Since our inception, we have served sectors, industries, and borrowers not served by the traditional financial system.
Like many CDFIs, Capital Impact provides more flexibility than traditional lenders in some key areas like loan-to-value limits and financial covenants that borrowers must meet.
However, our credit guidelines — the policies that guide our loan structures and lending decisions — are built on the traditional approach to credit that has deep roots in a financial system that intentionally excluded some people for much of its history. Often, our lending team seeks one or several “exceptions” to our credit guidelines to accommodate the diverse needs of our borrowers.
Creating flexible financing is both a mindset and an approach. To do so, we need input from our clients and communities to rethink and reshape our products and requirements. When done correctly, this approach gears us away from the extractive patterns of traditional financing and closer to confirming that when people are given the opportunity to succeed, their communities, local residents, and our country thrive.
We have spent the last several years providing capacity building and support to community-rooted developers across the country. Having seen in our own lending that these developers were not well represented and hearing the barriers that they face in scaling up to work on more and larger projects, we determined that we needed to take bigger steps to address the need.
How We Are Doing Things Differently
In that light, we spent the better part of 2022 reviewing and revising our lending requirements and processes to be more equitable, to better support community-rooted developers and borrowers from all walks of life in having access to the capital and opportunities they deserve.
As a part of the Momentus Capital branded family of companies, it also became important for Capital Impact to revise and improve efficiencies in lending approval processes to account for a combined strategy.
Because one of the most important parts of transformation is transparency, we want to share the recent updates to our credit guidelines with our communities, partners, and other stakeholders.
EDI program graduates benefit from training and access to capital.
An Overview of Our New Credit Guidelines
Equity Commitment
Developer Experience
Staying true to our vision, we want to be able to support community-centric developers who might not have had the opportunity to build and sustain a track record in the markets where they are active.
Old guideline: requirement of three completed and operating projects
New guideline: one completed project and have been in operation for 3+ years
We are committed to looking at the borrower as a whole, taking into account their background including education, work history, participation in the EDI program or other capacity building initiatives, as well as any relevant experience with joint venture partners and consultants.
Developer Equity
We wanted to lighten the load on a borrower to bring a certain amount of cash to each project.
Old guideline: 25 percent equity requirement for predevelopment costs in cases where there is real estate collateral
New guideline: 10 percent equity requirement for predevelopment costs
This change benefits borrowers by allowing them to preserve their funds and use them toward working capital, growing/expanding their business, hiring staff, etc.
Guarantee Requirements
Given that most of the borrowers we work with have limited resources, we have eliminated the requirement of a strong guarantor possessing liquid assets and cash flows.
We still expect people who own 20+ percent of a business and are actively engaged in the business to issue guarantees, but we now look at guarantees as an assurance of the borrower’s commitment to the project rather than as a source of repayment.
Small Multifamily Project Guidelines
We are mindful that not every developer has the expertise and capacity to pursue larger-scope projects with more than 20 units. This, however, should not impede them from having the opportunity to start smaller projects that may be a better fit for their current experience level.
Old guideline: stringent requirements on projects under 20 residential units; did not allow developments with less than 10 units
New guideline: Eliminated requirements on projects under 20 residential units and now allow developments with fewer than 10 units
Smaller unit projects often have higher credit risk because a single vacant unit could jeopardize the project’s ability to make loan payments. However, smaller projects are an important stepping stone for many developers trying to build their portfolios, and we can mitigate the risk with other things like operating reserves and technical assistance.
That being said, we do have minimum loan sizes (now $500,000), but this does not have to impede borrowers from coming to us, as we are actively building a partner network to which we can refer clients in need for smaller loan sizes.
Streamlining Lending Approval Processes
As a mission-driven organization, it became all the more important for us to improve efficiencies in lending approval processes so as to be able to serve entrepreneurs and their communities seamlessly.
To that end, we have worked on the follow updates:
Eliminated credit committee approval to be able to issue term sheets to borrowers;
Reduced the size of our credit committee and streamlined approvals for lower-dollar loans;
Moved away from issuing commitment letters upon loan approval, and switched to issuing approval letters that are less of a legal document and more of a summary of terms. The reasoning behind this is that we want to avoid putting borrowers in a position where they have to make legal decisions prior to engaging legal counsel, and we also want to streamline our process to close loans more quickly.
Pivoting to Achieve Financial Equity for Our Communities
The changes above are only a starting point. We are committed to adapting to the needs of our borrowers by adding new products and continuing to evolve our credit guidelines in a way that meets the needs of our borrowers. In addition, we are building out a more robust network of technical assistance for our borrowers that ultimately reduces credit risk to both the borrower and the lender. One great example of that is our EDI program. Through EDI, we aim to provide capacity building in the form of training, mentorship, access to technical assistance, and predevelopment grants (where/when available) to community-centric developers, so as to enable them to succeed in projects appropriate to their levels of expertise.
We are continuing to think through how we can fold equity into our credit guidelines to transform how capital and investments flow into communities. We are excited to share more about our journey as we grow and evolve to serve communities.
As a real estate developer looking to deliver social impact, the process of finding and engaging with a lender can be hard. Once your mind is set on starting a community development real estate project, who do you turn to? Where do you find them? What is the process like?
As part of the Momentus Capital family of mission-driven lenders, Capital Impact Partners – a certified Community Development Financial Institution (CDFI) – provides flexible and affordable loans of $650,000+ ($350,000 under special circumstances) to finance key community pillars, including health centers, education facilities, food retailers, affordable housing, small businesses, and cooperatives.
We are a national lender, capable of providing loans across the country, but we also have a place-based focus in specific regions, including California, Michigan and northwest Ohio, the New York Tri-State Area, the Southeast, Texas, and the Washington metropolitan area.
We know you have got questions about the community development real estate process. To help get your process started, we offer some answers here about working with a CDFI lender.
1. When in the development process should I start working with a CDFI lender?
It is never too early to start gathering information from lenders, but you’d ideally want to get started when you are about six months from starting construction.
By then, you would have a good estimate for the timing of obtaining permits and starting construction.
CDFIs such as Capital Impact Partners will work hand in hand with real estate developers looking to deliver social impact
2. What types of reserves will a CDFI lender require?
Lenders will have contingencies on your project that may go above and beyond what you have budgeted; usually 7.5-15% of hard costs expenses and 5% of soft cost expenses.
If you are capitalizing interest during construction, which is recommended when there are no operations ongoing during construction, that will need to be included in the overall project budget.
Once construction is completed, there may be lease up reserves, debt service reserves, and/or facility maintenance reserves.
3. Where does the capital that CDFIs lend come from?
CDFIs serve as capital aggregators that attract capital from the market, banks, government sources, and foundations.
4. Will a CDFI lender hold the loans or will they sell them?
CDFIs do both. At Capital Impact, if they are sold, we ensure that there is no impact on the Borrower’s experience or relationship.
5. What influences CDFI lenders’ rates?
Primarily it is the Treasury rates, unless the CDFI has a sector/geographic fund that is independent of Treasuries.
6. Who approves the loan and how does the loan committee work?
CDFIs have groups that review deals. Capital Impact has an internal credit committee that reviews deals on a weekly basis.
Some CDFIs or specific loan products require external review and approval. Underwriting packages must be submitted at least a week in advance to receive approval the following week.
The committee cares about the financial strength of the transaction, the deal fitting into our established credit guidelines, and the impact of the transaction on the community.
8. Who will be my main contact for loan closing and will it change afterwards?
You may first interact with a business development officer or someone with a similar position, who will be the initial point of contact until a term sheet is signed.
Then you’ll speak with a loan officer who will underwrite your transaction until it is approved.
Once approved, a legal and closing team will drive the process, but the loan officer will remain involved to ensure the loan is closed according to what was agreed to with the borrower and as outlined in their underwriting.
9. As a non-legal person, how do I review a loan agreement?
Consider seeking legal counsel to review a loan document. But generally, check that the interest rate, fees, and dates match your understanding. Check the reporting and financial covenants to ensure you can meet them.
10. What should I do if I think I am going to default on my loan?
Tell your lender as quickly as possible. CDFIs are lenders with a mission to provide fair, responsible financing, and they will work closely with you when things are tough. Another very important element to take into consideration when looking to establish a relationship with a community development real estate lender is that lender’s value system. You have the right and responsibility to vet the lender to make sure that their values, goals, and philosophies align with yours. It is a two way street and any conversation about funding should be as much about the entrepreneur evaluating the funder as the funder evaluating the entrepreneur.
Momentus Capital’s Chief of External Affairs, Robert Villarreal, recently testified in front of the Senate Committee on Small Business and Entrepreneurship about improving access to capital in disinvested communities through the Small Business Administration (SBA) Community Advantage (CA) loan program.
The Community Advantage pilot program was launched in 2011 to expand the points of access that small business owners had for getting loans from mission-driven financial institutions. These lenders intentionally support underestimated community members, businesses, and organizations – with an emphasis on assisting people of color, women-owned businesses, and startups.
This blog also appears on the Engage R + D blog. You can find it here.
How can foundation dollars be more powerful in a time of crisis? As COVID-19 continues to disproportionately impact communities that have long experienced economic disinvestment, many are asking how to leverage philanthropic funding differently for more immediate impact and greater social good. One solution comes in the form of impact investing, which includes a range of financial tools for both individuals and institutions seeking to do greater good with their dollars. While impact investing is not new, it is a powerful tool that many foundations seek to better understand and that remains relatively underused in philanthropy. [1],[2]
Grants vs. PRIs: What’s the Difference?
Grants are most foundations’ bread and butter. They support a foundation’s charitable mission and are limited to 501(c)3 tax-exempt organizations. Grants do not require repayment.
PRIs are an IRS designation that allow private foundations to make charitable, mission-aligned investments. These investments typically take the form of low-cost financing and loans, which require repayment within a specified time. While many require a return or accrue interest, they are not expected to produce market-rate returns.
Boyle Heights is a bustling Latino neighborhood just east of downtown Los Angeles with a history dating back before the Mexican-American War. However, it’s the pressures of the present day that weigh heavily here. Approximately 66 percent of the population lives below 200 percent of the federal poverty level, 22 percent are uninsured, and few primary care doctors remain. The systemic poverty the residents grapple with creates ripple effects throughout their lives.
The ability to access affordable health care is among the most critical challenges. Many in Boyle Heights, and similar communities across California, wait until they are so sick that they are forced to visit the emergency room because they cannot afford health insurance. Having to make such decisions can have negative ramifications not only on their own long-term health but for the entire health care system in the region.
OLE Health and other CHCs have become frontline providers of many kinds of care, taking on care that they historically have not provided.
In the face of such struggles in Boyle Heights and communities like it, there are a few health care providers that provide a safety net for local residents. In the northwest area of Boyle Heights, for example, White Memorial Community Health Center serves approximately 20,000 patients. This community health center (CHC) provides crucial primary and preventative care, behavioral health and dental services, and serves as an alternative to emergency room care for low-income patients in a generally underserved community.
East of San Francisco, Tri-City Health Center offers primary and preventative health care services to low-income and uninsured patients in the Alameda County area. In a new 20,000 square foot facility amid a large immigrant population, Tri-City implements a Patient Centered Medical Home model — which coordinates care across teams (i.e. medical, behavioral health, lab) — serving 8,000 patients and employing staff that cover 20 languages, which is reflective of the surrounding community.
Urban and rural communities alike would fall through the cracks without the services provided by CHCs like White Memorial and Tri-City. It is their ability to serve residents, no matter their socio-economic status or ability to pay, that creates an equitable system of care necessary to build healthier communities.
In order to continue providing this kind of high-quality community care, CHCs need adequate financing to grow to reach more patients and provide more patient-centered, whole-person care. But financing can be hard to come by. Too often, CHCs operate in areas deemed too risky by traditional financial institutions.
As a mission-driven organization focused on social impact and equitable access, it is critical to Capital Impact Partners to help CHCs fill that gap. That is why we collaborated with long-term partner The California Endowment (TCE) to find ways to better support the growth and innovation of CHCs and ensure that communities do not have to go without the critical health care services on which they depend.
Adapting to Create Sustainable Community Health Impact
Our teams at Capital Impact Partners have spent time talking to health center operators to better understand their needs and how we could help. What struck us most during those conversations was how clinics are expanding their services to take on care that they historically have not provided.
As more older adults seek care at CHCs, health care providers are expanding these services to address their needs.
Hospitals and Federally Qualified Health Centers (FQHCs) are partnering to better serve local populations. FQHCs mainly focus on primary care, but some are moving into urgent care to reduce emergency room visits at local hospitals. CHCs are incorporating dental and urgent care, as well as new wellness and preventative care services, including healthy food counseling, yoga, and disease prevention and management support.
Ensuring that we could create sustainable social impact for California communities meant that we had to adapt alongside CHCs. To meet that need, Capital Impact and TCE established The Healthier California Fund, a $20 million initiative providing loans, grants, and capacity building. Our goal with this new effort was not only to support traditional growth and expansion, but also to foster new innovations in care among CHCs. By helping these organizations meet their range of needs, the CHCs can focus on what they do best: support each patient with care from physical and dental care to behavioral health and overall wellness.
“Health centers provide a core service for their communities,” said Ian Wiesner, manager, Business Development at Capital Impact. “They increasingly are stretching above and beyond their normal mandate, both integrating additional services to address the complete wellness of their patients and taking on new patient segments to address the needs of the whole community. Creating the Healthier California Fund provided a unique opportunity to support this expansion of innovative care, particularly for communities where patients struggle to access vital health services affordably from traditional providers.”
“The California Endowment is committed to improving the health of all Californians,” said Amy Chung, director, Program Related Investments at The California Endowment. “Our partnership with Capital Impact Partners through the Healthier California Fund has not only increased access to critical health services but also supported innovative models of holistic, whole patient care.”
We were able to put this effort into action with LifeLong Medical Care, which serves the Richmond community twelve miles north of Oakland, California. A high proportion of the city’s racially diverse population lives below 200 percent of the federal poverty line. Providing for the needs of this underserved community as the only FQHC meant, for years, that Lifelong had to find any space possible to accommodate patient visits. After working out of three separate sites throughout the city, LifeLong needed to centralize its operations out of one location so it could better serve 7,400 local residents.
With financing through our Fund, that site will become the William Jenkins Health Center, a new three-story, 34,784 sq. ft. clinic offering primary care, behavioral health services, dental care, urgent care, and lab and imaging services. The new medical center will also provide wellness services such as diabetes prevention, smoking cessation, music and art groups, and stress management classes. In addition, LifeLong is increasingly serving older adult patients referred to them by regional hospitals.
Like the residents of Richmond, patients of both White Memorial and Tri-City have benefitted from more whole-person care financed through the Healthier California Fund, including behavioral and dental health and urgent care services.
Empowering Community Health Centers Through Capacity Building
Before CHCs could expand their innovative services, they needed the skills to manage the process. Many small community health centers work with a lean administrative staff and often do not have the capacity or expertise to take on the additional work involved with planning and constructing a new health care facility. They needed assistance before taking on these projects to make sure they were prepared and had fully considered the impacts the project could have on their operations. Grants were given to prospective CHCs at the beginning of the Healthier California Fund to build their capacity to manage the loans they later received.
“We knew that in order to support innovation and help grassroots health centers grow, we needed to provide more than capital. The Healthier California program allowed us to match our capital with the technical assistance these administrators needed to properly plan their projects,” said Wiesner.
One grantee that has benefitted from this capacity building element is Roots Community Health Center. Roots CHC was created to reduce health disparities and improve health outcomes among residents of East Oakland, California, one of the most disinvested neighborhoods in the city. Roots CHC serves nearly 10,000 patients, most of whom either use Medi-Cal or are uninsured. Roots provides a range of services, including primary care, behavioral health, workforce navigation, and job creation programs for formerly incarcerated people. Its services also link to transitional housing and entrepreneurship training.
Roots needed a loan to purchase and renovate a building and transform it into a health facility to better meet the demands of their community. But this small community organization had never taken on this type of project before, and had to be sure that taking on this building — and the associated construction — was financially and logistically feasible. A grant from the Healthier California Fund enabled Roots to bring on a consultant to help forecast the financial implications of the project and prepare the team for the construction process. Now Roots is ready to bring the project to fruition.
Capital Impact is currently working with several more health centers to provide capacity building to get them ready for financing and construction. Combined, these grantees could impact more than 21,000 patients.
Overall, the Healthier California Fund has financed seven community health centers that will provide more than 91,000 patients with vital health care. Community members will receive more and more diverse kinds of care as clinics and hospitals collaborate to divide and conquer the health care needs of their patients.
Combining capacity building and financial support through Healthier California has helped CHCs expand high-quality and efficient health care for their target clientele. Our continued partnership with TCE will help us expand our work as the largest health care lender in California; we have provided financing to more than 50 percent of all FQHCs in the state. We remain committed to ensuring that CHCs acquire the skills and capital that they need to remain vibrant, vital parts of their community fabric.
To learn more about how Capital Impact supports expanding equitable health care access nationwide, visit our Health Care page.
In 1982, Capital Impact was created with a single focus — support the development of cooperatives in communities.
Charter schools create opportunities for innovation that drive academic success for students in communities.
Along the way, we gradually expanded our scope to meet the growing needs of the communities we served by working to increase access to health care, education, housing, and healthy food.
A handful of loans slowly grew into a truly diversified portfolio of offerings as we took the risk to partner with those organizations that traditional financial institutions shied away from. Twenty-five years after we began lending in 1984, we hit an incredible milestone of deploying $1 billion into low- and medium-income communities across the country.
We are humbled that just eight years after that initial milestone, we more than doubled that achievement by deploying more than $2.5 billion through the end of our record-breaking efforts in 2017.
It is a true testament to our mission-driven team for living our mission statement by delivering both the capital AND commitment that enables those most in need to build communities of opportunity that break barriers to success.
While we pause to celebrate, we also know that we must increase our resolve. Too many of us continue to struggle, with a disproportionate impact on people of color.
To help solve the key social and racial justice issues facing our society, we must continue to make inroads in achieving our strategic pillars to address systemic poverty, create equity, build healthy communities, and promote inclusive growth.
Innovative health care models support older adults to age with dignity in their communities.
This requires supporting our lending work by deploying new and innovative programs backed by cutting-edge research; making the case for support from lawmakers at the federal, state, and local levels; amplifying our impact investing efforts with both individuals and large institutions; and forming partnerships that ensure that our solutions are grounded in what communities both need and can act on.
We did not get to this point alone, and for that I want to thank all of those who have supported us, as well as those organizations who are working directly with often-neglected communities every day to deliver the services they need to thrive.
By working together, I know that we can empower communities to achieve transformative progress in 2018 and beyond.
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