Stuck in the Middle
What do community development intermediaries do these days, and why do we need them?
By Michael Hickey Posted on July 17, 2013
We tend to think of intermediaries as the middlemen: an extra layer that’s somehow always in the way; a necessary, bureaucratic inefficiency; a pass-through delivery mechanism; a glorified gatekeeper that makes retail out of wholesale.
I believe intermediaries are misunderstood. Not just in their intentions, but in their capacities, their scale, their reach and their roles.
I’ve been a funder and lender to many nonprofit intermediaries over the years, and I’ve also run a nonprofit intermediary of sorts myself. I’ve argued in the past, and not exclusively from self-interest, that intermediaries play a critical role in the community development ecosystem, sitting at the center of a web of relationships that both binds and strengthens connections between nonprofit service providers (CDCs in particular) and supporters in the public, private, and philanthropic sectors.
But our world keeps achangin’. CDCs are both more and less than they used to be. Many of the more sophisticated community development nonprofits have moved beyond their community organizing roots, relying less on external advocacy and more on internal capacity to get things done. These organizations have grown both horizontally and vertically complex, highly professionalized, and multijurisdictional.
At the same time, other CDCs have faced contractions resulting from challenges in maintaining effective operations and management, fewer development opportunities, and changing market conditions. These groups now have even less capacity to deal with aging and struggling housing portfolios, putting substantial sections of the affordable housing stock at risk. Even those nonprofits that have, for lack of a better word, remained successfully “artisanal” in their focus on a specific community or development strategy can find themselves struggling with more complex projects. For many, the days of the “plain vanilla” development opportunities are gone. They’ve either been done, or they are now handed off to those scaled developers who can shave the margins and deliver projects in a cheaper, faster way.
How have community development intermediaries evolved and adapted to this new environment? What role do they see themselves playing in this brave new world? What risks and challenges await? And what effects will these changes have on CDC partners?
I spoke with the leaders of four of the largest community development intermediaries in the country: Antony Bugg-Levine, CEO of the Nonprofit Finance Fund; Deborah De Santis, president and CEO of the Corporation for Supportive Housing; Terri Ludwig, president and CEO of Enterprise Community Partners; and Michael Rubinger, president and CEO of LISC. The consistency of their responses was somewhat surprising given their different organizational priorities and cultures and the reflections, corrections, and directions they lay out are quite telling.
Based on the thoughts of my four esteemed interviewees, I have glimpsed the future. It’s, well, complicated.
h6. Think Locally, Act Globally
“What CDCs are experiencing is the fruit of their own success,” De Santis says. There was a day when CDCs had these neighborhoods pretty much to themselves. All the hard work that CDCs have put into fixing up troubled communities, particularly in the development of affordable housing, but including the provision of social supports, workforce development, educational resources, public safety, and a host of other issues—all these have brought some stability and economic vitality. These neighborhoods are much more attractive. Now these same organizations are competing with for-profit developers and other specialized nonprofit service providers in an environment with fewer resources available to do the work and (at least these devilish days) much greater need.
All four intermediaries commented on this growing bifurcation in the field: There are the big, scaled supra-CDCs that can deliver projects quickly and efficiently, but that frequently focus on the more straightforward deals with the usual partners around the table. And then there are those scrappy, quirky, capable little folks who are building on funky “leftover” lots, cobbling together a dozen sources of capital, many from unconventional sources, and including atypical uses such as community cultural spaces, food distribution points, or small commercial enterprises. They survive on local knowledge, creativity, longstanding relationships with community stakeholders, and the ability to successfully engage the big boys as needed.
The intermediaries have been busily adapting to this by building capacity both up and down the demand chain.
As Rubinger points out, “It used to be wither the CDCs go, so go we.” That’s changing. These days, while a CDC partner is “always in the mix” with LISC, only about half their direct partners are CDCs. LISC compensates for this by having local offices that can dig down deep to assess needs and find those marginal projects where the little folks need a boost (CSH has its own system called the “Community Scorecard” designed to do much the same thing). These smaller players are acting within a more complex, more demanding ecosystem with a higher bar for entry. It’s not that intermediaries are bringing these smaller CDCs into the mainstream, it’s that the intermediaries are bringing the mainstream to them.
Meanwhile, all the intermediaries are also vying to create competitive financial products specially tailored to meet the needs of those supra-CDCs. These folks, after all, are big consumers of structured tax credit tools built around Low Income Housing Tax Credits (LIHTC) and New Markets Tax Credits (NMTC), as well as pre-development, acquisition, construction, cash flow and even mini-perm financing. What’s more, these tools are being applied to a much wider array of nonprofit commercial uses, including school and health care facilities financing. This way lies mainstream profitability for the intermediaries, and they have a big stake in defining their role as “market makers” as much as “market meeters.”
In this emerging environment, the job of the intermediary is to maintain those deep connections on the ground, while simultaneously staying one step ahead of the new competition with greater scale, higher functionality, and longer reach.
The intermediaries are really facing parallel challenges to their CDC peers: now that they’ve proven the market, they’re having to fight to keep a slice of the pie. Some of the very groups they successfully nurtured many years ago have grown far beyond their original borders, and now have multistate, regional reach or have expanded deeply into development sectors that take them far afield from their initial niche practice. They are both comrades and emerging competitors, taking on scaled delivery of community development efforts in weak CDC markets, and in certain cases directly competing with the intermediaries for resources.
h6. The Inefficiency of Scale
“Scale,” “sustainability,” and “efficiency” are both watchwords and code words: watchwords because they define the leading edge of building capacity and longevity; code words because they typify new pressures to reduce service delivery costs while increasing and diversifying income streams. More and more these effects are achieved by the growing class of supra-nonprofits. Yet while it’s so very tempting to rely on a larger, regional provider that can build the project or deliver the service and simply get the job done, “we shouldn’t fetishize scalability,” as Bugg-Levine puts it.
And there are two darn good reasons we shouldn’t.
The first and most obvious is that once the job is done the development capacity itself doesn’t remain behind. Supra-CDCs move on to the next project or distressed geography. Meanwhile, intermediaries haven’t been able to ply their craft and local CDCs haven’t grown, leaving the community with a shiny new project but no long-term increase in capacity.
The second reason is more insidious: quite simply, we can’t scale our way out of addressing entrenched social problems. Bugg-Levine told me a story of working with 40 of the largest domestic violence shelter providers in California. Given state budget cuts, “even becoming more and more efficient is not going to ensure they can avoid going bankrupt,” he concluded. Delivering social services is not like delivering pizzas: to go where there is demand is to go the opposite direction of the market.
I’ve argued before that capital markets are designed to generate wealth and concentrate capital. The populations and communities we serve exist at the margins of capital markets, where profits are fragmented, inefficient, and weak, assuming they exist at all. That’s why we focus on social benefits: our goal has never been to generate profits, but to reduce suffering and improve human dignity.
I know, I know—them’s real pretty words. But it is true. And the financial implication of this is that the best we can hope to achieve is a reduction in cost in delivering our services, or a more clever way of offsetting those costs by cross-subsidizing revenues. And then there are those places—the Texas border towns, the downtrodden second ring Detroit suburbs—where scale can’t really exist. Sometimes, that little domestic violence shelter with seven beds is really the best way to get things done.
The trouble is that it’s difficult to tell when trying to achieve scale runs counter to succeeding in a social purpose. Bugg-Levine says: “We need to be clearer about which organizations require subsidy because they are (1) inefficient, (2) sub-scale but could break even if scaled enough, or (3) public good providers that will always require subsidy because what they do is essential but cannot pay for itself.” Confusion reigns. Many stakeholders may irrationally hope that a No. 3 is a No. 2, or cut off a No. 2 because they think it’s a No. 1.
Intermediaries these days are playing a larger role in developing the tools to identify an organization’s true capacity. What’s more, they are increasingly tasked with providing the resources needed to either move that CDC toward greater self-sufficiency or make the case for it remaining financially inefficient in order to serve a larger need.
h6. The Capital Behind the Capital
“You can’t preserve the social safety net with just one kind of capital,” adds Bugg-Levine. Intellectual capital, political capital, social capital—it’s no surprise these are all playing a growing role in the lives of both intermediaries and CDCs. But these days it’s not just about kicking out new ideas and products. Increasingly intermediaries are in the business of building new “open source” networks designed to increase access to a wealth of best practices tucked away in corners of the sector.
For instance, each of the four intermediaries has developed a consulting capacity constructed upon existing internal expertise. Green building, health care facilities, arts and economic development, HUD contract management, board development, financial operations—active engagements exist in all these categories. And this work is not limited to CDCs either, as clients now include public agencies, foundations, even corporate partners.
What’s more, while some of the consulting consists of fairly bread-and-butter, one-off engagements, more and more of it is about addressing the needs of a whole subsector or cohort. Refining the process can save a substantial amount of cash, heartache, and brain drain. Can loan application procedures be streamlined so that processing them is more efficient? You betcha. Can certain entities or uses be pre-approved, requiring only a cursory credit review to proceed with closing? Even better. Can we train all the service providers in your community to access the tools and utilize the new process? Absolutely.
This evolution inverts the traditional orthodoxy of building policy around programs. More and more, we’re seeing programs built around policy. For instance, when Enterprise launched its Enterprise Green Communities criteria in 2004, it immediately set to work making those standards public, and having them adopted in state LIHTC award procedures. “We created the carrots that drew resources to the initiative,” Ludwig says. This allowed Enterprise to deploy other green building loan products and, in the process, learn heaps more about evolving market needs and design consulting activities it hopes will be revenue generating.
h6. Staying the Same = Change
The needs of CDCs themselves have changed. “In the 1980s, NFF was lending to a largely unbanked segment of the nonprofit sector,” says Bugg-Levine. “Now the banks understand that these [nonprofits] are viable borrowers.” He points out that, from a mission perspective, this is a success for the intermediaries. They nurtured this particular class of borrowers with special loan products, reduced borrowing rates, and flexible lending terms, and now many CDCs can borrow directly using conventional finance.
The bad news is they can now borrow directly using conventional finance. What’s an intermediary to do? “One of the greatest things I ever did was to start applying a ‘value added’ lens to all our work,” says De Santis.
It used to be that CSH and its colleagues did the deals that others didn’t want to do. Now they are doing the deals that other folks simply can’t do.
Need a partner with a deeper balance sheet to support that LIHTC deal? An intermediary will find one and help you structure the relationship. Need some soft predevelopment capital or a credit enhancement on a new project because you don’t have deep pockets? Intermediaries aggregate cash (including mission-related capital) with a wide range of risk tolerances and flexible uses, taking risk on their own balance sheet to offset yours. Got a complicated, high profile project that’s entangled with some reputational risk or a testy community of stakeholders? Alongside new strategies for engaging other sectors, intermediaries have been building insights and alliances that can help you trim some thorns.
And this ain’t small potatoes. The National Equity Fund just had its two biggest years running. Enterprise has built more than 150 funds, including being one of the partners in the foreclosure abatement-focused Mortgage Resolution Fund, that address different facets of the sector. Its Multifamily Mortgage Finance group recently merged with Bellwether Real Estate Capital, a multifamily and commercial mortgage originator.
h6. Stuck in the Middle With You
Intermediaries have become tough old birds. Given that the entire sector is probably just over 40 years old, these entities have seen a lot of bright ideas come and go. In the end, this may be their single greatest strength: they understand the unique business cycles, the key relationships, the bureaucratic mechanics, and the deep-rooted needs that compel the forces behind the machinery. Building on this knowledge and their aggregated heft, they can wedge together a transaction or relationship like nobody else. They fill a critical gap where the knowledge and practice of others cannot reach, simply because the capacity to know what they know requires an entity built they way they are built. If this sounds circular it is intentionally so. Intermediaries have evolved within a closed system catering to that system’s needs.
But there’s something else. The intermediaries have long been the research and development arm of the community development sector, providing classic “idea engineering” services. Only there’s a twist. The goal is to create a non-proprietary product, an anti-patent, a dress pattern down to the stitch work that’s hung in the shop window as marketing. While seldom recognized, this may be the single greatest contribution of the intermediaries to the sector. The ability to aggregate just enough capacity and intelligence to try, fail, flounder and evolve, then turn all the results over to someone else (often including the credit for the innovation). The intermediaries do what individual nonprofits, funders, financiers and public partners cannot or will not do: spend resources to define innovation in a sector where returns are sub-marginal to negative. Why? Because that’s how you keep growing your mission.
Michael Hickey currently serves as Vice President of Development for the Fund for Public Schools. He writes the Man-About-Town blog, http://man-about-town.org.