Are you looking to invest with a social enterprise that has an extraordinary track record for tackling complex problems with creativity, not gimmicks?
Enterprise Community Loan Fund (assets: $176 million), one of the largest loan funds in the country, has started offering "community impact notes" to individuals and institutional investors that help finance green and affordable housing, as well as the revitalization of communities, which its founder once visualized as "gardens that grow people and civilizations."
On the face of it, affordable housing can seem, well, uncomfortable. But it is, as actor Edward Norton has pointed out, an "underlying reality" that the U.S. has been "blithely skating over" for a long time.
"There was an affordable housing crisis before this latest downturn, and now we've really got a housing crisis in America obviously compounded by the foreclosure crisis and the collapse of credit," he told an audience at the Harvard School of Design last December. "We have enormous [his emphasis] populations of people in this country who are a paycheck away from homelessness."
Norton, it turns out, is the grandson of visionary urban developer James Rouse who, with his wife, Patty, started what is now Community Enterprise Partners (total assets: $295 million), a nonprofit based in Columbia, Md., a city of 100,000 people that he designed and built during the l960s as a racially integrated village on 16,000 acres of farmland. Through its subsidiaries (the aforementioned nonprofit loan fund and Enterprise Community Investments, the for-profit syndicator of low-income housing tax credits and New Markets tax credits), Enterprise has invested an extraordinary $12.6 billion since l986 in 270,000 affordable homes.
Rouse always cared deeply about social impact. When he built the first inside shopping mall in l956, he insisted it be racially integrated. Two decades later, when people did not believe in cities, he developed Boston's Fanueil Hall as a "festival marketplace" where all manner of small businesses might hawk their wares. "Most planning and architectural design suffers for lack of real purpose," he once said. "The ultimate purpose, it seems to me, must be the improvement of mankind."
According to Norton, Enterprise was conceived in the "depth of [Rouse's] despair" during the Reagan era about an emerging housing crisis when traditional government investment in housing through HUD was scaled back. Thus was born the low-income housing tax credit (LIHTC,) an innovation that Enterprise helped develop and get passed by Congress in the mid-80s. The LIHTC, which gives profitable companies (usually financial institutions) an incentive to invest in below-market housing and make a profit, contributes to the financing of an astounding 90% of the country's affordable housing.
In fact, leadership and innovation in the face of crisis are arguably part of Enterprise's DNA. In late 2008, Fast Company named the nonprofit/for-profit hybrid, which it called the "one bright light in an industry dominated by excess and foolishness," one of the top ten social enterprises of 2009, Enterprise's secret sauce: collaboration. In its 2006 annual report, former CEO Bart Harvey said that Enterprise counts as its partners 2,500 nonprofits in 800 different places.
Among Enterprise's activities:
* In 2004, prodded by Norton and developer Jonathan Rose (both board members,) Enterprise was a key player in catalyzing the Green Communities Initiative, a set of green standards for affordable homes. Among other things, it continues to develop a daunting database that already has proven the profound economic and health benefits of green for lower-income housing. (See Incremental Cost, Measurable Savings: Enterprise Community Criteria Report.)
* In 2005, in the wake of Katrina, former CEO Doris Koo staked out the scene in the Gulf, where 265,000 homes were destroyed and nearly half the people affected were "very low income." Concluding that its help was needed, Enterprise through its public policy office in Washington, D.C., then helped get the Gulf Opportunity (GO) Zone Act passed by the end of the year.It helped states design some of the programs that would use Go Zone resources, and helped developers and nonprofits on the ground access those program dollars to get projects done. Enterprise, which established a permanent office there, committed to investing $200 million to develop 10,000 affordable homes in the area.
So how does the Loan Fund fit into all of this? Its resources often support housing built with other Enterprise products, particularly the LIHTC.
"My job is to understand the need in the market and bring in the other parts of Enterprise and the other products Enterprise offers," says Michelle Whetton, vice president and Gulf Coast Impact Leader at Enterprise Community Partners. "I work with underwriters at Enterprise Community Investments and loan officers at the Loan Fund to achieve our goals here on the ground."
The Loan Fund, however, plays perhaps the riskiest role. In general, it provides loans to community-based affordable housing developers to buy the land that the property is built on or to do pre-development work such as architectural engineering, cost estimates or feasibility studies. And since investors often want to see the developer hit certain milestones before making an equity investment, the loan fund also provides bridge equity loans.
In the wake of the mortgage meltdown, however, the market for much of that equity in the form of LIHTCs dried up. As profits plummeted at financial institutions (or the banks disappeared altogether), so did the need to offset them.
Not surprisingly, the economic environment has had a devastating impact upon the loan fund, which, though it makes loans nationally, focuses on New York; Washington, D.C.; Baltimore; Ohio; California; the Pacific Northwest and the Gulf. Between 2007 and 2009, assets dropped 36%, from $276 million to $176 million. Its 90-day delinquency rate nearly tripled from 3.5% to 10.4%, and credit-impaired assets (unlikely to be paid back) nearly quadrupled from 5% to 22%. At the end of 2009, New York accounted for 38% of its portfolio, up from 21% in 2009. Five borrowers accounted for 25% of the Fund's loans.
New York had been a real success story for community development. But overleveraged landlords are defaulting, deferring maintenance, and abandoning their buildings, leaving thousands of renters in deteriorating buildings that are unsafe and unhealthy.
The bottom line: "Conditions threaten to destabilize the neighborhoods that we and our partners have worked so hard during the last 20-30 years to transform," says Whetton, who worked in New York for ten years before moving to the Gulf.
Can Enterprise and its partners turn the situation around? During the l980s, when Enterprise began its groundbreaking work, philanthropists served as the catalysts that took a chance until the market came back. Now, through its community impact notes, the Loan Fund is offering the same opportunity to impact investors (See "The New Candy," March 2011, Financial Advisor) for whom mission is a key priority.
Rates range from 2% for one year to 3.5% for 10 years. The minimum purchase is $5,000, and the notes are unsecured. But the Loan Fund's parent is guaranteeing the funds.
One question for investors, of course, is how the funds backing the guarantee are invested. "Our parent [enterprise] has $120 million in unrestricted net assets. The guarantee is backed by that," says Liz Sessler, investment marketing manager at the Loan Fund, who adds that the funds are "conservatively" invested. Among its investments, which are diversified: City First Bank of DC. "The funds are FDIC-insured," she says.
So how safe is an unsecured guarantee provided by a nonprofit dependent upon grants and government contracts? In the case of Enterprise, a master collaborator whose partners number in the thousands, it may be helpful to think of George Bailey, the banker in the classic film, It's a Wonderful Life. This is about building community, and the stronger that community is, the less risky it becomes.