During the last two years voters have approved new State and local bonds totaling over $500 million for housing preservation, rehabilitation and construction. The Los Angeles City Council in June voted to place a $100 million seismic safety and housing preservation bond issue on the November ballot. And as Alan Cranston’s article in this issue details, the U.S. Senate in June passed the first housing legislation in a decade that puts money into new housing production for low income families. These new funding initiatives share one trait above all: they all emphasize the role of non-profit housing developers.
But with this ascension of non-profit housing onto the policy agenda have come doubts. Some question whether non-profits really have the expertise for complicated development deals. Others are doubtful that non-profits, which are often small and underfunded, can produce enough units to close the region’s gap between demand and supply for low-cost housing.
The Planning Report explores non-profit housing from three perspectives, with contributions from the Local Initiatives Support Corporation, Neighborhood Housing Services, and the Los Angeles Community Redevelopment Agency, which increasingly relies on non-profits.
In Defense of Non-profit Housing
By Denise Fairchild
Non-profit housing developers have demonstrated the capacity to build more affordable units, for the lowest rents, for the longest period of time, in the least desirable locations. This is especially true for non-profits with a special constituency such as the homeless, single mothers, or a targeted low-income neighborhood.
For-profits, by contrast, avoid these housing development challenges. The profit motive limits the rent levels, number, type and location of low-income units.
Furthermore, the record shows that nonprofit developers deliver. In 1989, 800 community-based non-profit development organizations built nearly 125,000 units of affordable housing nationwide.
Few of these projects fail. Fewer than 5% of the community-based organizations funded by the Local Initiatives Support Corporation defaulted on their loans. This success has come despite the unique complexity of arranging multiple sources of financing, and often balancing competing project goals such as shelter, training, and job opportunities. As evidenced by the savings and loan scandal, the nonprofit record compares favorably to that of for-profit developers.
These capacities notwithstanding, nonprofits should not be seen as the panacea for the region’s housing problems. Currently, slightly over 3,000 units of low-income housing are in development by 35 Los Angeles area non-profit organizations. By comparison, the City of Los Angeles needs 10,000 affordable housing units a year merely to keep up with population growth.
More money is needed to meet the region’s affordable housing needs. The demand far outstrips the ability of nonprofits to supply the requisite units.
Unfortunately, non-profits have no special capacity to build low income housing for less money, especially given their typical commitment to providing decent housing. The fact is land costs are inelastic and universally high. Moreover, the cost of labor and materials changes only with production volume, not with the motives of the developer.
The lack of adequate staff resources also hampers the production capacity of nonprofits. While the financial statements and staff resources of non-profits vary, in Los Angeles most operating budgets for housing fall under $100,000 and support fewer than two staff members.
Enhancing organizational and production capacity requires a reliable source of operating funds. One solution would be to enable non-profit developers to earn developer fees commensurate with the for-profit community. Due to government restrictions, non-profits typically earn development fees at less than 5% of total development costs compared to upwards of 25% in the for-profit community.
Increasing non-profit housing production also requires on-going programs of training, peer-to-peer consulting, and technical assistance.
Fortunately, a number of public and private organizations have begun to address these capacity building needs. In 1988, for example, the California Community Foundations, the Irvine, ARCO, and Parsons Foundations, and GTE jointly funded a year-long, production-oriented nonprofit housing development training and technical assistance program.
Yet such efforts are only part of the solution—the private sector also has a role to play.
Contrary to current trends, however, that role should not be to form non-profit development organizations. Well for-profit developers only tap already scarce government resources without significant value-added and diminish the special contributions (e.g. long-term affordability) of community-based organizations.
These efforts also stir confusion and cynicism about who benefits in the “nonprofit development game.”
Support from the for-profit community is needed to stop the affordable housing hemorrhage. Aggressive housing preservation strategies and one-to-one replacement plans for major development projects are needed to reduce the loss of affordable units.
A more proactive posture, however, would be to build more affordable units than required for density bonuses in market-rate projects, and to keep the units affordable longer than the normal 15-year regulatory period.
In essence, a fair share commitment by the for-profit community, together with commitments of new resources to nonprofit developers will go a long way to ensure decent, safe, and affordable housing for all.
Denise Fairchild is Program Director for the Local Initiatives Support Corporation (LISC) of Los Angeles, a national community development investment bank.
Non-Profits Must Consider a More Comprehensive Approach to Housing
By Lori Speese
When non-profit developers consider producing housing on a large scale, resource development and capacity issues arise. Improving the development capacity of non-profits not only involves the increase of financial resources from the public and private sectors, and strategic planning by non-profits to assess their operation’s needs, it also means working with for-profit developer to create innovative solutions.
Working with for-profit developers means more than limited partnerships or joint ventures—it involves a mechanism for review of land use plans and community issues and a joint advocacy to revitalize neighborhoods.
Non-profit developers must review their internal needs and agendas and partner with
other non-profits and for-profit developers to produce plans for overall community revitalization. When non-profits scurry for any available project or dollars, they do not solve the housing crisis, but merely apply yet another band-aid.
Each piece of a neighborhood’s puzzle must fit together to provide a complete picture. We should be constantly asking the questions, what do we want our communities to
look like, and how can we develop plans with residents, businesses, and local government to bring that about?
Lori Speese is Executive Director of Neighborhood Housing Services of Los Angeles, Inc., a non-profit developer which is one of 263 NeighborWorks organizations nationwide.
CRA’s Housing Programs: A New Agency Emphasis on Non-Profit Assistance
By John Maguire and Leslie Lambert
Since its formation in 1948 by the Los Angeles City Council for the purpose of rebuilding the city’s blighted neighborhoods, a key component of the overall mission of L.A.’s Community Redevelopment Agency has been to bring about a net increase in the housing supply.
CRA housing activities today focus primarily on low-and moderate-income families where the need is most critical. State redevelopment law mandates that a certain percentage (20 percent in most cases) of all tax increment funds generated by redevelopment activities be spent to develop additional low-and moderate-income housing.
Because the alleviation of blight and creation of suitable housing must be accompanied by sensitivity to the existing fabric of the community, CRA is developing 78 percent of its current housing projects in cooperation with non-profit organizations and minority developers who are especially attuned to localized needs.
The agency has encouraged this expanded participation by non-profits and is currently evaluating its own financing programs to try to make them better meet the needs of the non-profit housing developer.
There are several reasons for the increase in the number of active non-profits producing housing in Los Angeles. Primary among them is a growing public awareness of the value of the non-profits’ long-term commitment to affordable housing, as well as their demonstrated capacity to develop, own and operate this housing.
The CRA actively supports building the capacity of new non-profits, particularly those which are community-based, by encouraging joint ventures between these new organizations and more experienced non-profit developers.
The value of this approach is that, after developing one or two projects as part of a joint venture, the newer community-based non-profit will then leave the capacity to begin developing and owning housing on its own.
Another reason for the emphasis on nonprofits is that the agency’s priorities appear to be more attractive to non-profit organizations than to profit-motivated developers. Among these priorities is long-term affordability. In order to compete successfully for scarce housing funds, developers must agree to maintain the projects as low-and moderate-income for the longest feasible time, but in no case less than 30 years.
The CRA and other public financing agencies also generally give a competitive advantage to developers who include large family housing (three or more bedrooms) in their projects, who propose development or rehabilitation of Single Room Occupancy (SRO) units, or to projects which target very low-income households.
Recognizing the growing importance of non-profits in helping the Agency carry out its housing objectives, Administrator John Tuite created the Non-Profit Housing Advisory Committee in late 1989.
Membership of this committee currently consists of twenty-two non-profits involved in the development or financing of agency-assisted housing projects.
The major function of this Committee is to advise the agency on how its policies and programs affect the ability of non-profit developers to produce housing with agency assistance.
The Committee is currently reviewing the draft version of the agency’s housing policy, which is intended to provide the framework for all agency-assisted housing activities. The draft policy contains several financing options aimed at facilitating development by non-profits. One such option is waiving or reducing the CRA’s equity requirement for non-profit developers if certain findings regarding the developer’s track record in producing affordable housing are made.
As a rule, the agency requires that developers agree to a 15 percent equity participation in an agency-assisted housing project.
Since non-profits must rely on the availability of federal and state low-income tax credits for raising equity, and since the amount of available credits is limited, the agency believes that exceptions to the equity requirement must be made.
The draft also includes provisions which adopt as policy the agency’s existing practice of providing acquisition and predevelopment loans to non-profits.
Another important issue, raised by nonprofits and the CRA, is whether the need exists to create a non-profit property management company to manage the increased supply of affordable housing being produced by Los Angeles non-profits. The agency, with guidance from the Non-Profit Housing Advisory Committee, has contracted with the California Housing Partnership Corporation for exploring the feasibility of establishing such an organization.
As currently envisioned, this organization would be an independent non-profit corporation and could be structured as a cooperative or a membership organization with decision-making participation by non-profits.
The CRA welcomes the increased participation of the non-profit housing community and will continue to work with these developers in producing long-term affordable housing in Los Angeles.
John Maguire is Deputy Administrator for Housing Services, and Leslie Lambert is Housing Manager for Policy & Development at the Los Angeles Community Redevelopment Agency.
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