Financing Child Care in the United States - Ewing Marion Kauffman ...

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PUBLIC–PRIVATE PARTNERSHIPS CAPITAL INVESTMENT PARTNERSHIPS range of issues such as assessing business risk, estimating revenue and planning facilities. It includes specialized spreadsheets that are also available on computer disk. HOW FUNDS DISTRIBUTED Loan applications are submitted to Self–Help, which operates like a bank and administers all aspects of the loan, including processing payments and working with borrowers who are having difficulty repaying the loan. POPULATION SERVED Self–Help makes loans to early childhood programs of all types and sizes, including nonprofit, church–based and proprietary child care and Head Start centers, as well as large and small family child care homes. Self–Help primarily meets the needs of child care borrowers who have the capacity to carry debt but have trouble obtaining a loan from a commercial lender. STRATEGIC CONSIDERATIONS • In 1993, Self–Help examined its small–business lending and realized that child care was the industry to which it had made the most loans. After a survey of child care providers, resource and referral agencies, and state child care personnel indicated that there was more than $80 million in loan demand in the child care industry, the organization decided to provide targeted loans and technical assistance to these providers. The effort has been very successful, and demand for child care loans has grown dramatically in recent years. • The community development financing strategy used by Self–Help is an effective way to help child care programs access capital. It does not, however, lower the cost of borrowing money. • Economy of scale is an important factor. Credit union deposits and many PRIs are small or are available for short periods of time, and therefore they might not be a viable source of capital for the long–term loans many child care operators need. But Self–Help is able to combine small, short–term investments with other large, long–term investments that have been made to its institution. Additionally, Self–Help can package its loans with loans from other state and federal partners such as the Small Business Administration, Housing and Urban Development and the Rural Development Agency. Self–Help also administers a child care loan fund for the state’s Division of Child Development, which is funded with federal CCDBG dollars. Taken together, these funds provide capital needed to offer both long– and short–term loans. • Technical assistance is a crucial element of child care lending. Self–Help has the capacity and the commitment to provide intensive technical assistance to many of its borrowers. • Self–Help has found the delinquency rate on child care lending to be higher than it is for other lending, but actual losses have been minimal. (Loan losses have represented only two–tenths of one percent of its portfolio.) Self–Help’s management of the loans has been critical to ensuring that the funds are repaid. Not surprisingly, borrowers who provided child care to middle– and upper–income families had no delinquency problems, while the majority of those that aimed for a low–income clientele suffered delinquency problems. Self–Help also found that for–profit borrowers had more delinquency problems than nonprofits. OTHER SITES WITH SIMILAR STRATEGIES Most large community development financing institutions (such as Coastal Enterprises, in Maine) use financing strategies similar to those described above. CONTACT Laura Benedict, Director North Carolina Community Facilities Fund c/o Center for Community Self–Help P.O. Box 3619 Durham, NC 27702 Phone (919) 956 4430 Fax (919) 688 3615 E–mail laura@Self–Help.org 159
COMMUNITY DEVELOPMENT FINANCE FUND LINKED DEPOSITS (OHIO) DESCRIPTION “Linked deposits” involve depositing funds into a conventional lending institution for the specific purpose of enabling the bank to loan funds at a reduced rate to a specific borrower. The Ohio Community Development Finance Fund (CDFF) has used this strategy to lower the cost of loans made to nonprofit entities, including child care and Head Start programs. WHEN ESTABLISHED In July 1995, the Ohio Legislature appropriated $3 million for a child care facilities fund. CDFF was selected to administer and use the fund to leverage additional private–sector dollars. Linked deposits is one of CDFF’s strategies for leveraging funds. ANNUAL AMOUNT The legislature made a one–time allocation of $3 million to CDFF. An additional $3 million has been generated by sale of the revenue and re–capitalization of those funds, a process known as “securitization.” The first $3 million funded 13 centers and enabled an additional $1.8 million to be recaptured. This $4.8 million leveraged an additional $11.5 million, for a total of $17.3 million. The Department of Education subsidized this effort with $600,000. SERVICES FUNDED Linked deposits currently are used to support short–term construction loans. Once construction is complete, the construction loan is converted to a mortgage. The mortgage is held by the lending institution; CDFF is not involved in this aspect of the financing. Of the 13, the majority (11 of 13) are first mortgages, with an average term of six years. The interest rate provided is significantly below market rate. HOW FUNDS DISTRIBUTED CDFF makes a bank deposit, linked to a specific loan to a specific child care or Head Start program, at a specific interest rate, and incorporating any other specific concessions. The bank then loans funds at a reduced rate. Interest on the deposit is used to help offset the cost of making a low–cost loan to the Head Start program. Linked deposits are Certificates of Deposits that remain in a lending institution. They have a principal value which leads to monthly interest. A purchaser of maturity plus interest is identified, and the upfront payment is discounted. POPULATION SERVED CDFF works with nonprofit organizations. All of the child care and Head Start programs it assists serve primarily low–income families. SERVICES FUNDED Linked deposits is one of several financing strategies that CDFF uses to support capital financing in child care. CDFF provides Head Start training and technical assistance in financing and facilities development, and it also administers a special state–supported Head Start facilities planning grants program. The agency has recently developed a new “gap financing” loan program, which will directly loan funds to help cover the gap between the mortgage secured by a child care or Head Start agency and the total cost of the construction or renovation project. STRATEGIC CONSIDERATIONS • The $3 million appropriation for the Ohio Community Development Finance Fund grew out of CDFF’s experience in working with Head Start agencies and a growing recognition that additional funds were needed to support capital construction in Head Start and child care. The decision to use a linked deposits strategy was based on CDFF’s experience using a similar strategy in the area of low–income housing. • CDFF is exploring ways to use the state appropriation as equity to support the issuance of securities (i.e. stocks) to capitalize the facilities fund. The agency has determined that an additional $3 million—bringing the total facilities fund to $6 million—will be needed to support a securities issuance. CDFF believes that $6 million in equity could support a securities issuance that would leverage $10 million a year. • The decision to develop a “gap financing” loan program grew out of CDFF’s research into the steps necessary to establish the experience required to successfully issue securities to capitalize the facilities fund. This is not a strong market need; organizations are more interested in lower first mortgage rates. OTHER SITES WITH SIMILAR STRATEGIES A number of other states and cities have used a linked deposits strategy to leverage funds for low–income housing and small business development. However, the Ohio Community Development Finance Fund appears to be the only entity using this strategy for capital financing in child care. CONTACT James R. Klein, CEO Ohio Community Development Finance Fund 42 E. Gay Street, Suite 1000 Columbus, OH 43215 Phone (614) 221 1114 or (800) 959 2333 Fax (614) 221 7493 E–mail jrklein@financefund.org Web www.financefund.org 160
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FINANCING CHILD CARE IN THE UNITED
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FINANCING CHILD CARE IN THE UNITED
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ABOUT THE GRANTEE PHILADELPHIA CITI
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:02 ALLOCATING PUBLIC REVENUES 54 O
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HOW TO USE THIS CATALOG This catalo
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This revised, expanded edition of F
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DIFFERENT EXPECTATIONS The expectat
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03 LONG-TERM THINKING Successful st
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LEVERAGING Matching and leveraging
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TAXES Income taxes are the major so
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EMPLOYER INCOME TAXES Twenty-five s
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LOCAL PROPERTY TAXES CHILDREN’S S
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GENERATING PUBLIC REVENUE LOCAL PRO
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GENERATING PUBLIC REVENUE SALES AND
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GENERATING PUBLIC REVENUE FEES •
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GENERATING PUBLIC REVENUE LOTTERIES
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SOCIAL AND HUMAN SERVICES A number
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EDUCATION Education is a powerful r
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ALLOCATING PUBLIC REVENUES SOCIAL A
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EDUCATION STATE INVESTMENTS IN PREK
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ALLOCATING PUBLIC REVENUES LOCAL GO
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