When Liif was asked for a $2 million loan a couple of years before to finance a homeless shelter, it could have deployed its own resources. But in order to stretch them as much as it could and thereby maximize social impact, Liif sought the State of New York Mortgage Agency (Sonyma) for the shelter. "This amounts to a guarantee," she said, "and if Sonyma guarantees a loan, banks will happily make the loan ... and Liif would not need to use its own capital."
But the deal was too risky for Sonyma to guarantee. So Liif then offered Sonyma a 10% guarantee-or, as Andrews puts it, "a guarantee on the guarantee." This was first-loss capital, and Sonyma bit the bait. With Sonyma's guarantee in hand, Liif raised $2 million in financing for the shelter from the United Methodist Fund. And when the final tally came through, Liif put up a $216,000 guarantee.
"That's 10-to-1 leverage, and a lot of social good," she says. "This is an ideal situation for a small foundation."
But while PRI-funded guarantees are used to free up capital, they can also reduce its cost. According to the Guide to Impact Investing, a 2011 report by Lisa Richter and Lucy Bernholz that targets health funders, charter schools and charter school management organizations (CMOs) can save up to 50 basis points for every level of improved bond rating due to credit enhancement. Case in point: The Gates Foundation has provided guarantees to CMOs in Texas and California.
In Texas, its $30 million guarantee matched $30 million in local philanthropic support and a partial guarantee from the Local Initiative Support Corporation, a national CDFI, to provide credit enhancement for up to $300 million in bond issues by KIPP Houston and other quality CMOs.
In California, its $8 million guarantee matched an $8 million guarantee from the Schwab Foundation and a $1 million guarantee from NCB Capital, another national CDFI, to provide credit enhancement for a $93 million bond issue by Oakland-based Aspire Public Schools.
In its 2009 and 2010 annual reports, the Gates Foundation estimated cost savings of $10 million in Texas on a $67 million bond financing and almost $12 million in California over the 35-year life of the bonds.
But here's the kicker: Guarantees ultimately only count as part of a foundation's required distribution if the funds are actually used.
The MacArthur Foundation has used a guarantee to solve a different type of social problem altogether-one that Debra Schwartz, director of program-related investments, calls a "permanent math problem."
The problem that has kept her awake at night is the availability of affordable housing-an issue that became particularly acute in the wake of the financial crisis, when the market for low-income-housing tax credits (LIHTCs) plummeted over 50% due to factors exogenous to the market itself. "A huge number of projects that were perfectly good investments could not access that tax credit equity," she says, and the money that was there was "picky and tough."
The math problem relates to Section 8 rent subsidies that HUD pays to cover the difference between the cost to operate a building and the amount a renter can afford to pay (limited to 30% of his or her income). "These are low-income elderly people that live on Social Security disability," she says. "They do not have enough money to put up even half the cost of operating the building they live in."