Depressed property values, stressed infrastructure and investment flight are just some of the economic issues faced by distressed communities. Potential small business owners or community organizations seeking funding for projects in these areas may have a hard time securing financing through conventional means. And even when financing is available, interest rates may be prohibitively high for borrowers. The Ohio Community Development Finance Fund ("Finance Fund") is helping organizations in Ohio's distressed markets access capital more easily through its Linked Deposit Fund.
Finance Fund is a private, nonprofit, 501(c)(3) corporation that supports community partnerships working to revitalize disadvantaged communities in Ohio. Our partners collaborate to transform emerging rural and urban communities into vibrant, diverse, economically healthy neighborhoods. These public/private partnerships are a combination of financial institutions, foundations, community-based organizations, and federal, state and local governments.
Finance Fund creates partnerships that provide financing resources to locally controlled community-based nonprofit organizations serving low-income communities as well as those for-profit businesses within the communities expressing an interest in revitalization and beneficial development.
The Linked Deposit Fund is a financial product used to reduce the interest rate on permanent and construction financing. It provides community-based, nonprofit developers with access to affordable financing from local lenders for housing and economic development projects.
A variety of linked deposit programs exist throughout the country for needs ranging from agricultural waste management to water- and energy-related projects. The Finance Fund's Linked Deposit Fund focuses on affordable housing and community development from a mission-driven standpoint.
Through the Linked Deposit Fund, Finance Fund places reduced-rate certificates of deposit at local banks participating in specific projects. The lower interest rates paid to the Finance Fund on these deposits allow the banks to provide community-based nonprofits with greatly reduced interest rates for permanent or construction financing. The rates are fixed for these clients for the life of the loan, even though the average linked deposit is seven years.
The Linked Deposit Fund itself is funded through a combination of public monies and benevolent investors. Though there has been strong investment support for this program, liquidity is limited. A lack of liquidity could mean no money for further linked deposits, and thus, no money for vital community development. Finance Fund is able to solve this problem through a unique recapitalization model that offers aggregated portfolios of CDs as collateral for a loan to the Finance Fund—freeing up cash flow for additional linked deposit projects.
The linked deposit model is sustainable. Linked deposits perform a programmatic function in that they lower interest rates on mortgages but do not serve as collateral or security for the mortgage. Therefore, the risk of loss is minimal and, upon maturity, capital may be recycled.
The linked deposit model is scalable. This model works for small projects and large projects equally well. The Finance Fund's Linked Deposit Fund has impacted projects of $25,000 and projects of $13 million. The biggest limitation to the model is on the availability of capital for depositing.
The linked deposit model is flexible. The characteristics of a deposit can be adjusted to achieve specific rate objectives by varying the amount, term and rate.
The linked deposit model leverages. Because a lender's objective is to achieve a yield on a loan over a set term, the linked deposit's function is to enable a revenue stream that pays for shortfalls incurred when loan rates are lowered. Any shortfall will be funded once the linked deposit matures—usually many years prior to the loan amortization. Because the lender has received compensation for the reduced loan rate, the loan can continue even after the deposit has matured.
The linked deposit model is a true public/private partnership. Though capital resources for the Linked Deposit Fund initially came from the public sector, substantive private investment also has been attracted. The fund provides a perfect opportunity for many private investors to fulfill socially responsible investing requirements.
The linked deposit model is a valuable tool in distressed markets. Economically distressed markets need varied subsidies to tackle a wide range of development hurdles. Linked deposits are one of the tools adding value to these economies through a "hidden" subsidy strategy. When borrowers are able to make smaller loan payments because of lowered interest rates, many parties benefit. Money saved by a housing developer, for instance, can translate to lower purchase prices for those homes, making home ownership accessible to more people within the community.
Since 1989, the Finance Fund's Linked Deposit Fund has provided lower interest rates to clients, leveraging over $291 million. Investments totaling $24 million have been made in 125 projects, creating 940 full-time jobs and 3,841 units of new or rehabilitated housing. Two recent success stories are examples of these projects.
The St. Paul AME Wellness Center in Columbus, Ohio, brings needed health-care services back to a blighted urban community and fills a void left by the departure of a community hospital a decade ago. The wellness center is projected to create 25 full-time jobs and 33 construction jobs and will support the development of 16,075 square feet of commercial space. A linked deposit provided a significant interest rate reduction, from 6.9 percent to 3.94 percent.
The New Straitsville Downtown Revitalization project promotes the historic Main Street districts in two of the "Little Cities of Black Diamonds" within Southern Ohio's Hocking Valley Coal Region. The project is refinancing and rehabilitating five properties in rural downtown areas. The project will lead to the creation of 10 full-time jobs, 13 construction jobs and 10,000 square feet of commercial space. The linked deposit greatly reduced the interest rate from 7.75 percent to 5.25 percent.
For more information on the Linked Deposit Fund and other programs, visit www.financefund.org.
Keep up with what’s new and noteworthy at the St. Louis Fed. Sign up now to have this free monthly e-newsletter emailed to you.
FedCommunities.org is a portal to community development resources from all 12 Federal Reserve Banks and the Federal Reserve Board of Governors.