On March 20, 2019, Living Cities, a national organization which harnesses the collective power of the world’s largest foundations and financial institutions to build a new type of urban practice that gets dramatically better results for low-income people, approved a $2,000,000 commitment for the creation of a revolving loan fund to provide access to capital for the City overall and especially for members of economically disadvantaged communities in Minneapolis. The $2,000,000 commitment will be structured as a loan at 3.5% annual interest, payable quarterly, with a maturity date of March 15, 2025. The Living Cities commitment requires that its funds be used only for loans to Minneapolis based businesses and not for operating expenses. The Living Cities commitment also requires that its own funds and the City investment be held by a non-profit entity separate from the City of Minneapolis.
Fortis Capital is a Minnesota non-profit corporation formed for the purpose of expanding access to capital for Minneapolis-based businesses in challenged communities and/or owned by disadvantaged persons, and Living Cities has asked Fortis to serve as the administrator of the Revolving Loan Fund. Two of the board members of Fortis are Brian Smith, Director of Performance and Innovation for the City of Minneapolis, and Jim Terrell, Manager of Participation Loan Programs for the City of Minneapolis. Because Mr. Smith and Mr. Terrell work for the City in addition to their volunteer work with Fortis, staff requested an Internal Audit review of City operating guidelines to ensure the City has established adequate internal controls to minimize the risk of conflicts of interest and improper use of City resources. Staff has already made some improvements to existing procedures in response to the Auditor's suggestions, and more improvements are in the works.
In order to qualify for the $2,000,000 loan, Living Cities requires a $500,000 matching contribution. Fortis Capital and Living Cities have requested that the City provide a $500,000 forgivable loan in order to meet that requirement. Like the Living Cities loan, the City’s $500,000 forgivable loan will be contributed to the Revolving Loan Fund, and no portion of it will be available to Fortis to be used for operating expenses. Fortis’ performance will be evaluated against a series of goals focused on leveraging the City’s funds, deploying the City’s funds, jobs created and retained, and support provided in challenged communities.
Access to capital in certain areas of Minneapolis (in particular, North Minneapolis and the Minneapolis Promise Zone) is limited compared to other parts of the City. The objective of Fortis Capital is to make capital increasingly more available to these underserved areas. The following objectives comprise a developing list of Fortis Capital anticipated outcomes:
- Enhance access to capital infrastructure and financial opportunities
- Create a sustainable Revolving Loan Fund model
- Build community knowledge capital
- Aid in the creation of real wealth in target areas
- Measure jobs created and or retained by Fortis Capital operations
- Aid in the creation of enhanced business knowledge transfer models
- Leverage Revolving Loan Fund funds with lending partners to maximize financial impact
- Leverage Living Cities funds to attract additional capital and grants
- Leverage City of Minneapolis funds to attract additional capital and grants
- Capitalize on lessons learned to replicate successes in other areas
The Fortis Capital model is similar to the City’s 2% Loan model wherein the lead lender will approve the potential credit for participation loans, based on their own standard banking analysis: capacity to pay, credit history, conditions, etc. Fortis Capital will then complete its own review of the credit request in the same manner that the City does with its 2% Loan Program. Fortis Capital will reach borrowers that would not qualify otherwise, based on its higher participation percentage and the risk mitigation factor from the bank partner’s point of view. Fortis Capital will also reach borrowers that would not qualify for City financing, given its much higher maximum loan level, currently $300,000.
Fortis Capital will serve businesses and bank partners who need larger levels of credit that current City loan programs can provide. Fortis Capital will also serve businesses and bank partners who need higher loan participation based on collateral deficiencies or credit deficiencies. Fortis Capital will purchase up to a 75% participation in partner approved credits, as compared to 50% for the City’s programs. As a requirement of the Living Cities loan, Fortis Capital will ensure that the Revolving Loan Fund’s participation in any loan does not exceed 75% of the total loan size.
City forgivable loan
Staff recommends approval of a $500,000 forgivable loan to Fortis Capital. The loan would not accrue interest and would not require principal payments, and would be forgiven at the end of the term (except in the case of a default). The funding source will be the City’s small business lending program, funded by $2.2 mllion in the 2019 budget and $120,000 in 2018 rollover. From this, the City has closed on 26 loans totaling $1,320,000 so far in 2019, leaving $1 million balance available before the Fortis loan. The loan would be subordinate to the Living Cities loan.
Lender: City of Minneapolis
Borrower: Fortis Capital, a Minnesota nonprofit corporation
Program: The Revolving Loan Fund will be run by Fortis Capital. It will provide access to capital for the City overall and especially for members of economically disadvantaged communities in Minneapolis. The City’s forgivable loan will fund the Revolving Loan Fund by increasing the capital available for loans in the Revolving Loan Fund and leveraging the $2,000,000 commitment from Living Cities. The Revolving Loan Fund is a participation loan program pursuant to which Fortis Capital partners with local banks and foundations to make loans to small and growing businesses in Minneapolis. The City finds that the Revolving Loan Fund will serve the public interest by making loans to support economic development in the City.
Time of Performance: The term of this agreement shall commence in October/November 2019, and continue until March 15, 2025.
Loan Amount: $500,000
Interest Rate: 0.00%
Term: Until March 15, 2025.
Repayment: Payment in full upon an uncured default, otherwise forgiven upon maturity.
Collateral: The loan will be unsecured.
Performance Metrics: Fortis’ performance under this agreement will be evaluated against the following goals:
1. Secure at least $2 million in matching funds from Living Cites and or other grantors or partners.
2. Enroll at least 3 partner banks in the Fortis Capital Participation Loan Program.
3. Deploy at least $2.5 million in Fortis Revolving Loan.
4. Produce a report on jobs created and retained
5. Produce a report on support provided in challenged communities.
Failure to meet these goals will constitute an event of default which would cause the loan to be payable.