You’ve just closed a loan for a residential conversion of a commercial property.  The LTV is on target and the DCR is sound. Then you pick up the paper and read an article like this, detailing how the residential-only property isn’t actually eligible for the mixed-use real estate tax exemption it was granted.

This is in many ways a nightmare scenario for any lender (including at least one CDFI that financed some of the properties in question): you have done your due diligence, requiring proof of approval for the exemption that makes the project viable, and now it turns out that the exemption was granted in error and will be rescinded.  What are the next steps?

• Look Backward: This step may come later, but in any workout a lender should review what happened to see if such crises can be prevented in the future.  In my last post, I reminded readers to verify subsidy program requirements independently.  But should an underwriter really be expected to verify the validity of a real estate tax exemption already approved by the city?  Does the underwriter need to question everything?  Perhaps not, but then again, it would take seconds to Google the source of the exemption, and the last line of the first hit would point you to the crucial distinction:

This search could have prompted questions from the underwriter regarding why the residential use conversion was eligible.  It is very possible that the in-hand approval still would have won the argument, but this would have given the lender one more chance to avoid becoming victim to the city’s mistake.

• Look Forward: When an issue like this surfaces, it is critical to be proactive in your response.  The city made a mistake, and now has to figure out how to correct it.  You and your borrower should both be at the table for that discussion, advocating for a fair approach that recognizes that investment decisions were made based on the city’s misstep. 
• Pat Yourself on the Back: Perhaps due diligence didn’t go quite as far as it could have, but you still may be in good position because you are actively monitoring your portfolio and the markets you serve, so you were the first to hear about the issue.  You have maintained excellent relationships with your borrower, so they are likely to do what they can to ensure that you are made whole in the end.  You are also in good standing with local politicians, giving you a better chance of convincing them that city hall needs to limit the collateral damage of its mistake.

Even good underwriting can be undermined by surprises like this.  Thankfully, this specific scenario is rare, but it should provide a strong reminder to go the extra mile in your underwriting, monitor your portfolio and lending markets diligently, and maintain excellent relationships with your borrowers and local government.

In community development, nothing is a sure thing.  Except, that is, excellent service from High Impact.
​Contact us today to discuss your underwriting, portfolio management, and program development needs.

​The final FY18 federal budget will likely be much different than the president’s “skinny budget” proposal, but nevertheless, the threat to eliminate programs like Community Development Block Grants and severely cut others like Section 8 housing vouchers underscores the risk associated with subsidy programs.  Carefully evaluating all capital grants, operating subsidies, and credit enhancements is essential to effective risk management for CDFIs.
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How best to address the uncertainty?  Strong underwriting and prudent monitoring.

1. Verify program requirements independently. Understanding program guidelines and conditions on subsidy awards is essential to sound underwriting.  If a subsidy source is involved in the phase of the project you’re financing (such as a construction subsidy that will come in during your construction loan term), make sure to review the executed grant agreement prior to closing.  Key terms to consider include conditions precedent to funding, retainage, limitations on funding reimbursements versus costs incurred, and events triggering repayment.  If a subsidy source is part of your planned take-out, you may not be able to get a signed (or even draft) grant agreement. Instead, go to the funding agency’s website to read about the program terms, and call the agency to discuss terms if you need clarification.
2. Understand the source of subsidy funds.  Are funds coming from the municipal, state, or federal government?  Has funding for the subsidy already been approved, or will it be approved as part of a future year’s budget?  The answers to these questions determine the risk involved.  A closer look may be necessary for particularly important subsidies—for example, if a project works with a HAP contract but doesn’t without it, you may want to read into the current politics around HUD funding.  If a municipal subsidy is key to the plan, you may want to call around to understand how internal politics, newly elected leadership, and unwritten priorities might affect who receives a subsidy.
3. Consider the borrower’s experience.  A borrower’s experience obtaining and using a specific subsidy source provides a barometer of the likelihood that they will be able to access it again.  When underwriting a subsidy whose exact value may change (based on tax credit pricing, for example) or which will be uncommitted at closing of your loan, borrower experience may help mitigate the risk that the planned subsidy is reduced or falls through.  A borrower who survived the recession and has a history of cobbling together various funding sources to make projects work may be more likely to push a challenged project through successfully than one who is newer and has fewer relationships with funders.
4.  Monitor closed loans with an eye toward subsidy risks.  Making sure your loan administration team understands your expectations for when subsidy will come into the deal is vital for effective oversight of construction draws.  To monitor subsidy sources of take-out, set up checkpoints (either through the loan review process, milestone covenants in loan documents, or informal ticklers) to get updates on the status of subsidy applications, commitments, and closing timelines.  The earlier you identify an issue, the easier it may be to resolve.
5. Keep watch on portfolio-wide exposure.  Over-exposure to a single program or funding source is a key form of concentration risk that is often overlooked.  Is 50% of your portfolio dependent upon Section 8 payments from tenants?  LIHTC rates holding steady?  Take-out by a state-funded program?  Consider tracking subsidy exposure and adjusting your risk position through geographic dispersion, new business development in a different financing product or lending sector, or by allowing subsidy exposure to inform other lending parameters.  Concentration risk may be unavoidable, but any CDFI can take steps to reduce the size of the risk.

We hope you will use some or all of these strategies to proactively monitor and mitigate risk for your institution.  Exposure to subsidy risk goes hand-in-hand with community development finance—let’s make smart risk management just as common.

Would you like a hand implementing any of these ideas?  Give us a call: (518) 599-0482.

These words were sent out to the B Corp community by B Lab, the nonprofit behind the B Corp designation, the day after Election Day.  During the election, some of the darkest, most perverse aspects of our capitalist system were on display—tax incentives favoring the wealthiest among us, eager use of bankruptcy to redistribute losses from failed ventures, and disrespect for the environment in favor of short term economic benefits.

At High Impact, we believe in the capitalist system because of our unwavering trust in the goodness of people to mobilize to bend capitalism toward the good of all.  Capitalism runs on incentives—the incentive to work hard to improve your lot, the incentive to find innovative ways to disrupt markets, and yes, the incentive to avoid taxes and build wealth.  We stand behind B Corps and the broader social enterprise movement as the best vehicle to bring another incentive to bear on the capitalist system—the incentive to have a conscience, act responsibly, and even go out of your way to do good in order to attract and retain customers.

Most people want to do good in the world, and this positive capitalism movement offers us the chance to do good in the most mundane ways, by buying laundry detergent that doesn’t harm the environment, shopping for Christmas gifts at a store that treats its lowest wage workers fairly, and investing in a company that deploys capital to benefit the underserved.  By spending our money at businesses that commit to integrity, transparency, compassion, and responsibility to all stakeholders, we can make the incentive for businesses to act in these ways irresistible.

Capitalism, when infused with humanity, is beautiful.  It does not demand the ruthlessness and willing exploitation that has been on display in the debates and defenses heard during the election.  It can be conducted with dignity, love, and respect for all.  That is our goal at High Impact.  We may be small, but we are proud to do what we can to support and grow compassionate capitalism.

To find companies doing the most good, visit the B Lab website here.
To find nonprofit lenders who you can invest in or donate to, visit the CDFI Fund’s website here.

It’s mid-September, so you know what that means.  Kids are going back to school, summer is slowly fading into fall, and everyone’s working on their New Year’s Resolutions.
Sound familiar?  Probably not.  Most people don’t start putting together resolutions for the new year until January 1st, or mid-December at best.  TIME magazine wrote last December that 80% of resolutions fail, and I can summarize my explanation why in one word: preparation.

To make a major change in your life, business, or lending institution, you can’t just flip a switch.  That’s why now is the perfect time to start working on your New Year’s Resolution.
Have a habit you’re trying to kick?  I’m a habitual knuckle-cracker, and set out many years to stop.  But simply saying I would never crack another knuckle starting January 1st didn’t work—it wasn’t until I took the time to research different habit-breaking techniques to prepare myself that I actually managed to stop.  If you see me wearing a rubber band, now you’ll know why.

The same research and planning can help in the business world.  Looking to increase lending volume in 2017?  Don’t wait until December or January to build an execution strategy.  You’ll need to raise capital, develop a marketing plan, and figure out how to keep workflow moving with a larger pipeline (and that’s where High Impact can help—see our underwriting services webpage for more).

At High Impact, we have a few big resolutions for 2017, and we’re starting to lay the groundwork for them now.  We plan to launch a professional development series for our clients and the wider lending community, to broaden our expertise through talent acquisition, and to pursue new lines of business to further our mission.  For more details, keep an eye on this blog to track what we’re up to.

Without proper preparation and a well thought-out plan of attack, it’s easy to get frustrated with personal goals or stumble out of the gate on business goals.  The beginning of a new year is a great time to sit back and evaluate where you are and where you want to go, but if you want to achieve big things in 2017, now is the time to start.​

High Impact is pleased to introduce our new blog, which we will use to share news about the company and our clients, discuss issues in underwriting and community development, and keep in touch with our clients and community.  We will always alert you of updates through our social media accounts, so keep tabs on us by following us through the links to our Twitter and LinkedIn accounts in the footer of the page.

To kick off the blog, we have an exciting announcement coming up later this week.  Be sure to check back to hear our (b)ig news!
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