Diana Turoff is still surprised that a lot of investors aren’t familiar with community development financial institutions like Finance Fund.
“For social impact investors — people who would like more of a social return and aren’t just so much interested on the financial return — CDFIs are a great place for them to invest their dollars,” says the nonprofit's president and CEO.
CDFIs, which can be banks, credit unions, loan funds, microloan funds or venture capital providers, strive to foster economic opportunity and revitalize neighborhoods. According to the U.S. Department of the Treasury, there are 1,000 CDFIs in the U.S.
Finance Fund, and its affiliate lending arm Finance Fund Capital Corp., connects underserved communities in Ohio with public and private sources of capital to improve access to healthy food, health care service, education and affordable housing. The 32-year-old organization has invested in every county except three.
“CDFIs definitely have been gaining traction through the years, but we just talked to a foundation a couple weeks ago and they didn’t know what a CDFI was,” Turoff says. “So, we had to educate them on who we are, on what we do, about CDFIs, and they’re very interested now in making a program-related investment.”
Targeted, flexible lending
CDFIs are more flexible than traditional financing institutions, Turoff says.
“We engage the community to understand their needs, to bring to the communities what they want, so that then they will support these projects,” she says.
Finance Fund provides New Markets Tax Credits (NMTC), and typically around $10 million in direct lending through FCAP each year. The mix of projects changes based on community needs and government funding.
One project that recently took advantage of the tax credit is Fortuity Calling LLC in Franklinton. The call center is a social enterprise that provides employees with a defined career path, permanent and portable career advancing skills, and other high-need services like child care with sick child workday care services.
Finance Fund provided $7.5 million in federal NMTC allocation and $2.56 million in state NMTC allocation; and Capital One, the tax credit investor, provided an additional $1 million in federal NMTC allocation to the project.
“Our goal is to create a profitable, economically sustainable business platform that will offer low-income people an opportunity to participate in the area’s revitalization and the potential to achieve economic self-sufficiency and some measure of prosperity,” Fortuity Calling co-founder and CEO Fred Brothers says. “Without NMTC investment and Finance Fund’s vision and commitment, we couldn’t have closed the considerable upfront financing gaps and this project simply wouldn’t have come to fruition.”
In 2018, Finance Fund expanded into real estate development. Its first project is helping turn two blighted Franklinton hotels into 100 units of affordable housing for at-risk youth, ages 18 to 24 years old. Wraparound services, such as employment and job training and mental and physical health services, will help address barriers to success.
The organization also recently acquired a 53-unit property in Athens where a majority of the resident are seniors and many are disabled. The idea is to keep it as affordable housing. Other projects included financing for a grocery store in Vinton County, which only had a Family Dollar and General Dollar store, so residents didn’t have to drive 25 miles to purchase produce or meat.
“As a CDFI, a certain percentage of our lending has to be in our target market, which is low- to moderate-income communities. So, although we could go outside of that threshold to some degree, the majority of all of our investments are within our target market,” Turoff says.
This means CDFIs like Finance Fund do take on more risk than a traditional bank, she says.
“We are funding projects that often times take longer to come together. As a CDFI, we provide technical assistance to our borrowers until they are actually ready to take on a loan. A lot of times, these are maybe startups, these are new businesses, they’ve never had a loan before,” Turoff says.
Mitigating the risk
To mitigate that risk, Finance Fund diversifies its revenue streams and collaborates on projects.
“If there’s a loan that we would like to provide and say it’s $500,000 in total. We will partner or participate maybe with another CDFI, and so we’re each sharing the risk and will come in at $250,000 a piece,” she says.
It also works closely with borrowers, providing technical assistance and resources.
“We will start working with them as soon as we suspect that there could potentially be a problem. We’re not waiting around until, ‘Oh, somebody missed a payment and now this is on our radar.’ We like to get in front of any potential problems that may exist,” Turoff says.
This collaboration helps Finance Fund and its partners sustain a project by offering a payment holiday or a certain timeframe of interest-only payments — getting borrowers the resources they need to ensure, at the end of the day, they are able to pay back in whole.
“I think a lot of times people assume that CDFIs must have high losses or write-offs, and we really don’t,” she says. “The data that’s been collected compares us to traditional financial institutions. We’re right in line with them.”