Uncovering a Pot of Gold: CDCs As An Alternative Source of Funding

Community Development Corporations (CDCs) are nonprofit organizations focused on the economic, infrastructure and social systems revitalization of low-income communities. As the Small Business Administration (SBA) notes, the primary focus is jobs creation and access to affordable housing. However, individual CDCs have the leeway to specify goals that best fit the needs of the community.

The legal definition requires that a CDC is established as a nonprofit under section 501(c)(3) of the federal tax code. A CDC is usually established by an association of local residents, small business owners, churches, civic groups and other parties in the community.

While there is no national certification standard, certain states require CDCs to meet certain criteria to receive state funding. CDCs can apply to become an SBA Certified Development Company that is authorized to market, package and service SBA 504 loans. The SBA’s CDC 504 loan program finances fixed assets such as equipment or real estate. It offers a first mortgage up to 50 percent of the project cost, and a second mortgage covering up to 40 percent of the cost.

According to Community-Wealth.org, 4600 CDCs located across all 50 states make significant investments not only in community development, but in businesses that serve the communities. CDCs frequently enter into joint ventures with for-profit business because they lack:

• The experience and competencies of the for-profit business


• Adequate staffing or capacity


• Sufficient scale to execute the size of a particular project


• Financial capabilities or access to financing available through a for-profit partner

For-Profit Partnerships

By partnering with CDCs, for-profit businesses gain access to federal grant programs and low interest financing programs otherwise unavailable to the private sector. As Nu-Wire Investor points out, CDC grant money can help lower the cost of housing for first-time buyers. This financial incentive is just what for-profit investors and builders need to move a house or justify the commitment of dollars and resources to a development project.

While roles and responsibilities between the CDC and for the for-profit business partner are always negotiable and determined in part by project scope, typically the for-profit CDC partners fulfills such functions as:

• Project development and management


• Staffing


• Applications and financial packaging for conventional financing sources


• Site management.

Doing Business in the Community

For-profit partnerships aren’t just for businesses that develop and manage community projects—they also extend to businesses that decide to set up shop in the community itself. CDCs provide favorable financing to community-based businesses to either:

• Construct, purchase or rehabilitate property sites


• Purchase new equipment or capital acquisitions

CDCs can help for-profit businesses get financing at lower fixed interest rates with loan terms 30 percent longer than most standard loans, resulting in lower and more affordable monthly payments. Moreover, CDCs can help businesses that otherwise wouldn’t qualify obtain a bank loan. Business Know-How points out that many companies struggle to meet traditional bank loan-to-value (LTV) requirements. For example, on a $1 million loan, the bank provides 65 percent of the amount, but the business must secure the remaining 35 percent in equity. Most CDC programs, in contrast, raise the loan-to-value amount to 90 percent, so the business only has to secure 10 percent in equity.

It’s the classic win/win situation. CDCs promote local businesses so those business stay in the community and help improve it.

Where to Find Your Local CDC

Any of the following local organizations can connect you to a CDC in the community where you do business.

• SCORE Association chapter


• Small Business Development Center


• Town/city officials

Uncovering a Pot of Gold: CDCs As An Alternative Source of Funding