It is no secret that community-based CDCs in Chicago have recently been experiencing trouble on several fronts. Despite their efforts, the deterioration of Chicago’s neighborhoods continues, accelerated by the flood of drugs and the proliferation of gangs. The buildings CDCs have spent 15 years rehabilitating and managing are showing signs of wear, vacancy, and pools of red ink. Federal resources essential to subsidizing further acquisition and rehabilitation of properties are drying up. Groups that have closed on at least one building each year for the last seven years will be lucky to gain approval for one building in the next two years. Fewer projects mean fewer developers fees, the funds used to pay staff and subsidize operating deficits.
To add insult to injury, after government agencies and private lenders refused to subsidize the rehab of projects to the level necessary for viability, they then question the capacity of nonprofit developers to manage property relative to their for-profit counterparts. Finally, as if to tweak their collective noses, in the pages of Shelterforce, (see “Community Building and Community Organizing” in Jan/Feb ’96) community organizers attack CDCs for being only concerned with financing bricks and mortar to the exclusion community empowerment. It is clearly time for community-based CDCs to think strategically about how they can survive the onslaught of challenges currently facing them.
One problem these organizations will need to immediately address is whether to maintain their development staffs, who are no longer able to do the work and earn the fees that they recently had. Some Chicago CDCs had as many as three or four full-time developers working to produce affordable housing in one neighborhood. The current reality is that a neighborhood-based organization probably can no longer support its own development staff. Therefore, an organization is faced with the choice of either paring down its staff to a level it can afford, or using its excess capacity other ways. One way a CDC can preserve the staff capacity that cost so much to develop is to exploit its excess capacity by applying its development expertise beyond its own neighborhood.
Lakefront SRO
Three years ago, Lakefront SRO, a CDC whose mission was to rehabilitate and manage single room occupancy buildings with supportive services for the homeless in the Uptown, Edgewater, and Lakeview neighborhoods, brought in consultants to implement Total Quality Management (TQM) procedures. In addition to analyzing and improving the processes for applications, rent collection, and project design, TQM forced Lakefront to think strategically about the consequence of the election of the 104th Congress. “We knew that we would not be able to continue to do the same work next year that we did last, so we had to design a strategy to prepare for this inevitability,” says Executive Director Jean Butzin. Lakefront cut its budget, reorganized its management structure, implemented quality and continuous improvement processes, banked a portion of its developers fees, and began to look for other revenue sources that fit its mission.
Lakefront SRO began contracting out its development services to organizations outside its neighborhood for turnkey projects. In addition to allowing the Lakefront to earn a profit, acting as a development consultant employs its development staff, helps meet the demand for housing services in the city, and furthers its mission of preserving and creating SRO housing in Chicago. Lakefront SRO is currently involved in two projects where its has been contracted to obtain financing, manage the construction, and rent out the property, at which point it will turn the keys over to its community partner.
The first project is the Renaissance Apartments, formerly the Wabash YMCA, an abandoned SRO building with 107 units and a recreational facility on the Near South Side. This building was an important institution in the “Black Metropolis” in the 1920s and 30s where many of Chicago’s African-American leaders first learned to swim. Its partner is the Renaissance Corporation, a consortium of local churches that formed to restore this treasure. “Working with an emerging organization has its challenges,” say Butzin. “We need to do a lot of hand-holding.” Another challenge is working in partnership with an organization with a different mission, but Butzin says it is well worth all of the work to develop this important and historic building.
Lakefront’s second turnkey is St. Andrew’s Court, a 42-unit SRO for ex-offenders on the city’s Near West Side. Its partner in this project is St. Leonard’s House, a 40-year-old social service agency that helps 350 ex-offenders annually rebuild their lives after release from prison. St. Leonard’s House and its Executive Director Bob Doherty bring a lot to the partnership. Doherty has raised $250,000 in donations for rental subsidies in very short order – half the funds needed to make the project’s financing feasible. The partnership has been profitable all around. Doherty says, “Lakefront SRO’s staff have so many skills that, quite frankly, I don’t want to have. It’s been an empowering process. Working with Lakefront has enabled us to do something that we couldn’t have done alone.”
Both of Lakefront’s turnkeys have been awarded funds from the federal government’s McKinney Homeless Assistance program, the City’s Department of Housing and the Illinois Housing Development Authority. When asked, “does this put Lakefront SRO in its role as consultant in competition with its own deals in applying for limited resources?” Butzin responds, “the allocating agencies will have to learn to treat us like other development consultants who bring many different organizations’ deals to the table.” The one important difference favoring Lakefront SRO’s consulting services over a private consultant’s is the strength of the organization standing behind its work.
Century Place Development Corporation
Century Place Development Corporation (CPDC) began with a citywide mission of partnering with neighborhood organizations to build and strengthen community. Executive Director David Sliwicki sees diversification as the key to the health of his CDC. CPDC is diversified by product type, developing a continuum of affordable housing ranging from for-sale single family and multifamily family-sized rental units to supportive housing in SROs for formally homeless individuals; by geography, building links to communities in the north, south, and west sides of Chicago; and by services, providing consulting in development, asset management, technical assistance and eventually, property management.
The diversified approach allows CPDC to respond to a variety of affordable housing challenges in different communities, insulates its portfolio against negative market forces in a particular neighborhood, and develops relationships with a region-wide group of partners. As opposed to Lakefront SROs turnkey approach, CPDC’s strategy is to develop lasting relationships with each community in which it works.
When HUD gave the Lakeview Action Coalition (LAC) a week to submit a proposal to develop a 90-unit HUD-owned property at 712 Division Street, LAC approached CPDC, which quickly assembled a winning proposal. LAC secured the support of the alderman and county supervisor, while CPDC worked to obtain financing from Equitable Real Estate Investment Management, the City’s Department of Housing, the Illinois Housing Development Authority’s Low Income Housing Trust Fund, and the Federal Home Loan Bank Board’s Affordable Housing Program. CPDC owns the property and received a developers fee. LAC will refer tenants to CPDC when the project is complete, and it, in turn, has benefited from the partnership by gaining a track record. LAC is already planning its second project, a seniors’ building, in partnership with a private developer.
Sutherland Apartments
In 1988, CPDC developed the Sutherland Apartments, 154 units of studios and one bedrooms in the Kenwood community on the South Side. The building was previously known as the Sutherland Hotel, housing a nightclub famous for its role in promoting jazz in its earliest days. The 1988 plans included only a minor rehab of the auditorium, which is used intensively as a community meeting space for weddings, performances, dinners, and other public events. The Sutherland Community Arts Initiative, a local arts group composed of local musicians and other artists, many of whom live in the building, wanted to renovate the space and approached CPDC. Together they applied for Empowerment Zone funding and received a grant of $300,000 for the auditorium renovation. While CPDC will earn a developers fee for its role in the development, the Sutherland Community Arts Initiative will choose the manager for the renovated space and will receive a portion of the ongoing revenues for rental of the space. In addition, CPDC created the Sutherland Community Investment Fund, which will provide a replenishing pool of funds for scholarships and other local needs. CPDC agreed to create the Investment Fund to demonstrate its long-term commitment to the community.
“We do not see ourselves as an alternative to the locally based CDC, but rather a complement,” Sliwicki says. Many neighborhoods do not have CDCs with the capacity to develop real estate, and it would be inefficient for each community to develop that capacity, given the expense. CPDC is also active in the Chatham neighborhood, which currently has no neighborhood-based CDC with development capacity. CPDC is building 10 single-family homes across the street from a 72-unit building it is renovating for supportive housing. CPDC’s building of the new homes convinced the community that its vision of an improved neighborhood was sincere. CPDC takes the time to learn what the community wants and needs and employs a full-time manager of community initiatives to build the trust in the neighborhoods in which it works.
The growth and success of Lakefront SRO and CPDC present a novel opportunity and challenge to community-based CDCs in Chicago. Partnering with community organizations can be an effective way for a citywide CDC to use its development capacity. Citywide CDCs can efficiently provide community development services to nonprofit organizations. This situation may encourage community-based CDCs to abandon their efforts to maintain their development staffs and focus on organizing, defining community needs, community planning, and creating pressure for resources. Alternatively, community-based CDCs may broaden their missions and start looking for opportunities to use their expertise citywide.
While partnering with community-based organizations can be an effective way for citywide CDCs to expand into new neighborhoods, the experience of working in collaboration may be challenging. Partnerships work best when both parties are experienced and bring different, but complementary, expertise to the table. To gauge whether an organization will make a good partner, citywide CDCs should examine the organization’s track record, the experience of its executive director, the capacity of its board, and the board’s commitment to the project. Emerging organizations without track records, which have not hired an executive director, have weak and untrained boards, and are not fully committed to the project, will make challenging partners in need of much assistance in organizational and real estate development.
Citywide CDCs must evaluate whether the compensation they hope to achieve justifies their participation in certain partnerships. To determine whether a partnership is financially prudent, CDCs must consider both the time and energy the partnership will consume and the amount of risk they are being asked to absorb. While the value of the time and effort is easily converted into an hourly rate of compensation, risk is more difficult to evaluate. If a community partner organization has no significant assets, an equity syndication source may insist that the citywide CDC be the general partner in a limited partnership, or a public finance agency may insist that the CDC be the guarantor for the project’s financing. When partner organizations lack assets, citywide CDCs must make sure this risk is adequately compensated. These CDCs must assess the likelihood of a situation occurring in which they would have to take financial responsibility for the project.
Before entering a partnership, a citywide CDC should determine how it will split fees with its community partner, and whether it will assume the entire financial burden. While there are no hard and fast rules, this determination should be made beforehand. Community partners who are not doing the work and are not taking any financial risk, but are lending their name and reputation in the community to a partnership project, can still receive an important non-monetary reward for their participation: a track record. With a track record, an emerging organization can decide whether to do its own deal in the future or continue to leave the development expertise to someone else.
Being mindful of the challenges as well as the potential benefits of such partnerships will allow organizations to grow beyond their boundaries, diversify their real estate risks, and enhance their abilities to achieve their mission of providing affordable housing to those in need and improving the communities in which they work.
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