Community Development Joint Ventures

Editor's Notes

• #2: 9:00 Welcome and Introductions (15 minutes) Local Program Director provides general welcome and introduces Trainer. Ask participants to introduce themselves by providing their Name Organization Whether they are working on commercial projects currently Whether they have prior experience with commercial If participants are sitting with their co-workers, ask them to move to different tables
• #3: Trainer: We are going to talk about a range of different structures that all allow a CDC to work closely with a private company in order to build a project that the CDC might not be able to undertake alone.
• #4: Joint ventures can also be structured as “General Partnerships” in which both partners are jointly and severally liable.
• #9: Inadequate experience: It may be a CDC (1) has not done any physical development yet, (2) has not attempted a project of large scale before in a particular area such as housing, or (3) is trying to branch out, for example, from housing development into commercial or retail space development. The CDC can access the technical expertise and experience of a for-profit business in a joint venture arrangement.   Lack of staff. The CDC may have a small staff or no staff at all, or its staff may be part-time or not have the available time required to carry out the development.   Opportunity to achieve higher production scale. Without the for-profit the nonprofit might not be able to do a particular project or might have to do a smaller project of less impact.   Core skill building opportunity. If structured correctly the arrangement can present a capacity building opportunity for the CDC with the for-profit in a mentoring role. Lack of financial strength. It may be that a CDC has a long track record, solid staff with lots of experience and capacity, but that financially it is weak.   Access to development financing through for-profit partner. A for-profit partner may have access to conventional financing sources that a CDC does not. The developer may be in a strong financial condition or because of its track record and character able to access a significant amount of capital that the CDC cannot attract on its own.   For-profit developers cite a number of reasons for partnering with CDCs including:   Access to the community. The project may be in a community where a for-profit developer has not done business before. CDCs are typically more in touch with the community and can better identify the needs.   Site Control. The CDC may have site control of a key property which is critical to a project’s viability or better access to a property through a Redevelopment Agency or City.   Support among community residents. The CDC may be able to garner support among neighborhood residents for a difficult project, get local elected officials on board in favor of the development, and help counter any nimbyism that could derail the project.   Access to public funding sources. This is often one of the strengths a CDC can bring to the relationship. Many potential sources of project subsidy either provide a priority for or limit access exclusively to nonprofits. Federal grants such as HUD’s HOME and Community Development Block Grants (CDBG) programs, and Health and Human Services’ Office of Community Services (OCS) and the Federal Home Loan Bank’s Affordable Housing Program make funds available to nonprofits that might not be available to for profit developers.   Access to attractive debt sources. The CDC may have access to low interest financing (LISC, for example) that is unavailable to the for-profit. Not only is this a financial benefit, but it often pays the early costs of the project at its riskiest stage, something many banks are unwilling to do.   Access to tax credit allocations. This can occur through the CDC’s site or project control over a high scoring LIHTC project. Without access through the CDC to the credits, the for-profit would have difficulty getting the deal. CDC joint ventures may be more competitive in obtaining New Markets Tax Credits as well.   Pool of interested job applicants. For an economic development joint venture, a CDC can be a pipeline for interested local residents to apply for the jobs to be created. Not only may this speed the filling of the jobs, but it can provide the for-profit co-venturer with some helpful initial screening of job applicants.
• #11: The deal. Often the CDC will bring a deal concept to the table along with predevelopment work that has been done, including possible title to the project property or at least site control. The more the CDC has developed the concept for the project and the more up-front work the CDC has done, the more attractive it can make the deal for a potential partner and the more leverage it will have over a prospective co-venturer during negotiations.   Knowledge of the neighborhood and neighborhood support. A community-based organization should know its target area(s) well and understand what the pressure points are and what the community needs, wants and will support. The CDC can shape a deal so it’s consistent with a neighborhood revitalization plan, thereby ensuring the project’s support and success and providing the joint venture partner with a marketing and acceptance comfort level not obtainable from a non-community-based business. The CDC also brings support from its client base and hopefully, the larger community.   Knowledge of the market. Related to the above point is the CDC’s knowledge of the market. Though the CDC may not have a definitive handle on all aspects of its market, it typically is in a much better position than a for-profit (particularly one not based in the neighborhood) to understand what the market is for housing, commercial space for growing businesses, retail services, community facilities such as child care and health centers, and charter schools.   Political Support. The CDC’s contacts with local political and administrative officials can be a huge factor in making the project successful. Beyond the obvious overt support for the project, it can translate into public subsidies and other support such as zoning, building and environmental reviews in a more expedited manner (or in some cases a zoning change to move the project forward).   Attractive Public and Private Funding Sources. Mentioned above, if the CDC can come to the table, even with preliminary commitments from such funding sources, it strengthens the attractiveness of the arrangement to the for-profit and gives the CDC added bargaining clout.
• #12: Technical Expertise and Experience. The for-profit will bring its real estate development skills and experience to the table. If the CDC is inexperienced, this is critical to successfully completing the project. Additionally, the for-profit’s experience and track record is critical in attracting support and funding for the project.   Staff Size. The for-profit will usually bring a complement of dedicated full-time staff to the project.   Financial Strength. The for-profit has access to funds that many smaller CDCs do not. They typically have established financial institutions that they work with and many times have access to their own company funds that can be used to finance the project. For example, in an Indianpolis deal where an LLC joint venture contracted with for-profit builders to build new homes on lots owned by the LLC the builders funded the costs of construction through their own financing sources.   Access to Conventional Funding. Separate from the issue of financial strength, the for-profit may have a relationship with banks or mortgage companies based on the for-profit’s “character,” i.e., its track record in completing deals skillfully, efficiently, on time, and within budget. These long-standing relationships providing access to financing may or may not correlate to the actual financial strength of the for-profit.
• #13: Trainer: LISC and ULI in Chicago led a joint study process to research CDC partnerships with private developers. A group of CDC leaders and for profit developers looked together at projects in Chicago and Boston and identified these keys to success. The whole report is in the binders.
• #14: These are some of the roles that Chicago study participants thought were typical and logical for each partner
• #15: These are characteristics that they felt each partner should look for in the other.
• #16: Some other general observations
• #17: Trainer: I am going to tell you some real CDC joint venture stories. These are true stories (though I have surely gotten some of the details wrong here and there). The CDCs featured have made some mistakes and have been generous enough to share their mistakes with us – so we can make new mistakes! Keep in mind that, while I am focusing on the challenges here, that these are great projects that you might read glowing profiles of in some other context.
• #37: These are the objectives that they identified for the New Horizons Center. In order to finance the project, their lenders pushed MBD to take on a development partner.
• #38: Trainer: Unlike Marin City, MBD decided to hire a development consultant who took day to day responsibility for most aspects of the project on a fee for service basis but left MBD in control of all the important decisions.
• #39: Trainer: This left MBD with only a small list of responsibilities – basically to oversee the consultant, approve budgets and line up public financing.
• #40: Trainer: The project has had mixed results. They created a large number of jobs for local residents but the project was late and over budget. Equally important is the fact that they burned through a number of staff members including two different Executive Directors during the course of the project. Rather than building staff capacity, it may have left them with diminished capacity. While they are preparing for another commercial project, none of the staff that will work on it worked on New Horizons!
• #41: Trainer: The current Executive Director shared several lessons that MBD learned from the partnership. The CDC had all of the decision making authority but because they were not responsible for the day to day work they had no choice to rely on the advice of their expert consultants (and various subcontractors) even when they suspected that that advice was wrong. They had the power but lacked the necessary skills, experience and information necessary to really make decisions. One moral of the story is that there may be no alternative to the CDC becoming the expert for these projects.
• #43: Both of these approaches involve a CDC or other community group working with a private developer to insure that a project meeting the community’s goals is built but in both cases, the CDC does not actually participate as co-owner of the project.
• #48: The City of LA Living Wage ordinance only applies to city contractors – this developer and his tenants would have been exempt without the agreement.
• #50: Local governments are not always good at enforcing these agreements. CBA allows the community groups to directly enforce but allows government to do so also.
• #54: Trainer: These are some of the many issues to be clear about UP FRONT when putting together a new joint venture.
• #55: Ask people to return to their earlier groups. In each group half of the people must now play role of the for profit partner. Each group should negotiate the terms of the partnership that they spelled out in Exercise #1 and fill out the Joint Venture Agreement Planning Tool. It is OK to leave some items blank.
• #56: Ask participants to describe what their groups came up with related to insuring that social benefit goals are met. Get one or two examples – not every group reporting back.
• #57: Trainer: Here is a list of some common goals that CDCs cite for undertaking commercial projects??
• #59: Ask some participant(s) to describe what their group came up with as a split?
• #60: The private partner and the CDC share 1% ownership while the limited partners own 99% of this project. Nonetheless the Managing General Partner makes all the decisions with active involvement from the Co-General Partner. The Limited Partners take much of the risk and receive all net revenue but have almost no involvement day to day. The CDC’s role in development was extremely limited but because they have stronger property management capacity, they serve as long term manager and owner of the project. The private developer is essentially a turn-key builder except that they are taking on development risk (which the CDC is protected from). CDC takes the long term management risks and benefits.
• #61: While Marin City CDC had 50% ownership they had no real control. OCHLT negotiated for real control even though they didn’t have a partnership agreement.
• #62: Ask participants to describe how they proposed to split responsibilities in the case example.
• #65: Ask participants to describe how they proposed to split decision making responsibilities in the case example.
• #67: Ask participants what their groups came up with?
• #68: Explain that the legal structure may protect the partners against liability and loss but other lenders may insist on guarantees, cosigners, etc to get around those protections – lenders want access to your other assets and those of your partner. In some cases the CDC guarantee may not have much value (ie. CDC has limited assets). If the CDC takes on too much of the financial risk but partner shares in return than there may be tax issues for the CDC’s exemption.
• #69: Ask for an example of what one group decided?
• #73: Ask participants to describe how they proposed to handle termination in the case example.
• #74: Point out that detailed accounting issues will can make the difference between a successful transition and a lost project under several of these scenarios. It is important to have technical experts review the specific language of any option agreement.
• #75: A few additional points about keeping the partnership running smoothly.
• #79: One way to prove the tie between the assistance and improvement of the area is by showing that the businesses selected for assistance were prioritized based on their potential impact.
• #82: We seldom spell out the capacity building goals of these partnerships clearly enough. If CDC capacity is a social goal then we should treat it like hiring and create a program to support it and insure that it really happens. A complete program would look something like this: