Community Investment Loans

November 1, 2008       Mark Hrywna      

It took a Nobel Peace Prize to get microfinance on the map — at least in the mainstream – even though the idea had been around for decades. Community investment notes were started well more than a decade ago but you might have a hard time finding people who know what they are.

The Calvert Social Investment Foundation launched community investment notes in 1995 with the help of foundations like Ford, MacArthur and Mott, and in recent years has received support from the Gates and Dell foundations, as well as the Omidyar Network.

"The idea was to create a special financial note product that would make it safe and convenient for average individuals to be able to invest their capital and have those resources be lent to community-based financial intermediaries for the most part," said Shari Berenbach, president and CEO of the Bethesda, Md.-based Calvert Foundation, a nonprofit associated with — but a separate entity from — the Calvert Mutual Fund Company.

Through the years, $130 million has been raised from sales of community investment notes to the general public, with about 3,500 investors and some 230 nonprofit borrowers. "We fall outside the way people assume the world works," Berenbach said. "Part of that is the world is divided between the investment people and the philanthropic people and we clearly rest in between. We’re using the rigor and discipline of investment to accomplish direct community impact that would typically be associated with philanthropy," she said.

"The radical concept is that we’re really all about interfacing these direct investments into the financial mainstream by resolving regulatory and legal complications," she said. "In many ways, we’re the vehicle that links the nonprofits with the financial market," Berenbach said.

The premise of the Calvert Foundation is using investment as a tool to end poverty, Berenbach said, instead of the traditional understanding that to make a philanthropy-styled impact one needed to make a donation. "The real challenge is really helping people to wake up to the opportunity to use investment as opposed to just giving," she said, where donors give, get a tax deduction and the money is gone, though there are no tax benefits with community investment notes.

People can choose a geographic region in the U.S. or internationally to invest in, and if they do it online they can get into much more finite, granular targeting, specifying a region like the West Coast or mid-Atlantic, etc. Investments are pooled into a managed portfolio of affordable loans to more than 200 nonprofits and social enterprises, focusing on alleviating poverty.

At the end of the community investment note’s maturity, an individual investor gets their money back with interest. It’s designed to make it very flexible and responsive to customer interest, Berenbach said. An investor can choose a variety of terms (from 1 to 10 in two-year increments) as well as the interest rate (0 to 3 percent). The average term is about three years, she added.

Why would someone choose to earn zero percent interest on an investment? More than 15 percent of investors actually selected zero interest, which allows Calvert to offer better rates and more flexible terms to the nonprofit borrowers.

Approximately half of the capital is invested in the United States to support affordable housing, community development through loans to affordable housing developers or community development financial institutions (CDFIs), which are Calvert’s principal buyers. There’s also a mix of social enterprises, she added, where there might be a nonprofit social service agency that has a subsidiary for-profit business. Calvert also lends to microfinance international organizations and fair trade cooperatives.

Community investment notes can be purchased through a broker or financial planner, directly through the foundation, or online at MicroPlace.com, a broker/dealer operated by eBay. There is a $1,000 minimum through a broker while online the minimum is $100.

Individuals buy fully registered securities with the Calvert Foundation, which takes all the risk in guaranteeing the investment since investments are not federally guaranteed like a bank account. "We make it safe and convenient for people to do this and handle all the administration and all that," she said. Berenbach estimates that losses have been less than 0.25 percent, roughly $300,000 out of the more than $130 million in its portfolio.

"These instruments are very liquid," Berenbach said. "The foundation sort of stands ready to buy it back if you were to need to get your money back before maturity," she said, though there would be interest penalties.

"The real value proposition is that we’re designed to help make it safe for investors so many foundations are providing a layer of cushion or support of about $30 million that stands between the investor and any potential losses," Berenbach said. "It all works because investors can fully expect to get their money back."

The foundation earns its keep off the difference between what it pays investors (up to 3 percent) and what it charges borrowers (about 4.5 percent). Internationally, the risk is greater so the cost is usually higher, more like 6 to 8 percent, according to Berenbach. There’s also more field supervision in place in Europe to make it safe and reliable, she added.

In seeking more ways to raise capital, Atlanta-based Habitat for Humanity International announced in July its partnership with Calvert Foundation. Though it’s not clear yet how much capital will be generated by the community investment notes, it will be another source of funding for Habitat’s existing lending program. "This is just another way for us to access capital for our local affiliates around the world," said Cindy Song, director of capital expansion and financial services for Habitat.

U.S. affiliates will apply for their loan to Habitat, based on financing needs, servicing families, and their ability to make timely repayments. Habitat’s existing loan program has been very successful, Song said, with 100 percent repayment from affiliates. The initiative has loaned about $8 million annually in recent years and $74 million since it was started more than a decade ago.

Habitat has capped the interest rate that investors can choose at 2 percent, to keep the interest rates from going higher for affiliates. It will charge a small administrative fee to cover costs but the interest rates for affiliates will always stay below 4 percent, according to Song.

The Federation of Appalachian Housing Enterprises (FAHE) started as an advocacy group with its first community investment note coming from a religious organization in 1982. The Berea, Ky.-based nonprofit pools those funds for affordable mortgage lending, as well as loans to housing nonprofits, whether to buy land, building equipment or stabilize their cash flow, according to Jenna Urusky, director of marketing.

The approximately 50 members of FAHE are more traditional nonprofits, like a local Habitat affiliate or housing authority that get access to products, Urusky said, as FAHE tries to funnel more and better resources into Appalachian Kentucky, Tennessee, Virginia and West Virginia.

Last year, there were about 89 loans, with some lending outside of the membership, she said. FAHE lends money primarily in two areas: small cash flow capital loans of about $100,000, to cover things like equipment or buying land; and the more likely loan of as much as $1 million to building housing.

A nonprofit microlender, ACCION-Texas typically awards low-interest loans of about $10,000 each 100 times a month to high-risk borrowers and those who don’t have access to capital through traditional sources, according to Gary Lindner, chief operating officer.

Though nonprofits are not a core business of ACCION (only about 2 percent), there is a demand for it, Lindner said, mainly community and social service nonprofits either for a project or a bridge loan to cover operating funds until an anticipated grant comes in. NPT