Stories of Technology, Innovation, & Entrepreneurship in the Southeast

Have you ever heard the saying, “If at first you don’t succeed try, try and try again?” It is attributed to the King of Scotland who supposedly uttered it in 1314 shortly before his troops walloped the English at Bannockburn.

That phrase came to mind when we caught up recently with Grady Vanderhoofven for an update on Three Roots Capital, the certified Community Development Financial Institution (CDFI) he launched in 2016 to make debt and equity investments in companies in predominantly low-income areas of East Tennessee and the broader Appalachian region.

Now, nearly eight years later and after submitting its fifth application to the U.S. Department of the Treasury for an allocation of federal tax credits under the New Markets Tax Credit (NMTC) program, Three Roots finally received its first allocation of $45 million in September 2023. Those tax credits were quickly awarded to two projects – Fitzgerald Trailers in Byrdstown, TN and Tompkinsville, KY, and Quality Metal Stamping LLC in Henderson and Humboldt, TN.

“We applied for $50 million and were awarded $45 million,” Vanderhoofven said, explaining that each project received one-half of the award amount or $22.5 million. “It is uncommon to allocate as fast as we did. We hope that bodes well for a potential future allocation.”

It was not the first experience that the President and Chief Executive Officer of Three Roots has had with the NMTC program, but it was the first time to receive an allocation. As alluded to in this early February article in teknovation.biz, the Knox County-based nonprofit financial institution was involved in the Model Mill project in Johnson City that turned an abandoned 110-year old flour mill into an office complex just down the street from East Tennessee State University.

“We were the leverage lender in that project,” Vanderhoofven said, explaining that the leverage lender generally is one of three players in an NMTC transaction. The other two are the tax credit allocatee, which Three Roots became with the $45 million allocation, and what he calls “tax credit investors” who provide capital in exchange for the federal tax incentives that are designed to attract private capital into operating businesses and real estate projects in urban and rural low-income communities.

“We need another allocation,” Vanderhoofven says. “We have a number of good projects in our pipeline based on the relationships we have built over the years with companies in this region and with banks, law firms, and consultants in the NMTC industry.”

The NMTC program is just one way Three Roots helps businesses in rural and distressed census tracts. The organization also worked with Operating Partner Pete Waddington to turn Brushy Mountain State Penitentiary in Petros, TN into a popular tourist attraction, featuring a museum, restaurant, concert venue, moonshine distillery, tours, and gift shop. Starting with a $50,000 loan six years ago, Three Roots’ aggregate financial support for Brushy Mountain crossed the $5 million threshold in late March as the firm collaborated with Pinnacle Bank to close a new $2.3 million loan to fund an expansion.

The work of Three Roots with Brushy Mountain State Penitentiary was spotlighted on page 84 of the 30^th anniversary annual report from the CDFI Coalition.

As described in the introductory letter he wrote for Three Roots’ 2023 impact report, Vanderhoofven reminds people that the original concept for the firm “was inspired by an appreciation for how the root system of a plant enables the plant to access the important nutrients (water, fertilizer, etc.) that feed the plant and allow it to grow and thrive. Capital, coaching, and connections are important factors that help businesses grow and succeed.”

That thought continues eight years later as Three Roots helps companies and projects access what they need for growth and success in ways that are analogous to the way a plant’s root system feeds the plant.

“We (now) have $176 million in total assets,” Vanderhoofven says, compared to just $200,000 when Three Roots assumed the nonprofit charter from the old Tech 2020 and sold the Tech 2020 building to Navarro Inc. The organization currently has more than $100 million deployed and committed to small businesses and projects. It has doubled the size of its staff that now numbers six full-time employees and has added external supporting resources to supplement in-house staff.

The example of the recent collaboration with Pinnacle Bank to support the Brushy Mountain project underscores the importance of relationships.

“We have worked with 16 different banks since our founding and deployed $141 million total capital,” Vanderhoofven says. “Our model of being an evergreen source of capital is so important. That means we can grow our balance sheet through productive lending and investing, and our capital can be re-loaned and reinvested again and again.”

In 2023, Three Roots raised $51.7 million from five banks and through the “LendTN” program, part of the state’s nearly $117 million allocation under the federal State Small Business Credit Initiative 2.0. Three Roots made $58.2 million of loan and investment commitments in 2023.

“We have $73 million of dry powder,” Vanderhoofven adds. That means we have approximately $10 million for equity and equity-like investments and $63 million for lending. “We’re always looking for outstanding partners and high-impact lending and investing opportunities.”

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