4Raising<strong>the</strong>stakes<strong>The</strong> <strong>IFF</strong> started out with <strong>the</strong> easiest kindof money: $1.75 million in grants th<strong>at</strong> could be lent outto support ongoing oper<strong>at</strong>ions. Oper<strong>at</strong>ing grants werein hand to get <strong>the</strong> first loans out <strong>the</strong> door, and <strong>the</strong>re wasan expect<strong>at</strong>ion of additional support from <strong>the</strong> ChicagoCommunity Trust. But it was understood from <strong>the</strong>beginning th<strong>at</strong> <strong>the</strong> <strong>IFF</strong> couldn’t grow without findingo<strong>the</strong>r sources of funds.<strong>The</strong> crunch came quickly. To make <strong>the</strong> most of itsequity, <strong>the</strong> <strong>IFF</strong> kept lending terms short—five to eightyears—so th<strong>at</strong> principal repayments could accumul<strong>at</strong>equickly and be recycled into new loans. Even with$405,000 from United Way and a $120,000 no-interestloan from <strong>the</strong> Harris Found<strong>at</strong>ion, money was goingout faster than it was coming back. By 1992 discussionsabout fundraising were under way, and loan officerLiz Olfe Feldman l<strong>at</strong>er put <strong>the</strong> situ<strong>at</strong>ion in writing:“<strong>The</strong> <strong>IFF</strong> is running out of capital to lend.”<strong>The</strong>re were three options. Like its counterpartsin commercial lending, <strong>the</strong> <strong>IFF</strong> could “buy” moneyto lend it out again <strong>at</strong> a higher interest r<strong>at</strong>e. <strong>The</strong>second approach was to pursue more equity grants th<strong>at</strong>provided funds “free of charge.” In <strong>the</strong> middle wasa Program—rel<strong>at</strong>ed investment, a very-low-interestloan, from philanthropic organiz<strong>at</strong>ions, th<strong>at</strong> wasalmost as good as an equity grant.93
After numerous discussions <strong>at</strong> <strong>the</strong> board and stafflevel a decision was made to go after all three types ofinvestments.Finding inexpensive fundsIn its first four years, <strong>the</strong> <strong>IFF</strong>’s overall cost of funds wasan enviable 0.8 %, while it charged about 7% onits loans. <strong>The</strong> resulting margin of 6% net interest wasimpossible to maintain. Inquiries th<strong>at</strong> began in 1992with found<strong>at</strong>ions and financial institutions revealedno immedi<strong>at</strong>e prospect for equity grants, but <strong>the</strong>re wasa possibility of program-rel<strong>at</strong>ed-investments, or PRIs,from found<strong>at</strong>ions.<strong>The</strong> John D. and C<strong>at</strong>herine T. MacArthur Found<strong>at</strong>ioncame through first, committing a $750,000 PRI in1992. <strong>The</strong> McCormick Tribune Found<strong>at</strong>ion followedwith a $600,000 PRI <strong>the</strong> following year. <strong>The</strong> agreementscalled for 3% interest and no principal payments, with<strong>the</strong> balloon payment not due until 2004 <strong>at</strong> <strong>the</strong> earliest.<strong>The</strong> two investments represented <strong>the</strong> <strong>IFF</strong>’s firstinterest-paying oblig<strong>at</strong>ions, but <strong>the</strong> costs were low and<strong>the</strong> arrangements weren’t a major departure because<strong>the</strong>y took place within <strong>the</strong> “family” of nonprofitinstitutions. Breaking into <strong>the</strong> commercial lendingworld was ano<strong>the</strong>r m<strong>at</strong>ter. When <strong>the</strong> <strong>IFF</strong> visited five ofChicago’s big banks, looking for money th<strong>at</strong> it couldrelend to nonprofits, <strong>the</strong>re wasn’t even a nibbleof interest. <strong>The</strong> idea took root only when <strong>the</strong> <strong>IFF</strong> storyreached <strong>the</strong> desk of Continental Bank’s Fran Grossman,who knew <strong>the</strong> nonprofit world and was a pioneer inth<strong>at</strong> bank’s community development lending programs.She shepherded <strong>the</strong> applic<strong>at</strong>ion through <strong>the</strong> bank’supper levels and in 1993 <strong>the</strong> <strong>IFF</strong> closed on a loan of$1 million. As expected, <strong>the</strong> bank funds were moreexpensive than equity grants, <strong>at</strong> 5.6% over three years,so <strong>the</strong>y provided only a slight margin to cover expenses.But <strong>the</strong> loan opened <strong>the</strong> door to <strong>the</strong> downtownbankers. <strong>The</strong>y would become key partners in <strong>the</strong> future.In <strong>the</strong> meantime, Olfe Feldman and Logue foundo<strong>the</strong>r willing partners. <strong>The</strong> Polk Bros. Found<strong>at</strong>ionprovided a $200,000 grant to <strong>the</strong> loan program; <strong>the</strong>Blowitz Ridgeway Found<strong>at</strong>ion pledged a series of five$200,000 PRIs, and <strong>the</strong> Calvert Str<strong>at</strong>egic Growth <strong>Fund</strong>invested $100,000. All were <strong>at</strong> low interest r<strong>at</strong>es. Whilediluting <strong>the</strong> original equity-rich pool, this new waveof investments never<strong>the</strong>less kept <strong>the</strong> cost of funds low.But with $2.1 million approved for new loans in 1994,and $3.5 million <strong>the</strong> following year, <strong>the</strong> money was sooncommitted, and <strong>the</strong> push for loan capital continued.9495
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