Simple Solutions

Community development corporations and other nonprofits engaged in commercial and residential development depend on a variety of funding sources – from developers’ fees, government subsidies and foundation grants to loans and grants from intermediaries like NeighborWorks America, Enterprise and the Local Initiatives Support Corporation (LISC). Because they rely on so many different funding sources, their financial capabilities often depend on factors outside their control. Cuts to the federal government’s budget, reductions in foundation giving or changes to foundation priorities and staff can hurt an organization’s finances. To lessen their reliance on foundation and government dollars as the primary means for carrying out their mission, CDCs and their boards should consider two fairly easy, but often overlooked, steps that could improve their cash flow and give them additional financial flexibility.

Tony Browne, a Merrill Lynch institutional consultant based in New Jersey who works with community development nonprofits, suggests a simple way to increase cash on hand: get the best rate of return on your reserve accounts. Browne advises dividing reserve funds into three tiers: short-term operating funds, short-term reserve funds and long-term reserve funds. Short-term monthly operating funds should be in a high interest checking account. Short-term reserves (funds that won’t be used for at least 6-36 months) should be invested in CDs, T-bills or money market accounts that get higher returns than the interest on a checking account. Long-term reserves (assets that can stay invested for three years or longer) should be invested in a diversified portfolio of intermediate to longer maturity bonds (preferably 3-12 years) that earn even higher return rates than the first two.

Getting a higher interest rate doesn’t provide immediate financial benefits, but there will be more cash available in the long run. Although going after higher interest rates sounds simple, Browne says that a lot of CDCs don’t always consider it. To find out what institutions offer higher rates, do a rate comparison on Web sites such as Bankrate.com. It’s understandable that some would prefer to stay with the financial institution they’re used to or where they have several accounts. A higher rate may only yield an additional five or 10 thousand dollars, which might not be enough compensation for ending a good banking relationship, or for dealing with the administrative hassles of opening and closing accounts. Despite the objections, it is still important to know that reserve funds can generate additional income, and credit, says Browne.

Just as switching to higher interest accounts can add to your bottom line, establishing lines of credit can increase a CDC’s ability to bring in money. Applying a line of credit to reserve accounts gives a CDC the opportunity to access capital quickly without selling off any mutual funds or properties or dipping into the reserve funds themselves, and it has become a valuable financial tool for nonprofits in recent years. Only reserve funds that are not linked to a development project or that don’t have investment restrictions can have a line of credit attached.

Jenny Krstinovski, another Merrill Lynch consultant, advises CDCs to set up pre-approved lines of credit, termed lending facilities at Merrill Lynch, if they have at least $250,000 in cash and assets. A number of nonprofit developers already have lines of credit established through organizations such as LISC or with community development financial institutions, such as New Jersey Community Capital, that are earmarked for specific projects. But if it is arranged through a bank or broker, there aren’t as many limits on what the funds can be used for.

A $250,000 reserve account with a line of credit valued at 80 percent would give an organization access to $200,000. “It’s a unique way to keep their money working for them,” says Krstinovski. If they are expecting financing for a property or development, they may be able to pay interest-only for a short time period and, when permanent financing comes in, they can repay the loan in full.

Palladia, Inc., has been working with Merrill Lynch for seven years. One of the largest multi-service agencies in New York City, Palladia provides substance abuse treatment and supportive housing programs, HIV services and homeless and domestic violence shelters to the urban poor. Marshall Goldberg, Palladia’s chairman emeritus, says that having a line of credit provided funds for the acquisition of properties that they could draw on without selling off assets. Palladia has eight buildings, and will be completing three more in the next three years.

Lines of credit and access to capital that were unavailable from the more traditional funding sources a decade ago have opened up to nonprofit developers. When Palladia began its first supportive housing project in 1996, nonprofit real estate development was not a market that banks and other lenders readily ventured into, nor did they understand the rules governing how nonprofit real estate developments were financed. Goldberg recalls that their bank “didn’t pay much attention to helping us with [our] investments” and didn’t understand “agencies such as ours, who were just entering this real estate field, [and who] would be getting large sums of money” to invest. If banks didn’t understand the business or the organizations, then it was unlikely that they would issue them lines of credit.

The assistance and investments from intermediaries and other specialty loan funds helped to pave the way for nonprofit developers to be able to access working capital from institutions outside of the community development realm. Palladia now receives “inquiries from many lenders, and [tax credit] syndicators themselves have offered us lines of credit,” says Goldberg.

As nonprofit housing developers grow and increasingly compete with for-profits for control of property, ready access to funds can give them the competitive advantage they’ve lacked by relying so much on government or foundation support. Though simple to set up, these two financial tools can bring more operating funds and provide quick and flexible access to working capital.

Copyright 2006