Equity Equivalent Investments (FRBSF Community Investments, PDF - 72KB)
Beth Lipson, National Community Capital

Summary
The EQ2 product is a long-term deeply subordinated loan with features that make it function like equity. These features must be present under current bank regulatory restrictions. Without them, this financial instrument would be treated as simple subordinated debt. Like permanent capital, the equity equivalent investment enhances the non-profit’s lending flexibility and increases the organization’s debt capacity by protecting senior lenders from losses. Unlike permanent capital, investments must eventually be repaid and they require interest payments be made during their terms, although at rates that are usually below market. In for-profit finance, a similar investment might be structured as a form of “convertible preferred stock with a coupon.”