A Real-Life Leveraging Example—How $500,000 Became 90 Deals Encompassing $8 Million in Lending
In the late 1990s, the City of Minneapolis was struggling to counter the effects of urban deterioration that had resulted from absentee landlords neglecting their properties. The city’s response was to help neighborhood small business owners, who were leasing space in neglected properties, purchase and rehab them. However, the capital to support this effort was not readily available:
- City funding for the project was severely limited and additional appropriations from the city council were not possible.
- In addition, these capital-starved, low-wealth borrowers were unbankable by conventional sources.
In 1998, CRF launched the Capital Acquisition Loan (CAL) program in collaboration with the City of Minneapolis to solve the city’s capital challenges in addressing urban blight in distressed neighborhoods. Through the CAL program, CRF first developed and employed its innovative Advance Commitment process and created the Financial Access for Business (FAB) model.
How the FAB Model Works
Using the FAB model, CRF provides subordinate financing up to 40 percent of the purchase price of buildings or equipment, which encouraged banks to lend up to 50 percent of the purchase price. In addition, CRF’s funding is provided at origination, requiring no cash outlays and therefore no additional appropriations from the city.
The FAB model in Minneapolis has been a huge success:
- The early loans spurred additional investment.
- A once neglected Minneapolis community has become a symbol for urban revitalization.
- Nearly a third of the borrowers were minority or immigrants.
- To date, 94 loans have been funded for more than $8,449,997. The city’s investment was a $500,000 loan loss reserve.
While leveraging’s effect is not always as dramatic as it was for the City of Minneapolis, it clearly is a powerful financial tool that enables the impact of your social investment to be magnified.