Comm. Devel Finance Instit Stud
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MEMORANDUM
May 10, 2004
TO:
The Honorable Mayor and City Council Members
FROM:
Michael C. Van Milligen, City Manager
SUBJECT: Community Development Financial Institution (CDFI) Study
City staff has been researching the community development financial institution (CDFI)
concept since the first of the year to determine whether local market conditions merit
establishing a specialized lending entity to promote community lending. A CDFI is
defined as a financial institution that works in "market niches" that are not traditionally
served by other lenders, providing a wide range of financial services and products.
These institutions provide services that help consumers use credit effectively, including
technical assistance to small businesses and credit counseling. CDFls include
community development banks, credit unions, loan funds, venture capital funds and
microenterprise loan funds.
Representatives from city staff and from Dubuque Bank and Trust met with the
Neighborhood Finance Corporation Director and teleconferenced with Paige Chapel, a
private consultant, to explore the possibilities for a CDFI in Dubuque's market. Based
on those discussions, a proposal has been prepared by the consultant.
The costs are $4,500 for Phase 1 and $14,400 for Phase 2, plus expenses.
To expedite this process, Dubuque Bank and Trust has proposed that their institution
and the City cost-share the Phase 1 study. Planning funds in the Housing Department's
CDBG FY04 administrative budget, in the amount of $2,500, are available for this
purpose. DB&T would pay the difference.
Assuming the feasibility study was positive and a recommendation for commencement
of the Phase 2 assessment would result, all other local lending institutions would be
invited to take part in this effort. This would include sharing the costs of the second
phase study.
Housing and Community Development Department Director David Harris recommends
City Council authorization to enter into a contract with Paige Chapel, co-funded by
Dubuque Bank and Trust, for the purpose of an initial assessment of the feasibility of
establishing a community development financial institution in Dubuque.
I concur with the recommendation and respectfully request Mayor and City Council
approval.
JLtLL~ l~ flL
Michael C. Van Milligen
MCVM/jh
Attachment
cc: Barry Lindahl, Corporation Counsel
Cindy Steinhauser, Assistant City Manager
David Harris, Housing and Community Development Department Director
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MEMORANDUM
30 April 04
To: Mike ",\n Milligen, City Manager
From: David ~s, Housing and Community Development Department
Re:
Community Development Financial Institution (CDFI) study
Introduction
The purpose of this memorandum is to request the City Council's authorization of a
preliminary feasibility assessment for a proposed community development financial
institution, or CDFI, to be established in Dubuque.
Background
Staff has been researching the CDFI concept, since the first of the year, to determine
whether our local market conditions merit establishing a specialized lending entity to
promote community lending. A CDFI is defined as a financial institution that works in
"market niches' that are not traditionally served by other lenders, providing a wide range
of financial services and products. These institutions provide services that help
consumers use credit effectively, including technical assistance to small businesses and
credit counseling. CDFls include community development banks, credit unions, loan
funds, venture capital funds and microenterprise loan funds.
CDFls in Iowa include Homeward Inc, in Allison; Covenant Financial Services,
Davenport; Mississippi Valley Neighborhood Housing Services, Davenport; Iowa
Community Capital, Des Moines; Neighborhood Finance Corporation, Des Moines; and
the Grow Iowa Foundation, in Orient.
As part of this research, we met with the executive director of the Neighborhood
Finance Corporation (NFC) and were subsequently referred to the Shorebank
Development Corporation, in Chicago. Shorebank is a nationally recognized
community-based lender, responsible for development of thousands of residential units
and successful commercial projects in underserved neighborhoods. We established a
contact with Paige Chapel, a former Shorebank employee now working as a private
consultant. Ms Chapel was instrumental in establishing NFC in Des Moines as a CDFI
and subsequently in assisting them to obtain more than $2.5 million in federal funding
assistance for their lending programs.
Representatives from city staff and from Dubuque Bank and Trust met wit'" the NFC
director and teleconferenced with Paige Chapel, exploring the possibilities for a CDFI in
Dubuque's market. Based on those discussions, a proposal has been prepared by the
consultant.
Discussion
The Chapel proposal consists of a two-phased approach. In Phase 1 - "Concept
Formation and Preliminary Assessment" - the consultant will meet with local lenders,
investors, realtors, neighborhood representatives and potential clients to assess the
feasibility of establishing a CDFI. A written summary with findings and
recommendations will be prepared.
Phase 2 - "Feasibility Assessment and Design" - will include data collection and
analysis, design of appropriate loan products, development of financial projection
models, volume estimates, capital requirements and preparation of a presentation for
potential investors.
The costs are $4500 for Phase 1 and $14 400 for Phase 2, plus expenses.
To expedite this process, Dubuque Bank and Trust has proposed that their institution
and the City cost-share the Phase 1 study. Planning funds in the Housing Department's
CDBG FY04 administrative budget, in the amount of $2500, are available for this
purpose. DB& T would pay the difference.
Assuming the feasibility study was positive and a recommendation for commencement
of the Phase 2 assessment would result, all other local lending institutions would be
invited to take part in this effort. This would include sharing the costs of the second
phase study.
A copy of the Chapel proposal is attached.
Action Step
The action requested of the City Council is to approve expenditure of Housing
Department CDBG funds, in the amount of $2500, to enter into a contract with Paige
Chapel, co-funded by Dubuque Bank and Trust, for the purpose of an initial assessment
of the feasibility of establishing a community development financial institution .(CDFI) in
Dubuque.
cc:
Bill Baum, Economic Development Department Director
att
DRAFT FOR CLIENT REV!EW
Scope of Work & Budget:
Proposed by Paige Chapel
for
City of Dubuque:
Preliminarý Feasibility Assessment for Proposed GOFf
3112104
Objective: To assess the need for and opportunity to create a development finance institution
that 1) stimulates renovation of existing residential properties in support of the downtown
Dubuque redevelopment plan; and 2) expands homeownership opportunities for minority and
low-income households.
Phase i-Concept Formation & Preliminaïý Assessment
1. Meet by phone with City of Dubuque staff and private-sector leaders to
discuss scope of work and plan site visit to Dubuque, ilìcluding identifying
resource people to interview (existing lenders, Realtors, first-time home-
buyer advocatesltrainers, rehabbers, etc), meeting with potential investors
to discuss types of CDFls, types of lending activity to achieve desired de-
velopment objectives, types of investments in CDFls to support develop-
ment lending activity, eto.
2. Prepare for site visit including reading background materials and reviewing
available data. (City staff to arrange inteNiews for consultant.)
3. Visit to Dubuque to tour downtown and surrounding neighborhoods; interc
view resource peopie and potential borrowers to determine obstacles and
opportunities to stimulate residential rehab in do..,TItoVVTI and surrounding
neighborhoods; meet with City staff and potential partners to debrief. (Site
visit #1)
4. Prepare written summaI)' describing findings, recommendations, and next
steps re: potential market niche.
5. Review findings and recommendations by phone with City staff and private-
sector leaders. If appropriate, identify potential investors and partners to
involve in Phase II. Agree on next steps, as appropriate.
.25
.50
2.0
.75
.25
Phase II - Feasibiiity Assessment & Design
1. Prepare for and meet with potential investors and partners to discuss CDFI
concept (based on Phase I findings), desired impact, key feasibility
questions to be addressed in Phase II, timeline, types of capital and support
that likely will be required. (Site visit #2)
2. With City staff assistance, collect and analyze data on existing housing
conditions, residential mortgage market, historic and existing rehab activity.
Prepare written summary of data analysis and description of loan products
and potential volume.
ProDosed SCODe & Budaet
1.0
5.0
Paae 1 of 2
DRAFT FOR CLIENT REV!EW
3. Review written findings with City staff (by phone). Modify loan products and
volume estimates, as appropriate. Disouss operating issues and altemate
institutional structures and servicing options.
4. Develop financial projection model based on proposed loan products, terms
and volume estimates. Determine amount and type of capital required.
5. Review financial model with City staff. Discuss capital requirements, poten-
tial sou roes, options for funding loan originations (e.g. portfolio participa-
tions per Neighborhood Rnance Corp), subsidy requirements, strategic
partners (particularly re: homebuyer training).
6. Modify financial model per discussion with City staff.
7. Prepare presentation for potential investors and partners that summarizes
the proposed CDFI's target market, estimated loan volume, services, op-
erations, oapital and subsidy requirements.
8. Present refined concept to potential investors and partners. Discuss addi-
tional feasibi!ity issues, likelihood of raising required resources, and next
steps, if any. Meet with City staff to debrief investor meeting and disouss
next phase (business planning and management recruit-nent), if
appropriate. (Site visit #3)
.25
2.0
.25
1.0
1.5
1.0
$ 4,500
$ 300
240
80
70
70
.L.l§Q
$ 5,260
$14,400
$ 600
360
120
140
140
~
$ ;5,760
Paoe20f2
Proposed Budget:
PHASE I
Fee
Expenses
Airfare (1 tñp SEA-DBQ)
Hotel (2 nites x $120)
Meals (2 days x $40Iday)
Ground transportation (Seattle)
Ground transportation (Richmond)
Total Expenses
TOTAL PHASE I
PHASE II
Fee
Expenses
Airfare (2 trips SEA-DBQ)
Hotel (3 nites x $120)
Meals (3 days x $40Iday)
Ground transportation (Seattle x 2)
Ground transportation (Richmond x 2)
Total Expenses
TOTAL PHASE II
Proaosed Scoae & Budaet
Comparing Different Types of CDF!s
The following tables present a detailed comparison of six types of community development financial
institutions. The first table evaluates the CDFls by purpose, start-up considerations, governance and
ownership, and regulation. The second table continues the comparison in the fields of borrowers,
capital sources, financial products and services offered, and technical assistance provided.
Community To provide capital to -Large capital For profit Federally regulated
Deveiopment rebuild lower-income requirement - corporation; stock and insured through
Bank communities through Compliance with ownership; the Federal Deposi-
targeted lending and regulatory community tory Insuranoe Corp.,
investment agenoles representation on the Federal Reserve,
board Office of the Comp-
troller ofthe Curren.
cy, state banking
agencies
Community To promote community -Need to organize Nonprofit financial Federally and state
Development ownership of assets and communities - cooperatives owned regulated and
Credit Union savings, provide Compliance with and operated by insured by the
affordable credit card and regulatory lower-income National Credit Union
retail financial services to agencies persons who are Administration
lower-income people with members
special outreach to
minority communities,
take deposits and make
loans only to members
Community To aggregate capital from -Flexible start-up Nonprofit,
Development Individuals and requirements democratic;
Loan Fund institL'Ìlona! socia! in- community
vestors at below-market investors, borrowers
rates and re-Iend this and teohnical
money primarily to non- experts serve on
profit housing and the board and loan
business developers in committees
urban and rural lower-
income communities
Community To provide equity and -Large capital For profit or Variabie; depends on
Development debt with equity features requirement nonprofrt; varied funding sou roes
Venture for medium-sized community
Capita! businesses to create representation.
Fund jobs, entrepreneurial
capacity and wealth that
benefit low-income peo-
pie and communities
Micro- To foster social and -Flexible start-up Nonprofit, Regulated by the IRS
enterprise business development requirements democratic; in peer and grant makers as
Development through loans and tech- lending model, any other
Loan Fund nical assistance to low- borrower groups 501 (c) (3) nonprofit
income people involved in make loan
very small businesses or decisions
self-employed and unable
to access conventional
credit
Community To revitalize neighbor- -Community Nonprofit; fonned Regulated by the IRS
Development hoods by producing af- participation - by local community and grant makers as
Corporations fordable housing, creating community- residents; operated any other
jobs, and providing social directed work by a volunteer 501 (c)(3) nonprofit
services to low-income plans board, community
communities residents are board
members
Community Non-profit community Deposits (often Mortgage financing; Usually sub-contrac-
Development organizations, below market home improvement, tors or separate
Bank individual entrepre- investments) from commeroial business, subsidiaries offer
neurs, small busi- individuals, non profit and student credit counseling,
nesses, housing institutions and the loans; consumer business planning
govemment banking services
Community Members of the credit Member deposits Consumer banking Credit counseling,
Development union (usually and limited non- services (e.g. savings business pianning
Credit Union individuals) member deposits aocounts, check
from social Gashing, persona!
investors, the loans, home
govemment rehabilitation loans)
Community Non-profit community Foundations, banks, Construction; pre- Extensive guidance
Development organizations, social religious organlza- development: before, during and
Loan Fund service provider tions, corporations, facilities and business afterthe loan
facilities and small the govemment, start-up and
businesses insuranoe expansion loans
and
Community Invests in small to Foundations, Commeroialequity Extensive technical
Development medium-sized busi- corporations, investments and assistance to portio-
Venture nesses in distressed indi\~duals, the loans with equity lio oompanies, in-
Capital communities that hold govemment features eluding taking seats
Fund promise of rapid on board of directors
growth
Micro- Low-income Foundations, the Micro-business start- Substantial training
enterprise indfýiduals and government up and expansion and technical
Development entrepreneurs assistance in social
Loan Fund and business
development
Community Entrepreneurs, Banks, foundations, Equity Investments, Mar'¡(eting, business
Development homeowners, corporations, other mortgage lending, planning, flexible
Corporations business owners, private support, the debt financing, linked manufacturing
consortia of govemment deposits, Individual networks, business
community residents Development improvement
Accounts