This paper reviews the concept of a "green" revolving loan fund (GRLF) under Oregon law.

I.    SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS.

A revolving loan fund (RLF) with appropriate lending criteria and technical support for borrowers can achieve significant and quantifiable reductions in gases which contribute to global warming. An RLF and/or venture capital fund (VCF) can be a low-overhead method of creating or sustaining enterprises which will therefore not need to be dependent upon the changing agendas of charitable foundations and donors.

Additionally, newly created opportunities may exist for an RLF to leverage monies with federal matching funds in cases where the green enterprise is located in economically disadvantaged urban or rural areas. The structure of such a fund may take one of several forms.

An RLF and/or VCF is simpler to establish if it does not solicit money from investors other than a single donor. There are, however, two reasons to seek outside investors: spreading the risk and increasing the pool of money available for loans.

Once an RLF or VCF seeks outside participation, it must comply with blue sky laws (securities regulation), unless it gets a waiver from the Securities and Exchange Commission and state authorities as a charity. An RLF or VCF which has many small loans or investments and caters to smaller businesses will have high administration costs and may need to offer support services to relatively unsophisticated borrowers. To offset these higher costs, many innovative RLFs and VCFs have some charitable component to receive tax-deductible donations and provide support services.

After preliminary review, for discussion, I discuss three hypothetical options.
Option 1 offers maximum flexibility and Options 2 and 3 offer different ways to examine governance and accountability issues.

II.    OVERVIEW.

There are a number of lenders (perhaps 350 or so), loosely united by principles of being performance-based and community-centered, which are referred to as "community development loan funds." These lenders can be structured as federal or state chartered banks (depository institutions such as SouthShore Bank and the Albina Bank), federal or state chartered community credit unions, for-profit venture capital investors, microenterprise lenders (closer to the famous Grameen Bank model of loaning small amounts to women in developing countries at relatively high interest rates to start home-based and cooperative businesses and gain financial independence), charitable revolving loan funds, and a host of non-profit development corporations modeled along the lines of a Ford Foundation program for encouraging neighborhood capital investment, as well as a number of governmental and quasi-governmental funds. Generally, they all seek to serve borrowers underserved by traditional financial institutions and accomplish broader social policy goals through lending practices.

In 1994 Congress passed legislation to encourage Community Development Financial Institutions (12 USC §§ 4701, et seq.), which targeted rural communities, rundown urban areas, and Indian reservations. The legislation authorized creation of a fund to match dollar-per-dollar monies raised by others to purchase loans and enhance the liquidity of community development financial institutions (CDFIs). The intent was to enable CDFIs to offer loans at lower interest rates, as the matching funds would enable private investors to buy the loans from the CDFIs at reasonable prices. If actually implemented, this could allow the GRLF to purchase loans which meet its criteria from existing CDFIs (such as, for example, Albina Bank or Cascadia Revolving Loan Fund). The GRLF would then receive the stream of interest and principal payments from the purchased loan. But Congress has yet to appropriate funds for this program.

If a non-profit Board decides to develop a business plan for a loan fund, it needs to consider lending criteria which allow allocating some funds to green businesses located in communities which meet the Congressional target areas, in order to take full advantage of potential federal matching funds which may eventually become available.

III.    COMPARATIVE STRUCTURES OF LOAN FUNDS.

A.    LOAN FUNDS ADMINISTERED BY BANKING INSTITUTION.

In broad summary, as a federally insured institution, a bank must meet capitalization and loan criteria in order to have access to the large amounts of capital available to regulated lending institutions for leveraging. The regulations conflict with the goals of encouraging riskier, less conventional enterprises.

Therefore, some of the revolving loan funds and investment pools forego the access to federal insurance in order to have greater flexibility in lending criteria. These lenders claim that their niche loans are repaid at nearly the same rate as the banking industry average (over 90%) but that their administrative costs are generally high by financial services industry standards, because the loans are small and have to be carefully screened and because the borrowers often need staff and technical support.

B.    LOAN FUNDS AS CHARITABLE ORGANIZATIONS.

To take advantage of both the charitable contribution tax deduction and to qualify for exemption from security registration requirements (which would otherwise apply to the offering of participation interests or obligations to investors), many of the innovative lenders are set up as charitable entities themselves. In order to qualify as a charity, the organization's articles of incorporation and bylaws state that at least 51% of the loans and equity investments will be made to encourage the charitable purpose, as for example, loans to people below a certain income level or to business which will serve low-income communities.

The charitable organization then seeks funding for its target loans and investments from charitable foundations, religious institutions, businesses, and individual investors who will make a contribution to the administration of the charity (tax deductible) or will agree to provide money at low interest rates. The difference in interest recovered by the individual is recognized as a tax-deductible contribution in some loan arrangements. Generally, these charitable organizations have relatively small funds (up to several million dollars) and thus most of their loans are under $100,000. They concentrate on leveraging the effect of their loans by providing bridge loans or technical assistance and business support services to the borrower to enable the borrower to make up the rest of necessary financing from conventional lenders and public agencies.

In the following examples, the lending organization sought charitable tax status so it could solicit donations from the public and solicit investments from members without complying with burdensome "blue sky" laws. Securities laws are not an issue so long as no money is solicited from investors other than the endowment trust. If administrative overhead, loan processing, environmental and CO2 assessment and other support costs are high, there may be good reasons to have an affiliated charitable entity in order to solicit donations and grants to cover these expenses, but the RLF itself could be a closed or private investment fund since it does not necessarily require (and may decide to forego) investments from others.

1.   CASCADIA REVOLVING LOAN FUND.

An example of revolving loan fund set up as a charitable institution is Cascadia Revolving Fund (CRF) in Seattle, which provides loans of up to $150,000 or investment capital to entrepreneurs and non-profits unable to secure traditional business support and financing programs. It emphasizes:

1. small businesses with priority to--
   
   
   1. minority or woman ownership,
      
      
   2. improving or preserving the environment, or
      
      
   3. rural locations;
      
      
2. community based non-profits;
   
   
3. worker and/or consumer owned cooperatives; and
   
   
4. affordable housing and land trusts.

It was initially capitalized in 1987 with 5 donations of $200,000 each from the Bullitt and Stimson families and corporate donors. It has since increased by other donors and reinvestment to a $3 million fund, which is maintained as an endowment, while it actually reloans money pooled from individual investors to borrowers which meet the criteria.

Although the individual investor of $25,000 or more may establish criteria for the borrower, that individual investor receives no security interest in any particular borrower's enterprise to secure the loan. Instead, the money is pooled with other investors' funds. The individual investor receives an offering circular explaining the risk of the investment and a promissory note from Cascadia Revolving Fund at a negotiated interest rate. This arrangement would ordinarily come within the federal and state securities laws, but a charitable enterprise is eligible for waiver upon application, and CRF has received waivers.

As of January 1994, CRF had made a total of 68 loans in an aggregate principal amount of $1.7 million and had outstanding notes plus accrued interest and earnings of $1.41 million. In 1994, it had a full-time staff of 8 persons with an administrative and staff budget of $248,000. Loan and bank interest income and fees amounted to $180,807 (of which $44,500 was paid as interest to investors). The difference between expenses and personnel and administrative expenses was made up by contributions and grants. The fund maintains a reserve of $20,000, which seems very low by industry standards but probably approximates an average outstanding principle balance.

2.   NORTHEAST VENTURES (DULUTH, MN).

This is a venture capital fund begun in 1986 to encourage economic development, worker retraining and reinvestment in Northern Rust Belt communities. It was organized initially as a non-profit organization with charitable purposes to administer two affiliated organizations: (1) a for-profit venture capital fund which would donate its net profits to a separate (2) venture capital fund established as a 501(c)(3).

Northeast was originally funded with $3 million donated by a paper products company leaving the area, utilities, and assistance from the Northwest Area Foundation. A copy of a progress report in 1994 is attached. The board chair, Nick Smith (an attorney), says that it has recently "merged" the 2 funds as a single non-profit for various reasons. They sought and received an IRS determination that the for-profit fund is within IRS criteria as an investment and income-producing venture within Northeast's charitable purpose and does not produce taxable "unrelated business income" (much as a nonprofit housing entity can run a home and charge rent or a nonprofit school can charge tuition and the income is not treated as unrelated business income and the entity still qualifies as a charitable institution even though it may receive only a small portion of its support from charitable donations). Since the for-profit venture fund is run by a charity, the fund's operations maintain the exemption from securities registration.

Nick Smith will share more confidential information about the IRS process, if I will sign a confidentiality agreement as to client specific details.

IV.    HYPOTHETICAL EXAMPLES.

A.   Example 1:

CO2 Green Revolving Loan Fund (GRLF) is set up as a for-profit private (no investors other than endowment money) investment fund. A related charitable foundation is endowed for the purposes of assisting loan applicants qualify for loans, locating other financing, and offering CO2 reduction strategy and implementation support services.

If the loan fund loans to individuals in amounts of up to $50,000 primarily for family or household purposes for periods of time of less than 62 months, it might be a consumer finance institution and need to obtain an Oregon license. This might be the case if the RLF were to make loans for solar installations to the end-use consumer. A licensed finance company is exempt from the 12% cap on fees and loans imposed by Oregon usury law. The license fee is $375.00 per year.

Without a license, the fund is subject to Oregon's usury cap of 12% or 5% on top of the federal discount rate. This cap has limited Cascadia Revolving Fund's activities in Oregon, since its fees and interest rate on a high risk venture have been deemed to exceed the cap in a few instances, causing CRF to restructure some Oregon loans. In this hypothetical, since the investment fund is for-profit, it seeks out both good loan risks or venture capital investments, and charges necessary rates, which may be rather high, to those who would not otherwise obtain conventional financing. The investment fund donates any profits to the charity.

If $250,000 were provided from an endowment for charitable uses, that would provide at current interest rates about $15,000 a year for support for borrowers. The annual amount could be increased, if the endowment were intended to last only a certain number of years.

The for-profit RLF would have loans outstanding of approximately $485,000, keep about $15,000 for reserves, and earn interest and fees of about $48,000 a year. The for-profit entity would pay for rent, auditors, and other administrative expenses.

B.   Example 2:

The CO2 RLF is a for-profit private venture capital and revolving loan fund.

The for-profit loan fund would have loans outstanding of approximately $400,000, keep about $15,000 for reserves, and earn interest and fees of about $35,000 a year. It also is a green venture capital fund and invests $350,000 in equity in one or more green businesses. It does not earn income on those ownership shares for several years, only and if and when the business turns a profit and declares dividends. The RLF realizes gains or losses when it sells equity.

C.   ACCOUNTABILITY, PROJECT FUNDING CRITERIA.

1.   CO2 REDUCTION STRATEGIES, MONITORING AND QUANTIFICATION.

The RLF could adopt proposed loan criteria which can assure that the RLF loan committee assess and rank a loan application by such criteria as:

• energy efficiency of the product or service;
  
  
• potential CO2 reduction achieved by use of the product or behavior the loan applicant replaces or mitigates; and
  
  
• CO2 assessment of applicant's means of production, sources of supply, transportation of raw materials, labor and product distribution.

A CO2 offset strategy can be required as part of the loan application process in order to assure that the borrower has a clear and fundamental commitment to using the loan for a sustainable purpose. The non-profit organization (if that is a part of the proposal) can provide technical assistance to borrowers to assure the most energy efficient means of production, transportation of raw materials and goods, product design, or service implementation, depending upon the needs of the borrower.

A portion of the loan fee can be used to finance a CO2 Offset Report, which can include assessment and quantification of global warming gases reduction during and at the close of the loan period.

2.   POLICY AND PUBLIC EDUCATION.

CO2 Offset Reports could provide case studies and assessments of global warming gases mitigation strategies in real settings and provide valuable information for public education and policy implementation of the successful strategies. Thus the loan fees can help finance the actual case studies of CO2 reduction strategies which will be useful in fulfilling the advocacy component of the Lazar outline.

V.   CONCLUSION.

Revolving loan funds are specifically identified in the Settlement Agreement and can be implemented to fulfill CO2 reduction goals in a variety of creative ways. The decision on the best working structure for this RLF requires further research and review of the experiences of successful funds.

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1.    Up to a ceiling of a $5 million on a single match.

2.     ORS 78.1020, for example, defines a security as:

Definitions and index of definitions. (1) In this chapter, unless the context otherwise requires:

(a)    A "certificated security" is a share, participation or other interest in property of or an enterprise of the issuer or an obligation of the issuer which is:

(A)   Represented by an instrument issued in bearer or registered form;

(B)   Of a type commonly dealt in on securities exchanges or exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a medium for investment; and

(C)   Either one of a class or series or by its terms divisible into a class or series of shares, participations, interests or obligations.

(b)    An "uncertificated security" is a share, participation or other interest in property or an enterprise of the issuer or an obligation of the issuer which is:

(A) Not represented by an instrument and the transfer of which is registered upon books maintained for that purpose by or on behalf of the issuer;

(B) Of a type commonly dealt in on securities exchanges or markets; and

(C) Either one of a class or series or by its terms divisible into a class or series of shares, participations, interests or obligations.

3.    Oregon law does not define a "consumer" loan, but the legislative history indicates this phrase was to have the same meaning as it is used in "Regulation Z" of the FTC.

725.140 Issuance of license; conditions.

(1)    Conditioned upon the applicant's compliance with this chapter and the payment of the license fee, the director, within 90 days after the date of filing the application referred to in ORS 725.120, shall disapprove the application or shall issue and deliver a license to the applicant to make loans in accordance with this chapter at the location specified in the application. However, before issuing a license, the director must first find upon investigation:

(a)    That the financial responsibility, experience, character and general fitness of the applicant, and of the members thereof if the applicant is a partnership or association, and of the officers and directors thereof if the applicant is a corporation, are such as to command the confidence of the community and to warrant the belief that the business will be operated honestly, fairly and efficiently within the purposes of this chapter; and

(b)    That allowing the applicant to engage in business will promote the convenience and advantage of the community in which the business of the applicant is to be conducted, and in the absence of any other reason or condition which in the judgment of the director would warrant the refusal to grant a license.

(2)    A license issued under this section shall be a continuing license and need not be issued annually, and shall remain in full force and effect until the license is surrendered by the licensee as provided in ORS 725.250 or revoked or suspended as provided in ORS 725.230.