Community InvestmentsMarch 2002precedentsettingdevelopment debenturethat will permitin notforprofitCCOUNTINGAn investor should treat the equityequivalent as an investment on its balance sheet in a ID: 889496
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1 A strong permanent capital base is criti
A strong permanent capital base is criti-creases the organizationÕs risk tolerance Community InvestmentsMarch 2002 precedent-settingdevelopment debenturethat will permitin not-for-profit CCOUNTINGAn investor should treat the equityequivalent as an investment on its bal-ance sheet in accordance with GAAPand can reflect it as an Òother asset.ÓThe CDFI should account for the in- 12 ETHprojects in the financial services division atNational Community Capital. National Com-munity Capital provides financing, training,consulting and advocacy services to a na-tional network of private-sector CommunityDevelop
2 ment Financial Institutions (CDFIs).Beth
ment Financial Institutions (CDFIs).Beth manages National Community Capitalscollection and publication of CDFI industry Community InvestmentsMarch 2002 The equity equivalent investment product (EQ2) is a long-term deeply subordinated loan withfeatures that make it function like equity. These features include the six attributes listed belowwhich are characteristics that must be present under current bank regulatory restrictions. Withoutthem, this financial instrument would be treated as simple subordinated debt. Like permanentcreases the organizationÕs debt capacity by protecting senior lenders from
3 losses. Unlike perma-during their terms
losses. Unlike perma-during their terms, although at rates that are usually below market. In for-profit finance, a similarinvestment might be structured as a form of Òconvertible preferred stock with a coupon.Ó1.The equity equivalent is carried as an investment on the investing institutionÕs balance sheet2.It is a general obligation of the non-profit organization that is not secured by any of the non-profit organizationÕs assets,3.It is fully subordinated to the right of repayment of all of the other non-profit organizationÕscreditors,4.It does not give the investing institution the right to accele
4 rate payment unless the non-profitorgani
rate payment unless the non-profitorganization ceases its normal operations (i.e., changes its line of business),5.It carries an interest rate that is not tied to any income received by the non-profit organiza-6.It has a rolling term and therefore, an indeterminate maturity.On June 27, 1996, and March 28, 1997, the four federal bank regulatory agencies issued jointing test (the pro rata share of loans originated equal to the percentage of ÒequityÓ capital pro-vided by the institution). In some circumstances a financial institution could receive consider-Community InvestmentsMarch 2002 Applicability: