Overcoming Challenges to Business and Economic Development in Indian Country. Increasing Access to Investment Capital

08/01/2004

Tribes participating in the study are using four innovative strategies to increase access to investment capital. They are (1) negotiating, with investors and companies, agreements that include a limited waiver of tribal sovereignty (discussed above); (2) persuading lenders to use leasehold improvements as collateral for business loans; (3) using federal support to issue bonds; and (4) developing CDFIs.

Using Leasehold Improvements as Collateral for Loans. The trust relationship between tribes and the United States limits the availability of investment capital in Indian country. The United States, primarily through the BIA, serves as trustee for each federally recognized Indian tribe. Most reservation land (as well as other assets) is held in trust for tribes and cannot be sold without permission of the BIA, acting as trustee. Because the land is held in trust, banks and other lenders will not accept it as collateral for a mortgage. Thus, a tribe cannot use one of its most valuable assets to leverage investment capital.

Three tribes in the study (Citizen Potawatomi, Mississippi Choctaw, and Navajo Nation) reported they were able to induce banks to make loans to them using leasehold improvements as collateral. In each case, the tribe wanted to construct a building or to renovate an existing building needed to operate a tribally owned business or tribal program. A bank was willing to accept as collateral the improvements on the land (the new or renovated building) rather than the trust land.

A leasehold improvement approach used by Navajo Nation can serve as a model for other tribes. This effort promoted entrepreneurial activities by tribal members, rehabilitated a building that had been long vacant, leveraged federal welfare reform funding, and provided facilities required to operate the federally funded program. A large building in one of the largest Navajo communities (Shiprock, New Mexico) was structurally sound but had remained abandoned for eight years after the manufacturing business using it was closed. When Navajo Nation took over operation of the TANF program, it sought to open several satellite offices throughout the reservation, including Shiprock. A construction firm owned by a tribal member negotiated a deal with Navajo Nation to rehabilitate the building in accordance with the specifications of the tribal TANF program. No TANF funds were expended to renovate the building - the TANF program signed a long-term lease with the construction company, which used the lease as collateral for a bank loan. The construction company used the loan to finance the rehabilitation needed by the TANF program. In addition, the builder was able to develop space in the renovated building for a restaurant and retail stores.

Because of the great potential for profits, some tribes found it easy to obtain financing for gaming facilities and operations. For example, a local bank and a gaming machine manufacturer lent the Gila River Tribe funds needed to purchase and install its first "video slot and poker machines." Within three months, the tribe was able to pay off the loans with profits generated by its gaming operations.

Issuing Tax Free Bonds. One of the tribes participating in the study, Mississippi Choctaw, was among the first to generate investment capital by issuing a bond. In 1969, the Choctaw issued a bond to help fund the construction of an industrial park on the reservation. This industrial park served as the foundation for the tribe's many BD/ED successes. The Indian Tribal Governmental Tax Status Act of 1982 (26 USC Sec. 7871) generally treats tribes like states in raising capital through the sale of bonds, with one restriction not applied to states  tribes can issue tax-exempt revenue bonds only for "essential government functions." Informants at several tribes said that this requirement is ambiguous: before a tribe could issue a bond, it might have to obtain a ruling from the Internal Revenue Service that the project to be funded meets the essential-government-functions requirement. Tribal officials said that this ambiguity, along with difficulty in obtaining favorable ratings from credit rating agencies such as Standard and Poor's, has deterred tribes from issuing bonds to finance BD/ED.

Federal legislation has been introduced to liberalize some of the current restrictions on the issuance of tribal tax-exempt bonds. For example, the Tribal Government Tax-Exempt Bond Fairness Act of 2003 (H.R. 1421) would allow tribes to issue bonds to finance business activities, such as golf courses and other non-governmental establishments, on Indian lands. Another bill, the Tribal Economic Enhancement Act of 2003 (S. 1542), has many provisions designed to promote economic development in Indian country, including liberalizing the tax exemption.

Creating Community Development Entities (CDEs) and Community Development Financial Institutions (CDFIs) to Provide Investment Capital. Three of the tribes/Native corporations in the study (Citizen Potawatomi, Navajo Nation, and Doyon, Ltd.) have received grants from the CDFI Fund to develop a CDFI.(2) The programs focus on increasing capital for housing or business expansion on the reservations. CDFIs provide a wide range of financial products and services, including mortgages for first-time homebuyers, financing for community facilities, commercial loans and investments to start or expand small businesses. In 1996, Navajo Nation, through a joint effort with the Neighborhood Reinvestment Corporation, developed the Navajo Partnership for Housing, Inc. This CDFI is developing a capitalization strategy, obtaining training about technical aspects of mortgage lending, and developing a curriculum to educate professionals involved in the lending process to facilitate mortgage lending on and near the Navajo reservation. When the study data were collected, the Citizen Potawatomi Tribe was in the process of obtaining certification from the Treasury Department. The Potawatomi plan to use their CDFI to support small business development.

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