Nonprofits Look to Business for Funding Model

July 01, 2006
By  Lisa J. Locke Glenda J Wilson

Franklin School Apartments were developed by River City Housing in Louisville with the help of tax credits and the Commonwealth Bank & Trust Co.

How organizations come up with the money to pay for development projects has been on a path of change for some time, and the pace is accelerating.

There is a long history of grant funds from government and philanthropic organizations to pay for projects. In fact, charitable giving was the first source of funds for community development.

However, stakeholders have learned that a principal ingredient for community development—in addition to social, moral and economic motivation—is an adequate, sustainable supply of financial capital. So, many community development corporations (CDCs) are adopting models more typically used by for-profit businesses. Terms such as revenue, growth, sustainability, equity investors, self-sufficiency, earned income and access to capital are becoming commonplace.

Although this approach may be new for many community development organizations, it's a tradition for other nonprofits. Some have been selling products and services for years as a way to generate their own source of funding. For example, the Girl Scouts annual cookie drive generates enough revenue for Girl Scout Councils across the nation to continue offering programs, training and special events for thousands of young girls and adults. Likewise, the revenue that Goodwill Industries of America makes from selling donated items in its stores sustains programs, such as job training and counseling, for people with disabilities and other disadvantages. More than half its revenue comes from retail sales.

A nationwide collaborative of 84 regional organizations, the Housing Partnership Network (HPN), creates efficiencies, increases product, and enhances the performance and social impact of nonprofit community developers. The partnership is based on a European model of co-ops and mutual organizations. HPN enterprises include:

  • Housing Partnership Insurance Co.—a $10 million captive insurance company owned by 18 of the regional nonprofits. The premium savings is about 15 percent, so each of the 18 participants has more money to spend on programs.
  • Housing Partner Securities—a $100 million 501(c)3 bond conduit with Freddie Mac that delivers a more efficient source of capital for the housing producers.
  • A new mortgage services company that will do $18 million in loans to 200 new home owners in 2006.

A future HPN enterprise is a community development financial institution (CDFI) investment bank that will be a liquidity outlet for large-scale CDFIs.

"Why do we care? HPN saves us money; HPN increases our competitiveness; HPN solves problems too big for a single member," says Nancy Andrews, president and CEO of the Low Income Investment Fund and an HPN board member. Together, the member organizations have produced or financed 600,000 housing units.

Several local CDCs-United Housing and Cooper Young Development Corporation in Memphis, for example-are building and selling market-rate houses as a secondary activity for the sole purpose of creating a revenue stream to fund their primary mission: affordable housing. These market-rate houses are sold to buyers who are not income-restricted since the CDCs are using sources of funds that do not dictate price or income qualifications.

Habitat for Humanity's ReStore operations provide another example. Located in many cities—including St. Louis, Louisville, Little Rock and Memphis—these retail operations sell donated new or gently used tools, furniture, building supplies and other items for the home. Sales revenue helps Habitat continue building affordable homes.

According to Diane Kirkpatrick, executive director of Habitat for Humanity in Louisville, ReStore produces community-wide benefits in addition to creating revenue for Habitat. Materials are donated instead of being sent to landfills, donors receive a tax deduction for the fair-market value of the donated items, jobs are created for community residents, and items are sold at a deeply discounted price.

As demonstrated by HPN, building collaborations and coordination is critical. This is also true at the local level, and using tax credits is one way to engage the private, for-profit market in affordable housing development. River City Housing in Louisville, Ky., did this when it acquired and sold historic tax credits and low-income housing tax credits to convert an abandoned school into 12 affordable rental units for the elderly. Commonwealth Bank & Trust Co. was the investor. The project cost $1.8 million, with more than $1.2 million financed through a combination of historic and low-income housing tax credits.

All these organizations have discovered models that provide them access to capital. Whether selling products or tax credits, the revenue generated is helping CDCs reach scale and sustainability.

About the Author
Lisa J. Locke

Lisa J. Locke is a community development advisor at the St. Louis Fed, specializing in the Bank On National Data Hub. Read more about Lisa's work.

Lisa J. Locke

Lisa J. Locke is a community development advisor at the St. Louis Fed, specializing in the Bank On National Data Hub. Read more about Lisa's work.

Bridges is a regular review of regional community and economic development issues. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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