Getting Beyond the Developer Fee
In tough financial times, community developers are hanging on to their developer fees despite competition, but many are also diversifying their programs and revenue streams.
By Jake Blumgart and Miriam Axel-Lute Posted on July 25, 2016
The 21st century has not been kind to the funding model of community development corporations. Thanks in part to their own success, these scrappy organizations face increasing competition from private sector actors in many of the old urban neighborhoods where previously few other actors were willing to take a risk. As they compete with these new faces for scarce low-income housing tax credit dollars, the rewards from developer fees—which have long provided the lifeblood for many CDCs—have shriveled commensurately. At the same time, as the housing crisis revealed how tenuous the finances of many smaller CDCs were, the government programs that supported their activities, once deemed unassailably bipartisan, have come under increasing attack.
“In a lot of different ways, federal, state, and local resources have all pulled back,” says Eileen Fitzgerald, president of Stewards of Affordable Housing for the Future. “We have the lowest rental housing vacancy in over 30 years, so you are competing with the private sector in almost every neighborhood.”
Relying on development fees “just feels like feast or famine,” says Allison Handler, a former executive director of Proud Ground, a community land trust in Portland, Oregon, and now a partner at Solid Ground Consulting. “I’ve got to survive for the next two years on the results of this development. . . . You’re chasing your tail all the time.”
As a result of this onslaught, there have been increasing calls for CDCs to change their business models. Housing development, it is argued, should be left to larger nonprofit developers, which have more stable balance sheets and wider geographic areas to provide more efficiency and more confidence for investors. “In certain cases around the country there has been an effort to allocate housing resources to larger organizations that have a balance sheet that gives lenders and investors more confidence in the lifecycle of a housing development,” says Richard Manson, program vice president at the Local Initiatives Support Corporation. “Lenders and investors who are today still the major source of financing [for] affordable housing [want] the developments to be owned more by large nonprofits or joint ventures between smaller nonprofits and private developers. They bring the financial stability that lenders and investors need.”
By deemphasizing housing development and perhaps spinning off such duties to larger entities, CDCs could then re-devote themselves to the kind of hyper-localized efforts and community organizing that were their initial raison d’être.
Of course the question then becomes how to fund those activities.
It can be difficult to get public or philanthropic funds to support community organizing, because the point of such power building is to create an organization that can influence these larger entities and hold them accountable—something not many governments are particularly interested in. After the conservative attack on ACORN, it has become even more difficult to get philanthropic and public dollars.
Although some of the CDC members of the National Coalition for Asian Pacific American Community Development also raise funds through dues and philanthropic funding, “they would not be able to support the level of organizing and community planning and advocacy that they do without developer fee income,” says Josh Ishimatsu, director of research and capacity building.
“People talk about trying to figure out how to not rely on developer fees,” says Fitzgerald. “But that doesn’t mean there is an easy replacement for it. If you don’t have a strong property management side, which most CDCs wouldn’t, you have to get some money through the operations side. So both CDCs and other nonprofit affordable housing developers, especially if they are small, are very reliant on developer fees and kind of have been forever. But what is the alternative? An over reliance on philanthropy?”
“Before [the Low Income Housing Tax Credit, or LIHTC, boom], CDCs had been scraping together little bits of money to do really small amounts of housing,” says Rick Jacobus, principal at the community development consulting firm Street Level Advisors and a veteran of the field. “Then in a fairly short period of time they were able to do significant housing development. There was an increase in sophistication and capacity, which was really important. But the consequence was that there wasn’t a comparable professionalization of commercial development, or neighborhood planning work, or neighborhood organizing.”
And despite the Great Recession, housing is still where the bulk of the reduced pool of public dollars are—and certainly where the bulk of the dollars that many CDCs know how to get are. “The bottom line is that real estate is still the source of revenue and assets that make CDCs durable and effective,” says Joe Kriesberg, president of the Massachusetts Association of Community Development Corporations, in an email to Shelterforce. The only CDCs who are moving away from housing development entirely are those that are going out of business.
“Development is still where the money is, and you don’t see people giving up their access to where the money is,” says Jacobus.
And indeed, Shelterforce was not able to find any community-based organizations voluntarily taking developer’s fees out of their business models. However, contrary to the focus on specialization and efficiencies of scale in the move to larger housing developers, an increased, or renewed, focus on diversification and partnerships is increasingly part of the conversation among community-based community development organizations.
Going Big and Leaving Home
Some organizations have tried to diversify by covering a larger geographic area, or by partnering with organizations able to work on a different scale. “I think those CDCs should think about whether they should have a broader geographic area,” says Fitzgerald, especially in environments where community development lacks strong political or philanthropic backing. “If you are able to have a bigger footprint by partnering with an organization or doing it yourself, you will be able to develop more frequently because you have more potential neighborhoods and more access to possible deals.”
In New Jersey, where Gov. Chris Christie’s budget cuts have mauled state-level CDC funding, many local organizations have been coping by partnering with larger organizations. There had not been any mergers as of the end of 2015 (although a few smaller CDCs did go out of business). Instead, alliances with larger organizations seem to be the most popular path. A principal partner in these deals is New Jersey Community Capital, a 28-year-old community development financial institution, with roots that stretch even deeper into the state’s community development past.
“A lot of them are adapting by partnering, by changing their business model a bit, becoming a little more regional,” says Wayne Meyer, president of New Jersey Community Capital, which lends to more than 100 nonprofits throughout the state and operates its own CDC. “We’ve been partnering with nonprofits. We provide the organizational equity to really get a project going. We provide real estate expertise, too, but we ask the nonprofit to be an active partner. If we can bring in equity here and we can meaningfully take on significant roles—be it around community, around achieving approvals for a project, around community organizing in the neighborhood—at the end of the day we want to share whatever fee we have.”
Partnering with a larger organization can bring many boons. There are the widely recognized benefits that come with economies of scale and, of course, the more expansive network of philanthropic and political connections that can come from an alliance with a better-established organization. And New Markets Tax Credits, created under George W. Bush’s administration, are mostly only accessible to those with the size and sophistication to master their complexities—like NJCC.
In the small city of Orange, in northern New Jersey, HANDS Inc. is embarking on two partnership projects in their ongoing efforts to revitalize a neighborhood called The Valley.
The first of these projects is a 4-acre, 228-unit complex, projected to cost between $45 million and $50 million. HANDS brought its local expertise and influence to bear to do the planning, identify the need, and clear the way for its partner by having the ground assessed for environmental issues and re-zoned as residential property, as well as by clearing away titles to dead properties. But once it came to developing the new housing complex, HANDS needed help. For a small organization with only 178 properties, such a project was daunting to say the least. So it brought in a private partner. But that solution certainly isn’t recession-proof: the project has been delayed for the last eight years, put on hold by the fallout from the housing crash.
“It was clearly way too big for us, but we wanted to get this big-budget project moving,” says Patrick Morrissy, executive director for HANDS. “It was so pivotal to our 15-block redevelopment area. All the acquisition and redevelopment were things we could handle. That was within our capacity. But we didn’t have a financial capacity, obviously, or even staff capacity for a project that big.”
The second project is on a far smaller scale, with costs only expected to run to $5 million, so HANDS brought in a smaller nonprofit partner. This partner organization is only a little bigger than Morrissy’s outfit, but it still brought with it some equity, loan guarantees, and staff capacity. Without the partnership, it seems unlikely the project would be in motion today.
“We’re a small organization and there are things we just can’t do,” says Morrissy. “If we want to move the needle in a given neighborhood, and we find ourselves without sufficient capacity to do it alone, we seek the right size partner for a given development.”
The advantages are obvious for smaller groups that partner with larger nonprofits or private organizations, but it may not be immediately clear why such an arrangement would be advantageous for the larger firm. A group like NJCC has a similar mission to the small CDCs, but the draw for private developers may just be local validity. When a private actor wants to operate in the community, their smaller partner can provide them with legitimacy and the local connections to smooth the path for development.
Meyer of NJCC says his organization certainly isn’t the only one partnering with the state’s struggling CDCs. But he fears many of the other alliances do not seem likely to build nonprofit capacity in the long run.
“A lot of these partnerships in the for-profit sector are more tag-along partnerships” that are driven by the for-profit partner, says Meyer. “Saying, you know, ‘I had this nonprofit partner.’ . . . like a public image thing.”
Back to the Future: Non-Housing Development
In the early days of the community development field, many CDCs did a bit of everything. In the 1960s and 1970s, the Office of Economic Opportunity’s Special Impact Program funneled money to CDCs in the field that wanted to develop everything from retail to light industrial properties in their neighborhoods. This tapered off during the 1980s, lean years that destroyed many CDCs, so when the federal housing spigot was turned on for nonprofits, many reoriented to focus on that field.
Some remained more broadly based, and continued their interest in areas like foreclosure counseling or community organizing. And some continued to pursue commercial development, though it is far harder to find public backing for such endeavors and, like all small business ventures, they can suffer a brutal attrition rate. But in the end, for those who made it work, keeping it in the portfolio seems to have been a good idea.
“There have always been a handful of organizations in Florida that focus on [a] broader economic development vision, and they are the ones that weathered the storm best,” says Terry Chelikowsky, executive director of the Florida Alliance of CDCs. “If all the money is directed towards homeownership and affordable rental housing, that makes it very hard to diversify what you are doing. A number of CDCs closed their doors because they were just completely reliant on income from the development of housing.”
That isn’t to say that the more diversified CDCs had neglected affordable housing all together, nor that they were spared the pain occasioned by the Great Recession. Layoffs wracked organizations of every type, but those that had kept their interests in commercial and economic development suffered less and were able to rebound more quickly.
And many of the more housing-oriented CDCs noticed how much better equipped their diversified counterparts were when disaster struck.
“One of the things we’ve seen is the groups that managed to stay alive are looking at their community a little differently,” says Chelikowsky. “And they are looking at their organization differently, looking for opportunities to generate revenues aside from their housing credits and property management. We have some groups looking at commercial projects that weren’t [doing so] before.”
The prospects for commercial properties have certainly improved today in locales like Brooklyn, in contrast to initial forays in the 1970s. The Brooklyn-based CDC Fifth Avenue Committee (FAC), for example, develops mixed-use buildings, allowing the organization to diversify both its offerings and income streams in the same development.
When New York City was mired in the depths of an urban crisis, this kind of development was less reliable, but now that New York, and Brooklyn in particular, is booming again, the ground floor shops are able to do a brisk business. This isn’t to say that these commercial properties are unalloyed moneymakers. CDCs are mission-driven nonprofits that usually seek to “do good” with all of their properties. So even in its retail spaces, FAC tries to prioritize rentals to minority-owned, women-owned, or local businesses, considerations that are more important to the organization than bringing in the maximum returns. That means the rent for its retail storefronts is often substantially lower than the market rate. The return still seems to grow every year in booming Brooklyn, according to Jay Marcus, FAC’s director of housing development, but it’s still only a very small percentage of the organization’s bottom line.
The most successful development effort that Fifth Avenue Committee has branched into, in terms of stabilizing its finances, is mixed-income housing. FAC continues to own and manage the properties it develops, but the management fees it reaps from a purely affordable rental development are barely enough to even cover the cost of staff and the expenses generated by the additional paperwork, says Marcus. But if half of a complex can rent at an affordable $600 to $700 with management fees of about $45, while the other half rents at a market rate of well over $2,000 a month, allowing for a fee of over $150, the entire enterprise becomes more cost efficient, although less affordable housing is generated.
“Ultimately mixed income is an opportunity for nonprofits to be self-sufficient,” says Marcus. “Mixed income is a great strategy for diversification for nonprofits, and developer fees are also larger for mixed-income projects. New York has always been a place where you can have it, but now there are a lot more models in other places, too.”
Marcus also notes that mixed-income housing means that CDCs will be even more market oriented and vulnerable to recessions. And other affordable housing developers have argued that outside of very hot markets, the market-rate units in a mixed-income development don’t command premium rents and often do not actually pay their way.
The value of diversifying can go beyond different types of development, into different kinds of programs and different types of income streams, especially earned income.
Atlanta’s Resources for Residents and Communities (RRC) began with a focus on the city’s Reynoldstown neighborhood, a historically African-American district. From the beginning the organization focused on rehabilitating old houses and, once the LIHTC came along, they made enthusiastic use of that funding as well. RRC gets funding from HUD for housing counseling, funds from major banks looking to meet their CRA obligations, as well as support from both the city of Atlanta and the state of Georgia. Historically they have received funding from developer’s fees, too, but RRC remained interested in a range of projects and so wasn’t as badly exposed when the current crisis began.
“[A number of] CDCs in the Atlanta area that are not here with us today that were here in 2005/2006 had a huge reliance on development fees,” says Jill Arrington, CEO of RRC. “That’s the advantage of being diversified. It allows us to provide more services, it allows us to modify our services based on what the community needs and desires.”
Similarly in Brooklyn, the Fifth Avenue Committee provides services ranging from job training to tenant organizing to GED and English as a second language courses. There are home ownership and foreclosure counseling services that relate to housing, too. Each of those areas comes with different funding streams from different government agencies.
“I would argue that most of the successful CDCs in New York have diversified to include social services,” says Marcus. “But not all them can prove to be successfully self-sufficient because most of them have very low overhead rates. Very often the extra fiscal assistance and management that you need can’t be covered by the contracts. ... Housing development fees still have to be seen as a major source of funding particularly for housing development and management and all the supports that are needed to do this well.”
For more established CDCs that haven’t shed the units they developed, property management fees can be a reliable source of revenue. West Palm Beach’s Neighborhood Renaissance Inc. gets the bulk of its support from philanthropy (39 percent), but property management fees run a close second (37 percent), with developer fees only providing 10 percent.
“We survived the recession so we certainly understand the wisdom of not relying too much on one source,” says Terri Murray, executive director of Neighborhood Renaissance Inc. They have enough holdings that property management has become a substantial part of their business model. “We generate revenues through property management fees, and that’s been a pretty steady and consistent revenue stream that we are trying to grow,” says Murray. “This is all non-development fee income.”
Property management won’t work for everyone. Many smaller CDCs haven’t held on to the properties they created because they developed housing for homeownership or for rental by a third party—which of course doesn’t generate management fees.
However, there are many mission-related opportunities for earned income. While organizations that are focused on workforce development have been perhaps the most well-known for launching social enterprises, there are many ways to earn income on real estate–related themes—not only property management, but maintenance and landscaping, weatherization, and brokerages.
Handler, of Solid Ground Consulting, has developed a training for community development groups that introduces them to business planning. Based on the classic text called Business Model Generation, she walks organizations through thinking about questions like who their customers might be, who else is offering their idea at what price point, why would someone want this from you, and introduces concepts like “minimum viable product” and “pivoting” in the testing phase of a business.
Some of the participants in the first round of her training (which was for community land trusts, though the content is not specific to them) launched or further developed business lines, some launched new program areas with more of an earned-income orientation, and some are still exploring or planning.
Proud Ground, a CLT in Portland, Oregon, already had in-house skills as real estate agents for its land trust buyers, and decided to diversify its income by taking on market clients as well. They are starting slow, using only existing staff and marketing themselves largely by word of mouth. Executive Director Diane Linn says the endeavor generated $30,000 this year, significant, if modest. They are hoping to ramp up, but also want to be very careful that market clients don’t pull too much staff time away from the land trust clients. “Everybody wants nonprofits to be purist and all,” says Linn, “but we have to be creative about how we fund what we do or get more irrelevant.”
PUSH Buffalo has two major social enterprises—a sustainable landscaping business that installs green infrastructure, and a “high-road” temp agency for construction-related work. As an organization that was always focused on labor issues as well as housing, these were natural extensions of their work. They didn’t know “what housers were expected to do,” says Jenifer Kaminsky, the housing director for PUSH’s housing arm, the Buffalo Neighborhood Stabilization Company.
As with many social enterprises, PUSH Blue (the landscaping business) began with a grant which allowed the organization to install green infrastructure on its own properties. Then, says Kaminsky, they had an experienced workforce, examples of their work, and a city in need of their services. Buffalo is under an EPA consent decree to reduce stormwater runoff, and in the city’s new zoning code, all new developments are required to deal with the first inch of stormwater on site. The grant set PUSH up to take advantage of this market opportunity, and now the organization has a contract with the local sewer authority.
Providing services internally to the organization by doing landscaping and maintenance for PUSH’s housing developments while creating jobs is another way that the business supports the overall organization. Sometimes a social enterprise can support the operations side rather than the program side, says Kaminsky. “There are grants for [green infrastructure] installations, but there aren’t grants for mowing lawns. When we have 100 parcels that need to be maintained, how will we do it?”
Bickerdike Redevelopment Corporation, a CDC in Chicago, thinks in similar terms of its 30-year-old Humboldt Construction Company, which it started to enable its own commitment to local hiring. As former director Bob Brehm wrote in a 2014 Shelterforce article, “Bickerdike never set out to earn profits from Humboldt, but it did expect to be able to sustain the construction operations from the revenues on jobs. This has been achieved. Humboldt has performed over $99,000,000 in construction work, mostly for Bickerdike. . . . And it has employed an average of 15 carpenters annually for over 30 years—all without relying on grant support.”
“Humboldt has technically lost money over the years,” Brehm acknowledged, “but the cumulative running total is . . . a paltry 0.16 percent of gross revenues. . . . Humboldt has been paying Bickerdike for its share of administrative personnel and other expenses, and rent on its offices. After factoring in Bickerdike’s investments in Humboldt, it has earned some $2.5 million from the venture over the 30 years . . . While these are not ‘profits’ per se, they represent earned income to Bickerdike, which helps support Bickerdike’s operating budget.”
PUSH Buffalo is also launching some greenhouses, which they have set up as for-profit B Corps. “The goal is to have them be at minimum self-funding,” says Kaminsky. “The best case scenario is throwing off cash. But they start from a mission place.”
Sometimes thinking along business planning lines doesn’t result in for-profit business ventures. After Handler’s training, OPAL CLT on Orcas Island in Washington is planning to launch a CDFI to fill an underserved lending market on the island, where a non-traditional economy reliant on seasonal work has made traditional credit hard to come by, and Yellow Springs CLT in Ohio is expanding into affordable rental housing in addition to homeownership. Directors Lisa Byers at Opal and Emily Seibel at Yellow Springs are clear that the primary goal of their new program areas is not spinning off profit to displace other sources of funding. Nevertheless they do see diversification as a source of economic stability for their organizations.
“We didn’t start a for-profit subsidiary to drive revenue,” says Siebel. “I think of it more as return on investment to reinvest in the mission.”
“Revenue generation is not the goal,” says Byers. “Our hope is that it would be self-sustaining. We do see it as a way to diversify our activities. Diversification ends up strengthening us as a whole. If we were only doing ownership housing, I believe we would be more vulnerable to what’s happened with some of our funding sources, [where] ownership housing has gone out of vogue and rental housing is in vogue. We now have a rental portfolio. By diversifying the services we offer, we are more responsive to the range of needs in the community [and] we are more resilient, able to weather changes in priorities—of community or of funders.”
No Silver Bullet
It’s perhaps ironic that the pressure to cede development to highly specialized developers has actually resulted in further diversification. However, it makes sense for those who have been talking for a long time about the comprehensive nature of community development. “The comprehensive solutions that these place-based CDCs can bring is their strength,” says Handler.
“How do the little organizations in more underserved and remote locations make it work financially, when scaling is not an option?” says Byers. “There’s not a CDC in our area that can do what we do more efficiently. There’s a different kind of efficiency if you are plugged into a community.”
In an ideal world, the burden wouldn’t be on small CDCs to reform themselves. If the work they were trying to do could turn a profit, market actors would already be filling those needs. Yet it would be to the detriment of cities and the nation as a whole if, during tough times, we let these organizations disappear. Even as the field is working diligently on diversification, the funds necessary cannot all be generated at the local level. Only new policies at the state and federal level can return these organizations to firmer footing, so when tough times come there will still be a strong nonprofit sector to step in and cushion the blow.
This is the second article in the New Frontiers series. Read the first, “Staying Afloat by Branching Out,” here.
Jake Blumgart is a freelance reporter, researcher, and editor based in Philadelphia.
Miriam Axel-Lute is editor of Shelterforce.