Filling the Lending Gap

Since then, and while still working for Northland Institute, Martin has founded two economic development funds. The Minnesota Community Capital Fund began in 2003, providing gap loans in the 80 counties outside the Twin Cities, and Twin Cities Community Capital Fund, which limits its loans to small businesses and nonprofits in the seven-county metro area.

In Perpetuity

Twin Cities Community Capital Fund’s structure is not unique within the national market, but it’s the only subordinated loan fund in the Twin Cities that is comprised of local governments that accesss national capital markets to offer small business loans in partnership with banks and other commercial lenders, Martin says.

The fund’s capital comes from municipalities that want to benefit from the fund. To join, a city or a county pays a $5,000 membership fee and deposits between $50,000 to $200,000 in the fund. Membership allows businesses and nonprofits in that city or county to be eligible for loans up to ten times the deposit, with no limit to the number of loans sponsored by that municipality. “And there is no risk to members,” Martin adds. After three years, a member can withdraw and receive their deposit back.

The fund sustains itself by selling its loans and minimizing expenses. After a loan is closed, it is sold to Community Reinvestment Fund, another Twin Cities–based development corporation, which in turn sells securities backed by the loans. Since companies are carefully vetted by their banks and the two funds, these securities are considered safe investments, according to Martin. “Our track record helps. None of TCCCF’s loans have defaulted,” he says. Since Martin still works for the Northland Institute and Palmquist simply charges a fee for his services, the fund does not employ anyone. As a result, its expenses are covered by the joiner’s fees, loan origination fees, and interest earned on the fund’s capital.

Plotting A Future

Since its founding in 2005, Twin Cities Community Capital Fund has originated nearly $7 million in loans for 14 projects throughout the Twin Cities. Martin is proud of these numbers, but he’s not satisfied. “I originally thought that we’d do 10 to 15 loans every year,” he admits. He also admits that the competitiveness of the Twin Cities’ lending market took him by surprise.

Minnesota Community Capital Fund did not have much trouble finding candidates for gap loans, mostly because there are fewer banks in outstate Minnesota. “But a company in Hopkins can apply to five different banks in one day,” Martin notes. “And their rates were usually slightly lower than ours.” He adds that because the fund is self sustaining, he is not under pressure to constantly recruit new members. As a result, he’s referred a lot of good deals elsewhere. “If the SBA or another community development agency has an appropriate loan with a better rate,” he says, “I don’t hesitate to tell an applicant.”