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By Letty Shapiro, Community Development Expert, Office of the Comptroller of the Currency (OCC)
Multibank community development corporations (CDCs) are like orchestras. They bring together a group of experienced players who jointly work on projects to create something that they could otherwise not accomplish individually.
In Illinois, two such multibank CDCs have combined the knowledge and capital of dozens of bank members to fund business ideas and expansions that create or retain jobs in their communities.
The first, the Jefferson Marion Washington Community Development Corporation (JMW CDC) was formed in the early 1990s by seven financial institutions and serves a rural, three-county area in south central Illinois.
The second is the Upper Illinois River Valley Community Development Corporation (UIRVCDC), which serves a rural area running through Illinois. It was founded in the early 1990s by 20 members, including national banks, regional banks, and an electric cooperative.
The two CDCs fulfill a need for gap financing, allowing deals to go forward that would otherwise not meet traditional underwriting standards. Although both CDCs have small deal flows, their impact on the community is huge.
Jefferson Marion Washington CDC
Transactions to be financed by the JWMCDC typically come in through member banks. That was the case with US Sonet, the brainchild of a local business person who had executive experience with a high-speed Internet operation in the St. Louis metro area.
The borrower saw an unmet need for additional bandwidth required by local government agencies, the local hospital, and the business community. When the project began in 2002, consumers did not have access to a fiber-optic network that could provide high-speed Internet, cable, and telephone service. The borrower had the knowledge to build and run a local network, but no capital to fund the project.
Among the companies that were frustrated by slow Internet speeds was Marion County Savings Bank. "When the regulators implemented Check 21, it was taking us three and a half hours to download information from the Federal Reserve in St. Louis," said Marion County Savings Bank Chairman and President Larry Clark.
Clark saw the value to the community, not only in the increased bandwidth for the businesses and municipalities, but also in the nearly one dozen local jobs the company, US Sonet, would create. However, since the borrower lacked equity, the deal would not pass traditional underwriting requirements.
Clark pitched the borrower's business plan to the JWMCDC, which agreed to provide $150,000 in gap financing, a crucial component of the initial capitalization for US Sonet.
Source: Marion County Savings Bank
The subordinate financing for US Sonet was provided under the Small Business Administration (SBA) 504 loan program. The senior loan was a participation of five lenders, including the JWMCDC. As illustrated in the sources and uses table above, the first lien lenders provided $1.664 million and included Marion County Savings Bank, Peoples National Bank, the Illinois Department of Commerce, South Central Regional Planning Commission, and the JWMCDC. The SBA 504 subordinate financing of $1.2 million was provided by South Central Regional Planning Commission, an SBA-certified development company.
Today, despite challenges from national and local competitors, US Sonet has more than 1,200 subscribers along its 67 miles of cable and provides firewall and network security to two local police departments and Salem Community Hospital. It is also building a secure fiber wide area network, or WAN, that will serve the offices of Marion County State's Attorney, Sheriff, and Probation Department.
Upper Illinois River CDC
As with the JWMCDC, the UIRVCDC is dedicated to funding projects that create or retain jobs in the local economy. Its primary tool is a flexible-purpose loan that can be used for land acquisition, construction, working capital, leasehold improvements, equipment and machinery purchases, building renovation, or to purchase inventory.
Member banks bring forward deals and continue to service their banking relationship with the borrower after funding. Eventually, borrowers grow to a point where the bank can take the UIRVCDC out of the deal.
The typical UIRVCDC borrower, said Financial Advisor Andrew Hamilton, is one that a bank member would really like to help but can't because the borrower lacks either cash or collateral, despite having an excellent business plan.
Business Mushrooms with UIRVCDC's Help
One of the more unique UIRVCDC deals helped Phoenix Paper Products, Lostant, Ill., expand its product line. The company had received an Illinois Department of Conservation grant to transform scrap newspaper into pellets that replace peat moss in mushroom-growing operations. However, it needed additional funding for working capital and for purchasing additional machinery.
The borrowers' only collateral was paper-shredding machinery, but UIRVCDC member First Midwest Bank, Itasca, Ill., saw potential in Phoenix Paper's innovative product.
With the new machinery and capital, Phoenix Paper manufactured and marketed its new pellets, which hold moisture more effectively than peat moss. Using the pellets, mushroom growers can produce higher priced, premium mushrooms than if they use peat moss as their growing medium.
To make the transaction work, the UIRVCDC agreed to make a low interest rate loan in return for a significantly higher rate when Phoenix Paper began making a profit. First Midwest Bank provided primary financing to the paper products company.
Phoenix Paper paid off the original financing and eventually became a business client for First Midwest. Today, Phoenix Paper's three dozen employees produce a host of eco-friendly paper products, including a lightweight, flushable cat litter; several varieties of garden mulch; several earth stabilizers for construction sites; and a grass-seed, paper-pellet, fertilizer combination product for growing grass on shady lawns.
Revisioning to Serve a New Market
A CDC that provides gap financing cannot reasonably expect all its deals to work out, but the Illinois Valley Banquet Center, LaSalle, IL, is certainly a deal that has successfully generated double bottom lines for the UIRVCDC and the communities it serves.
Housed in a remodeled grocery store, the banquet center had been closed for some time when it caught the eye of Raoul Rosales in 2003. He and his family were already running a bar and restaurant in a nearby community and thought the banquet center would make a perfect gathering place for the local Latino community to hold celebrations, such as weddings, anniversaries, and concerts.
While their experience running their current business had given them the skills they needed to run the banquet hall successfully, the Rosales family did not have money to purchase the property.
Citizens First National Bank wanted to fund the $250,000 deal, but the high loan-to-value ratio of the loan needed by the Rosales family did not fit within the bank's traditional business loan underwriting criteria. When the UIRVCDC stepped in with gap financing, the deal worked.
In this financing, the bank provided $175,000 of the purchase price via a market rate loan that amortized over 10 years with a five-year balloon. The UIRVCDC took the second lien position, offering a subordinated $75,000 loan at the same terms. That loan has since been paid off.
By targeting an underserved market, the Illinois banquet center today is booked year-round with Hispanic community events, including weddings, anniversaries, and other celebrations as well as concerts featuring Latino musicians.
Small Projects Equal Big Results for Both CDCs
Since its inception, the UIRVCDC has completed about 28 projects totaling nearly $2.7 million with deal sizes ranging from $25,000 to $250,000. The JMWCDC, meanwhile, has completed 10 projects with deal sizes ranging from $63,000 to $250,000. While that deal size may seem small to some, the effect of the CDCs on the lives of community members is significant.
The two CDCs have retained and created more than 1,000 jobs in companies ranging from a snack cake manufacturer to a bicycle shop and a hair-styling academy. By working together, the members of the JMWCDC and UIRVCDC have enriched the business environment, nurtured new bank customers, and changed the lives of hundreds of families in their local markets.