CDCs Adapt to the New Normal

CDCs and their support organizations consider what it takes to weather the recession—from business model changes to different funding streams to mergers.

Courtesy of North Shore CDC.

For many community development corporations, these are especially challenging times. This is true whether they are urban or rural, large or small. A shrinking pie of funding, restricted credit, competition from private developers, greater need in their neighborhoods, and the undoing of much of their previous successes via the foreclosure crisis, among other things, have CDCs searching for new ways to develop financially sustainable real estate programs, or just stay afloat. Some are finding ways to become more sophisticated and disciplined that allow long-term sustainability to be balanced with commitment to mission and impact. But not every community-based group will thrive, or even survive, in this highly competitive environment.

Some CDCs are partnering with private entities, spinning off certain functions so they can focus more on what they do best. Many are looking for new sources of revenue, whether by eking more out of those developer’s fees they are so familiar with, or finding new fee-based programs they are well-suited to manage because of their unique roots in particular neighborhoods or metro areas. Many are also working to increase cash flow from existing properties through energy efficiency improvements and improved property management or by refinancing older projects in ways that generate cash, improve the physical stock and ensure longer term affordability.

But regardless of who they partner with or what programs they take on, their unique role as place-based organizations with a commitment to serve people with low- and moderate-incomes is what should continue to define CDCs, says Joe Kriesberg, who directs the Massachusetts Association of CDCs (MACDC). “At the heart of the community development field is a long-term commitment to engaging local residents and stakeholders in a collective effort to create places where low- and moderate-income people can thrive,” Kriesberg says. “While the methods and tactics we use may change, the core values and goals remain as valid today as they ever have.”

Kriesberg spent the past five years talking with member groups in his state about how they can grow smartly, yet stay true to their core mission. “We began this dialogue because there was an angst within our field about what role CDCs should be playing in our rapidly changing world and how we could sustain that role,” he says. He noted that one member in a rapidly gentrifying neighborhood questioned what his CDC’s long-term mission should be and how it could survive given the intense competition from private, market-oriented developers and a shrinking constituency of low- and moderate-income families.

MACDC joined with the Boston office of LISC and other stakeholders to establish the Community Development Innovation Forum in 2008 to engage in a sector-wide discussion about the future of the field. The forum generated a number of concrete recommendations, including a renewed focus on management of existing assets to stabilize revenues and strategies for finding new funding sources not directly tied to real estate development.

New Tax Credits

In the summer of 2012, Massachusetts enacted the Community Development Partnership Act, following a two-year campaign led by MACDC. The law creates a tax credit to benefit CDCs, with awards of up to $150,000 per year for an organization. It is notable that the law comes with significant criteria that community groups must meet to qualify. The law reads, “The selection process shall favor [CDCs] with the highest quality community investment plans and strong track records.”

“The Legislature voted to support high-impact community development with flexible resources that will enable groups to achieve higher levels of performance,” Kriesberg says. “What’s more, the Legislature decided to do this through a tax credit program that will ensure one dollar in private funding for every dollar in state funding. This doubles the dollars available and helps to target resources to organizations that can attract private investment.”

Tax credits for CDCs already exist in a few other places, including New Jersey and Pennsylvania. Philadelphia created a tax credit program in 2002 and to some extent it served as a model for those that have followed. That program has created partnerships between businesses and the 35 CDCs in which they have made financial investments.

The Massachusetts bill was distinctive in that it said a community investment plan had to show how residents and stakeholders were involved in crafting the document. The funding, moreover, is not limited to brick and mortar projects. “This program is community-centric, not real estate centric,” Kriesberg noted.

Dave Christopolis, who directs the Hilltown CDC in rural western Massachusetts, says that if his organization receives funding through the tax credit program, he will definitely use it to do more community engagement. He views it as a tool to help his organization move out of the crisis mode it has been in for several years.

“Our main challenge is to diversify our sources of revenue,” he says. Hilltown had historically relied on a federal Community Development Block Grant (CDBG) for most of its funding. In recent years that source has shrunk and last year the agency didn’t get the grant at all. Christopolis was forced to cut two full-time positions from an already thin staff. He was able to replace some of the lost CDBG revenue with a contract to manage another federal program. He also negotiated an exception from the state’s cap on per-unit costs, arguing that the state’s cap on developer fees was too burdensome since Hilltown built mostly scattered site housing to serve a very rural area.

“My goal is to have at least one full-time housing person and an assistant,” he says. “I can’t be overly ambitious, given this funding environment. I’m trying to balance the need to engage the community more with the need to find work that we can do more efficiently in the office.”

New Partnerships

Enterprise New York’s Smart Futures Initiative works intimately with CDCs facing challenges to figure out what they need to change to stabilize their finances. The initiative has helped two community developers in its service area so far and hopes it can serve as a model for other parts of the country.

One of its clients, Community League of the Heights (CLOTH), has operated in the Washington Heights neighborhood in Manhattan for 60 years. CLOTH has been involved in real estate development since the 1970s; in recent years, maintaining previously developed apartment buildings had become a drag on the organization’s energy. In response, CLOTH opted to outsource management of its buildings to another company. Then the CDC decided to partner with private developers when planning new housing. On a recent building project, 552 Academy Street, CLOTH is splitting the developer’s fee with Alembic, a for-profit developer with a shared interest in affordable housing. Alembic is providing a guarantee for the mortgage, which CLOTH didn’t have the equity to do.

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For the CDC, the partnership brings additional expertise to a real estate deal, without more staff or consultant costs. For the private developer, the arrangement gives them access to public money (in this case, from the City of New York) that can only be channeled through a nonprofit like CLOTH.

“From an ideological standpoint, our mission is very much a social service one,” says Yvonne Stennett, CLOTH’s executive director. But, “at the end of the day, with real estate, you have to bring in the income. You have to strike a balance. With the partnership, we can focus on moving buildings through construction or rehab.”

“I don’t see this as a step back for the organization,” adds William Frey, director of relationship management for Enterprise New York. “I see it as their becoming more sophisticated. What is critical is looking at your opportunities in a community that has come back to a certain extent. The most important task is to ensure those buildings are managed well.”

From Projects to Working Capital

Much of the dialogue on how to build the capacity of CDCs and other housing nonprofits in these challenging times has been occurring through a collaborative called Strength Matters, made up of three other networks: Stewards of Affordable Housing for the Future, the Housing Partnership Network, and NeighborWorks. The collaborative has issued several white papers in which it encourages affordable housing developers to adopt metrics to standardize their financial management methods and to participate in peer exchanges where they can learn and share this information. Such metrics are increasingly important if CDCs want to attract investment.

In a 2010 paper, “Building Stronger Nonprofits in Housing and Community Development,” Strength Matters lists four primary objectives for nonprofits engaged in housing development: improved organizational operating performance; transparency in financial reporting; increased access to capital; and aligning public sector policies with sustainable ownership.

The paper makes the bold claim that “at the right scale and with the right business plan, the stronger nonprofits have the potential to earn sufficient revenues to obviate the need for general operating support from the government or philanthropic sector in order to deliver the desired public benefits.”

“There’s a lot of shared learning to be done between lenders, social investors, and developers to encourage enterprise rather than project-specific investment,” says Alexandra Turner, who staffs Strength Matters as part of her work with Housing Partnership Network. “Part of the challenge is that a lot of the debt and equity that developers can attract is for projects. What organizations need is working capital — you need the ability to move money in the market.”

Scale

Strength Matters avails itself to affordable housing developers of all sizes, whether they are active nationally, in multiple regions or in a single metro area. While Strength Matters does not focus on the question of scale in particular, the 2010 paper does point out how larger organizations and economies of scale can mean more efficient delivery of services.

“The government should consciously take advantage of the administrative cost-saving power of economies of scale,” the paper reads. “Some policies could explicitly encourage or facilitate the transfer of property ownership from those owners struggling to cope with today’s complex environment to larger, more diversified organizations. Likewise, policy could encourage mergers and acquisitions in order to build additional capacity and geographic diversity in the operations of the resulting entity.”

“We’ve tried to say it’s not about size, but about impact and performance,” Turner says. However, “on most cases, to improve performance, that involves growing bigger, because scale helps you do other things. But it’s a relative term and very market-dependent. Scale is a means to an end, not a goal in itself.”

Indeed, some in the community development field question whether scale should even be a priority. Many CDCs achieved great success precisely because they were small and closely attuned to the needs and wants of their neighborhoods. It’s important for them to continue to focus on engaging their residents and carrying out small projects as well as big ones.

Whether and how they can do that while growing and partnering to achieve the kind of organizational strength and stability Strength Matters is aiming for is a debate that is sure to carry on in the coming years.

Series NavigationThe Changing Model of CDCs >>Growing a Stronger Nonprofit Housing Sector >>
David Holtzman is a planner for Louisa County, Virginia, a freelance writer, and a former Shelterforce editor.

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