The First Ten Years at the Illinois Facilities Fund - IFF

Relationships and riskLike every lending institution, the IFF is built on risk.But where a typical bank protects its real estate loansprimarily with a claim on the property being mortgaged,the IFF uses a different formula. It will take collateralwhen possible, but it looks primarily at cash flowfrom government payments, judging whether they willbe adequate to service the loan and if the year-to-yearappropriations are likely to continue. It also looks closelyat the borrower’s management, the makeup of its boardof directors and its ability to raise funds. In everycalculation there is the question of benefit: will the projecthelp low-income individuals and communities?The IFF was created to provide loans that traditionallymany banks won’t touch. Building a facility on adistressed inner-city street may bring excellent benefits—many IFF projects have become anchors of revitalization—but the immediate market value of the finishedbuilding may be far less than the outstanding liability.Compounding that problem is the limited equity ofmany nonprofits and the unsure nature of governmentappropriations. Even though bankers today are far morereceptive to community development lending than inthe past, these factors often add up to three strikesagainst the agency. The IFF was created to incorporatethese risks and balance them against a strong base ofknowledge of the borrowers, of government and of thesocial needs of Illinois residents.The IFF’s most radical departure from traditionalunderwriting is its approach to borrowers of limitedmeans. When banks and mortgage companies stretchto serve these customers—as they sometimes do—they will usually increase the interest rate a point or twoto help cover costs if the borrower defaults. The IFFfigures it differently; if the organization is managing onflat revenues, why siphon away funds and further cutinto cash flow? “Repayment is more likely if paymentsfit comfortably within the known revenues,” arguedloan officer Liz Olfe Feldman in a 1994 presentation tothe loan committee. Rates on IFF loans stay about 1.5%below what a bank would charge. There is no variancebased on risk.Getting a loanThe loan process typically begins when one of the fourloan officers handles a telephone inquiry. The callinvolves a quick screen to make sure the project willbenefit a disadvantaged community and to determine ifthe borrower is strong enough to use a conventionalbank. If the match sounds right, the agency fills out anapplication and the loan evaluation process begins.There is a site visit, meetings with key people, an3031