Profitwise News and Views

September 2003 Issue

Seeds of Growth Conference Summary

Seeds of Growth Sustainable Community Development: What Works, What Doesn't, and Why

Session Three - Partnerships
The papers in this session explore the utility of the partnership model to affect sustainable community development. Although the presenters employed no standard definition of "partnership," a set of common characteristics runs through their papers, including cooperation between private entities, the public sector, and local residents. Successful partnerships share common goals, decision making, responsibilities, and power. Similarly, the concept of "community development" defines itself in the papers with characteristics that include improving the quality of life for the people who live in communities facing social and economic challenges. The four papers in this section explore various real-world partnership models and their effectiveness in promoting sustainable community development.

The paper by Mark Tranel and Kay Gasen, Community Partnerships: A Sustainable Resource for Nongovernmental Organizations, begins with a discussion of a fundamental shift in bringing about community development initiatives. The industry has largely moved from a typical process of confronting public and private organizations to demand redress, to seeking partnerships and cooperation with organizations that can make a difference. A decrease in federal funding for community development over many federal programs has increased the tendency for groups to turn to institutions in a position to serve as active, engaged partners and to precipitate change in partnership with local residents and organizations.

The authors note that community partnership is a term used commonly "by government at all levels," but that the concept is more recent to the community development field. Further, the term has been used to define a wide cross-section of community activities from physical improvements to social services to web-based information sources. Tranel and Gasen cite several other studies and sources that emphasize the importance of capacity among all partners in a community development partnership. Not least is community capacity, the active involvement of local groups and individuals to define needs and remedies. Without local participation and decision making, there is not a true partnership, and the local community becomes simply a "recipient of goods and services." Capacity is further broken out by the authors as social or community capacity and organizational capacity. The Rockefeller Institute (1997) defines four attributes of social capacity as:

Attachment/identification - stronger identification with the neighborhood than the city as a whole
Neighboring - relationship with neighbors, supportive, friendly, or not
Organizational/associational infrastructure - number and influence of community organizations and degree to which residents perceive them as effective
Political/civic engagement - voter registration, turnout, or membership in lobbying or advocacy organizations.

Organizational capacity refers to the ability to take responsibility and manage key aspects of the partnership's objectives. Without well-defined and meaningful roles for the local partner, the authors maintain, "There is no assurance that [the partnership] is representative of shared interests or that there is any capacity for sustainability."

The paper outlines community development partnerships in two St. Louis neighborhoods, Forest Park Southeast and Old North St. Louis. The central institutional partner in Forest Park Southeast was the Washington University Medical Center, which had formed a redevelopment corporation (MCRC) in the 1970s to respond to decay in its surrounding neighborhood and to secure land to expand the facility. The partnership was able to achieve several key goals, but its efforts were hampered due to a fragmented, 30-member neighborhood advisory group. The group was selected entirely by MCRC, an aspect questioned by some local organizations and individuals, and also lacked formal power, serving in an advisory capacity only. Every community partnership has some unique characteristics, but that the key institutional partner inhabits the redevelopment area almost certainly impacted the partnership's achievements despite capacity issues among (other) local partners. The orientation toward goals and away from relationship and capacity building, however, has ramifications for the ability of the community to sustain and replicate its success.

The Old North St. Louis neighborhood has a long history of relationship and capacity building. The Old North St. Louis Restoration Group helped foster two partnerships in the community analyzed by Tranel and Gasen. In response to neighborhood blight, the group became a nonprofit housing developer in the 1990s. In 2001, they formed their first partnership with an outside institution, the Regional Housing and Community Development Alliance (RHCDA), to redevelop housing and offer related services. In 2000, the Restoration Group partnered with the University of Missouri, St. Louis, and received a HUD Community Outreach Partnership Center grant to enhance historical assets and address environmental hazards. In essence, both partnerships have focused more on relationship and capacity building than was the case in Forest Park. While there is a strong sense of community involvement, support, and trust, there is also frustration because physical improvements have not proceeded at a pace consistent with early expectations.

The authors contend that the partnerships in Forest Park Southeast and Old North St. Louis highlight challenges "that are likely to be typical of community/institutional partnerships." Among them, when large, well-funded institutions control or appear to control the agenda in a community partnership, and further if they control or are the sole recipient of funding for the initiative, it can impact the partnership's success. Also, ensuring that neighborhood representation is representative of the whole community is a difficult task.

The paper by Jason Bram, Jesse Edgerton, Yigal Gelb, Andrew Haughwout, David Lagakos, Margaret McConnell, and James Orr, Neighborhood Revitalization in New York City in the 1990, uses neighborhood data to characterize the changes in a variety of economic and social categories in New York City over the 1990s, with a special focus on low- to moderate-income neighborhoods. In general, the data shows that conditions improved in New York during the 1990s. These improvements included progress in housing quality and a reduction in crime. The biggest gains occurred in the poorest ten communities. As a result, by the end of the decade, there was a more uniform distribution of the quality of housing.

The paper then explores the relative roles of economic gains and public policies in driving these social outcomes. Using a variety of statistical techniques, the paper attempts to disentangle the influences of neighborhood resident characteristics, community organizations, local industry trends, and targeted public policies on neighborhood improvement. The paper finds that community development corporations and private lending were key in the implementation of New York's housing program. The crucial aspect to neighborhood revitalization is investment, which occurs in amounts that in part reflect greater anticipated returns resulting from property upgrades. The upgrades include improvements to private property and those brought about by the public sector, such as street and other infrastructure upgrades. The revitalization improved neighborhoods directly, but also had a positive spillover effect by giving rise to further investment.

Elise Bright's paper, Making Business a Partner in Redeveloping Abandoned Central City Property: Is Profit a Realistic Possibility?, explores the possibilities of a "win-win" partnership between local governments and the private sector derived from putting vacant abandoned property back into productive use. By undertaking this type of partnership, the operative premise is that local governments gain tax revenue and the private sector profits by bringing unused buildings into productive use.

Bright spent a decade studying the devastating effects of property tax policies on low-income neighborhoods and searching for ways to profitably redevelop abandoned property in central cities and rural America. More than one-half million properties sit vacant nationwide, she discovered. These properties blight neighborhoods and discourage lending and investment. Bright points out that of the more than one-half million tax delinquent properties located in many American central cities, most are owned by local governments. In economic development terms, these parcels have positive aspects: they have a central location, good access to transportation, close proximity to large labor pools, and low cost. They are a government-owned resource and partnering with the private sector to return them to productive use should be a priority. Yet, she finds that successful partnerships are the rare exception.

Bright's work discloses that there is little data kept by local governments on the costs and benefits of redeveloping abandoned property within their jurisdictions. Many local governments contacted did not have good records of property owned.

To determine whether a "win-win" partnership could exist, Bright studied five properties that were redeveloped in Dallas/Ft. Worth. She notes that a lot of public incentives were offered in most of these five projects (e.g., tax abatements, infrastructure cost sharing, development fee rebate incentives, Section 108 loans, historic landmark tax credits, enterprise zone tax exemptions, and brownfields assistance). She also tried to determine whether the projects actually made a profit for private investors. Utilizing mostly public documents, Bright computed the average return on investment for these projects and determined that they ranged from 5.6 percent to 25 percent, with most falling between 15 percent and 25 percent.¹ Bright tried to determine whether the projects were profitable from a tax revenue versus cost standpoint. A fiscal impact analysis showed that for the residential downtown projects, the tax revenues generated equaled or slightly exceeded the public costs before, but not after, tax abatements. The public housing project did show a loss, but the loss was small considering the project pays no property taxes.

Only one project showed a profit from a tax revenue standpoint, mainly because the city didn't provide any incentives to the developer. However, the developer pulled out of the project due to profitability issues on his part. Despite the profit to the city, Bright characterizes it as an unsuccessful project due to the breakdown in the partnership. Finally, the author tried to estimate the nondirect money measures of success, and points to one project that generated significant new employment and sales tax revenues. Due to qualitative and secondary benefits, the overall cost-benefit picture of these projects was better than it first appeared.

Bright's paper makes the following conclusions. First, due to the obvious benefits, development of neighborhood businesses that hire local residents should be strongly encouraged. Second, public sector incentives must be tailored to fit the private sector's needs, without giving too much away. Public officials should analyze the need for incentives closely. Third, the public sector should consider longer-term benefits when formulating partnership proposals, not just tax revenue. Bright asserts that public and private gain is a realistic result of partnerships to redevelop abandoned property, but the structure of the partnership is key to success.

The author made three closing points in her presentation. First, Bright stressed the need to develop better methodology for evaluating project-driven economic impacts, particularly qualitative, employment, and indirect financial impacts from urban redevelopment. Second, she urged creativity and far-sighted thinking by local governments and broader use of tools such as tax waivers, city services, and low-interest financing, plus assistance with brownfields issues and realistic property value assessments.

Finally, Bright concluded that sustainable community development on a large scale will require creativity on the federal level as well. Bright recommended less focus on enterprise zones and tax relief, and more attention to developing incentives to foster public-private redevelopment partnerships. Past federal programs such as loan guarantees, highway funding, and home mortgage deductions have subsidized middle- and upper-income suburban development. More targeted programs, Bright maintained, are needed to level the playing field, reduce lender risk, and increase profit potential for neighborhood redevelopment.

In Corporate Civic Investment Funds: New Models for Community Development Finance?, Amy L.W. Hosier, Artem Gonopolskiy, Carolyn McCarthy, Sonya Ravindranath, and Elizabeth Drapa, explore the emerging role of privately funded, often for-profit, community development investment organizations. The authors assert that the community development sector has evolved from a focus on federally funded and managed housing and urban renewal programs to a decentralized system in which numerous entities function alone and in partnerships to address a wide range of community and economic development issues. The authors contend that although a federal funding and oversight role remains for some types of assistance, the federal government is now just one of many stakeholders in the system. Today, each stakeholder brings to the community development field varying foci, investment criteria, processes, and resources. This evolution has generated additional actors to the community development sector, and their operations increasingly provide high-level prototypes and catalysts for expanded community investment.

The authors examine the evolving roles of hybrid for-profit/ nonprofit entities and for-profit funds that channel private resources directly to community development initiatives. Specifically, the authors look at the roles and impact of corporate civic investment funds and their subsidiaries, including the spectrum of organizational types investing in community development, and recent investment performance. In examining corporate civic funds, the paper draws on case studies and evidence from other types of corporate civic alliances to provide a preliminary assessment of corporate funds and partnerships and their impact. Because most of these funds are relatively new (established in the mid- to late-1990s), performance information is limited. However, results so far indicate that corporate civic funds can provide financing (debt, equity, and near equity) based on sound investment criteria as well as mainstream perspectives, financial and social criteria, and resources that bridge for-profit and traditionally nonprofit approaches to community development.

They conclude that corporate civic funds and alliances have been most successful in identifying sector-specific needs and opportunities that support small businesses, helping retain and expand existing businesses, and creating job opportunities with advancement potential for the local labor force. Experience with corporate civic investment funds demonstrates that reliable market information and business assistance are critical in developing successful strategies, maintaining investment performance, and sustaining subsequent rounds of funding. Further, in the case of for-profit funds, financial returns are often below-market, but also offer social returns that are difficult to quantify. Even so, where the funds are building more competitive business environments through their cumulative investments and providing evidence of other social returns, they have sustained themselves and acquired successive rounds of funding. Partnerships are essential to the success of corporate civic strategies, especially in supportive initiatives such as developing business infrastructure, recruiting employees, and upgrading the environment of distressed areas. Finally, and most importantly, corporate civic funds and alliances provide a level of leadership and visibility that can facilitate the flow of private funds to and management and advisory support for local community development initiatives.

The discussant for this session was Ken Wade, director of the Neighborhood Reinvestment Corporation, Boston. Wade opened by stating that Neighborhood Reinvestment clearly believes in utilizing the partnership model, whereby the private sector, public sector, and local residents are collectively represented in one organization. This model has proved successful over time as an effective way to address community development issues.

Wade agreed with Tranel and Gasen's paper that frequently the challenge in any community process is making that process broad enough to encompass and represent all the stakeholders. Wade offered some insights behind the challenges to involving a broad spectrum of stakeholders and stated that often these challenges are manifested in issues involving race, ethnicity, income, age, and newcomers versus established residents. Regularly, communities are divisively split along these lines. In order to overcome these challenges, it is crucial that a process be designed to include all stakeholders. In doing so, the process will be perceived as valid by the community and one that stakeholders can then invest in to achieve the desired outcome.

Wade found interesting the study by Bram et al. of New York City in the 1990s because the paper documents positive neighborhood changes despite income levels remaining the same. The discussant pointed out that a major challenge to the paper is that the study occurred during one of the most significant economic expansions in New York City in the past four decades. If this economic expansion has now ended, there will be much more difficult times ahead. Additionally, Wade stated that it would have been helpful if the authors had also studied metropolitan areas that were not as robust as New York City. For example, the study could have contrasted its New York City findings with data from upstate New York â€“ an area that hasn't seen such vigorous economic activity.

Concurring with author Bright regarding the positive economic impact derived from putting vacant abandoned property back into productive use, Wade agreed that the proper focus should not just simply be on removing a disamenity/negative value from the community while providing the private sector with a profit. Rather, the proper focus should be on the public sector's broader mission and the common benefits derived from being involved with this effort. Wade pointed out that a significant limitation of Bright's approach is the enormous amount of resources required to purchase abandoned property. Further, the practicality of a costly program is questionable in the current serious deficit environment faced by local and state governments. Wade sees the new markets tax credits as a possible untapped resource that could potentially be brought to bear on the funding problem faced by Bright's approach.

Wade made several points regarding the paper by Hosier et al. that discusses the relatively new phenomena of community development venture capital (CDVC) funds. Wade stated that CDVCs help to address a number of different challenges faced by the community development arena, including: mitigating risk, access to underserved markets, serving as an aggregator by taking smaller transactions and bundling them in a manner that better accesses capital markets, and serving as a provider of gap financing rather than venture capital. Wade sees these roles as very important and ones that CDVCs will end up playing.

As Wade envisions the future of CDVCs, he sees challenges. First and foremost is that CDVCs are focusing on the relatively uncharted economic development sector. Consequently, unlike their affordable housing brethren, CDVCs do not benefit from an existing track record. This makes it more complicated and difficult to achieve the same level of success with CDVC funding as has already been achieved with affordable housing. Further, in their formative years, the CDVC funds have needed to demonstrate early positive results, and henceforth have been fairly restrictive in terms of underwriting criteria.

Such cautious underwriting has caused CDVCs to suffer criticism from community groups that the funds are actually more conservative than mainstream financial institutions. Wade agreed and wondered if the stellar performance of many funds has caused CDVCs to essentially miss the market that many people hope they will serve. He pointed out that if CDVCs end up with risk characteristics that are better than local banks, it begs the question of whether the fund is far enough out on the risk curve. He summed up by saying that if the funds are doing better than the banks, then they are not focused on the right niche - not that the fund should experience significant losses - but most of these funds were created to serve a niche that banks could not serve.

Wade concluded the session by stating that the partnership model is clearly here to stay, but quickly added that it is not a panacea. The dynamic nature of the partnership model is both its strength and weakness. He cautioned that problems arise when individual partners begin pursuing their own self-interest. In these situations, the partnership model can actually constrain the forward progress of the community.

Notes
¹ One was not included in the profitability calculation due to the lack of applicable data; however, the developer stated that the project was not profitable.