Three Lessons for Land-Conservation Loans

Grandfather Mountain North CarolinaNote: This article is based on an interview with an employee of The Conservation Fund. The Conservation Fund is the physical and administrative home of the Conservation Finance Network.

Timing can make or break a conservation deal. Land trusts and other conservation groups often work with motivated sellers who must divest property by a certain date or are otherwise eager to close deals quickly. The organizations must either gather the required financing on the sellers’ short timelines or forego the projects. When organizations are short on cash but deem projects too important to ignore, conservation loans can bridge the financing gaps.

The strategic choices around a conservation loan can have implications for future projects. They help to build community relationships and even jump start fundraising.

Groups considering these loans should think like businesses. That includes including lenders in early conversations about potential acquisitions and incorporating the full administrative costs of projects into budgets.

Conservation organizations should understand the nuances of using traditional bank loans or working with more mission-aligned lenders.

Reggie Hall, director of land conservation loans at The Conservation Fund (TCF), manages a $50-million revolving loan fund. As of May 2017, TCF has worked with over 150 partners for a total of over $190 million in 325 loans since 1993. Loans range from $12,000 up to $10 million, with terms of three months to three years. They average about $545,000. No loans have defaulted.

Think like a Business

Hall said the most sophisticated land trusts he works with manage their finances like for-profit businesses while focusing on their nonprofit missions. “Some of the most professional organizations we’ve lent money to have been all-volunteer groups. Just having staff does not guarantee that resources are being used most effectively. There are some fully staffed organizations that are really conservative. And they might not be protecting as much land as they could if they took a calculated risk.”

TCF offers technical assistance for conservation borrowers, coaching them through financing strategies, fundraising activities, strategic planning, and other management challenges. Frequently, these coaching conversations reveal that organizations are not employing full-cost accounting to evaluate overhead expenses.

“We might be approached for a $700,000 loan, but once we walk through the project with the group and incorporate stewardship costs, staff time, and other administrative costs, they realize they need $1.2 million,” Hall said.

Hall said he encourages organizations to involve lenders early in their planning process and account for contingencies. “It’s great to have Plan A articulated in the project budget, but we’re not going to approve a loan unless Plan B and Plan C are identified and are solid.”

North Carolina Smoky Mountains

Be Strategic in Choosing a Lender

Conservation organizations will find tradeoffs between traditional bank or credit union loans and the lower-rate loans offered by mission-aligned nonprofits and foundations.

TCF generally offers below-market-rate loans to nonprofits that do not qualify for market-rate loans from traditional lenders.

Federal law stipulates that TCF and other nonprofits cannot offer below-market-rate loans to private, for-profit entities. This is true even for projects aligned with the nonprofit’s mission. Such transactions would violate the nonprofits’ public-service missions by providing the benefit of discounted loans to private entities. That could result in the organizations losing their tax-exempt status.

TCF’s bridge loans provide three months to three years of short-term financing. That gives conservation organizations the cash on hand to complete projects that otherwise would have been out of reach.

Hall said the TCF loans most often cover capital projects and provide bridge financing while organizations await government reimbursement for habitat-restoration projects.

Grant programs routinely require that organizations fully complete habitat restoration projects, even bringing areas into compliance with specific environmental criteria, before their expenses are reimbursed.

Beyond the lower interest rates, conservation lenders offer a few advantages over traditional lenders. They can often process loans more quickly to keep up with a fast-paced transaction and may offer more flexibility in loan security requirements.

For example, collateral for a loan might include real estate purchased or other assets held by the organization. It could also include operating reserve funds. It might even include the personal assets of one of the borrower’s board members or a major donor.

Conservation lenders can offer more flexibility in their repayment schedules and are more likely to adjust the repayment terms if a borrower needs more time. Most conservation-loan programs offer technical support on project and transaction financing. This support can even include fundraising and marketing strategies to capitalize on the momentum of a project.

But conservation lenders aren’t a good fit for all borrowers. There are nuanced differences between traditional and mission-aligned lenders that go beyond the rates they charge.

“It’s really nice to have mission alignment with your lender, but there should be a calculated decision when choosing between a warm and fuzzy mission-aligned lender and a more hard-nosed traditional lender,” Hall said.

Banks have greater access to capital, can often move faster, can offer longer terms like a traditional 30-year mortgage, and can help a conservation organization make inroads in the local community.

“Working through a loan with a traditional lender is a great way to build up a relationship with a valuable future board member,” Hall said. “A bank branch president will have strong local connections and can bring social capital to a land trust.”

An often-overlooked consideration, Hall said, is the signaling opportunity inherent in a conventional bank loan. A loan like this provides widely recognized external validation of a conservation group’s management and financial capabilities.

Although mission-aligned lenders like TCF have rigorous standards for prospective borrowers, a traditional lender’s stamp of approval may be more impressive to potential supporters.

“A traditional loan can send a powerful signal to the local community that a conservation organization is sophisticated, fiscally sound, and financially savvy,” said Hall.

Tell the Story

Although TCF’s loans cannot cover stewardship costs, Hall said, sophisticated conservation groups plan for that next phase of work even while assembling the financing to acquire a property.

“It can be a tremendously challenging task to raise funding for stewardship, and most organizations we work with have rolled that up into acquisition costs or buried it in a broader campaign,” Hall said. “There’s not a lot of money to be made in stewardship, except for a few types of conservation projects like community forests or hunt clubs that provide a steady cash flow.”

Instead, loans provide an opportunity to build momentum for the next phase of a project. A loan for acquisition can be used to jump-start fundraising for infrastructure and maintenance – if a land trust can tell the story effectively.

“Increasing the human element of land trust projects will increase philanthropic support from the local community. Groups need to start talking about projects as protecting water supply by saving a forest; securing jobs at the local mill by preserving forest; or accessing healthy, locally grown food via community gardens,” Hall said. “Community conservation is popular.”

Note: This article was updated on 6/27/2017 to reflect May 2017 data from TCF.

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