Access to Capital

SEA Corporation

Organizations Sustained Excellence Alliance Corporation
Calvert Social Investment Foundation

Contact Shari Berenbach,
Executive Director, Calvert Foundation
4550 Montgomery Avenue
Bethesda, MD 20814
www.calvertfoundation.org

Project Summary

The main goal of this project is to give community development organizations new ideas on how to raise capital. To that end, we will look at the Sustained Excellence Alliance Corporation and its Program-Related Investment (PRI) administered by Calvert Foundation.

The 10 community development corporations that make up SEA Corp needed flexible capital that could be drawn upon during initial phases of project planning, research, and development. To satisfy this need, SEA Corp teamed up with the Calvert Foundation to create a PRI to raise capital and create a fund for the member organizations to access predevelopment money. SEA Corp is expecting to raise a total of $5 million through the offering.

Antecedent

1998 marked the 10th anniversary of Fannie Mae Foundation's (FMF) Maxwell Awards of Excellence, which awarded nonprofit organizations in the area of low-income housing development and maintenance. In honor of the anniversary, FMF created the Sustained Excellence Alliance Program. The goal of the program was to take the top performers in the area of low-income housing and use them as examples for other nonprofits to follow. FMF chose 10 nonprofits to receive the SEA awards. In addition to receiving Fannie Mae Foundation Community and Neighborhood Development Fund Loans and other funding, each organization was granted 3 years of support in which FMF would help them develop as organizations and increase their effectiveness. During this time, the 10 award winners met biannually to discuss their individual progressions and learn from one another.

The 10 groups accomplished much during the 3 years, and wished to continue working together permanently. In addition, the groups all had an immediate need for more resources to fill funding gaps and increase outreach. The most important need was for predevelopment capital. Because the groups usually had very little money available to them at any given time and no collateral, they found it difficult to get approved for loans for projects that were in the predevelopment phases, where only planning and preparation were being done. Once a project was up and running, banks were much more approachable as there would be land and/or other resources that could be put up as collateral and tangible milestones they could observe toward completion.

To meet these needs, they created the Sustained Excellence Alliance Corporation (SEA Corp), a non-profit corporation filed in Washington, D.C. (501-c-3 pending.). Each of the original groups would continue with its own vision, but this new non-profit would allow the collective to continue learning from and supporting one another and to combine their resources to raise capital. After much goal setting and projections, SEA Corp decided to raise $5 million for flexible, predevelopment capital for housing units and other community development services such as day-care or parks and recreation facilities, depending on the needs of each community. This capital will be distributed amongst the member organizations.

By working with Calvert Foundation, a nonprofit organization that provides philanthropic financial services products to allow individuals and institutions to invest in community development, SEA Corp was able to set up a program-related investment offering and reach an enormous pool of investors.

Financial Challenge/Components

As with Wall Street offerings, the SEA Corp PRI transaction has three groups of participants: investors (both individuals and institutions), the beneficiary (SEA Corp), and an investment bank (Calvert Foundation). However, these are not securities to be traded on the secondary market. If an investor wishes to cash out before the retirement date, SEA Corp or Calvert must be contacted well in advance so that replacement investor can be found.

The capital for this PRI will be directed to SEA Corp and administered by the Calvert Foundation. Investments may be targeted toward one or several SEA Corp members, and made in amounts of between $25,000 and $500,000. The capital is channeled through the pool and either directed to the selected organization, or dispersed equally. A Loan Committee comprised of the SEA Corp Board of Directors, will have final approval on loan amounts to each member and loan policies. Investments over $500,000 are allowed, but cannot be directed at any one member organization. The excess amount will not be backed by the security enhancements.

Credit enhancements come from two sources; an equity reserve of $250,000 funded by SEA Corp ($25,000 from each of the 10 member organizations), and a $50,000 subordinated investment provided by Calvert Foundation. Grant support is also welcomed as an increase in reserves. No property will be used as collateral. All monies will remain in liquid accounts and be maintained at a minimum of 5% of total assets raised by the PRI. Investments made into SEA Corp after the initial offering will require an increase in reserves to maintain the 5% net assets to total debt ratio, and the consent of current investors. The equity reserve fund may be used for principal and interest payments if SEA Corp payments are late. However, amounts used to cover principal must be replenished within a 12 month period, and amounts used to cover interest must be replenished within 90 days. Calvert will notify investors of any payments late more than 90 days, and will assemble a workout plan for any loan that officially goes into default.

   Structure of Notes* 

Amounts: 	Increments of $25,000
Term:		3, 5, or 7 years
Return:		0%, 1%, 2%, or 3%; Interest paid semi-annually
Structure:	General recourse, principal due upon maturity
Security:	$300,000 first loss pool committed
*from SEA Corp PRI Offering


  Loan Pool* 

Eligibility:		10 SEA Corp. member organizations
Amount:		Maximum loan limited to 15% of total loan pool ($750,000 based 
			on $5 million pool)
Rate:			Weighted Average Cost of Funds + 1%
Term:			3 years, with 2-year extensions based on actual investor terms
Issuer:			Sustained Excellence Alliance Corporation (legally incorporated 
			501c3)
Use:			Real estate predevelopment projects (not tied to any specific 
			project).  May not be used to pay operating expenses.
Payments:	Balloon.  (Principal payments may be required at 3 and 5 years, in addition to the 7th year, depending on the term of the funds raised)
Prepayment Penalty:	Borrower can prepay at any time without penalty.
Documentation:	Promissory Note between Sustained Excellence Alliance Corporation and Borrower.
Collateral:	None.  General recourse loan between SEA Corp and borrower.
Credit Enhancement:	Minimum $50,000 Subordinated Debt and $250,000 equity for $5 million pool.
Administrator:	Calvert Social Investment Foundation
*from SEA Corp. PRI Offering

In addition to these tangible protections, Calvert Foundation will perform due diligence on each SEA Corp member. The members will provide Calvert Foundation annually with audited financial statements, the value and composition of assets, and staff/board changes, after which a due diligence report will be written. Internal financial statements, and any other information Calvert requests, will be provided quarterly for review of changes in possible risk. Investors may request copies of the due diligence reports.

In exchange for these services, Calvert Foundation received a 1% fee on the initial $5 million investment, and will continue to receive 1% per year as an administrative fee.

Significance

Using program related investing as a source of capital for nonprofits rather than grant money is a significant change for many organizations. The lender relies on the borrower for repayment, which facilitates more of a partnership between the two entities, and the rate if interest owed is often lower than the nonprofit would be responsible for with a commercial loan. This partnership is usually long-term in nature and allows for a more sustainable flow of capital than that received by grants. In addition, goals for use of the funds and timeframes for project completions do not have to be nearly as specific, which gives the non-profit some needed flexibility.

Transferability

Program related investments are rarely pursued by foundations because, as grantmakers, they have not felt comfortable with projects so different from their normal business. However, this is the main business of Calvert Foundation. It is focuses only on underwriting, financing, and fund administration for non-profit organizations. As such, it would be easy for other non-profits to utilize this service through Calvert.

Authors

Christina Cannella is an MBA student at the McDonough School of Business at Georgetown University focusing on nonprofit organizations. Previously she was an Investor Communications Supervisor for Janus Funds.

Mark Ervin is an MBA student at the McDonough School of Business at Georgetown University. Prior to business school, he was a client group supervisor at Investors Bank and Trust in Boston, MA where he coordinated custody and mutual fund accounting activities for a leading mutual fund family.