Loan Loss Reserves

Loan loss reserves can be a powerful tool to share the risk and enable an organization to take on or complete a project.

For example, private foundations can guarantee loans from lenders that might be too risky without a guarantee. This can take the form of foundation funds deposited into an account to be used in the event of a missed payment.  It can also be a legal agreement where the foundation takes responsibility for the entire loan. Foundations with large endowments are being scrutinized for the 95% of their assets which are typically tied up in traditional investments. These funds can be activated as direct loans to historic preservation deals that are higher risk and therefore not appealing to traditional lenders, or they can enter into an agreement whereby the foundation guarantees the loan, through funds deposited and/or a commitment agreement.

Cincinnati Preservation Association

In 2018, the Cincinnati Preservation Association (CPA) created the Cincinnati Development Fund. In short, the fund helps connect end users to threatened historic buildings and assist them in accessing loans for rehabilitation. The CPA deposits money into the Fund as escrow to support lending. These funds are “first risk” and therefore enable beneficial underwriting outcomes by reducing the risk to a lender. The escrow also enables more flexible terms, increases the amount of the loan, and can make the difference in the loan being issued at all. Overall, the program increases access to market lending for distressed properties that would otherwise not be supported by lenders. The Fund can support stabilization loans, acquisition loans, and more.

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This mixed use commercial property is an example of the type of project that would not be attractive to a commercial lender without the assistance of a loan loss reserve program like the Cincinnati Development Fund. Photo credit: Cincinnati Preservation Association.

Landmarks Illinois

Established in 2018, the Reinvestment Program helps move preservation projects forward by providing more accessible lending terms where conventional financing might be unavailable. Eligible projects include pre-development, construction loans, and operating loans. The program can loan up to $500,000 per project, but does not have set loan interest rates or terms as these are negotiated with the borrower.

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“Artists on the 9” Project ribbon cutting event, April 26, 2022. 735 E. 79th Street, Chicago. Photo credit: Landmarks Illinois.

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Manilla, Robert J. Mission, Money & Markets: Making ‘cents’ of guarantees, the view from a CIO. The Kresge Foundation. May 1, 2018.