Filling the Lending Vacuum

As credit tightens and higher and higher numbers of commercial real estate loans enter default, CDCs are stepping up to fill the financing gap in economic development deals from which conventional lenders have been retreating.

Stepping Up

WHEDA also routinely refers entrepreneurial endeavors to local CDCs. CDCs and CDFIs have long played critical roles in targeting capital for commercial projects to underserved commercial areas, but now many CDCs and CDFIs have found themselves called upon to step into a wider range of deals to keep important economic development projects on track.

When Industrial Glass Products, Inc., a minority- and woman-owned specialty glass manufacturer that has operated since 1991 in a Los Angeles neighborhood with 98 percent minority population, observed most of its competitors west of the Mississippi closing their operations, it sought financing to expand. Finding few banks willing to provide additional capital, it turned to TELACU Community Capital (TCC), a CDFI subsidiary of The East Los Angeles Community Union, one of the nation’s largest CDCs. TCC provided a loan for working capital and real estate refinancing. The additional investment capital for machinery, equipment, marketing, and improved production schedules, allowed IGP to pursue customers previously served by competitors. As a CDC with years of experience in development, financing, and government contracting, TELACU understood the subtleties of supporting a company capable of growing jobs while working with a customer base of aerospace and other global firms.

In Milwaukee, a prominent CDC obtained a federal grant from HHS/OCS for a green business converting recycled newspapers into cellulose fiber insulation. The supported entrepreneur had operated a comparable but unrelated business with his brothers less than a mile away. He was the owner of a partially improved manufacturing plant worth over $4 million that he was offering as collateral for a renovation and working capital loan to begin production of insulation materials. Despite an 80 percent governmental loan guarantee and a substantial real estate asset, the deal was initially jeopardized as the original bank demanded that the entrepreneur deposit a supplemental $1.67 million collateralizing amount to secure a $1.67 million loan. The sponsoring CDC in Milwaukee contacted the rural CDC/CDFI Impact Seven in western Wisconsin, which agreed to step in and preliminarily rescue the deal.

Impact Seven has collaborated with other CDCs, supportive state agencies, and developers to rescue a number of other projects that found themselves in jeopardy during the credit squeeze. One such project involved a conversion of a vacant industrial warehouse virtually adjacent to the Harley-Davidson Museum in Milwaukee into a boutique hotel targeting motorcycle enthusiasts and business travelers. Impact Seven’s $800,000 in gap financing allowed the project to move forward. Located in a neighborhood across the river from downtown with a significant Hispanic population and that had historically suffered from underinvestment, the popular hotel, The Iron Horse, now employs over 65 people.

CDFIs like Impact Seven are also serving as loan brokers for smaller financial institutions. In one instance, a bank making an SBA 504 loan was unable to find other conventional financial institutions to participate in the loan package for the construction of a 36,000 square foot machine shop, which was creating 25 to 30 new jobs in Waupaca, Wisconsin. Impact Seven not only participated in the interim and permanent loans for the project, but also played a key role in packaging the deal for SBA 504 financing. This was possible because the Obama administration has expanded the SBA 504 program to both provide refinancing for small business, owner-occupied commercial real estate and permit participation for the first time by CDFIs like Impact Seven.

Neighborhood-based institutions can be much more than just another source of capital for entrepreneurs functioning in a time of tight credit and declining property values. In Philadelphia, another prominent CDC, Impact Services, combined its financing role with its community organizing skills to support the retail tenants of a new shopping plaza in an industrial area bordered by extensive low-income housing mixed in with pockets of market-rate residential structures. It organized merchants, local police, bankers, and local residents to form a business improvement district. Volunteers hung marketing banners on old, overhead rail trestles. CDC staff and merchants undertook a range of cleanup and other cooperative efforts, such as developing a “calling tree” when one of the merchants encountered credit card scammers.

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