Appendix:
Types of Investments
Property Acquisition
Investment Model: Financial Guarantee
Definition: A financial guarantee is a type of promise given by a guarantor to take responsibility for the borrower in the case of default in payments to the lender or investor. Generally, insurance companies give guarantees to back the debt of large corporations (the borrower) in payments to the market (the lender). Incentivizes other social impact investors to move forward with deals. Essentially, a guarantor is saying, “If this project doesn’t generate the returns we expect, we guarantee you will be repaid” up to a set amount and under certain agreed-upon conditions.
Clear terms needed: what the guarantee covers, when it’s triggered, risk sharing, and when the guarantee is no longer needed.
kresge.org/news-views/the-power-of-the-guarantee-2
Example: A dozen impact investing organizations collaborated in 2020 to form a new entity called the Community Investment Guarantee Pool. This $38-million pooled commitment of financial guarantees will back investments in affordable housing, small business and climate change-related projects across America. The Pool’s intent is to be a “one-stop-shop” for organizations that need a philanthropic guarantee to accelerate community development investment.
Investment Model: Nonprofit banking
Definition: A nonprofit charitable organization, governed in the public interest, is the majority owner of the economic interest of the bank. This unique ownership model ensures that the bank has no shareholders seeking to maximize profit at the expense of our communities and planet. Nonprofit status creates a mandate to reinvest all distributed bank profits back into the community. This ownership structure allows us to learn and develop new metrics and standards in the banking industry.
Example: Beneficial State Bank (Oakland, CA). In 2013, Beneficial State Bancorp completed a stock purchase transaction of 90.1 % of Albina Community Bank. In 2017, Beneficial State Bancorp purchased the remaining shares.
Investment Model: Real Estate Fund (CIF)
Definition: The community invests in a fund that acquires, renovates, and leases out properties that have become blighted. A portion of the profits may be reinvested in further revitalization, but any remaining profits are distributed to investors. There is no exemption from other federal or state securities laws for a real estate fund, so a true real estate CIF typically must raise capital via a state registered DPO.
Example: cuttingedgecapital.com/community-investment-funds-page
Types of Investments
Main Street Businesses
Investment Model: Slow Money
Definition: 27 local groups. $79 million invested in 806 food enterprises. Slow Money Institute catalyzes the formation of self-organizing local groups, which use a diversity of approaches such as: public meetings, on-farm events, pitch fests, peer to peer loans, investment clubs, and most recently, nonprofit clubs making 0% loans and other low interest loans up to $100,000.
Example: 2ForksClub (CO): Members pay at least $150 (farmers/ teachers) or $200 (everyone else). At quarterly meetings, farmers and entrepreneurs make pitches to be voted on. Loans are 0% interest. No matter what you put in, everyone gets 1 vote.
$120,000 to 7 farmers/ entrepreneurs. 100% paid back their loans on time or early. This is the first Slow Money group to give 0% loans!
KY - slowmoney.org/local-groups/slow-money-north-carolina
NC - slowmoney.org/local-groups/slow-money-kentucky
Case Studies: louisvilledistilled.com/2016/04/19/slow-money-kentucky-helps-small-dreams-grow-big-dividends-local-food-businesses
Investment Model: Direct Public Offering (DPO)
Definition: In a DPO, a business owner or a group of leaders of an organization advertise the opportunity to invest in their enterprises to their community or to the general public directly, without the use of stock markets, brokers, or other middlemen.
Example: Nonprofit DPO.
Single State or Intrastate DPO
State Specific Exempt Crowdfunding
cuttingedgecapital.com/dpos-and-crowdfunding-whats-the-difference
cuttingedgecapital.com/direct-public-offering
Investment Model: Revolving Loan Fund (RLF) Programs
Definition: A RLF is a gap financing measure primarily used for development and expansion of small businesses. It is a self-replenishing pool of money, utilizing interest and principal payments on old loans to issue new ones.
Example: West Virginia Food and Farm Coalition - Lease to Own model: Start up grocers can access capital via the REF to fund equipment purchases. The machinery/ assets secure the loan, which is repossessed by WVFCC in the event of default.
Investment Model: Program Related Investments (PRIs)
Definition: PRIs are a grant alternative. Historically, they have most commonly taken the form of low- to no-interest loans or below-market equity stakes, although virtually any financial vehicle is possible. Used by private foundations, who are obligated to pay out 5% of their net assets each year to mission-aligned causes. They can meet this in two ways: grants and PRIs. As an alternative to straight donations with no possibility of reuse, the foundation has the option to structure some or all of that same amount as a PRI.
Example: cuttingedgecapital.com/program-related-investments-3
Investment Model: New Market Tax Credits
Definition: The New Market Tax Program was created to incentivize investment in low income communities by leveraging the risk of lower returns with the benefit of reduced tax liabilities for investors. Community Development Entities (CDE’s) apply for tax credits with the Department of the treasury. Investors (private institutions) provide capital to the CDE in exchange for the credits. The CDE then invests this capital into distressed communities.
Example: nps.gov/tps/tax-incentives.htm
taxpolicycenter.org/briefing-book/what-new-markets-tax-credit-and-how-does-it-work
Investment Model: Historic Tax Credits
Definition: Historic Tax Credits (HTCs) are a popular method for building equity since syndicated tax credits can be resold to investors, which provides cash for projects and diffuses risk across multiple layers of investors. The entities that actively invest in rehabilitation tax credit properties are generally Fortune 500 corporations with substantial federal income tax liabilities. The vast majority of completed tax credit syndication transactions generate in excess of $1 million in tax credits, require only a single corporate investor, and are highly structured, tax code intensive deals.
Example: nps.gov/tps/tax-incentives.htm
capitalimpact.org/how-to-use-historic-tax-credits
Investment Model: Local Funding (Buying Shares/Crowdfunding)
Definition: Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists.
Example: mainstreet.org/mainstreetamerica/ourwork/projectspotlight/crowdfunding