Brenda Mingo launched her Windsor Hills preschool with the only loan she could get--from her uncle. Dorothy Redmond took out a second home mortgage to finance her South-Central day-care center, later using her house as collateral to expand.
Rejected repeatedly for commercial loans, Carolyn and Raymond Wilder got a home loan instead, then gutted and rebuilt an Inglewood house with their savings to open a kindergarten across the street from their preschool.
The scenario has played out across the nation. Despite a staggering need for quality affordable child-care centers, providers have long been turned away by conventional lenders who view them as too risky to handle the debt.
The lack of financing has never been as critical as it is today, as welfare reform gears up to shuttle an estimated 700,000 Californians into the work force by 2000, many of them single mothers.
Now California lenders are beginning to eye the child-care market in a different light, crafting first-time loan programs for providers. The shift comes as small community banks assess the overwhelming needs of their customers--particularly in minority neighborhoods--and larger financial institutions seek ways to fulfill community-lending obligations.
Crenshaw-based Founders National Bank is among a handful of community institutions lending to child-care centers at market rates, and big players such as Bank of America and Citibank are partnering with private foundations to offer the loans at low interest.
Government, too, is getting involved. Recent legislation set aside $7 million in state loan guarantees for banks that would otherwise shun the risk, and the city of Los Angeles has carved out funds for child-care center construction.
The late-blooming movement--which comes years after Colorado and several other states tackled child-care financing--could help meet demand for new centers while bringing into mainstream banking an industry that has long struggled to piece together a patchwork of government grants, donations and loans from family members.
Financing for child care is "critical," said Kathy Malaske-Samu, Los Angeles County's child-care coordinator. "We have to start thinking beyond welfare reform to infrastructure."
The industry's traits make borrowing inherently difficult. About 60% of child-care center budgets go to personnel costs, which cannot be reduced. Many cater to low-income clients who rely on state subsidies that are subject to the whims of the annual budget process.
In addition, newly constructed child-care centers are special-purpose buildings, meaning there are restrictions on who can occupy them if the providers go belly-up, thus reducing their market value. And since providers have long been rejected for conventional loans, they often have no track record of credit-worthiness.
Until late last year, Raymond and Carolyn Wilder felt they had hit a wall. "The bank we were dealing with was just not in the market of financing private schools," Raymond Wilder said. "I said, 'Why is it so difficult to get a loan for a school if I could get a loan to put in a liquor store?' "
Today, the Wilders are waiting on a $1.6-million loan, approved last month by Founders. The loan will allow them to expand their preschool and build a 30,000-square-foot elementary school, adding grades six through eight to the current program serving students through fifth grade.
The Wilders' Tender Care Child Development Center, founded in 1983, is an immaculately landscaped oasis in a neighborhood filled with auto repair and supply shops. Dreamy-faced 4-year-olds in gingham uniforms practice ballet in the courtyard. The children work one grade level ahead of standard curriculum, and even the preschoolers have a well-stocked computer lab.
Tender Care serves a clientele of professional African Americans and doesn't accept government subsidies.
The Wilders' loan is one of three that Founders--the largest African American-owned bank west of the Mississippi--has made to day-care centers this year, part of what CEO Carlton Jenkins hopes to parlay into a formal child-care lending program.
For Jenkins, it is a personal crusade. His aunt and grandfather run two South-Central centers, and his mother operates two more.
"We go into it knowing that it requires us to be a little bit more than a bank," said Jenkins, whose loan officers have spent days inspecting child-care centers for cleanliness and observing their instruction techniques.
Jenkins made the Wilders' hefty loan at market rates with help from Shell Oil Co., one of the bank's growing list of corporate shareholders hoping to increase their reach into minority communities. Shell will assume a large part of the risk on the loan, and the Small Business Administration is backing another portion.
The Wilders are fortunate enough to be able to afford a market-rate loan. (Raymond Wilder is a real estate developer and Carolyn is a community college professor, so neither relies on the school for income.) For many, however, standard loan terms are prohibitive.
The fledgling movement to offer low-interest financing is largely geared to centers that offer an educational curriculum.
The think tank behind the movement is the Oakland-based National Economic Development and Law Center, which has worked to raise awareness about child care's contribution to the state economy.
The group worked closely to help BofA and Citibank launch low-interest lending programs for child care, and promoted the loan-guarantee legislation passed last year, said Jan Stokley, director for the center's division on children.
The guarantee program, administered by the state Department of Housing and Community Development, earmarks $7 million in public money to leverage private financing and should be running by fall, said assistant deputy director Bill Pava.
So far, Bank of America has secured $5 million from the David and Lucile Packard Foundation to leverage $20 million in loans to Northern California child-care centers whose clientele is one-third to one-half low-income.
The bank is negotiating with a Los Angeles foundation to seal a similar deal for $3 million, said Carla Dartis, vice president and manager at Bank of America's Community Development Bank.
The money kicked in by private foundations will enable the bank to write down interest rates from market rates--about 8%--to 3% to 4%, she said. The bank also committed $1 million last May to child-care facility grants through the city of Los Angeles.
"When we look at the impending crisis we recognize we need to do something about this," Dartis said. "The need is of crisis proportions."
Citibank's program is similar, using half a million dollars in Treasury Department grants to write down interest rates to 3% for child-care center loans, said Michael Freedland, Citibank's director of community lending.
So far the bank has completed one loan in Northern California and is negotiating two in Los Angeles. It has also invested $250,000 with the Enterprise Foundation as part of the affordable-housing organization's program to expand child-care centers in Los Angeles and East Palo Alto.
The city of Los Angeles is also responding to the need, carving out $6 million in Community Development Block Grants in 1997 for new child-care centers, and $2 million this year.
Government subsidies for child care are expected to flow to needy parents at record rates. With nearly 2 million children in California in welfare families, some experts believe more than half will need some subsidized care as a result of recent welfare reform measures.
At the federal level, President Clinton has announced a $21.7-billion child-care initiative. Gov. Pete Wilson has proposed $54 million in the next budget for early-childhood development programs and an additional $665 million worth of expanded child care.
But financing for construction of new centers and improvement of existing ones has long been the missing piece of the child-care puzzle.
"Traditionally, child care hasn't been looked at seriously as an industry, so access to loans and all those issues haven't been addressed," said Alice Walker Duff, executive director of Crystal Stairs Inc., which operates a South-Central day-care center and is the largest distributor of state and federal day-care funds in Los Angeles.
"With welfare reform, it became abundantly clear that the child-care market wasn't ready to accept a new influx of people. It's become more apparent that there is a major need to finance child care."