University researchers, conducted an 18-month study to explore the viability of creating a portable health insurance fund for independent workers in New York Citys new media, information technology and related industries (hereafter, new media industry). Working Todays proposed Portable Benefits Fund (PBF) would create a new model for delivering benefits to the growing number of independent and contingent workers who are not connected to a long-term employer by mimicking aspects of the employer-based insurance system. This model would diversify the risk pool, thereby reducing substantially the premiums for contingent workers. Organization: Working Today, founded in 1995 as a nonprofit organization, has developed a network of worker and community organizations that share its aim to create a new labor structure to provide independent workers with the information, support, and services they need to meet the challenges of the new economy. The network's 27 organizations represent over 92,000 workers and promote their interests through advocacy, service, and education. The founder and president of Working Today is Sara Horowitz, who has received both a Stern Family Fund Public Interest Pioneer award and, in 1999, a MacArthur Fellowship.
II.
The Ford Foundation made a $1 million Program Related Investment to help capitalize the Portable Benefits Fund, along with a $300,000 grant to generate starting net assets. In addition to the Ford Foundations PRI, Working Today expected support from the State and City of New York, as well as New Profit Inc., a recently launched foundation.
The term of the Ford Foundation grant and PRI is 10 years from the closing date, with an interest rate of 1% per annum. Interest is payable quarterly and principal repayments are due in 5 equal installments, starting from the fifth anniversary of the closing. The Ford Foundation addresses a number of key risks through structuring loan covenants. The sources of repayment are: net income from monthly fees, one-time setup fees, marketing fees, and interest income, once Working Today becomes profitable.
III.
Benefits: Through work with The Segal Company, the premier national benefits consulting firm, Working Today plans to offer health insurance first to freelance, parttime, and contingent workers in New York Citys new media industry, which includes workers ranging from data processors to computer programmers. By starting in the new media industry, where many workers can pay their premiums, the fund will be able to control for adverse selection, e.g., the propensity of people to apply for health insurance only when sick, the factor most responsible for the high cost of individual insurance. Working Todays ultimate goal is to expand this model to reach low-income people who lack affordable health insurance. By the end of the loan term, Working Today has plans to increase low-income membership in the PBF to 40%. The organization has also worked with the United Ways September 11 Fund to provide a years worth of health insurance to up to 15,000 individuals below New York Citys Canal Street and in parts of Chinatown. Risks and Strategy to Mitigate Them: Financing Working Today involves several key risks, mitigated in part by a strong and realistic business plan, the net asset grant to cushion start-up losses and a number of covenants designed to articulate a shared expectation about how the underlying risks will be managed. New Model in Industry: The greatest risk is whether or not the PBF proves to be an effective mechanism for limiting exposure to adverse selection in a New York market under the enormous strain of community rating, which requires insurance companies to make coverage available to any applicant within the State. The feasibility study outlined how that can be accomplished and an industry expert review indicates that the plan is based on conservative and achievable projections. A mandatory prepayment covenant mitigates the risk that the PBF does not become operational. Program: The principal program risk when the PRI was made was the possibility that PBF is unable to achieve its initial projected membership base of media workers, and thus must delay the low-income community expansion could be delayed and/or become unfeasible. This risk would be addressed by negotiating and monitoring a covenant specifying membership targets for low-income households, which Working Today would be required to achieve.
Start-up: This PRI project involves significant financial risks associated with Working Today's increasing its debt level, entering a new line of business, and managing projected business growth. The net asset grant, multiple funder support and covenants related to net assets, net income, and liquidity should assist in monitoring this risk. Management Risk: Working Today is led by an extremely talented executive director who has shaped the organization into its current form. The launch of the PBF requires additional staffing at the senior management level as well as continued board development to include industry membership. The recent strategic plan, working agreements with GHI (the insurance company) and the third party administrator, and covenants about key personnel changes will help mitigate this risk.
IV.
Policy Implications and Lessons
Lesson: This PRI structure presents a good example of how the combination of strong borrower planning and careful deal structuring can mitigate the substantial risks involved in supporting a start-up effort to create a new model. Policy: This great idea highlights the problems faced by many Americans caught between the US healthcare policy emphasis on employers as the source of health insurance, and a trend for many whole industries to convert formerly permanent positions into temporary work. The fact that this is happening to well-paid professionals as well as low-income workers strengthens the potential for new models to address the problem.
Educational Products
Prepared by Brody Weiser Burns, October, 2002
I.
Project Description
Social Purpose Business Venture
Educational Products, Inc. (EPI) is a not-for-profit 501 (c) (3) corporation spun off from Western College in 1998 and is headquartered in Sacramento, California. In the belief that reading is fundamental to other skill areas, the program targets leading schools for students in lower elementary school grades, providing students with intensive instruction in language arts. Through contracts with public schools, the program delivers curriculum materials and extensive professional development for teachers. The program targets student achievement in mostly high-poverty, Title I schools, which pay for the program with grants from a competitive federal grant program. Results from research conducted by the program developers, as well as by external evaluators, have shown the Educational Products program to be effective in enhancing the reading achievement of economically disadvantaged and non-native English speaking students. The Chairman of EPI and its President and CEO have been the principal researchers and management of the Educational Products program since its inception at the college in the mid 1980s. Since then, EPI has tested and sold its services and developed an organization with about 350 employees, the majority being located in regional training programs throughout the U.S. EPI has an annual budget of about $50 million, most of which is derived from fees from schools for training and materials, supplemented by grants and loans from charitable foundations and government agencies.
II.
Flexible, patient PRI loans For business expansion
EPI requested a PRI from a number of foundations to provide working capital for expansion. Foundations considered supporting EPIs expansion for two reasons. First, program staff was excited about the impact of its curriculum-based school reform program. Second, EPI had developed an organization and a track record, and was ready to roll out a plan to provide services throughout the United States. This proposed expansion provided the potential for improved curriculum in thousands of elementary schools in very low-income neighborhoods, and improved school performance for tens of thousands of low-income children. Three foundations made flexible PRI loans to support EPIs expansion, and one of them also provided grant support for evaluation. Two of the PRIs came from large national foundations and one came from the Schools Reform Foundation (SRF), whose mission is K-12 education reform. The PRI loans ranged in term from five to eight years and deferred principal repayment until after at least the first year, when the business plan projected that the business would begin to break even. During the initial year, EPI would make quarterly interest-only
payments. After the initial principal moratorium, EPI would make quarterly payments of principal plus interest for the remainder of the term. The funds for repayment were expected to come from EPIs profits, which were projected to generate sufficient cash both to fund the organizations continued growth and also to repay debt. Due diligence analysis indicated that EPI most likely would be able to repay the debt from its future business profits, but might need a somewhat longer repayment time than the three to five years the company showed in its financial projections. The three foundation PRI structures varied somewhat due to differences between their respective organizational cultures and their practices for supporting new programs. One of the large foundations, accustomed to basing its PRI risk mitigation on long term relationships and flexible terms, provided the longest of the three terms and several years of principal moratorium to give the borrower time to address unexpected setbacks as it learns to manage rapid expansion. The other large foundation typically required that borrowers define detailed management and financial plans, and used the discussions about these plans to help grantees define and plan their own risk mitigation strategy. Its loan structure included financial and business covenants for overall organizational management (such as net worth targets, breakeven requirements and leverage limits), as well as several covenants designed to help mitigate risks specific to this deal. (See next section) SRF is an industry expert, with a grant and investment fund established with contributions and board members from the venture capital industry. The opportunity to support expansion of a core grantee and to co-invest with experienced PRI investors led SRF to make its first PRI. Its approach was to use its corporate network to provide technical resources that would help the borrower succeed, including a board member with extensive experience in the public school educational products industry.
III.
Key risk factors the investors had to consider when making this deal centered on the type of business and the way in which it operates. EPI has significant upfront expenses to develop and produce curriculum products that require large amounts of working capital. Most of the new product development is supported by grants. If these grants decrease, EPI would have to reduce its new product development in order to repay its debt on time. When the PRIs were made, EPI had not yet reached the break-even point. In this situation, a typical risk factor is the burn rate, or how fast the company will utilize cash prior to breakeven. If the burn rate were to increase, a tension would emerge between using the new working capital for expansion as planned, and a need to staunch losses. The third major risk is that the curriculum materials produced by EPI have a shelf life of only a few years. If EPI does not sell the materials produced within that time frame, the inventory could become obsolete and unfit for sale. With working capital scarce, this could tie up cash needlessly. Yet when the PRIs were made, EPI was locked into a multiGreat Ideas: Investments Supporting Human Services Alliance for Children and Families & Annie E. Casey Foundation Produced by Francie Brody November, 2002 Page 53
year printing contract that required EPI to order and pay for its materials well in advance of most of its sales. Risks were mitigated by: A strong management team, including a CFO with experience managing another young rapidly growing company, EPIs strong reputation and existing track record, and The ongoing strategic partnership with Western College, which provided access to new research. Each of the three foundation investment structures mitigate some risks, including flexible and patient loan repayment terms, new management policies, financial covenants and access to ongoing technical advice from industry experts. (See section II above) Benefits: Research data documents EPIs success in promoting student achievement in mostly high-poverty, Title I schools. To dates, EPIs operations have grown to approximately 1550 elementary schools in the United States. Programs also exist in schools in Australia, Canada, Israel, and Mexico. Current Status: EPI reached financial break-even and utilized the PRI dollars to fuel growth as planned. The CFO succeeded in restructuring EPIs printing contracts to allow for rolling materials orders, reducing waste and shortening the time period between materials purchase and customer payment. Prospects for on-time PRI repayment look promising.
IV.
This case demonstrates a relatively simple investment structure for charitable social investors to support the expansion of social purpose business ventures expected to become profitable on a stand-alone basis. The three different foundation approaches to risk mitigation are useful in understanding how institutions with different cultures and policies can adapt a simple deal structure to meet the needs of both borrower and lender. Although each of the three investors conducted their own due diligence processes and negotiated their own investment structures, they also shared information. Benefits of this informal coordination included: A first PRI investment by SRF Better quality information Savings on staff time and consultant cost and Improved risk mitigation and likelihood of success.
Coastal Enterprises, Inc.

I.
Project DescriptionIntermediary,
Venture Capital for Job Creation
Coastal Enterprises, Inc. (CEI) is a private, nonprofit community development corporation and CDFI that provides financing and technical assistance to small businesses and develops social service facilities and affordable housing. Since its founding in 1977, CEI has financed $85 million and mobilized another $235 million from public and private sources in 1,200 ventures, facilities and affordable housing projects. These activities, combined with technical assistance in business and workforce development, have resulted in the creation or retention of more than 11,000 jobs. CEI is nationally recognized for its pioneering use of venture capital tools to provide employment opportunities for low-income people and to stimulate economic development in the communities where they live. CEIs first venture capital fund, CVLP, was launched in 1996 with total capital of $5.5 million. To date, this fund has made investments in 17 companies, three of which have been exited with a 24% Internal Rate of Return and none of which has failed. CVLPs portfolio companies have created 195 jobs, one-third of which went to people with low incomes. The average starting wage for these jobs has been $14 per hour and 98% carried health insurance. The proposed investment will go to capitalize, CEI Community Ventures (CCV), a New Markets Venture Capital Company. It is one of seven such funds to be licensed by the US Small Business Administration (SBA) in the inaugural round of this new Federal program. CCV intends to raise $5 million from accredited investors; this will be matched with $7.5 million in debt capital from the SBA. The fund will seek to invest in companies that generate a competitive return for investors and support CEIs mission. The fund will target companies that do one or more of the following: Create quality income, employment and ownership opportunities for community residents and people with low incomes. Operate in sectors that CEI considers important to the creation of sustainable communities. These include industries that produce socially-beneficial products and services (e.g., health care, education and information technology), innovative businesses that are natural-resource based (e.g., aquaculture, fishing, marine industries, food production and forestry), and traditional New England industries such as metal trades and composite technologies. Maintain progressive employment and business practices (e.g., investing in workforce training and development; preserving the environment; locating a business in a low-income community).
As required by the New Markets Venture Capital program, CCV will focus the majority of its efforts in low-income geographic areas designated within Maine, New Hampshire and Vermont.
II.
Equity Investment in Limited Liability Company New Markets Tax Credits
The MacArthur Foundation provided a $1 million Program Related Investment to purchase equity in CEI Community Ventures Fund LLC, a for-profit community development venture capital fund affiliated with Coastal Enterprises, Inc., which is a nonprofit community development financial institution serving low-income people and communities in Maine. The primary source of takeout for the investment is projected to be successful exits from a series of equity investments. CEI Community Ventures (CCV), a New Markets Venture Capital Company, intends to raise $5 million from accredited investors; this will be matched with $7.5 million in debt capital from the SBA. Pursuant to the SBAs policy of reserving funds to pay for the first five years of interest on these matching debt securities, the net amount of SBA funds available to the fund will be approximately $5.2 million. Based on a net capitalization of $10.2 million, the proposed $1 million PRI would constitute slightly less than ten percent (10%) of the funds total capital. To date, the fund has raised $3.5, including $1 million from the Ford Foundation. Additionally, as a New Markets Venture Capital Company, the fund is required to raise $1.5 million in grants and in-kind services to be matched with a $1.5 million grant from the SBA. These resources will be used to provide operational assistance to aid portfolio companies business development and may include management, marketing and other technical assistance. In addition, the New Markets Venture Capital Company, CCV, has a Community Development Advisory Board. As required by Federal statute, this board is charged with ensuring accountability to residents of low-income communities in the targeted geographic areas.
III.
Venture capital investing is an inherently high-risk endeavor. Shifts in the larger economic environment play a major role in the success or failure of individual companies and entire industry sectors. A funds success depends upon the financial and business management expertise of its managers. Equally important are the networks of relationships that supply a flow of potential deals, sources of co-investment and followon capital, business development resources and, ultimately, opportunities to achieve an investment exit, whether through sale, merger or initial public offering. The effects of these and other factors are compounded for community development venture capital funds particularly those located in more isolated rural areas due to their deliberate focus on underserved markets, sectors and geography.
Benefits: Increased range of employment opportunities in the target communities Stronger regional economic base through a more diversified business base Risks: Need for additional staff with venture capital expertise as fund size expands and number of deals as portfolio grows Geographic constraints on investing activity may limit deal flow Participation in an untried government program with an evolving regulatory structure is inherently risk-laden Targeted level of financial return to investors may not be realized which may or may not impact social returns
IV.
Policy Implications
As one of the leading advocates for establishment of the New Markets Venture Capital program, CEI also is stepping up to the challenge of participating in an important new Federal program whose direction and long-term prospects will depend heavily on the success of its early participants. CEI is part of the inaugural group of New Markets Venture Capital Companies, and the investment is expected to bolster chances for this programs immediate and long-term success. With the potential to deliver $120 million under its current appropriation and significantly more if future appropriations were approved, the fate of this new federal program holds great significance for the entire field, both rural and urban.
Seedco
Nonprofit Venture Nonprofit Social Venture Network

I.
Intermediary, Nonprofit Social Enterprises
Overview/Need: Seedcos Nonprofit Venture Network (NVN) is a multi-site effort that enables nonprofit organizations to develop for-profit social purpose businesses. Social purpose businesses are commercial ventures operated by nonprofits that help the parent organization fulfill its social mission and diversify revenue streams. These ventures promote innovative programs, create job and training opportunities, encourage entrepreneurial endeavors, and contribute to the financial viability of the parent nonprofit. As participants in NVN, nonprofits can access expertise and assistance from a wide range of partners -- public and private funders, intermediary organizations and a network of community-based organizations. Nonprofits also gain valuable insights through regularly scheduled peer support sessions. Experienced entrepreneurs are available to consult with nonprofits as they go through the process of developing social purpose businesses. Program Concept: The Nonprofit Venture Network was established in New York City in early 2001 with support from the MetLife Foundation, the United Way of New York City and Mizuho Corporate Bank, Ltd. A second site, NVN: Tampa Bay facilitated by Seedco and the University of South Florida, with support from the MetLife Foundation and the Eckerd Foundation is beginning this fall, and a third will be finalized early next year. The program focuses on building the capacity of nonprofits as they determine the feasibility of starting a commercial venture. Seedco provides financial and technical assistance that includes a series of workshops, one-on-one business planning, and financing for the start-up and/or expansion of the business. Each of these components builds upon the other, offering participating organizations a sequenced package of assistance related to each stage of the business development process. Individual technical assistance and financing services may be accessed at any point depending on the parent organizations level of sophistication and existing capacity. Assessment and Capacity Building: Seedco designed the MetLife Workshop Series to provide an overview of the field. These workshops outline the basic skills that are required to successfully implement a new venture, including business planning techniques and the potential benefits and risks involved in implementation of social purpose businesses. Seedco also offers one-on-one technical assistance to help nonprofits determine the feasibility of establishing such ventures.
Intensive Technical Assistance: Once a nonprofit decides to move forward, Seedco designs a technical assistance package tailored to meet specific needs. TA may include help with strategic planning, program design, operations and action planning, and measuring outcomes through the utilization of Seedcos proprietary tool of Performance Measurement & ManagementSM (PM&M).
II.
Social Investment Techniques
Intermediary loans, grants and TA
Several different funding/financing mechanisms are available: Pre-Development Grants Seedco provides qualifying nonprofits with small grants to conduct a feasibility analysis or develop a business plan. Loans Nonprofits can apply to Seedcos loan fund for debt or debt/equity project financing to support the creation and/or expansion of social purpose businesses. Flexible collateral requirements, below-market interest rates, and terms of up to ten years characterize Seedcos debt financing packages. Initial financing packages are expected to be in the range of $100,000 to $200,000. Venture Portfolio Fund With its funding partners, Seedco is creating a network of organizations and individuals interested in engaging in venture philanthropy to support social purpose businesses. Seedcos model will offer a diverse portfolio of start-up and early stage social purpose businesses to prospective investors. Seedco will also utilize PM&M to measure social outcomes generated through businesses in the Venture Portfolio Fund.
III.
Metropolitan Life-Sponsored Case Studies: Seedco is preparing case studies documenting the experiences of four social purpose businesses. These case studies will focus on best practices that are culled from the experiences of nonprofits that have launched such ventures. The case studies, funded by Metropolitan Life, will augment the curriculum of the MetLife Foundation Introductory Workshop Series on Social Purpose Youth Businesses. NEW YORK CITY ENTREPRENEURIAL ASSISTANCE FUND GRANTEES NVN: New York City has awarded grants to the following ten organizations to develop business plans and determine the feasibility of starting a social purpose business. 1. Brooklyn Childrens Museum is creating a 600 square foot museum store that will provide employment and training opportunities for local youth. 2. Brooklyn Woods, Inc. is creating a woodworking business to provide employment and training to low-income and unemployed individuals.
Brooklyn Woods plans to contract with nonprofit organizations and lowincome housing developers. 3. Center for Alternative Sentencing and Employment (C.A.S.E.S) is creating a greeting card business targeting the youth market that will develop the artistic and business skills of youth offenders currently participating in its community alternative service sentencing program. 4. The CityKids Foundation is creating a line of curricula and videos on youth leadership and training intended for organizations seeking to reach young people. Youth participating in CityKids programs will engage in business activities associated with this venture. 5. Managed Work Services of New York provides temporary employment to individuals with histories of alcohol/substance abuses. The business is a joint venture between VIP Community Services and the National Association on Drug Abuse Problems, Inc. 6. New Horizon Courier Service provides employment for formerly homeless individuals as couriers. This business is an outgrowth of Lenox Hill Neighborhood Houses vocational training program. 7. Pratt Area Community Council is developing a property management business to provide employment and training to residents of low- and moderate-income neighborhoods in Brooklyn. 8. Project Reach Youth is creating a catering business to provide training in the culinary arts and employment to local youth in Brooklyn. 9. Recycle-A-Bicycle is expanding its bicycle business. RAB teaches lowincome youth affiliated with the Henry Street Settlement House to refurbish used bicycles, which are then sold through their retail outlets. 10. TADA! is developing a business to market and provide short-term theater opportunities for New York City youth during holidays and other school breaks.
Portions of this article have been revised from Ford Foundation internal documents.

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Great Ideas: Social Investments Supporting Human Services

Produced by Francie Brody, Brody Weiser Burns

Great Ideas: Social Investments Supporting Human Services

November, 2002 Produced and Edited by Francie Brody

Brody Weiser Burns

November, 2002 Page 1

November, 2002 Page 3

Section II: Facilities A. Human Services

Section III: Social Purpose Business Ventures A. Business Ventures

Rubicon Programs: A Case Study in Capital Innovation

Social Investment Technique

November, 2002 Page 6

Financial Benefits and Risks

Lessons and Policy Implications

November, 2002 Page 7

Ways to Work, Inc.

Emergency loans to individuals

Social Investment Technique

Intermediary Guarantee program

Financial Benefits and Risks

November, 2002 Page 10

Missouri State Tax Credit for Services to Children and Families

Proposed State Tax Credit

Social Investment Technique

Proposed State Tax Credit

Financial Benefits and Risks

Learning and Policy Implications

November, 2002 Page 12

Innovations in Community Development

The Community Organization Financial Assistance Program

Intermediary, TA for nonprofits

Social investment technique:

Partnership Loans and TA

November, 2002 Page 14

Innovations in Community Development

Lower Manhattan Small Business and Workforce Retention Project

Small Business Intermediary

Social investment technique:

Low-Interest Loans with Grants and TA

Financial Benefits and Risks

November, 2002 Page 17

Fremont Family Resource Center

Social Services Facility

Social investment technique

November, 2002 Page 18

Financial benefits and risks

Policy implications and lessons

November, 2002 Page 19

Social Services Facility and Job Creation

Social Investment Technique:

Federal New Markets Tax Credits

Risks and Benefits

Policy Implications and Lessons

James F. Oyster School

Social investment technique:

Trade of Land for NewFacility

November, 2002 Page 22

Financial benefits and risks

Policy implications and lessons

November, 2002 Page 23

The Doe Fund

Special Needs residence facility

Social Investment Technique: Long-term loan participation with pension fund