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Financing Social Enterprises 1 A Focus on Low-Income Communities & Special Needs Populations Throughout the Midwest Number of closed loans 1,103 Total real estate projects 558 Total loan volume $451.9 MM Total project costs $1.4 Billion Jobs created/maintained 54,592 2 Building better futures for families, children, students, patients, and individuals with disabilities Capital Solutions Program • Accessible capital for nonprofits • Tailored solutions for community facilities • 5-year to 15-year loans • Financing from $10,000 to $1.5MM Real Estate Services • Affordable facilities planning and project management • Effective community development Capital Solutions Community Strategies Real Estate Services Research • Community investment analysis • Nonprofit financial health studies Public Policy Community Strategies Public Policy Research 3 What is driving the creation of social enterprises? 4 factors: Federal budget Emphasis on outcomes Foundations want to demonstrate outcomes Re-examination of how charitable activities are helping or hurting those being served. 4 Factors to consider when contemplating a social enterprise Does the proposed social enterprise provide employment or training opportunities for your clients? Can it provide quality goods or services at a competitive price? Will it be profitable for the nonprofit? 5 Strategic Plan Laying Groundwork: Assessing Readiness Predictable Future Project Readiness Board Buy-In Financial Health 6 Sample Space Plan PROGRAM SPACE # of rooms SqFt. per room Total SqFt. needed Classroom/Training 2 800 1,600 Counseling rooms 6 100 600 Conference room 1 400 400 ADMINISTRATION # of employees #SqFt. per employee Total SqFt. needed Executive Director 1 150 150 Director of Counseling 1 100 100 Social workers 8 80 640 Reception Area/Admin Area 1 300 300 MISCELLANEOUS # of rooms SqFt. per room Total SqFt. needed Kitchen/Pantry 1 300 300 Toilet Rooms 3 75 225 Maintenance 1 150 150 Circulation @ 30% 1,340 TOTAL SPACE NEEDED 5,805 Square Feet 7 • Current clients Client • Potential customers Laying Groundwork: Location Considerations Area • Geographic/community boundaries • Residential vs. commercial • Access to site/public transit Access • Access to funding by geography • Real estate market/conditions Market • Distance to competitors and collaborators Laying Groundwork: Location Considerations Current Population Potential New Population Ideal Target Area 9 Property Acquisition Construction (“Hard” Costs) Project Development Budget Soft Costs • Architecture/Engineering • Financing, legal • Developer/project manager Furniture and Equipment Other • Contingency • Construction Interest • Organizational/ramp-up costs Technical Assistance Worksheet #8: Creating a Project Development Budget 10 Sample Development Budget Acquisition $1,382,327 Hard Costs $373,038 Soft Costs $78,469 Furniture, Fixtures, and Equipment $72,000 Contingency $78,526 Total $1,984,360 15 Project Revenue Developing A Program Expansion Budget • New/expanded program revenue • New revenue sources • New fundraising Project Expenses • • • • • New personnel Added costs based on more activities Increased facility size and occupancy costs Reserves Start up costs Compare New Revenues and Expenses • Is there a surplus? • How does it change over the projection period? Technical Assistance Worksheet #2: Projecting New Operations and Monthly Cash Flow 12 Revenues Government Contracts Laying Groundwork: Sample Program Expansion Budget Current Operations New Operations $489,600 $734,400 $48,960 $73,440 $538,560 $807,840 $389,180 $511,253 Program Expenses $98,000 $130,000 Other Expenses $47,500 $71,250 $534,680 $712,503 $3,880 $95,337 And Service Fees Fundraising (10%) Total Revenues Expenses Personnel & Benefits Total Expenses Revenues Minus Expenses 13 What is the surplus? Laying Groundwork: Evaluating Feasibility Revenues - Expenses = $95,337 What debt can that support annually (with a debt coverage ratio of 1.2)? $95,337 / 1.2 = $79,448 annually What is the monthly payment? $79,448 / 12 = $6,621 monthly 18 LEASE No upfront costs Flexibility for future Less responsibility for maintenance Laying Groundwork: Lease vs. Buy Adds to landlord assets Renovation costs Landlord pays for improvements BUY Long term solution More control over property Significant upfront costs Renovation costs Adds to agency assets Real estate appreciation Technical Assistance Worksheet #6: Making A Facility Decision 21 Grant funds or foundation program related investments • Location-specific • Initiative-focused (example: Illinois Clean Energy Community Foundation for “green” projects) Capital campaign Financing: Potential Sources of Funds Bank or CDFI financing Government resources: • Historic Tax Credits, TIF funds, Community Development Block Grant (CDBG) funds, New Market Tax Credits (NMTC), and many others Agency equity • Tenant build out allowance • Rent escalation • Utilities and common area maintenance 16 Project financing can be as simple as securing a single loan or grant … Financing: Sourcing Project Costs $ Amount Sources of Funds $ Amount Acquisition 275,000 Agency equity 300,000 Renovation 300,000 IFF loan 275,000 Total $575,000 Total $575,000 17 … or more complicated involving many layers of financing. Project Costs $ Amount Acquisition Financing: Sourcing 1,900,000 Construction Soft costs Reserves 1,300,000 10,950,953 LIHTC equity 8,071,727 1,486,083 HOME loans 3,250,000 Ground lease 1,900,000 1,574,844 Coordinating the timing of financing sources and construction timelines is critical to project success. Bank legal equity 50,000 Foundation grant 600,000 Government grant 239,082 Donation tax credits 258,000 Energy tax credits Total $ Amount IFF loan 339,050 Developer fee Sources of Funds $16,250,930 36,632 Federal loan 252,000 Deferred developer fee 293,489 Total $16,250,930 18 Management experience and track record Important Five Factors: Organizational Capacity Board composition, structure and engagement Business model and program outcomes Industry reputation and standing Policies, procedures, systems and controls 19 Revenue mix, operating costs and profitability Important Five Factors: Financial Capacity Liquidity and Cash Flow Leverage Credit experience and track record 20 Readiness Indicators: • • • • • • Liquidity/Cash Working Capital Net Assets Debt Coverage Days Receivable Days Payable 44 Cash Investment or Contribution to Project Important Five Factors: Capital • Sourced from existing reserves • Sourced from grants Cash or other resources to support project risk Cash to support start up expenses 22 Building at project site Important Five Factors: Collateral “Second Way Out” Equipment Other assets (buildings, pledges, cash) 23 Market demand Competitive landscape Important Five Factors: Conditions for opening a social enterprise Legislative concerns Sector risks for agency Demographic served Economy 24 Assess your strengths and weaknesses from a lender’s perspective using the five factors What if I am not ready? Determine what steps can be taken to strengthen your organization’s application Work with your board and leadership team to establish benchmarks to achieve access to capital Seek specific input and guidance from your bank or real estate expert to acquire potential resources or external expertise 25 Questions? 26