CDC Best Practices Guidance - Investment in Other Economic Development Activities

SBA requires that any funds generated from 504 loan activity by a CDC remaining after payment of staff and overhead expenses must be retained by the CDC as a reserve for future operations or invested in other local economic development activity in its Area of Operations (13 CFR § 120.825). A CDC’s Board of Directors is required to ensure that a CDC’s staff and overhead expenses are reasonable and customary (13 CFR § 120.823(d)(5)), and that the CDC establishes and maintains adequate reserves for operations (13 CFR § 120.823(d)(9)). A CDC’s Board is also required to ensure that the CDC invests in economic development in each of the States in its Area of Operations in which it has a portfolio, and the Board is required to approve each such investment. If the investment is included in the CDC's budget, the Board's approval of the budget may be deemed approval of the investment. If the investment is not included in the budget, the Board must separately approve the investment (13 CFR § 120.823(d)(10)).

A CDC is required to submit a written report on investments in economic development in each State in which the CDC has an outstanding 504 loan with the CDC’s Annual Report (13 CFR § 120.830(a)(4)). Tab 1 of SBA Form 1253 (CDC Annual Report Guide) sets forth the requirements for the Economic Development Report, which is designed to provide local economic information as well as analytical data on the impact of the CDC’s non-504 assistance to small business. Among other things, the report must include the following: (1) a summary of the CDC’s current activity in non-504 SBA loan programs (including 7(a) packaging, Microloan, and Community Advantage); (2) a summary of the CDC’s current activity in non-SBA lending programs (including UDAGs, HUD 108 CDBG, EDA, and USDA); (3) a summary of the CDC’s activity in non-lending programs, including grants and other non-lending economic development efforts; and (4) a detailed description of the CDC’s economic development strategy that outlines the efforts the CDC will undertake during the upcoming fiscal year to serve its Area of Operations, including projections for 504 loan activity and investments in other economic development and including evidence of the Board’s approval of the investment plan for the upcoming fiscal year and the basis for determining the type/amount of investment.

Tab 1 of SBA Form 1253 also provides the following guidance on reporting on non-lending investments in economic development activities. CDCs are required to document non-lending investments in economic development activities by instituting a results-based reporting requirement from the recipient entity. For non-lending investments in economic development activities, the CDC should track and report on: (1) the initial investment amount for each program; (2) the amount of investment made during the fiscal year being reported; (3) the expected results of the investment in specific program(s) (at the time of the investment); and (4) the actual results of the investment in non-lending other economic development activities. A CDC must report on the previous year’s investment and results, the current year’s investment and expected results and the upcoming year’s budget estimate. CDCs should use a results-based assessment when considering the investment and/or reinvestment year after year. The results-based reporting should be a requirement of the entity and/or program receiving the investment. All of this information together should be reviewed and approved by the CDC’s Board of Directors.

Best Practices for meeting the requirement to invest in other economic development activities are centered on a Results-Based Reporting framework. This framework consists of the CDC Board of Directors, in conjunction with CDC Management, identifying programs/areas in need of support where the CDC can invest a portion of its 504 Revenue with the objective of supporting economic development and growth in its Area of Operations.