Steve and Deona Thomas manage a 13-unit apartment building on Chicago’s South Side, and they needed to refinance the mortgage on it this year. Through their small property management and rehab company, the Thomases have become award-winning preservers of affordable housing in the city. Such developments don’t get the familiar 30-year, fixed-rate mortgages that individuals and families use to buy their homes. Commercial loans, which apply in the Thomases’ case, tend to have terms of five to 10 years. Typically, in order to lower monthly payments during the life of the loan, commercial loans are structured so that the last payment is a very large lump sum of the remaining balance (what’s known as a balloon payment). As they near the end of a current loan, businesses usually refinance — and pay off the existing mortgage with a new five- to 10-year loan. That comes with a new balloon payment looming at the end.
For many small businesses and nonprofits, this mortgage game becomes a stress-inducing cycle.
A few weeks ago, the Thomases were able to obtain a 20-year loan for that property, fully amortized — meaning no balloon payment — from the Chicago Community Loan Fund (CCLF). No more endless refinancing cycles. At the end of the 20 years, the building will be free and clear of commercial mortgage debt.
That loan was made possible thanks to the newest program of the U.S. Treasury’s CDFI Fund, known as the CDFI Bond Guarantee Program, or BGP. It was created by the Small Business Jobs Act of 2010. The federal government purchases bonds issued by federally certified community development financial institutions, or CDFIs. The bonds are 100 percent guaranteed by the U.S. Treasury, and each bond provides capital at up to 29.5-year terms. The BGP is currently the only source of long-term, fixed-rate capital for community development.
With access to this money, community development loan funds can lend with much longer terms, eliminating the need for balloon payments and endless refinancing cycles.
CCLF has drawn down $5.5 million of its $28 million in BGP capital so far, benefiting 10 borrowers like the Thomases. “This is the type of deal we wouldn’t have been able to do in the past because a lot of our investments have shorter terms,” says Angela Dowell, vice president for finance at CCLF.
Community development loan funds like CCLF typically get funding from two sources: grants or bank loans. When they get a bank loan, it’s typically the same deal as other commercial loans. The loans are for five to 10 years, though usually at below market rates (to satisfy banks’ Community Reinvestment Act obligations). With them, an organization like CCLF turns around and makes smaller five- to 10-year loans with balloon payments at slightly higher interest rates to borrowers like the Thomases, community development corporations, nonprofits, small businesses, households with little to no credit history or damaged credit, and others. The loan fund earns a little bit of income from the interest, and philanthropic or public grant dollars (often from the CDFI Fund) help pay for operating costs.
Since 2013, the CDFI Fund has authorized $1.11 billion in CDFI guaranteed bond purchases. Crucially, the BGP is designed to operate with zero subsidy from taxpayers. As with other bonds issued by corporations or municipal governments, CDFIs have to pay back every cent of the bonds plus a little bit of interest to the federal government.
Fifteen CDFIs have accessed long-term capital through the BGP so far, working all across the U.S. in urban and rural areas, including one Native CDFI.
Capital Impact Partners has used BGP capital to finance two charter schools, in Detroit and Camden, and two health centers in California. One of the latter, Tiburcio Vasquez Health Center has two locations in California’s East Bay area, and serves 22,000 patients a year, 71 percent of whom are on Medicaid. A second location had been on seven-year refinancing cycles. Capital Impact Partners provided a $4.4 million, 25-year, fixed rate loan for Tiburcio Vasquez to permanently own that property. “Now they’ll know what their mortgage payments are going to be for 25 years, and at the end it will be wholly their facility,” says Ian Wiesner, of Capital Impact Partners.
“There was not a reliable source of this long-term type of capital for many of these organizations,” Wiesner adds. “Some organizations could go to the bond market, but it’s a complicated, expensive process. What BGP did was open up that type of financing that wasn’t really open before.”
Community Development Trust, a CDFI with borrowers and affordable housing projects in over 40 states, has used BGP capital for 14 affordable housing deals across four states. For these deals, they typically have been approached by local or statewide multifamily housing developers in need of some affordable, long-term capital for repairs and upkeep of affordable housing units. According to CDT, thanks to the BGP, it was able to step in and provide urgently needed capital more quickly and through a less cumbersome process than previous sources of capital for such borrowers.
There are some catches, of course. Since the bonds are 100 percent guaranteed by the U.S. Treasury, only the federal government may purchase the bonds. Also, the minimum bond size in the program is $100 million. Most of the 1,000-plus CDFIs around the country are far too small to take on that much capital at one time. CCLF, with around $56 million in assets at the time it entered the BGP, was able to access the program by joining a multiparty bond with six other CDFIs.
It’s also a very sophisticated program on the back end for CDFIs, since no one has ever done this before — deploying long-term, fixed rate capital for community development. It may get less cumbersome in the future as all parties become more familiar with these transactions, but for now it can be a bit intimidating, especially for a smaller CDFI like CCLF.
“Initially up front there’s a little more work, but now that we’re in the program, it’s been surprising how smoothly it runs with the rest of our programs,” Dowell says. “One pleasant surprise was how much support we received. … For the past two years we’ve been involved, the CDFI Fund staff has held trainings where we continue to learn about the program and spoke a lot with our peers in the program.”
Since it’s authorized by separate legislation outside the federal budget, the BGP is one of several programs under the CDFI Fund that won’t get cut if President Donald Trump has his way and zeroes out the CDFI Fund’s annual grant programs. The other CDFI Fund programs protected by separate legislation are New Markets Tax Credits and the CDFI Capital Magnet Program (which is funded out of profits from Fannie Mae and Freddie Mac). The cuts would still hurt, however, since CDFI Fund grants often help pay for the operating costs for CDFIs in these programs.
Nearly $400 million of the $1.11 billion in CDFI guaranteed bonds has been deployed, meaning there’s around $700 million still in the pipeline. So unless the federal government totally collapses or Congress repeals the Small Business Jobs Act of 2010, that $700 million will also find its way into community development projects like the Thomases’ affordable housing property on the South Side of Chicago.
Another billion dollars in CDFI guaranteed bonds are authorized for 2017, to be announced by the end of the year. It would take an act of Congress to prevent those purchases from happening as well.
The Equity Factor is made possible with the support of the Surdna Foundation.
Oscar is editor of Next City. Before that, he was a Next City contributing writer and 2015-2016 Equitable Cities Fellow. Since 2011, Oscar has covered community development finance, community banking, impact investing, equitable and inclusive economies, affordable housing, fair housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.