The Next Generation of Economic Development Tools: Community Development Corporations
Kevin Payne is vice president of development for the Roseville Community Development Corporation and can be reached at email@example.com. This article is adapted from a background report prepared by the City of Roseville as part of the planning process for establishing its community development corporation (CDC). The League gratefully acknowledges the assistance of John Sprague, Roseville CDC’s chief executive officer, and report author Kevin Payne, for permission to adapt excerpts from the report to help League members learn more about this important tool. The original background report and the Roseville CDC’s Business Plan are online at www.rosevillecdc.com.
In the wake of the state’s elimination of redevelopment agencies, cities throughout California are seeking alternatives to help create jobs and revitalize neighborhoods. Earlier this year the League Task Force on the Next Generation of Economic Development Tools began examining potential tools for cities to use to promote economic development. Community development corporations (CDCs) are one such tool that has been used successfully throughout the United States to accomplish community revitalization goals.
What Are CDCs?
CDCs are nonprofit, community-based organizations that secure private and public capital through development of both residential and commercial property. These organizations also undertake economic development efforts and offer programs that benefit the community. CDC projects and activities include developing affordable housing; redeveloping properties to create mixed-use, commercial and office projects; implementing economic development and social programs; and, in some instances, providing ongoing property management.
Created to provide an alternative mechanism to advance redevelopment and revitalization goals within communities, CDCs have expanded rapidly in size and numbers. An industry survey published in 2006 found that 4,600 CDCs throughout the nation promote community economic stability by developing more than 86,000 units of affordable housing and 8.75 million square feet of commercial and industrial space per year.
Functions of a CDC
A CDC is a nonprofit entity characterized by its community-based leadership, which differentiates it from other types of nonprofits. A typical CDC structured to promote redevelopment activities has a board appointed by the supporting governmental entity or city council. CDCs typically produce workforce housing and create jobs for community residents by securing financing and funding and attracting private investment to construct mixed-use and commercial development projects.
CDCs have strongly influenced many of the communities in which they work. A 2002 Urban Institute study (www.urban.org/publications/410638.html) of 23 cities found that CDCs had noticeably improved multiple neighborhoods in eight cities and one neighborhood in each of another 11 cities, with more limited block-by-block impacts in the remaining four cities.
Examples of successful CDCs include the Centre City Development Corporation in San Diego and the Portland Development Commission in Portland, Ore. Both of these organizations have acted as a private development company, implementing key projects that resulted in achieving the vision established by their individual communities. (The Portland Development Commission is structured and functions like a CDC, but is not a stand-alone 501(c)(3) due to its formation as part of Oregon’s urban renewal program and implementation under the city charter.)
Available Funding Resources
Multiple mechanisms are available to fund a CDC. Each CDC can be uniquely crafted to take advantage of a variety of funding sources, including the following.
General Funds. Cities can allocate General Fund money to a CDC. The City of Portland funds CDC staffing and administrative costs through its General Fund.
Gifts and Bequests. Private parties are eligible for tax deductions for donations made to a nonprofit. Funding and/or assets can be gifted to the CDC, and the contributors can reduce their tax obligations in accordance with the tax code.
Special Revenue Funds. This includes funds that are typically generated through enterprise zones, Housing and Community Development (HCD) contracts, housing acquisitions and other federal grants. These funds account for the proceeds for specific revenue sources that are dedicated for specific purposes. Generally, these funds account for federal, state and local grant and private activities. Typical grant programs categorized in this revenue source include the HOME Investment Partnerships Program and the Environmental Protection Agency’s brownfields revolving loan program.
Tax Credits. CDCs can take advantage of tax credits because they are a substantial provider of affordable workforce housing. New-market tax credits are a relatively new financing mechanism available to a CDC. For CDCs that establish for-profit subsidiaries, limited liability companies or partnerships may be eligible for equity investments by new-market tax credit investors. To structure the use of these funds the CDC extends loans to qualified local businesses, which are then eligible for tax allocation credit to be purchased by private investors.
Enterprise Loans. As part of Portland’s approach, this revenue source consists of housing and economic development loan funds, which are self-sustaining through the collection of principal and interest from borrowers. This funding source can also include private lender proceeds.
Income and Asset Management Funds. Funding secured through loan repayments, property ownership, development participation and ongoing property management is available to CDCs.
Benefits of Establishing a CDC
The City of Roseville anticipated numerous benefits from developing a CDC. These included:
- Leveraging existing community knowledge and resources that are tied to real estate development, financing and construction;
- Establishing a long-term mechanism for promoting revitalization, with no time limit;
- Creating a development and revitalization scenario sooner than that provided by the private sector market;
- Providing additional funding resources not otherwise available;
- Entering into agreements for projects with the CDC dictating the business terms, and the CDC entering into financing agreements with developers or developing projects itself;
- Having the ability for funds to revolve through the CDC for future downtown development projects and to create revolving loan funds;
- Providing a nonprofit that can own and manage assets in the long term while channeling profits for redevelopment purposes;
- Enabling charitable donations to the CDC;
- Expanding the geographical area for revitalization beyond the redevelopment plan area;
- Making it possible to receive financial returns on redevelopment financing using funds that originated as tax-exempt bond proceeds, which was not possible for the city’s redevelopment agency under the Internal Revenue Code;
- Establishing the CDC as a business entity expected to operate as such;
- Providing for continual reinvestment back into the community;
- Promoting a better environment to attract private investment;
- Focusing on job creation and expanding the existing tax base; and
- Allowing for the coordination of multiple housing, economic development and redevelopment activities.
How Other Jurisdictions Use CDCs
The cities of San Diego and Portland offer excellent examples of how a CDC can advance a community’s revitalization strategies.
Key points about the Centre City Development Corporation (CCDC) in San Diego include:
- Formation. This public nonprofit organization was formed in 1975 to help the redevelopment agency accomplish revitalization goals.
- Governance. A nine-member board, appointed by the city council, governs the CCDC.
- Responsibilities. The CCDC is responsible for strategic planning, urban design, property acquisition and development, affordable housing, development permitting, business and resident relocation, public improvements and securing public financing.
- Major Projects. The CCDC’s major projects include the San Diego Convention Center, Horton Plaza shopping center, and improvements associated with the Gas Lamp District and Petco Park.
- Investments in the Community. As of April 2012, the CCDC had invested a total of $12.3 billion dollars locally, including $1.7 billion dollars in public improvements.
- Job Creation. The CCDC had created 23,000 permanent jobs and 63,000 construction-related jobs as of April 2012.
A brief summary of the Portland Development Commission (PDC) includes:
- Formation. Voters approved the formation of this nonprofit in 1958.
- Governance. A five-member board, appointed by the city council, governs the PDC.
- Responsibilities. The PDC is responsible for housing, promotion and development associated with revitalization efforts and economic development, as well as the approval of urban renewal districts, bond sales, development projects and major economic development initiatives.
- Major Projects. The PDC’s major projects comprise the development of Museum Place, Pioneer Courthouse Square, light rail to the airport, Walnut Park Retail Center and the redevelopment of the North Park Blocks. In addition, the PDC has renovated and converted numerous historic structures into affordable housing and made thousands of homeowner repair loans.
- Economic Development. The PDC has implemented a variety of economic development projects, including recruitment of major companies such as Qwest Communications.
Forming a CDC
Forming a nonprofit entity under section 501(c)(3) of the Internal Revenue Code requires several steps. Each is a critical component of meeting the requirements for designation as a nonprofit. The first steps include:
- Creating a board of directors;
- Obtaining insurance;
- Obtaining tax-exempt status;
- Setting up payroll and tax filings;
- Opening bank accounts;
- Establishing annual audits and bookkeeping;
- Developing procedures for conducting meetings and taking minutes; and
- Creating a business plan.
The basic documents required to incorporate a CDC are bylaws and articles of incorporation. Bylaws set out the structure of the board, frequency of board meetings, how the board members are chosen and other details about the board, its committees and its officers. Articles of incorporation include the general purpose or mission, procedure for convening the board of directors, legal address, and other government-related accountability details.
With a 501(c)(3) designation the organization will be eligible to obtain grants and gifts from any government agency, corporation, foundation or individuals.
For cities seeking new ways to promote economic development and create jobs, CDCs offer numerous opportunities and advantages.
More About Forming a CDC
The following provides more detail about the basic yet critical steps to form a CDC.
Create a business plan. Key elements of a business plan include a formal statement of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. For-profit business plans typically focus on financial goals, such as profit or creation of wealth. Nonprofit business plans tend to focus on the organizational mission, which is the basis for their governmental status or their nonprofit, tax-exempt status — although nonprofits may also focus on optimizing revenue. The primary difference between profit and nonprofit organizations is that “for profit” organizations look to maximize wealth while nonprofit organizations aim to provide a greater good to society. A business plan is critical to outlining the criteria for success and describing the CDC’s goals for the first two to three years.
Create a board of directors. Roseville proposed a CDC board consisting of five members with development expertise including but not limited to real estate development, architecture, engineering, business, real estate financing, property appraisal or other development-related experience. In Roseville, the city council appoints the members of this body.
Get insurance. Incorporation may protect board and staff members from personal liability. However, there is no absolute protection from personal liability. Therefore it is critical that the organization maintain director and officer liability insurance that protects the members of the board individually from legal issues and concerns.
Obtain tax-exempt status. To raise charitable funds from foundations, corporations and individuals, as well as take advantage of tax credit financing, the CDC must be established as a Section 501(c)(3) corporation under the federal tax code. This allows donors and investors to take a tax deduction for their funds. The organization also needs to obtain a federal tax identification number (or EIN).
Set up bank accounts. The organization will require a checking and savings account at a local bank. It is recommended that this be an institution that will be involved in funding projects developed by the CDC. The bank will require authorized signers for the accounts. Typically, this is one of the first actions taken by the board and recorded as part of the board minutes.
Establish annual audits and bookkeeping. Annual audits are a typical check and balance as part of this type of business entity. The city/agency as well as most funders will require an independent annual audit of the organization’s finances. The audit firm should be established early on, so this critical detail is completed after the first year of operation.
Develop meeting procedures and minutes. Meeting procedures are critical to the operations of the board. These provide the framework within which the board operates. The procedures also help to focus the board’s actions on given topics. The records, or minutes, of every formal board meeting are an important operational management tool. These minutes capture the activities of the board and become an important corporate document.