By Susan Hammel Joyce
Cogent Consulting

The enormous promise of this industry is demonstrated in Self-Help’s track record of success helping low income individuals buy homes and run businesses. Led by CEO Martin Eakes, they have made $6 billion in loans to 60,000 individuals over the past 30 years. Their less than 1% default rate shows that these kinds of loans can work.

Grants alone could never have achieved the far-reaching results they have produced through a combination of patient capital, loans, and grants. Imagine if the foundation capital represented at this conference were leveraged and recycled to that effect!

Combating the prevalent helpless attitude best expressed in the increasingly common phrase, “it is what it is.” Martin said that if you have the vision to see a problem, then you have a moral duty to solve it. Adding PRIs to the foundation toolkit allows “impact investors” to do just that on a larger scale than grants alone allow.

By Kim Martin
Database Consultant
PRI Makers Network

Tuesday’s session on “Foreclosure Mitigation: PRIs as a Rapid Response Tool” discussed the opportunities and challenges of neighborhood stabilization in communities hit hard by the ongoing foreclosure crisis. Stabilization was the starting point for where this conversation went, as the panel members discussed their current initiatives to bring communities not to a flat line, but to an upward trajectory.

In the session we heard from: Elyse Cherry, Boston Community Capital; Scott Fergus, Mercy Housing Lakefront; Warren Hanson, Greater Minnesota Housing Fund; Linda Warren, Village Capital Corporation; and Craig Nickerson, National Community Stabilization Trust.

To begin the discussion, the panel came out with a shocking consensus that the recent foreclosure crisis has set their industry’s work back 40 years – what was a steady climb of progress by low-income neighborhoods ended up leading to where the sidewalk ends. According to Mr. Nickerson, “I thought I was going to be on a California highway, where I could see clearly for miles; I ended up on a roller-coaster.” He must be thinking of the Tower of Terror – a straight-line and gut-wrenching fall to the ground floor. (more…)

By Susan Hammel Joyce
Cogent Consulting

For a financial person who studied philosophy, this session got my brain cells buzzing. While it can seem somewhat esoteric to discuss methods to measure social impact, the presenters (Margot Brandenburg of the Rockefeller Foundation, Ed Diener of the Skoll Foundation and Melinda Tuan of the Bill & Melinda Gates Foundation) made the case that developing some minimum standards will help move the “positive impact investing” field forward.

Margot explained that for 10 of the 12 years Rockefeller has made PRIs, they simply used ad hoc social reporting metrics for each investment. They changed their approach a couple of years ago and began to think about PRIs as a broader part of their strategy to accelerate the impact investing industry. One key pillar of their approach is to help scale intermediaries. Another critical pillar is to seed industry infrastructure.

To do so, they asked about 100 impact investors for their “pain point” limiting their involvement. The main answer was the lack of measurement for aggregate social environmental impact, leaving investors with little other than anecdotal information and nice pictures for their annual report. These investors need a portfolio management tool, not just stories. They need common language for common impacts, such as number of jobs created, metric tons of carbon saved, etc. Ideally, they would like to aggregate data across multiple users, create benchmarks, and standardize reporting.

To address this challenge, Rockefeller is supporting 3 initiatives: (more…)

Community Foundations:

Conversation was lively with Vanitha Venugopal of the San Francisco Foundation and community foundations from Arizona, Alaska, New Hampshire, Hutchinson, MN and San Luis Obispo, CA. 

One community foundation jumpstarted a PRI revolving pool with a $5 million allocation from their endowment, after getting their board comfortable with PRI-making through a successful program of loan guarantees that ran for several years. Another created a small pool with a $200,000 allocation from their grants budget that they leveraged to build a $1 million pool with new local grant funds from banks and others. Still others are planning new programs. Most are partnering with local intermediaries who re-lend their funds to local affordable housing developers, sustainable development projects, childcare and small businesses.

With a decline in locally owned banks and other large corporate stakeholders, community foundations are increasingly important as advocates for and investors in local communities. They have the capacity to engage current donors and nonprofit organizations whose endowments they manage in PRI-making and to attract new partners via PRI programs.

The group agreed to continue the dialogue and work with the PRI Makers Network to arrange a follow up teleconference. They also committed to keep the flexibility they now enjoy in the early stages of their programs—being willing “play with the blocks” and “draw outside the lines” to keep their programs fresh and responsive to local needs.

-Lisa Richter, GPS Capital Partners

Small Foundations:

We had a full table this morning at breakfast. As it turned out, the main topics of conversation had little relevance to size of foundations. Rather, we began with the subject of finding investment opportunities in rural areas around farming and food processing. Connections were made, cards transferred and hopefully a regional foundation situated in rural Virginia will provide a PRI Maker in California with possible investment ideas. We also came to an agreement that regardless of size, foundations making PRIs offers an opportunity of building capacity and scaling nonprofits in a way which grants cannot do as effectively.

-Lisa Hiller, Helen Bader Foundation, Inc.

Day two of the PRI Makers Network 2010 National Conference: Expanding Philanthropy’s Reach saw a busy breakfast roundtable session, six more great breakouts, an inspiring lunchtime keynote from Martin Eakes, CEO of Self Help/Center for Responsible Lending, and learning tours that took us to all corners of Chicago to see PRIs at work.

We ended the day at the gorgeous Cafe Brauer at the Lincoln Park zoo, where the beautiful surroundings and cheesecake lollipops only served to enhance a smart, witty breakdown of the sub-prime mortgage crisis from Alex Blumberg and Adam Davidson of NPR’s Planet Money. (Can someone show me how to make those Power Point graphics where things go up in flames?)

PS – Click on any photo above to visit our Flickr page, where you can download and save copies of the photos.

The first day of the PRI Makers Network 2010 National Conference: Expanding Philanthropy’s Reach featured a packed PRI Fundamentals session, not one, but TWO networking receptions, eleven fantastic breakout sessions, perhaps the best confernece snacks ever (“Take me Out to the Ballgame” theme, anyone?), dine-arounds at some of Chi-town’s best restaurants and an impromptu “dine-around” at Wrigley Field for the Cubs game.

And that’s just day one of three – tons more photos of day two coming up!

PS – Click on any photo above to visit our Flickr page, where you can download and save copies of the photos.

By Frederick Stupen
MPA Student
Roosevelt University, Chicago

Yesterday, I was struck by something Christa Velasquez, of the Annie E. Casey Foundation, said about PRIs. “They are like grants except they are recycled.”

Now, I have heard of recycled paper, and even recycled glass, but recycled grants? Truly, in this age of sustainability and dwindling resources (they said it would come to this), we have proven that Frenchman De Tocqueville correct in stating that the strength of our democracy lay in associations and the charitable community.

In a keynote speech at the Social Enterprise Alliances’ annual event here in Chicago a few weeks ago, Dr. Don Haider, director of the Center for Nonprofit Management at the Kellogg School of Management at Northwestern, emphasized that “nothing will be as it was.” He also believes that the philanthropic community is transforming to meet the challenges ahead.

Yesterday, I was especially delighted to hear from panelists in the PRI Fundamentals session that PRIs have really served to strengthen relationships between nonprofits and foundations, and really help NPO’s put their resource development and funding strategies on track. As the founder of a community development corporation here in Chicago, I know how strong relationships with foundations translate into greater results. We mustn’t forget the credibility the NPO gains in the process and of course the additional by-product, organizational sustainability.

Much of yesterday’s conversations centered on the question of the cost and complexity of PRI transactions. Doug Stamm, of the Meyer Memorial Trust, tried to convey to those looking to avoid unnecessary complications that the secret to success lay in “keeping it simple.” Ms. Velasquez followed this by a suggestion that newcomers to the movement “piggyback” with those more experienced to reduce the learning curve.

I feel this is a time of growth and development for philanthropic community’s use of PRIs, This afternoon, we will see some tangible results to-date in this city of “broad shoulders.” Make sure to bring your umbrella!

By Frederick Stupen
MPA Sudent, Roosevelt University of Chicago
and
Sally Duros
Independent Journalist, sallyduros.com

Fred: In Monday’s session on working capital and PRIs, it was amazing to hear of the process, history and relationship developed in the Northwest among the Farmers Conservation Alliance and RSF Social Finance. It almost made me want to get out my tackle box and head for the wilds of Oregon. This story truly shows how PRIs have helped get a new technology out to where it is doing some good.

We also heard from Cindy Holler, who commented that her organization, Mercy Housing, was really run by “nuns with a nail guns.” She shard the incredible work Mercy Housing Lakefront has done in Chicago. It’s a classic example of PRI use in housing preservation initiatives.

Sally: Mercy Homes owns 2000 units of housing in Chicago and it’s holdings are expanding rapidly. With Cook County facing a 38,000 unit loss of affordable housing, Mercy wanted to hold on to a $65 million building, but sticky policy issues, including seven layers of financing put together over 20 years, now got in the way. Mercy faced a “section 8 overhang” of $10 million. None of the banks had any faith the federal government would honor that commitment, so Mercy couldn’t cover the $10 million. There were also process issues about when what paper needs to go where as well as other challenges working with the City of Chicago government, world famous for its efficiency.

In the “Bleak House” scenario Holler described, all could have been lost had not MacArthur stepped in and worked with Mercy to guarantee the section 8 overhang risk of $10 million that no bank would go near. The bottom line? “Eventually we will be able to train the lenders,” Holler said. “In that way, a PRI maker can help us educate the financial community. Some of these PRIs are not that risky.

“There’s the Duh! factor on the part of the banks,” she said. “Sometimes the PRI-maker is making the loans because they understand it better than a bank. It’s the world they live in.”

Fred: Finally, we heard how PRIs are helping small to medium sized arts organizations with a bridge loan program through the support of the MacArthur Foundation. When we found out that the average bridge loan was $70,000, I think the whole audience wondered, “Why don’t they just give them the $70,000?”

Sally: “These arts and cultural institutions without the line of credit would be in big trouble,” said Debbie Kobak, of Shorebank Arts & Culture Loan Fund,Kobak. Foundations might want to help, but they do not want to be in the role of being a lender. “So they are looking for a partner and I think as a commercial bank we are helpful,” she said. There was also a third party who provided technical assistance to make it easier for the NPOS to apply for the money. What made this partnership work was technical translation and assistance on all sides.

Fred: Kobak noted that it’s not just about the money, it’s also about the process and the impact. What would have Van Gogh do with a bridge loan? Probably more great art!

By Paul Reich
Program Officer
Meyer Memorial Trust

I attended the “Investing in the Health Safety Net” workshop, hoping to learn of PRI opportunities in financing of Federally Qualified Health Clinics. Though no current opportunities for investments were presented, there may be significant opportunities in the near future with the adoption of the Health Reform Act. In particular, I was intrigued with the concept of foundations serving as guarantors to help leverage New Markets Tax Credit financing.

I also learned of a great PRI by The Colorado Health Foundation to help save the mental health system in Western Colorado.

Working capital was also a hot topic. The Colorado Health Foundation recently established a short-term loan fund and the Calfornia HealthCare Foundation (I hope that is the correct name) has an established program.

Thanks to everyone, panel members and attendees, for participating!

By Susan Hammel Joyce
Cogent Consulting

While no one plans for loans to go bad, it’s part of doing business for any lender, including PRI makers.  In the “Working on Workouts” session today, we heard from Lisa Hall of the Calvert Foundation, Christine Looney of The Ford Foundation, Chris Perez of the Rasmuson Foundation, and Joshua Mintz from the MacArthur Foundation. Hearing these experienced panelists wrestle with the challenges that arise when borrowers have difficulty was sobering and enlightening. The panelists discussed hypothetical situations so as not to divulge any confidential information about their investees.

Ten Tips for Workouts:

1. Determine your foundation’s philosophy about lending. Are your PRIs more like recoverable grants? Do you expect 100% repayment? The Ford Foundation and Calvert Foundation both set aside reserves against possible losses, up to 15% for Ford. The Rasumuson Foundation expects full repayment, but since PRI’s count against payout, the foundation feels protected either way.

2. Know your borrowers. Since Rasumuson focuses exclusively on Alaska, Chris Perez mentioned he knows many of his borrower’s executive directors and has broken bread with most. Lisa advised that appropriate due diligence before making a loan is key in preventing problems. Focus on assessing free cash flow and net assets.

3. Know your fellow lenders. The panelists talked about how for-profit lenders tend to band together during a workout, assigning a lead lender to negotiate on behalf of all similar creditors, but this has not developed within PRI-making community yet. It’s important not to jump to conclusions and take time to gather the facts, all while consulting your fellow creditors. Sometimes a borrower will pay one lender and not the other, so it’s important the lenders are familiar with each other’s borrowing agreements.

4. Emphasize good communication from borrowers. All the panelists indicated a reasonable approach to workouts IF the borrowers exhibit good faith through frequent communication and show integrity, particularly if external events caused the underlying business model to become un-viable. The first step in handling a problem situation is to gather information. Calvert asks borrowers to submit a detailed cash-flow projection and bases restructuring decisions on a reasonable projection.

5.  Evaluate options. Ford sometimes makes grants for borrowers to hire outside consultants to help assess the situation. Does the business model still make sense? If not, can it be changed to take advantage of new opportunities? If a borrower is headed to bankruptcy it’s essential to measure the potential recovery versus the costs, which can be considerable.

6. Structure PRI’s to fit each opportunity. Chris mentioned that while his foundation has lending guidelines, each line has an asterisk to account for the full variety of scenarios.

7. Consider whether you will act on your security interest. Most of the foundations do not take security at the outset of a loan but may do so in the course of a workout. Before doing so, think about whether you would actually be willing to foreclose on a property or whether it even makes sense to do so.  One member of the audience said they do not take security because exercising their rights would be against their programmatic intent. No one present would admit to actually issuing a judgment or foreclosing on a loan. One audience member said they prefer to take a security interest as it gives them more power to protect the social impact of their investment.

8. Prevent a workout situation with good monitoring. Both Ford and Calvert mentioned assigning loans to “watch,  actively monitored or classified lists.” They report to foundation leadership quarterly about the portfolio, flagging all covenant violations and recommended increases to the risk reserve.

9. Monitor red flags that a PRI is in trouble: late or missed reports; poor communication including not returning phone calls or emails; lack of financial statements, change of staff in key positions, and of course, missed payments.

10. Involve an investee’s board of directors if necessary. Calvert mentioned contacting a Board chair when staff couldn’t explain how they were going to pay back a loan after circumstances changed.

Despite everyone’s best intentions and due diligence, sometimes PRIs do go bad. It’s important to monitor such loans carefully, structure reasonable agreements and and weigh the pro’s and con’s of pursuing the funds to the bitter end.

One more summary thought after the day:

There is considerable divergence of views about whether PRI’s are more loan or more grant-like.   As Josh Mintz so memorably said, are these “grants in drag” or are we serious about collection?