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Minnesota loan fund offers capital through community collaboration

Numerous small businesses and nonprofit organizations located in rural communities throughout Minnesota are benefiting from an innovative, nonprofit economic development loan fund known as the Minnesota Community Capital Fund.

March 1, 2006


Minnesota loan fund offers capital through community collaboration

Numerous small businesses and nonprofit organizations located in rural communities throughout Minnesota are benefiting from an innovative, nonprofit economic development loan fund known as the Minnesota Community Capital Fund (MCCF). In the past three years, the Fund has financed projects as diverse as the launch of a new child care center, the relocation and expansion of an environmental lab, and the major expansion of a cold storage warehouse and distribution center—all by facilitating a unique collaboration between banks and local government community development agencies.

The Northland Institute, a Minneapolis-based nonprofit organization, launched MCCF in early 2003 with the financial support of Minnesota's Blandin Foundation. Since that time, MCCF has attracted nearly 70 members throughout rural Minnesota and approved 46 loans totaling more than $12 million to small businesses and nonprofit organizations.

Pooling resources to access capital

MCCF members, which include cities, counties, electric utilities and regional development organizations, have pooled their limited local development financing resources to access significantly more loan capital through the Minneapolis-based Community Reinvestment Fund (CRF), which operates a specialized, national secondary market for community development financing.

With memberships ranging from $25,000 to $250,000, MCCF's member organizations can sponsor business loans of up to ten times the amount of funds they contribute to the pool, up to a maximum of $2.5 million per loan.

All loan requests begin with a local bank that wants to partner with MCCF, which offers fixed-rate subordinate debt financing for all kinds of businesses and for almost any business purpose. The participating bank determines the level of gap financing from MCCF that will enable the bank to make its loan. Since all MCCF loans are sold to CRF upon closing, the fund always has money to lend to growing businesses in its member communities. Further, banks that participate with MCCF in financing a project may be eligible for credit under the Community Reinvestment Act.1/

As the following MCCF projects demonstrate, the collaboration among the fund, its members and bank partners has already had a tangible effect on Minnesota's rural communities.

Helping a company maintain its competitive edge

When Cass Forest Products (CFP), a Cass Lake, Minn.-based forest products wholesaler, reached its lending limit at Security Bank in Bemidji, Minn., the company needed an alternative source of capital to finance some critical business-improvement projects.

In particular, CFP wanted to expand its retail manufacturing facility, Aitkin Hardwoods, and enhance the facility's showroom. Additionally, the company needed to expand its production and storage area.

"For approximately two years, we tried to obtain Small Business Administration and U.S. Department of Agriculture loans to support our business expansion," says Dave Goetz, chief executive officer of CFP. "Because we didn't meet the borrower requirements for these loans, we were forced to tap into our operating line of credit to begin funding the improvement projects. As a result, we hit a lending limit at our bank and were forced to find a way to restructure our debt. We had to find another source for the capital we needed to continue to grow our business."

That's when Goetz turned to Ross Wagner, economic development and forest industry coordinator for Aitkin County.

"We've been a member of MCCF since it was founded, so I felt this program could be the solution to Cass Forest Products' financing challenges," says Wagner. "Compared to the other loan programs the company explored, the MCCF loan process was more straightforward and less time-consuming. We were pleased to sponsor this business loan, which will help a small business in an economically underserved area further prosper and compete in a demanding industry."

Another MCCF member, Minnesota Power, cosponsored the loan with Aitkin County, enabling the fund to provide CFP with a loan of $480,000. This loan is unique for two reasons. Since CFP had reached its lending limit with Security Bank, MCCF provided 100 percent of a project's financing for the first time in its history. Second, MCCF provided the loan through the U.S. Department of the Treasury's New Markets Tax Credit Program, which is aimed at stimulating private investment in low-income communities.2/

Terry Matson, senior vice president at Security Bank, is thrilled his client received the required capital through MCCF.

"Cass Forest Products' financial position is complicated from a collateral, lien position and debt perspective because it has an employee stock ownership plan, or ESOP," comments Matson. "Consequently, it was difficult to use programs from the U.S. Department of Agriculture and other government agencies because they required a total restructure—including a first mortgage on all of the company real estate that would have resulted in a loss of the ESOP tax advantages for the company. We're extremely pleased we were able to work with MCCF to obtain the total loan amount Cass Forest Products needed."

Because the MCCF financing enabled CFP to pay off the first mortgage on its Aitkin property with Security Bank, the company may be able to obtain additional funds from the bank to support future operating needs.

"To remain competitive in an increasingly commoditized market, it's critical for us to continue to make business enhancements that will enable us to work as smartly and efficiently as possible," Goetz adds. "The MCCF loan helps ensure we'll have the resources to make that happen."

Funding the expansion of a small town hospital

Recently, Community Memorial Hospital (CMH) and Sunnyside Health Care Center (SHCC) in Cloquet, Minn., decided it was time for a facelift and expansion—the size and scope of which would require more dollars than CMH had spent on its facility since it opened in 1957.

The organization knew a large, concerted community fundraising effort would be required to raise the $14 million needed for the project. With Wells Fargo as the lead financial institution, CMH raised nearly $2 million in initial pledges from the local community. This funding was a great start, but the hospital had a long way to go to reach its $14 million goal.

"Originally, we believed we could secure all of the financing we needed through community pledges and one loan from one bank," says Rick Breuer, chief executive officer of CMH and SHCC. "However, at the eleventh hour, the bank indicated it wanted to structure the financing a bit differently to reduce some of its risk. That's when several members of MCCF became involved in the deal."

The City of Cloquet, Minnesota Power, Great River Energy and Carlton County sponsored the CMH deal, pooling all of the dollars available to them through their MCCF memberships to provide the hospital with a $2.5 million loan—the maximum amount under the MCCF program.

"We knew the city alone could not provide all of the gap financing required to get the hospital deal done," explains Brian Fritsinger, Cloquet city administrator and MCCF board member. "We're thrilled that MCCF was creative in pulling several of its members together to obtain the necessary capital. The project has been very well received in this community, which was in great need of expanded medical services."

In addition to the MCCF loan, project financing was provided by Wells Fargo Bank and the Northland Foundation, which enabled the hospital to triple the size of its emergency room and renovate its surgery department by replacing two old operating rooms with four state-of-the-art rooms and three endoscopic suites. The hospital also added a new lab, radiology department and pharmacy.

SHCC benefited as well. The facility gained a new dining and activity center on each floor, and air conditioning was installed throughout the building.

"It's very difficult for health care facilities in small markets to accumulate the equity capital needed for major expansions," comments Dan Moschet, vice president of business banking for Wells Fargo's northern Minnesota district. "In order for a significant facility expansion to be 'bankable,' it's often necessary to partner with lenders like Wells Fargo that are willing to take subordinate lien positions as a substitute for equity. Having an organization like MCCF stepping up and providing the additional funding was critical to the success of a project like Cloquet's Community Memorial Hospital expansion."

Breuer best sums up the benefits of the project when he explains, "Our original building was built for a different era of health care. Now, the quality of our building has caught up with the high quality of care we've been providing for decades."

Expanding the model to urban areas

To build on the successes of the MCCF model, the Northland Institute recently launched an urban counterpart to the fund. The Twin Cities Community Capital Fund (TCCCF) is designed to serve communities in the seven-county Twin Cities metropolitan area. It was launched in July 2005, with Wells Fargo Foundation Minnesota as the lead grantmaker. TCCCF is currently enlisting members and developing its network of financial partners. To date, 26 Twin Cities area communities have already signed on as members. Those communities will soon begin to share in the benefits of their collaboration, as TCCCF recently opened for business and is ready to finance its first development projects.

Scott Martin is president of MCCF and TCCCF. For more information on the funds, including loan applications and a membership list, visit and, or contact Martin by phone at (952) 546-9049 or via e-mail at or

1/ The Community Reinvestment Act, or CRA, was enacted in 1977 to encourage financial institutions to meet the credit needs of their local communities, with special emphasis on low- and moderate-income neighborhoods. In 2005, the CRA underwent significant revisions that included expanding the definition of community development in order to promote revitalization in rural areas. For more information on the revisions, visit

2/ The New Markets Tax Credit Program allocates federal income tax credits to taxpayers who make equity investments in designated community development entities. For more information, visit