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By Andrew Hamilton, Opportunity Alliance, LLC, Springfield, Illinois
Banks don't have to be large to meet the needs of underserved populations in urban or rural communities. Increasingly, banks of varying sizes are joining forces and sharing knowledge under the auspices of multibank community development corporations (CDCs).
These corporate entities are rooted in the communities they serve and leverage local resources to create jobs, stimulate economic activity, and channel funds toward low- and moderate-income persons and neighborhoods.
Multibank CDCs offer a two-pronged advantage for providing credit to nontraditional borrowers: centralizing expertise and distributing specialized tasks among bank members. Working in this collaborative environment can save time and resources and give hope to struggling communities sooner than later.
While there is no single solution for forming a CDC from several investor banks or other organizations, a for-profit structure is sometimes preferable over a nonprofit one for the following reasons.
The following highlights several steps for investor banks and other organizations wanting to form a for-profit CDC:
1. Setting Up Pre-Organizational Meetings
2. Identifying Serious Investors
Beside financial institutions, other potential investors include major corporations, units of government, development companies, utility companies, and other economic development stakeholders.
1. Articles of Incorporation
3. Written Policy for Loan and Investment Decisions
Staffing and Operational Plans
The CDC may decide to think big and hire full-time staff or prefer to keep operational and administrative costs to a minimum. Alternatively, the board members may be hands-on and perform a number of operational duties for the corporation. No matter the approach, make sure to reach agreement on and document the startup plans as well as the short- or long-term operational plans.
Funding and Capitalization
Investors generally sign a one-page stock subscription agreement that establishes the maximum amount of allowable draw from each financial institution. When a project is approved, each investor allows a pro rata draw on his or her individual subscription on a shared basis.
The CDC could fund several projects with a minor draw on each subscription. Some investors may be under the impression that cash is expected up front to organize the CDC. This does not have to be the case. If bank investors sign a preorganizational subscription agreement, funds are earmarked and will be used only when a project is approved.
Signing a subscription initially has only a minimal effect on the bank's income statement or balance sheet. The balance sheet change is booked only when the pro rata amount is drawn. Thus, a $1 subscription might have only 30¢ drawn in the first year or so. As a board member, the investor has a vote on whether the project is approved and, therefore, has control over the financial health of the portfolio.
CDCs often can close the gap between a borrower's credit needs and the funding that is available from traditional lending sources. Banks investing in CDCs would carry their investment as an asset. See the Financial Accounting Standards Board's "FAS 115" for a detailed explanation.
Operating Activities and Investment Guidelines
The CDC should formalize operating activities and investment guidelines. The guidelines should address the purpose or objectives of the CDC as well as:
After the CDC is formally organized, it must start marketing activities to generate new projects. The CDC can dictate the aggressiveness the marketing campaign. At the least, it should develop a fact sheet or brochure to summarize the CDC's products and services.
Mass mailing — sending marketing materials to a directory listing of companies, major employers, and specific individual clients, for example — is a less costly but a more scattered, approach. A more time-consuming approach is setting up appointments with specific persons to solicit applications. The CDC should try a combination of these approaches.
Each board member should be able to provide relevant, potential contacts. Local entities, such as Economic Development Professionals, Chambers of Commerce, Small Business Development Centers, and the Senior Core of Retired Executives (SCORE), also are excellent resources.
Marketing the CDC is a collaborative effort for investors, city- and county-elected officials and administrators, and economic development professionals. When most — if not all — of the stakeholders are committed to achieving the CDC's goals, the elements of success will be in place.
For more information, e-mail Andrew Hamilton at Opportunity Alliance, LLC or visit his Web site.