organizational changes among cdcs: assessing the impacts and navigating the challenges

ORGANIZATIONAL CHANGES AMONG CDCs:ASSESSING THE IMPACTS AND NAVIGATING

THE CHALLENGES

RACHEL G. BRATTTufts University

WILLIAM M. ROHEThe University of North Carolina at Chapel Hill

ABSTRACT: Since the 1970s, community development corporations (CDCs) have gained

skills, visibility, and prominence in their efforts to rebuild very low-income distressed commu-

nities. While the net number of organizations has increased, there has been a certain degree of

flux, with some organizations going out of business, while new ones have been created. Although

many CDCs are financially sound, some are facing significant financial problems that threaten

their viability. When confronted by serious challenges, CDCs may be forced to go out of

business, downsize, or merge with one or more other groups. This article focuses on how CDC

failures, downsizings, and mergers affect individuals and communities served; how the work of

CDCs can be supported by their local community; and how CDCs and their support community

can anticipate and prepare for the possibility that some organizations in their area may need to

dramatically change their operations. The final section explores how, if change is inevitable or

desirable, CDCs can best navigate and steer the process.

Since the 1970s, community development corporations (CDCs) have gained skills, visibil-ity, and prominence in their efforts to rebuild very low-income distressed communities. Withlosses in population, jobs, and investment in businesses and housing, CDCs are often theonly entities in these areas working to stimulate economic growth and provide housing.

The CDC movement grew significantly during the last quarter of the 20th century. TheNational Congress for Community Economic Development (NCCED), the national tradeorganization for CDCs, has been compiling information on the number of CDCs and theiraccomplishments since 1988. For the great majority of groups, housing production is theprimary activity, boasting a development and rehabilitation record of more than 550,000housing units. Nearly half of this total was produced between 1994 and 1997. In the mid-1970s there were an estimated 200 CDCs, but by 1988 this number had grown to some

*Direct correspondence to: Rachel G. Bratt, Department of Urban and Environmental Policy and Planning, TuftsUniversity, Medford, MA 02155. E-mail: [email protected]

JOURNAL OF URBAN AFFAIRS, Volume 26, Number 2, pages 197–220.

Copyright # 2004 Urban Affairs Association

All rights of reproduction in any form reserved.

ISSN: 0735-2166.

1,500 to 2,000 groups. The most recent survey, published in 1999, reported that about3,600 CDCs were in operation (NCCED, 1989, 1995, 1999).

The continued growth in the overall number of CDCs camouflages changes within theindustry. While the net number of organizations has increased, there has been a certaindegree of flux, with some organizations going out of business, while new ones have beencreated. Although many CDCs are financially sound, some are facing significant financialproblems that threaten their viability (Bratt, Keyes, Schwartz, & Vidal, 1994; Bratt, Vidal,Schwartz, Keyes, & Stockard, 1998).

When confronted by serious challenges, CDCs may be forced to go out of business,downsize, or merge with one or more other groups. A report from Chicago provided oneof the first views of CDC failures. It noted that during 1995

three high-profile CDCs . . . terminated their development activities and essentially

[went] out of business . . . leaving behind a troubled portfolio of low-income residential

projects that they had developed and managed over the years. In addition, several other

CDCs were going through unsettling leadership changes (Futures Committee on Com-

munity Development, 1997, p. 3).

Since then several more prominent CDCs have gone out of business, notably EastsideCommunity Investments (ECI) in Indianapolis and Banana Kelly in Bronx, New York(see Reingold & Johnson, 2003; Rohe, Quercia, Levy, & Biswas, 1998; Steinbach, 1999;Steinbach & Zdenek, 1999; Waldman, 2000). For advocates of CDCs, the demise of theseorganizations was particularly distressing because they had both been highlighted innumerous reports as model organizations.

Problems facing CDCs became a focus of the Local Initiatives Support Corporation.Summing up a conference on CDC failures, Proscio (1998) noted that a key factor leadingto CDC problems was financial and programmatic overextension and a failure on the partof funders and stakeholders to recognize these problems early enough to help CDCsrectify them. In addition, no single factor responsible for triggering a full-scale crisiswas identified: ‘‘serious crises, the kind that jeopardize an organization’s survival, arecumulative affairs in which individual problems, no one of which is fatal, gradually gainmass and momentum until the available forces for remedy are too little, too late’’ (Proscio,1998, p. 5).

Beyond this limited information analyzing why some CDCs fail, research on the extentand causes of CDC mergers has also been almost nonexistent. This is certainly due, inpart, to the fact that ‘‘among nonprofits, particularly those engaged in housing andcommunity development, mergers or acquisitions by one another are rare’’ (Hoffman,2000, p. 36). But in his analysis of a successful merger of two organizations in Scranton,Pennsylvania, Hoffman concluded that ‘‘the advantages had to be exponential not simplyadditive’’ and that a key factor related to success was that neither organization was incrisis (p. 38). Another study of CDC mergers traced the steps taken by two CDCs inNashua, New Hampshire, as problems in productivity arose and funders began to ques-tion the desirability of a merger (Davis, 2003).

Aside from these few studies, there had not been a systematic research project examin-ing the causes of CDC failures, downsizings, or mergers until the study by Rohe, Bratt,and Biswas (2003). This article focuses on how CDC failures, downsizings, and mergersaffect individuals and communities served; how the work of CDCs can be supported bytheir local community; and how CDCs and their support community can anticipate andprepare for the possibility that some organizations in their area may need to dramatically

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change their operations. The final section explores how, if change is inevitable or desir-able, CDCs can best navigate and steer the process.

As part of our larger research project, we also reviewed literature on the growth anddecline of non-profit organizations in general. That literature identifies several factors,both internal and external to nonprofit organizations, that are associated with organiza-tional survival. The composition and level of involvement of non-profit boards ofdirectors (Herman & Renz 1999), the qualities of executive directors (Bailey & Grochau,1993), the lack of adequate staff compensation (Ortmann, 1996), and the age and size ofthe organization (Hager, Galaskiewicz, Beilefeld, & Pins, 1996), for example, have beenfound to be important factors. This literature also recognizes, however, that each failedorganization has a somewhat unique set of factors that led to its closure (Hager et al.,1996). These findings helped to guide us in our attempt to identify the factors that led tothe failure, downsizing and merger of CDCs.

Through our research we found that a number of contextual factors may sometimescreate insurmountable obstacles for a CDC or group of CDCs. Where market conditionsare changing dramatically and competition for resources is becoming acute, some groupswill weather the challenges while others may not. In addition, changes in city policies or inlocal and national intermediary priorities will have varying impacts on a CDC’s viability.Depending on the type of changes being promulgated, and how narrowly or broadlytargeted they are, some CDCs will have particular difficulties, while others may be able toovercome the challenges presented. Finally, permeating all the contextual issues is the levelof trust and social capital among CDCs and other actors in the CDC support community.Where trust is strong and deep, where partnerships and collaboration are standardpractice, and where there are organizations supporting the work of CDCs, CDCs willlikely have considerably greater tools with which to navigate their way through difficulttimes (Rohe, Bratt, & Biswas, 2003; Rohe & Bratt, 2003).

We also found that several key organizational factors were associated with CDC failure,downsizings, and mergers. We found that the breadth of an organization’s missionaffected its ability to adjust to changes in contextual factors such as changes in marketconditions or the policies of major funders. Organizations with more diverse activities,larger service areas, and a broader clientele may be better able to adapt to changes incontextual factors. Along with this, over reliance on a single source of funds may makeCDCs vulnerable to collapse and reduce their autonomy. In addition, and not surpris-ingly, internal management problems, such as ineffective project and property manage-ment, contribute to the downsizing and failure of CDCs. This, in turn, undermined funderconfidence in the effectiveness of CDCs. Furthermore, a lack of staff or board capacitywas found to undermine CDC performance. Also, poor communication between executivedirectors and their boards, between executive directors and both funders and city officials,and among CDC supporters all contributed to the failures and downsizings studied.Finally, lack of community support, or outright hostility, to the activities of CDCs canplay an important role in downsizings and failures (Rohe, Bratt, & Biswas, 2003; Rohe &Bratt, 2003).

As CDCs have matured, so too has the infrastructure that has grown up to supporttheir work. There is a broad consensus among CDCs, funders, intermediaries, and publicofficials that the current stage of organizational growth, as well as the development of theCDC industry in the years to come, will depend on how well the problems that arise willbe dealt with. A key new direction in community development will involve anticipatingchanges and, where possible, providing needed resources to optimize the productivecapacity of CDCs. We anticipate that the next phase of CDC work will demand even

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more sophisticated levels of expertise in terms of understanding markets, packagingdevelopment deals, leveraging funders, managing properties, and mediating the socialservice needs of residents. By paying attention to CDCs that are exhibiting problems,better understanding how to gauge critical changes, and providing the needed assistance,CDCs and their support communities will go a long way toward ensuring that CDCs as agroup will continue to be valuable and viable players in the next generation of communitydevelopment.

METHODOLOGY

The research project on which the present article is based focused on three types oforganizational changes among CDCs: failure, downsizing, and merger. We defined afailed CDC as one that went out of business; before that, it may have accomplishedsome or even all of its intended objectives and benefited its target population. Concerningdownsizing, we wanted to examine major reductions in resources and staffing, which weredefined as at least a 40% reduction in staff size over the prior three years, substantiallyreducing staff capacity and hence the organization’s ability to deliver services. While weacknowledge that over their life cycles most organizations experience fluctuations inbudgets and staffing, for this study we were not interested in minor downturns that arepart of a typical growth process. Finally, a merger was defined as the joining of two ormore extant organizations. These mergers may be a survival strategy for one or moreorganizations experiencing financial stress, or they may simply be an attempt by healthyorganizations to become more efficient and provide more integrated services to the targetpopulation.

We used a systematic case study approach, which included visiting a number of sitesand carrying out in-depth interviews. We selected two organizations from each of the threemajor categories: failures, those that had downsized, and those that had merged within thethree years prior to our project. Other selection criteria included geographic diversity,locales with varying levels of local support for CDCs, and variations in the reasons behindthe changes experienced. We wanted to make sure, for example, that an important factorsuch as turnover in the position of executive director was not a key reason in more thanone or two of the sites chosen. Finally, we sought to include groups that, we believed, hadexperienced the changes for reasons other than blatant organizational incompetence orpurported illegal operations.

With the above criteria in mind, we identified candidate CDCs by conducting telephoneinterviews with key informants around the country. We generated a list of over 100persons at universities and local, regional, and national nonprofit organizations reputedto be knowledgeable about CDCs. From these telephone interviews we identified 103CDCs that appeared to meet our criteria. Of these, 46 had failed, 41 had downsized, and16 were examples of mergers. This initial phase of our research helped answer one of ourearly questions—whether changes in CDC operations were isolated occurrences or part ofmore systemic adjustments. While we make no claims about the precise percentage ofCDCs that are currently in difficulty, have closed their doors in recent years, have down-sized, or have merged with other organizations, our research has indicated that CDCfailures, downsizings, and mergers are not uncommon within the industry. And, based onwhat we learned through this project about the kinds of problems facing CDCs (see alsoBratt et al., 1994), we believe that many more CDCs share similar challenges and that atleast some will be confronted with the need to make similar organizational changes.


We narrowed our list of potential CDCs by considering only those in cities that: hadpopulations of 100,000 or more, had been in operation for at least four years, and hadactually produced or managed a significant number of affordable housing units. We founda number of CDCs that had failed before they were able to produce much in the way ofaffordable housing, and there did not seem to be as much to learn from those examples.The candidate sites were then arrayed in a matrix by the major selection criteria. Wefurther narrowed the list by selecting two to four cities with multiple candidate organiza-tions in each of the four major regions of the country. We learned more about theseorganizations, such as their size and the circumstances that led to organizational change,by contacting key government, intermediary, or foundation representatives in the 11 cities.Based on those interviews and the candidate organizations’ willingness to participate inthis study, we selected six organizations that met our basic criteria and whose storiesseemed to offer valuable lessons for other CDCs.

The two failed organizations selected were the Community Development Corporationof Wisconsin (CDCW) in Milwaukee and the Whittier Housing Corporation (WHC) inMinneapolis. The two downsized organizations selected were the Oak Cliff DevelopmentCorporation (OCDC) in Dallas and the Advocate Community Development Corporation(ACDC) in Philadelphia. The two merged organizations selected were the Albina Com-munity Development Corporation (Albina) in Portland and Slavic Village Development(SVD) in Cleveland.

To learn more about the factors contributing to CDC failure and downsizing, we alsoselected comparison organizations for the two organizations that failed and the two thatdownsized. Comparison organizations were selected by asking local informants in eachsite to identify financially healthy organizations that were as similar as possible, in termsof size and major activities sponsored, to the principal organizations under study. Bystudying these comparison organizations, we hoped to better understand the reasons forthe failures or downsizings. Comparison organizations were not selected in the two mergerexamples, because appropriate comparisons were not available. For information about thecomparison groups see Rohe, Bratt, and Biswas (2003) and Rohe and Bratt (2003).

Three-day site visits were made to each city to conduct interviews with key informantsand to collect relevant documentation. These interviews were guided by a schedule thatincluded questions on the history and characteristics of the organization under study, theevents that led to the change, the contextual and organizational factors causing thechange, and the perceived impacts of the changes.

CASE SUMMARIES

Community Development Corporation of Wisconsin (CDCW): OrganizationalFailure

CDCWwas created in 1989 whenMilwaukee’s public and private sector leaders saw a needfor a large developer of affordable housing to serve the highest poverty area of Milwaukee.However, just 10 years later, CDCW filed for bankruptcy. From its inception, CDCW waspositioned to take over properties from other CDCs that had gone out of business. Many ofthese properties needed repairs and had problem tenants and relatively low occupancy rates.CDCW staff spent considerable time turning these developments around.

By 1997 CDCW had developed 21 separate housing projects totaling 722 units. CDCWalso provided ongoing property management for rental complexes, many developed byCDCW. At that time, CDCW had a staff of 25, an annual operating budget of over


$1 million, and a production record of about 150 units of affordable housing per year. Butjust as the organization reached its peak, financial problems also began to surface. Softdemand for housing in the area, inadequate tenant screening, and personnel problems allcontributed to CDCW incurring losses on its property management operation. Unable tocompete effectively with the higher salaries and better working conditions offered by privatemanagement companies, CDCW was having trouble keeping competent management staff.The financial losses did not create an immediate crisis, however, because the organizationwas able to cover this deficit with funds generated from its development work.

In 1998, however, CDCW’s development activities slowed because of changes in citypolicies and internal management problems. CDCW was staffed to rehabilitate multi-family developments, but the city decided to focus its resources instead on the purchase,rehabilitation, and resale of single-family homes. The city also allowed neighborhoodorganizations to determine how CDBG funds were to be spent in their areas, and thesegroups drastically reduced the funding for affordable housing. In addition, CDCW wasunable to keep up with the rehabilitation of single-family units and had trouble selling theunits once they were rehabilitated. This combination of problems severely reducedCDCW’s operating income, and its deficits grew. Somewhat belatedly, CDCW soughtassistance in overcoming its financial problems, but it was unable to secure the necessaryfunding, thus leading to its demise.

Whittier Housing Corporation (WHC): Organizational Failure

WHC served the Whittier neighborhood in Minneapolis from 1994 through 2000. Itsparent organization, the Whittier Alliance, was created in 1978 to work toward therevitalization of Minneapolis’s Whittier neighborhood, which was showing serious signsof decline. For the next 12 years, the Alliance pursued its mission by sponsoring a varietyof neighborhood improvement activities, including buying and rehabilitating multifamilyhousing developments. In 1990, as part of the city’s Neighborhood Revitalization pro-gram, the Whittier Alliance launched a planning process that resulted in a strategy todevelop additional rental housing and social services targeted for the low-income popula-tion in the area. In opposing this plan, homeowners and private apartment owners wereable to assume control of the organization and develop their own agenda that omittedfurther rental housing development.

WHC was created as a separate organization by the Alliance as the latter’s new boardhad little interest in continuing to own and manage the multifamily properties the Alliancehad developed during the 1980s. The Alliance properties, many of which were in need ofrenovation, were transferred to WHC and included seven leasehold cooperatives with 16buildings and 158 units. While WHC was focused on turning around the buildings itowned, there was never enough money to make the substantial repairs needed. WHC staffalso had trouble finding effective property management companies, which contributed tothe continued decline in the buildings’ attractiveness. At its height, WHC had a staff ofthree—a director, a co-op organizer, and a secretary—and contractual arrangements withprivate asset and property managers. In 2000, after a final failed attempt to secureadditional equity investments, WHC closed its doors.

Oak Cliff Development Corporation (OCDC): Organizational Downsizing

In 1987 the housing outreach program of a local Lutheran church found that there wasan overwhelming demand for affordable housing in the South Dallas area. OCDC was


formed to respond to this need. The focus of the organization was on developing home-ownership projects for low- and middle-income families. Just six years later, OCDC wasasked to administer the Dallas in-fill housing program, a contract that enabled theorganization to construct new single-family homes throughout its service area. Withadministration fees for the expanded services provided by the city, OCDC hired additionalstaff.

At its peak, OCDC had over eight full-time staff members. But, even as the organiza-tion was growing, it was also encountering competition from outside employers. Severalexperienced staff members moved on to better positions, thus reducing staff capacity andcreating project delays. OCDC also suffered a severe setback when it encountered vocalcommunity opposition and unfavorable media and political attention to a planned unitdevelopment of 112 new homes. The most significant factor leading to the organization’sdownsizing, however, was the loss of the in-fill housing contract and the subsequentreduction of OCDC’s operating budget. Unsuccessful at finding alternate sources ofoperating support, OCDC was forced to downsize significantly, losing most of its staffand production capacity.

Advocate Community Development Corporation (ACDC): OrganizationalDownsizing

ACDC was formed in 1969 and was one of Philadelphia’s first CDCs. For the following27 years, its founder served as president of the board of trustees. In addition to housingproduction, in the 1970s ACDC developed an area master plan that helped lead to positivechanges in public policy, including more financial resources for the target neighborhoods.In the 1980s, ACDC undertook several large housing projects that led to other successfulcommunity development efforts. Over three decades, ACDC completed 365 houses in itstarget area.

With good support from funders, and a solid production record, the organizationenjoyed a strong reputation. Much of the organization’s success has been attributed toits founder’s charismatic leader. Although this individual was officially president of theboard, she was also de facto executive director; for most of her tenure ACDC did not havean executive director. And rather than developing other in-house capacity, ACDC reliedon consultants and contract employees to complete projects.

When its founder developed health problems, the organization encountered seriousdifficulties; the existing staff could not handle the complexities of development projects.After her resignation, the board tried to support ongoing initiatives but was unable tocarry these out effectively. As the board struggled to find alternate leadership, commu-nications with funders suffered and ACDC lost much of its operating support. Withoutadequate funds, the organization was forced to downsize dramatically.

Albina Community Development Corporation (Albina): Organizational Merger

The Albina Community Development Corporation was formed in July 2001 as theresult of a merger of two groups that had served Portland’s Northeast section for years. Inthe late 1980s and early 1990s the city and funders, such as the local NeighborhoodPartnership Fund (NPF), supported the creation and expansion of CDCs. But only afew years later, the city and funders felt that there was a need to rationalize the variousfunding streams, and in 1996 the Portland Neighborhood Development Support Collab-orative, known simply as ‘‘the collaborative,’’ was formed.


In the late 1990s market changes and funding constraints made it more difficult tosustain CDCs. At that time, the Northeast section of Portland, which is one of the poorestareas of the city, was home to five CDCs. In assessing the situation in Northeast Portland,the collaborative questioned the accomplishments and sustainability of the CDCs in thearea. Four of the five CDCs–Housing Our Families (HOF), Sabin CDC, FranciscanEnterprise, and Northeast Community Development Corporation (NECDC)–wereperceived to be financially unstable. At first, the CDCs were not explicitly asked tomerge; they were asked to find a way to work together more efficiently. Over time,however, the collaborative made it clear that it wanted to support fewer large organiza-tions in the area.

Three of these groups were engaged in discussions about a possible merger when onewent out of business. The remaining two CDCs, Sabin and HOF, were on the verge ofmerging when a fourth group, Franciscan Enterprise, rejoined the discussions. All threegroups were slated to merge into a single organization on July 1, 2001. However, at thelast minute, the membership of Sabin voted not to join in the merger. Thus, the neworganization, the Albina Community Development Corporation, was created from themerger of HOF and Franciscan Enterprise.

Franciscan Enterprise was formed in 1987 and HOF in 1991. While the community wasinvolved in their creation, a key impetus was the city’s support of CDCs throughoutPortland during that period. HOF came to the merger with 268 rental units, all but 80managed by an outside property management company. It had a staff of 7.5 and anannual budget of $800,000. Franciscan had completed 120 units of rental housing, some ofwhich were part of a mixed-use development. Its budget was about $650,000, and it had astaff of 6.5.

The merger discussions were difficult, with many tense interactions along the way. More-over, although the CDCs involved could see the logic of a merger, in retrospect they agree itwould not have happened without explicit directives from the city and funders.

Slavic Village Development (SVD): Organizational Merger

SVD was created in 1998 as the result of the merger of Slavic Village BroadwayDevelopment Corporation (SVBDC) and Broadway Area Housing Coalition (BAHC).Despite recent growth in the minority population, the Slavic Village-Broadway area is alargely white, lower-middle-class area of Cleveland.

BAHC started in 1980 and was primarily involved with low-end, market-rate housingfor sale. SVBDC, which was involved with commercial/storefront projects, originatedfrom a 1991 merger of two other organizations serving the area. With BAHC andSVBDC operating in the identical locale, funders pressured the groups to merge. Althoughthere was initial reluctance, by 1997 the CDCs acknowledged that it may be difficult forthem to carry the overhead of two separate organizations and that a merger was in thebest interests of all involved. They also felt that funders would not agree to the twoorganizations continuing to exist on their own, despite the fact that both were viewed asquite competent. At the time of the merger, there was generally a high level of trust andpersonal connection among the executive directors, the staffs, and the board members ofBAHC and SVBDC.

The merger is widely viewed as a success, with the new organization stronger than eitherof the two original groups. But even in the best situations, mergers are not easy. Currently,SVD is building about 50 new units and rehabilitating another 30 or so per year, plusmanaging close to 350 rental units owned by other nonprofits in Cleveland.


IMPACTS OF CDC DOWNSIZINGS, FAILURES, AND MERGERS

It might be argued that CDC failures, downsizings, and mergers are generally positiveoccurrences because, as in the private sector, less competitive and productive organiza-tions are weeded out. CDCs that provide a needed service in an efficient manner willthrive; otherwise, they will decline and be replaced by more effective organizations. Acounter argument, however, is that CDCs do not operate in the same competitive market-place as do small businesses. CDCs are filling needs for affordable housing and otherservices that private sector providers deem unprofitable. Given this lack of profit poten-tial, there is not a lot of competition to provide those services, and if a CDC fails, otherorganizations are unlikely to step in to fill the void. Thus CDC failures, downsizings, andeven mergers may leave communities and individuals without badly needed services or,if CDC owned properties remain vacant, actually contribute to neighborhood decline.Failures and downsizings may also have broader implications for how CDCs are perceivedby both the public and private sectors. They may result in a general loss of confidencein CDCs as effective producers of affordable housing and may precipitate the withdrawalof support for other CDCs in a city or region.

What do we actually know about the impacts of failures and downsizings on thecommunities and individuals served? Our research suggests that CDC failures and down-sizings can have a variety of negative impacts. The specific type of impacts, however,varied among the cases studied and depended on both the context and the characteristicsof the specific organization involved. The impacts of mergers tend to be different thanthose of failures and downsizings and are discussed separately at the end of this section.

Loss of Confidence in CDCs

The failure or downsizing of the CDCs in Milwaukee, Dallas, and Philadelphia under-mined both public and private sector confidence in CDCs as effective providers ofaffordable housing and other services. In Milwaukee the failure of CDCW and severalother CDCs caused the city administration to lose confidence in the CDC model andexplore ways to involve the private sector in the production of affordable housing.Furthermore, lending institutions in Milwaukee became reluctant to invest in CDC-sponsored housing developments. The remaining CDCs in Milwaukee were said to be‘‘hunkering down’’ and reluctant to propose any new initiatives. One person commented,that the failure of CDCW ‘‘hurt the nonprofits. It was horrible in the press and that splashhit everyone.’’

Similarly, the downsizings of OCDC (Dallas) and ACDC (Philadelphia) have made thelocal financial institutions in those communities more wary of funding CDC projects. InDallas there is also concern that public and private support has shifted from CDC-sponsored housing developments for low-income households to private sector develop-ments for higher-income households. One person noted, ‘‘Banks and others are more waryof funding CDCs since one of the ‘stars’ they supported downsized.’’ In addition, inPortland, one of the CDCs involved early on in the merger talks, NECDC, eventuallywent out of business, and this failure was said to have reduced support and privatefunding for all the city’s CDCs.

The failure of WHC (Minneapolis), however, did not have the same effect. It did notappear to reduce city or funder confidence in CDCs within the city. This raises thequestion of under what circumstances CDC failure or downsizing leads to a more generalloss of confidence in CDCs. Several factors appear to be important. First, the broader


history of CDC performance in a city seems to be a factor. In Milwaukee, for example, thefailure of several other CDCs clearly magnified the impact of CDCW’s failure and erodedpublic and private sector confidence in CDCs as effective producers of affordable housing.Second, the size and prominence of the failed or downsized CDC appears to be important.Both CDCW (Milwaukee) and OCDC (Dallas) were among the largest, most productive,and most recognized CDCs in their respective cities. Thus their demise was a severe blowto the credibility of all CDCs within their cities. The failure of WHC in Minneapolis,however, did not lead to a general loss of confidence as it was relatively small and had notestablished itself as a prominent CDC in the city. Moreover, as one person noted, ‘‘WHCwithered away rather than having experienced a catastrophic failure.’’

Decline in the Production of Affordable Housing

Another frequently mentioned impact of CDC failure and downsizing was a decline inthe production of affordable housing in the local community, at least in the short run. Thiswas particularly the case where the organizations involved were among the larger producersof affordable housing in the city. At its height, for example, CDCW (Milwaukee) wasproducing 150 units of affordable housing per year, an output that ended when CDCWfailed. With the loss of CDCW one person observed, ‘‘virtually nothing is being done inaffordable housing in the city.’’ The result is that many more households are left livingin substandard housing, paying a very high proportion of their incomes for housing, orboth. The downsizing of OCDC (Dallas) and ACDC (Philadelphia) had similar, althoughnot quite as severe impacts, in their respective cities.

In instances where CDCs fail or are substantially downsized, one might hope that otherorganizations could make up the loss in affordable housing production. However, there isno evidence of this in our case studies. In fact, as noted above, the failure and downsizingof large producers of affordable housing may cause a loss of confidence in the capabilityof other local CDCs, making it difficult for them to expand or even maintain their currentlevels of production.

Loss of Existing Affordable Housing

The failure and downsizing of CDCs can also lead to the loss of existing affordablehousing units. The most dramatic example of this was in Milwaukee, where an estimated100 housing units owned by CDCW were sold to investor/owners, some of whom weredescribed as slum landlords. It was expected that the rents for these units would risesubstantially and that some of the existing residents would have to move. As a result of thesale, the subsidies that made those units affordable were lost, and the U.S. Department ofHousing and Urban Development was requiring the city to repay the funds.

In Minneapolis, however, WHC’s failure did not lead to the loss of affordable housingunits. The different experiences in Milwaukee and Minneapolis suggest that the dispos-ition of units owned by failed CDCs is largely determined by two factors. First, the type oforganization that holds the first mortgage is important. If private financial institutionshold the first mortgages on properties owned by failed CDCs, they are likely to dispose ofthem by foreclosing and offering them to the highest bidder, which (as in Milwaukee) maybe a slum landlord. If the first mortgage is held by a public or nonprofit organization,however, the properties are likely to be transferred to another nonprofit organization toensure that they remain affordable. Second, the involvement of CDC intermediaries isoften important. CDC intermediaries, such as the Interagency Stabilization Group in


Minneapolis, can provide financial and technical assistance that ensures that propertiesare successfully transferred to other nonprofit organizations. This is particularly true if theunits involved need repairs, because additional subsidies may be required to cover thesecosts while still maintaining affordability.

Destabilized Neighborhoods

The failure and downsizing of CDCs can also lead to increased neighborhood instability,as CDC-owned housing units remain vacant, fall into disrepair, or both. In Milwaukeemany properties remained boarded up and vacant for over a year after CDCW failed.Several interviewees said these vacancies had a devastating impact on the stability of thesurrounding area. In Dallas the abrupt cancellation of the city’s in-fill housing contract alsoleft properties vacant for an extended period of time, contributing to flat or even decliningreal estate values in the Oak Cliff area. Finally, the downsizing of ACDC (Philadelphia)left many units slated for rehabilitation to deteriorate further. Many of these have deterior-ated beyond the point of rehabilitation and will likely have to be demolished. One personcommented: ‘‘The entire housing scene of North Philadelphia has suffered.’’ ACDC’s down-sizing has also weakened the community’s voice in Philadelphia’s political affairs. Withdiminished capacity, the organization could not be as involved as it had been in serving asa community advocate.

Several factors appear to determine the extent to which a CDC’s failure or downsizingwill negatively affect the targeted neighborhood. First, the number and location of unitsowned or managed by the CDC is important. The larger and more concentrated theportfolio, the more likely there will be neighborhood destabilization if no remedial actionsare taken.

Second, the type of housing units owned seems to make a difference. Rental propertiesfinanced with tax credits are less likely to be left vacant or allowed to deteriorate, becausethe limited partners have a strong financial interest in making sure the properties continueto be rented to lower-income tenants. If not, they lose their valuable tax credits. It is notuncommon for the limited partners to find another general partner and provide additionalfunds for property improvement. Single-family homes financed with bank loans may be ingreater jeopardy of deteriorating, becoming vacant, or both. Particularly troublesome areproperties that have been purchased for rehabilitation but have not yet been refurbished.Based on our cases, these units tend to sit vacant and continue to deteriorate, hencecontributing to neighborhood destabilization.

Third, the active involvement of CDC intermediaries and other supporters is importantin minimizing negative impacts on a neighborhood. These organizations can play animportant role by helping downsized organizations complete projects or by transferringbuildings to other entities.

Resident Distress among Tenants of CDC-Owned Properties

The failure of a CDC can cause considerable distress among the very people theorganization is trying to serve—the residents of the units owned or managed by theCDC. For example, when WHC (Minneapolis) dissolved, the residents reportedly werequite anxious about being displaced. According to one interviewee: ‘‘There was fear andconfusion. . .The residents did not get enough notice about the dissolution.’’ They alsowondered whether they would have to move out of their homes. Moreover, during theperiod leading up WHC’s failure, the properties were so badly maintained that WHC was


cited by the city for housing code violations, and the executive director ‘‘felt bad aboutbeing a slum landlord.’’ Similarly, residents in CDCW units (Milwaukee) had to live inpoorly maintained housing both before and after CDCW went out of business.

The extent of distress among residents appears to be determined by at least twofactors. The first is the degree to which rents remain affordable and the units are keptin decent repair. It is important for intermediaries and other CDC supporters to devise aplan to transfer the units to other organizations that can maintain them. The secondfactor is the degree of communication and consultation with residents. In MinneapolisWHC’s organizer spent time with residents helping them understand the implications ofWHC’s failure. Although resident anxiety was not totally dispelled, this effort clearly helpedto reduce it.

Impacts of CDC Mergers

Of the two CDC mergers studied, only the Cleveland merger had actually occurred atthe time of our visit. Thus, the discussion of the impacts of mergers is largely based on theCleveland experience. The impacts, which are generally positive, include an increase inorganizational capacity, greater ease in fund-raising, and the reintroduction of communityorganizing and advocacy.

Among those interviewed in Cleveland, there is general agreement that SVD is strongerthan either of the groups that merged. Now the largest CDC in the city, SVD is viewed asone of Cleveland’s three strongest CDCs. The merger was said to have substantiallyincreased the capacity of the new group. In particular, the combination of housing andeconomic development activities in the same organization allows for better use ofresources and a more holistic view of the neighborhood and its needs. The organizationcan work on nodes of housing and economic development in tandem. SVD’s larger, morecomprehensive approach is also said to help in fundraising, because funders are attractedto the merged organization’s comprehensive vision of community development.

With the merger, community organizing and advocacy were reintroduced. Theseactivities had once been part of the agendas of each organization, but over time thetwo groups had lost contact with community residents. SVD wanted to change this.With the help of a local intermediary and a grant from a nonprofit, SVD is engaged inorganizing and advocacy and has expanded community involvement in its activities. Theorganization was recently successful in a highly visible effort to keep a neighborhoodhospital from closing, and it is working to allay the racial fears that have been growingin the community.

The only negative impact of merging was mentioned by one informant in Portland, whowas concerned that the conflicts associated with the merger process may have alienatedsome longtime CDC supporters, including board and staff members, residents, andfunders. This suggests that the level of conflict involved in a merger process may havean impact on the new organization and possibly on other CDCs in the city.

In summary we learned that CDC failure and downsizing could have a variety ofnegative impacts. The impacts of any specific failure or downsizing, however, dependson the broader history of CDC performance in the city, the size and prominence of thefailed or downsized organization, the production level and number of units owned by thefailed or downsized organization, the first mortgage holder, the willingness of the inter-mediaries to assist in the transfer of units to other nonprofit organizations, the sources ofthe original funding, and the extent of communication with residents of the units involved.There was no evidence of other organizations making up for the loss of affordable housing


production caused by the failures or downsizings studied, although given more time thismay happen. Nonetheless, the results reveal that CDC failure and downsizing are likely tohave several negative impacts that should be avoided.

This article argues that CDCs do, indeed, warrant increased attention and support. Asone of the key producers of housing affordable to low-income households and as one ofthe key vehicles for promoting community revitalization initiatives, the work of CDCs isessential. Although we recognize that our research was based on a very small sample andthat not all CDCs in the country are performing at an adequate level, overall, thecontributions of CDCs are impressive (see, for example, Grogan & Proscio, 2000 & VonHoffman, 2003) and the great majority of these groups should receive substantial supportfrom public, private, and nonprofit organizations and agencies. The recommendationspresented below would bolster the work of CDCs as they continue to provide housing,services, and programs to some of our poorest residents and neighborhoods.

SUPPORTING THE WORK OF CDCS: CONTEXTUAL INITIATIVES

Our research leads to a number of observations about how the work of CDCs can besupported so that each organization is in as strong a position as possible to withstand thecontextual and organizational challenges that may threaten its viability and lead to thetypes of negative impacts described above. How CDCs face those challenges is, in part,dependent on the context in which they operate and the extent to which their supportcommunities create a positive environment for CDC activities. Supportive environmentsare, of course, important in and of themselves. But they also provide CDCs with anoptimum chance of being well positioned in the event that change becomes inevitable. Thiscan be accomplished in a variety of ways.

Developing Trust

One way that CDCs and their support communities can position themselves to dealeffectively with change is to be conscious of the need to develop trust among all key actors.In several of our case studies, the level of trust and extent of prior collaboration betweenthe CDCs and their support communities played an important role in the organizationalchanges that occurred. For example, staffs of the two CDCs that merged in Clevelanddeveloped a high level of trust through working together over the years, and this was saidto have significantly contributed to the relative smoothness of the merger. (Interestingly,Hoffman, 2000, also notes the importance of the two groups that merged in Scranton,Pennsylvania having worked closely together on a joint project before the merger. Thetwo executive directors reportedly came to view themselves as collaborators, as well ascompetitors.) In Portland, on the other hand, the CDCs involved in the merger talks hadfew working relationships. There was a lack of trust, which made the merger processconsiderably more difficult.

Although it is impossible to mandate trust, concrete opportunities for groups to worktogether are likely to promote a more trusting, mutually supportive community develop-ment climate. Joint projects and other forms of collaboration, which could be undertakenon an ongoing basis long before specific problems arise, may prove helpful in fosteringtrust both among CDCs and between CDCs and the public, nonprofit, and privatemembers of their local support communities. Collaborative efforts are often challenging,but the likely outcome—people seeing and acting on their shared agendas, rather thantheir areas of disagreement—is likely to yield positive results for community residents.


Creating Local CDC Support and Trade Organizations

An important way in which trust between CDCs and between CDCs and their supportcommunities can be enhanced is through citywide support and trade organizations. Anycity with multiple CDCs should create and nourish two types of support organizations.The first should be comprised of the major public, private, and nonprofit funders andtechnical assistance providers in the city; the second should be a trade organization oflocal CDCs. The first type of group is needed to facilitate communication and coordin-ation among the often numerous funders and technical assistance providers that operate incities. Such an organization can also develop coordinated strategies for assisting CDCsthat experience problems but have the potential to be effective providers of affordablehousing and other needed community services. The Interagency Stabilization Group inMinneapolis is a good example of this type of organization. In Milwaukee, the lack of aforum for CDC supporters to discuss CDCW’s problems and develop a coordinatedapproach to addressing them was cited as an important factor in the organization’sfailure.

The second type of organization, the trade association, should be organized by theCDCs themselves for the purposes of sharing knowledge, coordinating activities, collab-orating on projects, and advocating for their needs. Such an organization gives CDCsmore influence over some of the contextual factors that affect their financial health, suchas changes in city policies. While this type of group must be grounded within the CDCcommunity, the broader CDC support institutions and organizations should support itsdevelopment and maintenance. The lack of CDC trade groups in Milwaukee, Minneapolis,and Dallas was cited as contributing to the failure or downsizing of the organizationsstudied in those cities.

Involving CDCs in Local Decisions that Affect Them

City policy makers need to assess the impacts of proposed policy changes on CDCs andinvolve them in those decisions. Changes in city policies had significant, often unantici-pated impacts on all but one of the CDCs studied. In both Milwaukee and Minneapolis,the process for distributing city-controlled housing and community development fundschanged, resulting in sharp cutbacks in funding available to local CDCs. In Dallas a moreconscious decision was made to discontinue support for OCDC’s in-fill housing program,but the city did not seem to understand what the full impact of that decision on thefinancial health of OCDC would be. Finally, in both Portland and Cleveland, city agenciesdecided to encourage streamlining or mergers of selected CDCs. These policy changes haddramatic impacts on CDCs but in most instances were not made in consultation withthem.

Thus, when city policy makers propose policy changes that would affect the distributionof funds for affordable housing, they should analyze those changes carefully to under-stand their impacts on the financial health of local CDCs. To ensure that their voice isheard, CDCs should be involved in formulating, reviewing, and commenting on citypolicies that may affect them. This should ensure that policy changes do not catchCDCs by surprise and should enhance the level of trust between CDCs and local policymakers. The existence of both types of support organizations, noted above, would facili-tate communication between CDCs and local decision makers and would increase thelikelihood that all key stakeholders in the city would have an opportunity to activelyparticipate in major decisions with potential impacts on CDCs.


Providing CDCs with Core Operating Support and Creating Realistic PerformanceStandards

Despite the fact that CDCs are called corporations, they generally cannot cover theiroperating expenses. The work that CDCs do is often carried out in weak markets wherethere is little or no opportunity to sell their services at a break-even rate, let alone make aprofit. Although CDCs need to pay attention to creating income through their develop-ment work and developing the assets of the organization, the basic funding for CDCoperations should be provided by external sources, such as city and state funders, incollaboration with private entities such as foundations.

While it is acknowledged that city policies in relation to CDCs may change, it is criticalthat local and state policies concerning CDCs take into account the need for CDCs to beable to cover their core operating functions. Increased competition for resources was afactor for both of the organizations that experienced downsizing, as well as for theorganizations that merged in both Portland and Cleveland. Although we are recommend-ing significantly more resources to cover CDC operations, we are also aware of thehazards that can be created by an over reliance on a single funding source, as discussedin the last section of this article.

The CDC support community, in collaboration with CDCs should develop realisticperformance standards for CDCs and assist them in achieving those standards. Whatshould happen if a CDC is not performing appropriately or meeting other standards ofoutput? Clearly, the funders should not be expected to carry indefinitely an organizationthat is not functioning well. But rather than precipitously reducing an organization’ssupport, funders should either provide the organization with a sufficient amount of timeto plan for such a cutback, or they should commit additional resources to better enable theCDC to meet the specified standards.

Several of our cases provided information on how intermediaries and other localfunders had tried to enforce standards by guiding CDCs to take certain actions. Thetwo mergers, for example, came about largely because local funders joined with the city toput pressure on the CDCs to merge. In Portland, in particular, funders were eager tostreamline a group of CDCs that were at various levels of financial difficulty. In Cleve-land, the funders’ concerns related more to overlap and efficiency of services beingdelivered by the two CDCs in the area. In Minneapolis, the Interagency StabilizationGroup insisted that WHC hire an asset manager and develop a strategic plan.

These cases reveal largely unresolved questions: How can intermediaries and funderscreate standards for performance, along with sanctions for noncompliance, without beingtoo heavy-handed and overwhelming the CDCs’ own agendas? When, how, and to whatextent should intermediaries and funders intervene in CDC affairs? These are questionsthat warrant additional discussion by all key stakeholders.

Offering Staff and Board Training

Another way in which the CDC support community can strengthen CDCs and enablethem to function effectively is to provide additional opportunities for staff and boardtraining. Not surprisingly, both failed organizations and both downsized organizations inour study faced serious internal management problems that were personnel and projectrelated. These problems might have been avoided if additional staff and board trainingand assistance had been available. In particular, it appears that CDCs may need specific,tailor-made assistance, essentially on a one-to-one basis.


A lack of staff or board capacity undermined the performance of most of the CDCs inour study. Turnover in executive directors contributed to the problems experienced byWHC (Minneapolis) and ACDC (Philadelphia). In Dallas the executive director failed tomaintain OCDC’s political support, while in Milwaukee the executive director did notpay enough attention to CDCW’s financial management systems. In addition, manyorganizations found it difficult to retain experienced staff because city agencies andprivate sector companies paid substantially higher salaries. To increase retention andprevent turnover among staff, there is a need for better staff salaries and benefits. Inaddition, adequate transition plans should be in place to ensure a continuation ofleadership.

Passive boards of directors also contributed to the decline of several organizations. InMilwaukee, for example, the board did not adequately monitor CDCW’s financial situ-ation and did not react in time to save the organization. Board members should haveperiodic training to help them develop the necessary leadership qualities and to be betterenable them to set policy guidelines for the staff.

Project development and property management problems were also revealed as import-ant causal factors in CDC failures, downsizings, and mergers. We found instances ofinaccurate financial projections leading to cost overruns, overly optimistic underwritingassumptions, inadequate cost control and accounting systems, and poor-quality construc-tion. CDCW (Milwaukee), for example, experienced many of these problems when itshifted from the development of rental properties to the purchase, rehabilitation, andresale of single-family homes.

Property management problems that were cited as important contributing factors in thedemise of several organizations studied included inadequate tenant screening and evictionprocedures, inadequate maintenance of properties, and lack of social support services fortenants. ACDC (Philadelphia), WHC (Minneapolis), and CDCW (Milwaukee) were allplagued by property management problems.

Staff and board training should focus on teaching CDC staff how to develop realisticunderwriting criteria and cost projections. It should also address the importance ofproviding for cost increases and unexpected contingencies. Training in financial under-writing should also help ensure that projects include funding for quality constructionwork. Finally, whether the property management is handled in-house or contracted out,training needs to help CDCs ensure that rent collection, tenant services, and routinemaintenance are performed effectively.

Although there are a number of national initiatives focused on increasing CDC cap-acity, including the Enterprise Foundation, the Local Initiatives Support Corporation, theNeighborhood Reinvestment Corporation, the Fannie Mae Foundation, the Center forCommunity Change, and the National Congress for Community Economic Development,there is still a clear need for additional assistance in this area. CDC supporters must betterunderstand the types of help needed and commit to providing high-quality trainingprograms and consulting assistance. Although there are various ways that CDC staffand board members can receive additional training, many are not taking advantage ofthese opportunities. The CDC support community needs to better understand the reasonsfor this shortfall, which may include lack of funds to pay for the training available, lack oftime to attend training, and lack of understanding of the importance of additionaltraining. In particular, what may be needed is access to tailor-made on-site consultinghelp. Outside experts, who could be sent to a CDC to work with the board or staff on arange of issues, or who could help sort through issues with funders, may be the mostimportant type of assistance that is needed.


ANTICIPATING AND PREPARING FOR CHANGE: ORGANIZATIONAL INITIATIVES

Based on our six case studies, we also learned a great deal about the steps that CDCsshould take to anticipate and prepare for change. This section explores how CDCs, withthe assistance of their support communities, can anticipate the need for change. How canCDCs make sure that they are well positioned in the event that change is either desirableor inevitable?

Launching Strategic Planning Activities

Strategic planning should play a central role in all CDCs’ activities and their supportcommunity should provide funds and assistance to support these planning efforts. Two ofthe major contextual factors that we identified as leading to problems for CDCs werechanges in the local housing markets and growth in the number of CDCs. Strategicplanning should enable CDCs to anticipate and respond to such changes. In the case ofCDCW (Milwaukee), for example, a weakening in the demand for housing in its primarytarget area was at least partially responsible for higher than expected turnover andvacancy rates in its rental housing portfolio. Ultimately, this led to financial problemsthat contributed to the organization’s failure. In other instances, such as in Portland, arobust housing market made it difficult for several CDCs to acquire properties at a pricethat would allow the organizations to rent or sell the units to low- or moderate-incomehouseholds. This led to pressure for the CDCs in the area to merge.

Strategic planning is also needed to assess the impacts of the growth in the number ofCDCs in a city. Over time, CDC growth has led to increased competition for public,foundation, and private resources, whose growth has not kept pace with the expansion ofCDCs. In many cities this seems to be at least partially due to the spate of mergers in thebanking industry, which has left many cities with fewer banks overall and fewer locallyowned banks with strong commitments to supporting CDCs.

To address both market changes and increased competition, CDCs, funders, and policymakers need to work together to formulate strategies to be carried out both at the citylevel and by individual CDCs. Given the competitive environment in which CDCs oftenoperate, communities need to periodically assess their needs and the roles of local CDCsin addressing those needs. In some cities, neighborhoods may be served by multiple CDCs,creating unnecessary competition, while others go underserved. Such a collective effortshould ensure that all neighborhoods are served and competition among CDCs isminimized.

CDCs also need to initiate their own regular assessments of both market changes andthe products and services offered by other CDCs as well as by other nonprofit serviceproviders and advocacy groups serving their target areas. They need to read the marketand position themselves to remain competitive, building on their strengths while keepingthe needs of their local communities in focus. If there are a number of CDCs working in agiven area, they should anticipate that city officials or members of the local intermediarymight suggest a merger. CDCs should not be surprised by the suggestion that there are toomany groups operating in a given area, particularly if land, buildings, and financialresources are becoming increasingly scarce or costly, and if development activities arebeing threatened.

In cases where strategic planning initiatives suggest that one or more CDCs should goout of business, downsize, or merge with other groups, continued collaboration betweenthe CDC, the local intermediary, and the CDC trade organization would likely minimize


the negative impacts on the properties owned and the general reputation of CDCs. Insome cases, streamlining or merging CDC functions may be in a community’s bestinterests. In those instances, the challenge is to ensure that there is as little disruption inservices as possible while optimizing organizational efficiency.

Diversifying Activities

Beyond the type of strategic planning discussed above, as well as day to day goodmanagement of the organization and of its housing portfolio, what else can CDCs do toposition themselves as strongly as possible? Narrowly focused CDCs should considerdiversifying the types of activities provided, the geographic area served, the clientele ofthe housing units developed, and the sources of funding. A major aspect of an organiza-tion’s strategic planning should, therefore, address the question of how much it shoulddiversify versus specialize its activities. CDCs must tread a thin line between the two.Specification requires a narrower range of staff expertise, which is deepened with each newproject. But it also makes an organization vulnerable to changes in funding priorities andcommunity desires. Diversification, on the other hand, makes an organization less vulner-able to those changes but may lead to performance problems caused by a lack of staffexpertise or financial resources. The decision about whether and how much a groupshould diversify its activities is a complex one, and issues of mission, organizational size,and availability of funding, are key contributing factors.

In our case studies we found that the groups that failed or were downsized tended to haveactivities that were narrowly focused. In Milwaukee, for example, CDCW experiencedfinancial problems when the city of Milwaukee shifted its emphasis from rental housingto homeownership. Similarly, in Dallas, OCDC’s heavy focus on constructing single-familyhomes left it vulnerable to a shift in city funding priorities from homeownership towardmultifamily rental housing. The comparison organizations in these cities, however, had abroader set of activities, which seemed to provide a hedge against changing market andpolitical conditions.

Another dimension of the specialization/diversification dichotomy concerns the size andsocial characteristics of the geographic area served. CDCs that targeted areas that aresmall, homogeneous, or both were vulnerable to changes in market conditions in thoseareas. The units owned andmanaged by both CDCW (Milwaukee) andWHC (Minneapolis),for example, were concentrated in neighborhoods where the demand for housing decreasedsignificantly. Thus, rents could not be raised to meet increases in operating costs, andfinancial problems ensued. Having a larger, more diverse target area allows a CDC todiversify the location of its properties, thereby reducing the organization’s vulnerability tomarket weakness in particular areas of a city.

A third aspect of the specialization/diversification issue relates to the income groupsserved by CDCs. Although CDCs are typically geared to serving low- and moderate-income households, focusing exclusively on very low-income households may increase anorganization’s financial vulnerability. Housing very low-income households typicallyrequires deeper subsidies that are difficult to find. In Minneapolis, for example, all ofWHC’s housing developments served very low-income households that could not affordrent increases; hence funding for proper building maintenance was not available. A morebalanced portfolio that also included housing for moderate-income households mayhave provided enough revenues to cross-subsidize the developments for very low-incomehouseholds.


A final concern related to specialization and diversification involves the sources of CDCfunding. CDCs that rely primarily on one funding source seem to be particularly vulner-able to downsizing and failure. Abrupt changes in the policies of city agencies, founda-tions, or other principal funders can leave CDCs with little time to find replacement fundsand can lead to downsizing or failure. CDCW (Milwaukee), WHC (Minneapolis), andOCDC (Dallas) were all heavily dependent on single sources of funding. Interruptions infunding from those sources left those organizations in serious financial crises. With a morediverse set of funders, CDCs are not as vulnerable to interruptions in any one source.

In addition, relying on a single funding source leaves CDCs vulnerable to the dictatesof, or at least pressure from, funders wanting CDCs to adopt certain agendas or programsand erodes a CDC’s ability to address local concerns as it sees fit. Because CDCW(Milwaukee) relied heavily on city funds, it was pressured into making decisions, suchas taking on problem properties from failed CDCs, which were not in its best interest. Incontrast, CDCs with diversified funding sources can maintain more autonomy over theiractivities; they can afford to go against the wishes of individual funders without threaten-ing their viability. In fact, several of our comparison groups, notably those in Milwaukee,the Twin Cities, and Dallas, all had diversified one or more aspects of their operations,targeting a broader spectrum of residents, types of development, or geographic locations.These decisions and activities appear to have contributed to the viability of these organ-izations.

Although there are clear benefits associated with increased diversification, there mayalso be risks that are not evident in our case studies but might be found in other examplesof CDC failure and downsizing. If not done carefully and with sufficient resources,mission diversification may lead to financial over-extension, poor performance, and lossof funder support. Taking on new activities requires additional staff, a greater degree ofcoordination, and management expertise, and often results in the need for additionalfund-raising. Given these demands, it is likely that diversification is not possible for verysmall CDCs that are just beginning to gain expertise in a given area. Becoming proficientin delivering or carrying out the group’s core set of activities is important for all youngCDCs. There may, in fact, be an optimum point in an organization’s growth when it candiversify, but our research was not able to address this issue.

Another pitfall of diversification is that expanding the target area, if not handledproperly, may result in loss of support from the original community served, conflictwhen new constituents are added, or turf issues with other groups that may be operatingin the same area. Diversification of the income groups served may also result in loss ofsupport from funders that are narrowly focused on supporting housing for very low-income households. In addition, a CDC that has been focused on very low-incomehouseholds may feel that it is compromising its agenda by serving other income groups.

The decision to diversify, then, should be approached cautiously and involve bothresidents of the original target area and the local CDC support community. The full setof potential benefits and risks should be weighed, and the timing and speed of diversifi-cation should be carefully considered. (The question of diversification is a key dilemmafacing CDCs. For a discussion on the array of dilemmas these organizations are encount-ering see Bratt and Rohe, 2003.)

Connecting with Residents

Another aspect of how CDCs can be proactive in creating a strong position in theircommunities is by maintaining the support of residents they serve. A lack of community


support for various CDC activities was identified as an important factor in the failure ordownsizing of three organizations studied. For example, vociferous community oppositionto the Whittier Alliance’s focus on providing additional rental housing for very low-incomehouseholds led to the takeover of the alliance and the creation of WHC (Minneapolis).Similarly, in Dallas, OCDC’s plan for a new 122-unit subdivision of affordable homesgenerated considerable community resistance and contributed to the loss of its city funding.

The boards and staffs of CDCs need to work hard to ensure that their activitieshave widespread community support. The best way to do this is by opening up a dialoguewith a wide variety of community residents and by directly involving them in the reviewof proposed new activities and projects. This can also be accomplished by involvingresidents on committees, periodically convening general meetings with the larger com-munity, and holding social events in the area served. Ensuring that CDC-owned or-managed properties are well run and maintained is also important in retaining commu-nity support.

If a CDC becomes aware that it is losing touch with its local community, it should takesteps to open the lines of communication. There may be a need to better convey informa-tion about the group’s activities through newsletters or open community meetings, or toinitiate a neighborhood planning process, such as the one undertaken by one of the groupsinvolved in the Cleveland merger. The importance of CDCs maintaining close communityties was dramatically evident in the last-minute negative vote by the membership of one ofthe CDCs that was slated to merge in Portland. In that case, the lack of close connectionsto the community, as well as inadequate communication, led to the surprise outcome.

A good way for CDCs to develop a good relationship with the tenants of their proper-ties (beyond providing high quality management) is for the organization to work closelywith local social service agencies to ensure that tenants receive the support services theyneed. Several of those interviewed in Milwaukee suggested that tenants in propertiesmanaged by CDCW had issues beyond the need for affordable housing, including domes-tic abuse, lack of after-school care, substance abuse, and lack of job training. Similarly,many tenants in properties managed by WHC (Minneapolis) were said to have similarissues that reduced the ability of WHC to effectively manage the properties.

CDCs do not necessarily have to directly provide those services, but they can makereferrals to other appropriate service organizations. They can also establish formal partner-ships with service organizations so that those agencies will refer prospective tenants toCDCs and provide those tenants with supportive services. The provision of social services,however it is arranged, will likely reduce property management problems, promote goodrelations with tenants’ and positively contribute to CDCs’ financial health.

NAVIGATING AND STEERING CHANGE

If change is inevitable, there are still roles for CDCs to play that will enable them tonavigate and, hopefully, steer the change process. Our research revealed that the followinginitiatives are likely to forestall undesirable changes and to minimize negative impacts.

Developing Good Communication and Paying Quick Attention to Problems

CDCs and their support communities should maintain open communication lines andrespond quickly to problems as they develop. Communication problems played an import-ant role in the organizational changes experienced in five of the six cases studied. Theseproblems included poor communication between executive directors and their boards,


between executive directors and funders, between executive directors and city officials orpoliticians, and among CDC supporters. In Milwaukee the lack of communicationbetween the executive director and the board, as well as among the city’s various CDCsupporters, contributed to CDCW’s demise. In Dallas, poor communication betweenOCDC’s executive director and the local city council representative contributed to theloss of an important city contract. Also, in Portland poor communication between thefunding community and the four organizations targeted for streamlining caused earlyconfusion and mistrust in the merger process. When CDCs are undertaking potentiallycontroversial projects, they would be wise to inform and involve local political leadersearly in the process. This is particularly true of CDCs that rely heavily on support fromtheir local government.

In addition to the need for close and regular contact and communication, it is important toquickly identify and acknowledge problems as they arise, not allowing them to fester andworsen. One of the major reasons for the demise of CDCW (Milwaukee) was that theproblems facing the organization were not identified and dealt with early enough. TheCDCW management did not ask for help in addressing property management problemsuntil the organization was in deep financial trouble. CDCW’s management was concernedthat sharing its problems would cause both funders and the city to eliminate new fundingrather than offer needed assistance. In contrast, the Walker’s Point Development Corpor-ation, the comparison group in Milwaukee, responded to a similar financial crisis by imme-diately asking for assistance and taking decisive actions to address its financial problems.

Similarly, several of those interviewed in Minneapolis felt that WHC’s problems shouldhave been addressed sooner and more decisively. Funders should have stepped in earlier,either to provide the support needed to turn the developments around, or to find otherorganizations to take over the units.

One of the ways that organizations may respond to changes in market conditions or toother internal difficulties is to consider merging with another CDC. Our case studies of thetwo mergers in Portland and Cleveland revealed further lessons about how groups cannavigate and steer the merger process. We offer the following two conditions as relevant toother types of organizational changes as well.

Involving All Stakeholders

The organizations involved in the change must feel that they have a voice in the process.All key stakeholders should be brought into the discussions concerning the potentialchange as early in the process as possible. This would include board members, residentsof the community served by the CDC, CDC staff and executive directors, as well asmembers of the CDC support community. An early understanding of the change that islikely to occur, as well as an understanding of how it will likely affect the key players, isimportant to make sure that communication is kept open and that information is asaccurate as possible.

Even though some might argue that executive directors and staff should not be directlyinvolved in some of the conversations, it is a mistake to ignore their voices. While they willcertainly have a vested interest in the outcome, if the executive directors and staff see thechange as a logical or necessary step, the change will likely progress more smoothly. In theCleveland merger, for example, the enormous long-standing commitment of both CDCdirectors to the community allowed for a relatively smooth transition. The willingness ofone of the former executive directors to become a member of a four-person seniormanagement team in the new organization also eased the transition.


A lack of participation by board and staff members of organizations involved in amerger, or in a downsizing or failure is certain to undermine the process and create moraleproblems. In the Portland case, staff members appear to have been largely excluded fromthe merger discussions, which caused low morale as well as staff turnover.

Based on both the Portland and the Cleveland experiences, the CDC support commu-nity should also provide outside consultants to assist each of the organizations undergoinga significant organizational change. In addition, in the case of mergers, resources may beneeded to deal with the logistics of merging two organizations, including space planningand office renovations, moving at least one of the groups to new offices, and addressingorganizational issues, such as pay scales of staff at the merged organization.

Once the merger has occurred, funding for operational support from national, state,and local intermediaries should be kept at the same level as that received by the separategroups for at least one year after the merger takes place.

Taking Charge of the Process

Finally, whenever possible, it is desirable for the CDCs to initiate or at least take chargeof the discussions concerning their organizational change. When an outside funder sug-gests a merger, for example, this top-down pressure is likely to be resented by the CDCsinvolved. The experience in Portland highlighted the fine line that funders must walk; onthe one hand, it is important for them to communicate their goals as explicitly as they can,but on the other, too much direction will likely be viewed negatively. In Cleveland, theleaders of the two merging CDCs felt they were in charge of the process even though theyacknowledged that there was some gentle pressure from the funders.

Even if the CDC owns the merger process, these changes are still not likely to be easy.Numerous messy details will need to be resolved. Perhaps most obvious, the merger of twoorganizations means that at least one of the executive directors will not continue in thatrole. In addition, some board members may need to step down in order for the new boardto be a manageable size. There are also certain to be differences in organizational cultureand day-to-day procedures. Navigating through these concerns and finding comfortablesolutions is likely to take time, patience, and assistance from outside consultants.

CONCLUDING NOTE

Our research has revealed that some CDCs have encountered significant problems andhave had to make major organizational changes. While we do not predict how manygroups in the future are likely to encounter difficulties, it is certain that if a large numberof CDCs fail or are forced to substantially downsize their operations, there will bedetrimental impacts on efforts to provide low-income housing and other services topoor communities. With the aim of preventing this outcome, this article has provided aseries of steps that the CDC support community, as well as the CDCs, can take to enableCDCs to work as productively as possible, to anticipate and plan for possible changes,and to guide the change process if that becomes necessary. At a minimum, we urge CDCsand funders to pay attention to possible signs of organizational distress.

We are also aware, however, that not all CDCs facing difficulties should be saved.Where there are signs of widespread organizational incompetence or illegal activities, forexample, a CDC should likely be assisted in closing its doors. Also, market forces maydictate significant changes in a CDC’s operations. Although CDCs may need to make


major changes under these circumstances, it was beyond the scope of this study to developdetailed guidelines on when CDCs should go out of business, downsize or merge.

By acknowledging that change may be inevitable and planning for it, we are confidentthat CDCs will continue to play critical roles in community development work. In view oftheir prominence in producing and maintaining housing that is affordable to low-incomepeople, and in their commitment to rejuvenating poor neighborhoods, the ability of CDCsto weather the storms of change is of considerable importance. Our overriding goal is tocontribute to the development of better policies and interventions, which will promotemore productive and viable CDCs.

ACKNOWLEDGMENTS: This article is based on research funded by the Fannie Mae Foundation. A

companion article was published in Housing Policy Debate, Vol. 14, Issue 1/2, 2003, pp. 1–46. We

acknowledge and thank Protip Biswas who conducted two of the case studies upon which this article is

based. We are also grateful to Ayse Can Talen and Sohini Sarkar of the Fannie Mae Foundation for their

thoughtful comments on the initial research proposal as well as the final report: Evolving Challenges for

CDCs: The Causes and Impacts of Failures, Downsizings, and Mergers (Center for Urban and Regional

Studies, University of North Carolina, Chapel Hill, 2003). We also want to thank the scores of key

informants who shared their knowledge about the community development corporations that are the

focus of this study.

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