Northwest Indiana Regional Growth Fund

Mission Statement: To be a catalyst for economic development by providing businesses access to capital. The Northwest Indiana Regional Growth Fund (The Growth Fund) mission is to foster business growth through proactive community involvement and strong partnerships within the banking, real estate, and economic development sectors.

History and Experience: The Regional Development Company (RDC) is a Certified Development Company (CDC) that has been administering the U. S. Small Business Administration’s 504 Loan Program for 30 years. Since inception, the RDC has underwritten, closed and serviced over 800 loans totaling more than $326 million. The RDC services a seven-county area within Northwest Indiana, which includes Lake, Porter, LaPorte, Jasper, Newton, Starke and Pulaski Counties. The RDC is respected as the regional lending authority and has established long-term relationships with the banks within Northwest Indiana. This uniquely positions the RDC to create a loan fund.

The RDC has been invested in the creation of a regional Community Development Financial Institution (CDFI) since 2017. However, difficulties arose obtaining seed money for the program and investigation was paused in 2019. In late 2017, multiple organizations and communities in Northwest Indiana launched an ambitious effort to develop the first economic development strategic plan for the seven-county region, including Lake, Porter, LaPorte, Newton, Jasper, Pulaski, and Starke. TIP Strategies was engaged in February 2018 to facilitate the planning process and to develop the planning documents. Over the course of eight months, a broad coalition of regional partners and stakeholders came together to guide and inform this initiative. The end product—Ignite the Region: A Regional Strategy for Economic Transformation—was presented to the public in September 2018.Since the inception of this program, regional economic development has evolved spanning across seven counties within Northwest Indiana. Erica Dombey, as the Northwest Indiana Forum’s (Forum) Board Chair, was directly involved in the creation of the Ignite the Region.

The Ignite the Region plan was the catalyst for securing $50 million of grant funds from the State of Indiana under the READI 1 initiative. Due to the success of the READI 1 program, the Forum was awarded an additional $45 million in READI 2.0 funding in 2024. This newest round of funding allows for the creation of a Revolving Loan Fund (RLF), and currently $6 million is earmarked for this endeavor.

Definition: A CDFI is a specialized financial institution that works in market niches which are underserved by traditional financial institutions. CDFIs increase access to capital sources within low- to-moderate income areas. The fund was created in 1994, under the Riegle Community Development and Regulatory Improvement Act. The CDFI Fund’s purpose is to promote economic revitalization and community development in low-income communities through investment in and assistance to CDFIs. Currently there are over 1,500 CDFIs nationwide, 600 of which are independent loan funds.

Benefits of CDFIs to the community:

• CDFI lending fills market gaps for key underserved low-income populations.
• CDFIs deliver between two-thirds to over ninety percent of all loan volume to borrowers living in a CDFI Fund-designated Investment Area.
• CDFIs provide borrowers that may not qualify for loans from mainstream sources with loan terms and interest rates that are still comparable to mainstream products.

Need Statement:  Within the RDC’s geographical footprint, there are several pockets of low- to moderate- income (LMI) areas. These areas fall primarily in north Lake County, including the communities of Gary, Hammond, East Chicago and Whiting; Portage in Porter County; Michigan City in LaPorte County; and rural areas of Starke, Pulaski, Newton and Jasper Counties. These LMI areas are severely underserved by business and community lending. Looking at the RDC ‘s portfolio of loans, there are four times as many loans in the upper- income areas of Lake County (including Crown Point, Dyer, Munster, Schererville, and Highland) as there are in north Lake County (Gary, Hammond, East Chicago, Whiting), even though the population in the north Lake County communities is 40% higher than the upper- income areas. Similarly, loans in the upper- income city of Valparaiso were nine times higher than the number of loans in Portage, despite the two cities having similar population numbers.

The impact of the COVID pandemic along with the economic downturn afterwards, many strong redevelopment projects have not been able to secure financing. Not every project that applies to The Growth Fund would be financed, as The Growth Fund’s Board of Directors and Loan Committee would decide on loan parameters, which will include size, industry and geographic limitations, as well as credit standards, to ensure the ongoing viability of The Growth Fund.

“Due to recent economic and financial turmoil, commercial lenders and investors have tightened lending requirements, resulting in a “credit crunch” where credit needs are greater than resources. This economic landscape results in commercial financial institutions greater reliance on community loan funds and CDFIs as the mechanism to serve market needs. Financial institutions began to invest and lend more aggressively to sound CDFIs. This investment and lending strategy enabled institutions to meet CRA requirements while making safe and sound investments.  CDFIs have built a strong reputation in understanding local credit nuances and needs resulting in strong loan portfolios.”  (Community Action Partnership, Community Economic Development Toolkit)

Banks are encouraged to invest in community loan funds and CDFIs due to the requirements of the Community Reinvestment Act (CRA). Per the Office of the Comptroller of the Currency, banks are encouraged to make qualified investments into low- and moderate- income areas. “Qualified investments include investments, grants, deposits or shares in, or to:  Financial intermediaries, such as CDFIs, New Market Tax Credits (NMTC) DC) and community loan funds, that primarily lend or facilitate lending in LMI areas or to LMI individuals in order to promote community development.”

The market is currently served by Allies for Community Business (based in Chicago) and Community Investment Fund of Indiana (based in Indianapolis), along with various local revolving loan funds to address microlending needs. However, there exists a continuing need for larger commercial lending that (1) would not qualify for the SBA 504 program, either due to the start-up nature, or non-owner occupied nature, or non-profit nature, or other nature of the project; and (2) is unable to acquire traditional bank financing due to the above, paired with the depressed values of real estate in LMI areas.  There are currently no other community loan programs serving the seven-county Northwest Indiana region, and there are no registered CDFIs in Northwest Indiana.

At the onset of funding from READI 2.0, The Growth Fund will begin as an RLF, and it will evolve into a CDFI when Federal requirements are met. An RLF is limited to the amount of funding it receives. In the event of lending for larger project sizes, it is difficult for an RLF to “revolve” once funds are lent. This is because the RLF must wait for repayment of funds before they can be reinvested in new projects. However, CDFIs have additional funding sources available to them though Federal CDFI grants (annually) and from various financial institutions who have designed programs for CDFI lending. Banks are motivated to provide funding to CDFIs as it provides them with CRA credit, which is required by Federal and State laws. Moreover, CDFIs have long-lasting sustainability due to additional funding sources outside of READI 2.0 and the composition of the board being committed to community development.

The goal is the creation of a community development loan fund that will eventually transition into a CDFI. Per the U.S. Treasury, the fund needs to be created, funded, and establish a loan portfolio prior to applying for the CDFI certification. Per CDFI Consultant Jason Friedman, this could occur with as few as 3 loans and in as little as 12 months.

Creation and Purpose of the Fund: The Fund will focus on commercial real estate lending to for-profit and non-profit entities. The Fund will not lend to governmental entities. Initially, the Fund will focus on projects that accomplish the following:

1. Creation of jobs for residents in LMI areas
2. Revitalization of LMI areas, including renovation and façade lending, as well as attraction of new or anchor businesses to these areas
3. Community lending in LMI areas, including non-profit lending for projects that will improve quality of life or provide needed services to LMI areas
4. Job training or educational centers in LMI areas, to serve LMI residents
5. Affordable multi-family housing within LMI areas
6. Transit oriented development (TOD) in LMI areas, both commercial, retail and housing
7. Medical facilities for residents in LMI areas
8. Grocers for residents in LMI areas, as an offset for “food deserts”

The Growth Fund will likely not provide stand-alone financing for projects but will be part of a capital stack for larger endeavors.  Loan amounts will generally be between $250,000 and $1 million, with some exceptions for unique circumstances.  The Growth Fund’s intention is not to provide fully amortizing loan products over ten or twenty years but will instead provide shorter-term financing until a project is stabilized, at which point it will be refinanced into more traditional lending.  This type of structure allows more projects to be financed as cash is returned to the fund.

Market Area:  The Market Area of The Growth Fund shall be the seven-county area in Northwest Indiana, consisting of the entire geography Lake, Porter, LaPorte, Starke, Pulaski, Newton and Jasper Counties. The Target Areas will be the LMI areas within those counties, as designated by specific census tracts (refer to map below). To qualify as a CDFI, 60% of lending, by dollar and number, must occur within the Target Areas for CDFI certification and re-certification. Therefore, up to 40% of lending can be done outside of the Target Areas. Many CDFI funds lend outside the low- to moderate- income areas to strengthen the overall loan portfolio and continue their mission to support community development.

Financing of the Fund:  Per Bob Schall at the Self-Help Fund, the industry recommendation is 20% equity and 80% borrowed funds. If an initial Fund of $6 million is created, and a minimum of $2 million would come in the form of grants and donations, there would be a maximum of $32 million borrowed via bank loans. The equity portion will be retained as loan loss reserves until the portfolio is established and appropriate loan loss reserves can be established based on actual risk and default rates.

Bank loans will be assumed as interest-only revolving lines of credit, with a 5-year term, priced at 3%. (National average is 2.4%, per Opportunity Finance Network). The Fund will then price loans with a 3% margin. This margin will provide sufficient income to pay the operating expenses of The Growth Fund per the 2026 projection. Based on the most recent Opportunity Finance Network (OFN) survey, spreads between bank rates and CDFI rates have remained constant, ranging between 3% and 4%. Once revolving loans are fully drawn, they may convert into amortizing loans or revolving loans without a draw feature. Interest rates will remain within the 2% and 3% range based on current market conditions. Loans from banks will be unsecured, as is typical with community loan funds. Any losses from The Growth Fund will be shared between the partnering banks after the loan loss reserve is depleted. There are additional options for funding CDFIs including selling the established loans on the secondary market to free up availability for new lending. Such as projects in the community health sector, the Health Resources and Services Administration (HRSA) provides a partnering loan program that guarantees 80% of eligible projects including the construction and renovation of healthcare facilities.

Organization of The Growth Fund:  A 501c3 organization will be formed under the name Northwest Indiana Regional Growth Fund, Inc.. It has been recommended by all CDC and CDFI organizations that the CDC and CDFI remain separate legal entities, as both report to the Federal government under very different rules.  Separate bylaws will need to be created for the Fund.

At the onset, the current RDC staff will support The Growth Fund. A portion of the salary for the President and Marketing and Business Development Manager will be allocated and billed to the Fund by the RDC. In Year Two, a Chief Operating Officer will be hired, and a portion of the other salaries will continue to be allocated to the Fund. All employees will be legal employees of the RDC, and staff will be contracted to The Growth Fund. Per Greg Ward at Swartz Retson, once the Fund is created and has filed paperwork as a 501c3, the RDC can bill for salaries dedicated to the Fund retroactive to the start of the calendar year.

Initial Board of Directors:

Proposed Board composition provides The Growth Fund with a breadth of experienced financial and economic development professionals from the target market. The diverse board comprises a of pool talent and experience to ensure the needs of the target market are met.  This Fund will create a collaboration between the Forum, the economic development engine for the region, and the RDC, the sole non-profit community lender for the region. As the CDFI regulations require the entity to be a lending institution, The Growth Fund will be associated and affiliated with the RDC. The Forum will provide leadership to the organization via Board seats for the Forum President & CEO and Board Chair. The RDC President and Executive Director will serve as the President & CEO of NIRGF and the RDC Board Chair will also serve on the Board to create the required affiliation between the two entities. Other Board positions will be filled by regional entities and regionally headquartered banking institutions.

• Regional Development Company President & Executive Director
• Regional Development Company Board Chair
• Northwest Indiana Forum President & CEO
• Northwest Indiana Forum Board Chair
• Northwest Indiana Small Business Development Center, Regional Director
• Northwestern Indiana Regional Planning Commission, Executive Director
• Kankakee- Iroquois Regional Planning Commission, Executive Director
• Indiana Regional Development Authority, President & CEO
• Centier Bank, President
• Horizon Bank, Chief Executive Officer
• Peoples Bank, Chief Executive Officer

Loan Committee and Policy: A separate loan policy and Loan Committee will be created for The Growth Fund.  All of the Loan Committee members must reside, work, or represent, through elected positions, the Target Market areas. Fifty percent of the Loan Committee should consist of people with lending experience, and the remainder should consist of community leaders.

Competition: There are currently no other CDFI entities based in NW Indiana. Other competition could be viewed as traditional bank loans, community revolving loan funds, Allies for Community Business CDFI out of Chicago, Community Investment Fund of Indiana out of Indianapolis, and private investors. The loans that will be underwritten by The Loan Fund are those that typically would not be approved by a bank traditionally. If a borrower qualifies for bank financing, they will be encouraged to seek that avenue. Community revolving loan funds and the Chicago and Indianapolis CDFIs are great financing partners, however they only manage microlending programs. The Growth Fund would underwrite larger, community loans, and would not be involved in microlending. As with traditional bank loans, we would encourage borrowers to seek or receive private investment funding.

Marketing / Promotion of the Fund: General discussion of the creation of the fund has been an excellent source of promotion; as centers of influence find out about the fund, they are bringing it to the attention of many individuals who may have interest. Positive word has spread given that all are excited about its creation. Going forward, the fund will be promoted alongside the existing 504 program. Over 500 marketing calls are made yearly by RDC staff to potential referral sources and borrowers. The greatest referral sources will be municipalities, economic development groups, chambers of commerce, accountants, the Small Business Development Center, the SCORE office, commercial lenders and presentations to the community.

The Growth Fund will be cross promoted with the RDC 504 program, with a tab added to the RDC website directing borrowers to fund guidelines and applications. The mission statement and taglines may also be shared by the organizations. Limited print marketing material will also be produced for placement in chamber, local economic development organizations (LEDOs), bank, and government offices as well as handed out at presentations.

Feasibility / Risk Management: “The Great Recession challenged all financial institutions. One would expect that nonprofit loan funds devoted to working in low- and moderate- income communities would have been particularly at risk. After all, their borrowers are often small non-profit entities whose operations are supported by government subsidies, themselves under severe pressure; the communities they work in were hit hard by both the boom and the bust; the funds do not have access to the liquidity that insured deposits provide and have to ability to raise equity capital; and no regulator was looking over their shoulder to make sure they were safe and sound.”

“Yet the 1,500 Community Development Financial Institution (CDFI) loan funds certified by the US Treasury came through the recession not only successfully, but stronger. ‘We did not have a loan loss from any CDFI during the Great Recession,’ said Dan Letendre, managing director at Bank of America. Bank of America oversees the largest CDFI portfolio in the country- about $1.2 billion of mostly loans to 240 CDFIs in all 50 states.” (Federal Reserve Bank of San Francisco publication, August 2015).

Based on a national survey of 324 CDFIs, the average portfolio-at-risk (over 30 days past due) rate was 2.34% as of December 2021. The average loan loss reserve for that period was 8.1% of the portfolio amount. Average net charge offs for 2021 were 0.42%. (Opportunity Finance Network survey).

A loan loss reserve will be created to offset any loans that default. The reserve will be created by the grants and donations the Fund receives, and in the future, will be further funded via the Federal CDFI funding of up to $2MM per year.

A loan loss reserve will be established based on the risk rating of each loan, as recommended by the US Department of Treasury / CDFI Fund Capacity Building Initiative and the Carsey Institute. Per the report, the following guidelines are suggested:

These guidelines can be adjusted as actual default rates are better established in the market.

Training: Training in the CDFI industry will begin prior to the formation of the CDFI itself to ensure all aspects of the creation and execution are done within regulations and best practices. The Opportunity Finance Network organization offers training for new and experienced members. In Q4 2024 the following virtual training courses will be attended:

• OFN Virtual CDFI 101: Orientation to the Industry (11/6/2024)
• OFN Virtual Capitalization 101: Sources and Uses (12/2/2024)
• Capitalization 201: CDFI Loan Fund Business Model (12/96/2024)

Timeline:

Footnotes / bibliography

• “Weathering the Great Recession: A CDFI Case Study in Patient Capital”; August 2015; Kimberly Latimer-Nelligan, Low Income Investment Fund; via the Federal Reserve Bank of San Francisco.
• “CDFI Loan Policies and Procedures; Portfolio Management” Series Webinar; Carsey Institute; via the US Department of the Treasury CDFI Fund.
• “Expanding CDFI Coverage in Underserved Areas, Exploring New Models for CDFI Coverage”; Opportunity Finance Network; via the US Department of the Treasury CDFI Fund.
• “Capitalization Strategies: Raising Debt and Equity for CDFIS”; Opportunity Finance Network; via the US Department of the Treasury CDFI Fund.
• “Community Development Financial Institutions Toolkit”; Community Action Partnership.
• “Community Development Loan Funds Toolkit”; Community Action Partnership.
• “CRA: Community Development Loans, Investments and Services”; The Office of the Comptroller of the Currency.
• “Trends Toward Equity: Five years of OFN Member Data”; OFN, Published March 2023
• Northwest Indiana Forum website https://www.nwiforum.org/economic-initiative

Contacts:

• Maurice Williams, Chicago Community Loan Fund (Chicago IL CDFI)
• Dan Lawless, LIFT Fund (San Antonio TX CDFI / CDC)
• Tracy Ward, Self-Help (North Carolina CDFI / CDC)
• Bob Schall, Self-Help (North Carolina CDFI / CDC)
• Robert Villareal, Small Business Finance (San Diego CDFI / CDC)
• Pam Porter, Opportunity Finance Network (Industry group)
• Jason Friedman, Friedman & Associates (CDFI Consultant)