Issue #129, May/June 2003
Learning from Adversity
The CDC School of Hard Knocks
By William M. Rohe, Rachel G. Bratt and Protip Biswas
When East Side Community Investments, Inc. experienced financial crisis and ultimately failed, it was a wake up call to all who care about community development corporations and the work that they do. (See Shelterforce #104.) East Side had been one of the biggest and most productive CDCs in the country.
Previous studies of CDCs focused on their rapid growth and success across the country. However, the time has come to take a close look at the failures and to learn from them. East Side Community Investments was not unique. Our research into CDC failure led us to examine more closely four other organizations that failed or were forced to downsize, and to draw lessons from their experiences so that other CDCs could avoid their fate.
Milwaukee: Community Development Corporation of Wisconsin (CDCW)
In the late 1980s Milwaukees leaders in both the public and private sectors saw a need for a large developer of affordable housing. CDCW was created in 1989 to develop small- to medium-sized apartment complexes in the predominantly African-American Northside area. Northside has the highest poverty rate in the city and many older housing units in need of repair. Facing political pressure from the city, its major funder, CDCW also took on properties from other CDCs that had gone out of business. Many of these properties needed repair and had problem tenants and low occupancy rates. CDCW staff spent considerable time turning these developments around.
By 1997 CDCW had developed 21 separate housing projects with a total of 722 units, and was the property manager for its own and other developers rental complexes. The organization had a staff of 25 and an annual operating budget of more than $1 million.
But financial problems also began to surface in 1997. For some time CDCW had been losing money on its property management operation because of soft demand for housing in the Northside area, inadequate tenant screening and personnel problems. Unable to compete effectively with the higher salaries and better working conditions offered by private management companies, CDCW was having trouble keeping competent management staff. The financial losses did not create an immediate crisis because the organization was able to cover the deficit with funds generated from its multifamily development work.
In 1998 CDCWs development activities were also affected by changes in city policies. CDCW was staffed to rehabilitate multifamily developments using the Low-Income Housing Tax Credit (LIHTC) program, but the city decided to focus its resources instead on the purchase, rehabilitation and resale of single-family homes. The city allowed neighborhood organizations to determine how Community Development Block Grant funds would be spent in their areas, and these groups drastically reduced the funding for affordable housing. CDCW was unable to keep up with the rehabilitation of single-family units and had trouble selling units once they were rehabilitated. This combination of problems severely reduced CDCWs operating income and the red ink began to spread.
CDCW belatedly sought assistance, but was unable to secure funding. City officials felt that the organization was too far in debt and was unlikely to overcome its problems. CDCW asked its lenders to restructure their loans, but without city support the lenders were unwilling to do so. In March 1999 CDCW filed for bankruptcy and closed its doors.
Minneapolis: Whittier Housing Corporation (WHC)
The Whittier Housing Corporation was an offshoot of the Whittier Alliance, which was created in 1978 to revitalize Minneapoliss Whittier neighborhood. For the next 12 years the alliance pursued its mission by sponsoring a variety of neighborhood improvement activities, including buying and rehabilitating multifamily housing developments.
In 1990 the Whittier Alliance was chosen to participate in the Neighborhood Revitalization Program, which provides $20 million a year for neighborhood development and improvement projects in Minneapolis. The Alliance developed a plan that provided additional affordable rental housing and social services for the areas lower-income residents. But homeowners and private apartment owners got wind of the plan, orchestrated a takeover of the Alliance and developed a plan that did not include rental housing. The new board had little interest in continuing to own and manage the multifamily properties the Alliance had developed during the 1980s, so WHC was established as a separate organization and the properties seven leasehold cooperatives with 16 buildings and 158 units were transferred to it.
Many of these buildings needed further renovation. WHC sought assistance from the Interagency Stabilization Group (ISG), a consortium of the citys major funders of CDCs. But the ISG would not provide funding without seeing a stabilization plan; when WHC complied, the plan was judged inadequate. Eventually, the ISG provided some support, but it was not enough for extensive rehabilitation. WHC staff also had difficulty finding effective property management companies and the buildings continued to decline. At its height WHC had a staff of three a director, a co-op organizer and a secretary and contracted with private asset and property managers. In 2000, after a final attempt to secure additional equity investments from the National Equity Fund, WHC went out of business.
South Dallas: Oak Cliff Development Corporation (OCDC)
OCDC was formed in 1987 by the housing outreach program of a local Lutheran church in response to an overwhelming demand for affordable housing in the South Dallas area. Since its inception OCDC has focused on developing homeownership projects for low- and middle-income families with support from the regions financial and philanthropic institutions. In 1993 OCDC was made administrator for the Dallas in-fill housing program, which enabled the organization to focus on new construction of single-family homes. With adequate administration fees for the expanded services provided by the contract, OCDC hired additional staff. At its peak, OCDC had over eight full-time staff members.
But even as OCDC flourished, several experienced staff members moved on to better positions, leading to project delays. The organization also had to contend with vocal community opposition accompanied by unfavorable media and political attention to its Independence Park Project, a planned development of 112 new homes. The most significant factor leading to the organizations downsizing, however, was the loss of the in-fill housing contract and the subsequent reduction of OCDCs operating budget.
The city elected not to renew OCDCs in-fill housing program contract when it expired. Caught unprepared, OCDC unsuccessfully appealed the decision. During this time holding costs and legal fees drained the organizations reserves. Housing production suffered greatly, cutting into OCDCs income from developer fees. OCDC also was unsuccessful in finding alternate sources of operating support, and was forced to reduce its staff to an executive director and one part-time employee, greatly diminishing its production capacity.
Philadelphia: Advocate Community Development Corporation (ACDC)
ACDC was founded in 1968 and was among Philadelphias first CDCs. The organization, which completed its first housing project in 1971, also developed an area master plan that led to positive changes in public policy, including more financial resources for target neighborhoods. ACDC also undertook several larger housing projects and led a successful effort to designate the Diamond Street area the citys first historic district. By 1998 ACDC had completed 365 houses.
Throughout these years, the organization received widespread recognition for its work and was well supported by funders. Much of the organizations success is attributed to the charismatic leadership of its founder, who served as president of the Board of Trustees until 1996. She was also de facto executive director; for most of her tenure ACDC did not have an executive director. During these years, the number of permanent staff members was kept to four or five. The organization relied on consultants and contract employees to supplement its staff.
ACDC began facing challenges when its founder developed health problems and was unable to devote the same time and energy to day-to-day activities. Staff members could not handle the complexities of development projects. After the founder resigned, the board found it difficult to provide leadership, especially after several other members resigned. Communications with funders suffered and ACDC lost much of its operating support, which led to staff layoffs. Several development projects stalled and became community eyesores.
The search for a new executive director was not easy for ACDC. The first two choices did not work out, and the thirds tenure was cut short by illness. Development of new projects decreased, along with developer fees. Without adequate operating support the ACDC was forced to downsize its staff. Existing plans went unfinished, and for several years virtually no new projects were started.
These four examples lead us to several suggestions for avoiding downsizing and failure.
1. Develop and periodically revise strategic plans. Changes in local housing markets and city policies were two major problems faced by the downsized and failed CDCs. Strategic planning can help anticipate and respond to these changes. In Milwaukee the weakening demand for housing in CDCWs target area was at least partially responsible for the unexpected turnover and vacancy rates in the organizations rental housing portfolio. Similarly, a soft rental market in the Whittier neighborhood in Minneapolis did not allow for rent increases that were needed to cover rising maintenance and repair costs. CDCs need to read the market and position themselves to remain competitive.
Unanticipated changes in city policies also played an important role in the failures of CDCW and WHC and in the downsizing of OCDC in South Dallas. Strategic planning that assesses the political environment may help organizations anticipate, influence and effectively respond to changes. CDCs need to be involved in formulating, reviewing and commenting on city policies that may affect them.
Strategic planning is neither cheap nor easy and many CDCs will need financial support and technical assistance to implement this critical exercise.
2. Diversify activities, geographic areas served, clientele and sources of funding. CDCs must tread a thin line between diversification and specialization; a strategic plan should address how much it should do of either. Specialization requires a narrower range of staff expertise, which is deepened with each new project, but also makes an organization vulnerable to changes in funding priorities and community desires. Diversification makes an organization less vulnerable to those changes but may lead to performance problems caused by a lack of staff expertise or financial resources.
CDCs that failed or were downsized tended to have narrowly focused missions in terms of activities, geographic areas served, clientele served and funding sources. For example, OCDC specialized in in-fill housing and WHC specialized in multifamily development. They had little to fall back on when local support for these activities evaporated.
Also, CDCs that targeted small and/or homogeneous geographic areas were vulnerable to changes in market conditions in those areas. The units owned and managed by both CDCW and WHC were concentrated in neighborhoods where the demand for housing decreased significantly. Rents could not be raised to meet higher operating costs and financial problems ensued. A larger, more diverse target area allows a CDC to diversify the location of its properties and reduces the organizations vulnerability to market weakness.
Housing very low-income households typically requires deeper subsidies that are difficult to come by these days, and CDCs that focus exclusively on these households may increase their financial vulnerability. In Minneapolis all of WHCs housing developments served very low-income households that could not afford the rent increases necessary for proper building maintenance. A portfolio that includes housing for moderate-income households may provide enough revenues to cross-subsidize developments for very low-income households and generate more community support.
CDCs that mostly rely on one funding source seem to be particularly vulnerable. Abrupt changes in the policies of city agencies, foundations, or other principal funders can leave CDCs with little time to find replacement funds. The CDCs in Milwaukee, Minneapolis and Dallas were all heavily dependent on single sources of funding which left them in serious financial crises when that funding was interrupted. Diverse funding sources also provide CDCs more autonomy and some protection from the dictates of funders who want CDCs to adopt certain agendas or programs at the expense of local concerns.
The decision to diversify should be approached cautiously and should involve both residents and the local CDC support community. It is also likely that diversification is not possible or desirable for very small CDCs that are just beginning to gain expertise in a given area. Becoming proficient in delivering or carrying out the groups core set of activities is important for all young CDCs. There also may be risks associated with increased diversification that are not evident in our case studies; if not done carefully, and with sufficient resources, it may lead to poor performance and loss of funder or community support.
3. Work hard to earn and maintain the support of residents. A lack of community support for various CDC activities was an important factor in the failure or downsizing of three of the organizations studied. In Minneapolis vociferous community opposition to the Whittier Alliances focus on rental housing for very low-income households led to the takeover of the Alliance and the creation of WHC. Similarly, OCDCs plan in Dallas for a new 122-unit subdivision of affordable homes generated considerable community resistance and contributed to the loss of city funding.
Board members and staff need to build support for CDC activities by opening up a dialogue with community residents, involving them in the review of proposed activities and inviting them to join committees. The board should periodically convene general meetings with the larger community and hold social events in those areas where projects are being developed. CDCs also must ensure that the properties they own or manage are well-run and maintained.
4. Pay more attention to training and retention of board members and staff. Project development problems were implicated in all four case studies, including inaccurate financial projections leading to cost overruns, overly optimistic underwriting assumptions, inadequate cost control and accounting systems and poor quality construction. Property management problems also consistently appeared among the four CDCs, including inadequate procedures to screen and evict tenants, inadequate property maintenance and lack of social support services for tenants. Passive boards were another factor in organizational decline.
These problems may have been avoided if staff and board members had periodic training to provide strategic leadership and set policy guidelines for staff. We need to better understand why many staff and board members are not taking advantage of national initiatives to increase CDC capacity, and ensure that they receive the training they need. In particular, what may be needed is access to tailor-made on-site consulting help. Outside experts, who could be sent to a CDC to work with the board or staff on a range of issues, or who could help sort through issues with funders, may be the most important type of assistance that is needed.
Many organizations found it difficult to retain experienced staff because city agencies and private sector companies pay substantially higher salaries. Organizations need to offer better staff salaries and benefits to increase retention, and must plan for leadership transitions. Of course, public agencies and local and national nonprofit intermediaries can ensure competitive salaries and generally support CDCs by instituting programs that provide funds to cover core operating expenses. This support can be contingent on standards of productivity and professional competence.
5. Maintain frequent and open communication with support community and respond quickly to problems as they develop. Communication problems played an important role in all four case studies: between executive directors and their boards, between executive directors and funders and between executive directors and city officials or politicians. When CDCs are undertaking potentially controversial projects, they would be wise to inform and involve local political leaders early in the process. This is particularly true of CDCs that rely heavily on support from local government.
Identifying and acknowledging problems as they arise is also important. CDCW management did not ask for help in addressing property management problems until the organization was in deep financial trouble. Similarly, several of those interviewed in Minneapolis felt that WHCs problems should have been dealt with sooner and more decisively. Funders also should have stepped in sooner, either to provide the necessary support or to find other organizations to take over the units.
The cases presented here signal some important warnings. Strategic planning that assesses the opportunities and threats in the local political and economic environment, and that assesses the organizations mission in light of changes, should be a standard practice among CDCs. Staff training and retention also helps create effective and financially sound organizations. Ongoing communication with both the residents of the service area and funders is also critical to maintaining political and financial support. Finally, if CDCs do get into trouble, it is important that they identify the problems quickly and reach out to their local CDC support communities for assistance. For their part, communities need to respond positively by helping CDCs work through problems so they can continue providing vital services to their communities.
In addition to the steps that CDCs can take to foster their own vitality, there is a role for those organizations and other entities that support the work of CDCs.
Create a support community
Develop performance standards
Provide adequate core operating support