SOCIAL TOPICS (Archive): COMMUNITY DEVELOPMENT INVESTING

Published, November 1993

       Low-income inner cities and rural communities have enormous need for small organizations that know the people of these communities and can effectively assist local community economic development. Some not-for-profit, community-based institutions try to fill the gap but generally lack supplementary seed money or equity-like capital to spur housing and commerce.

       A proliferation of community development loan funds are working hard to fill the gap. These funds can step into the role of providing capital for development and down payments where loan business is too small or too risky for market institutions. Community development loan funds have high reserves and very low costs because many are subsidized by investors who have chosen to accept below-market rates or no interest at all.

       President Clinton, as a small part of the Administration’s economic strategy, proposed legislation in July to grow the capacity of community development finance institutions with a Community Development Banking and Financial Institutions Fund. Community development loan funds, complemented by community development banks, were recognized as critical to the legislation’s success.

       The Johnny Appleseed of the community development loan funds is Chuck Matthei, a former community organizer, who created a loan fund in 1980 within the Institute of Community Economics (ICE), now in Springfield, MA. With over $10 million in current loans outstanding, ICE has inspired imitation all over the country.

       ICE and 41 other members of the National Association of Community Development Loan Funds (NACDLF) have over $100 million in total assets of which more than 80% has been lent. While ICE and its siblings focus on very low income community housing, other members such as the Industrial Cooperative Association and the Lakota Fund, a project of First Nations Development Institute, focus on the needs of worker-owned businesses and small-scale, tribal enterprise.

       If you want to participate in a community loan fund, here are the basics of investing:

How much? Usually $1000 or more.

How long? Usually one-to-five years, as agreed.

How does it work? Like a bank certificate of deposit. Your loan goes into a pool, most of which is loaned. Unlike most bank deposits, your loan typically can’t be withdrawn before it matures and it is not insured.

What about interest? Usually below prevailing market rate for a loan of comparable risk. The difference in rates is your subsidy to the fund which will permit greater social return.

Level of risk? Determined by the quality of the management of each loan fund. Thus far, NACDLF members’ aggregated loan losses have been very low, and reserves more than adequate.

Who can help? Your USTC portfolio manager can help you implement your investment decision as with conventional market rate investments. However, you need to decide which fund to subsidize and to what degree.