Economic Justice: Social Impact on Urban Communities

                     Economic Justice: 

        The Social Impact of the Affordable

     Housing Model on Urban Communities

Sharon Sumpter & Calvin Kennedy

(First of a two part series)

After nearly a quarter of century of developing and providing affordable housing, experience has revealed that the model as originally conceived is not viable and contributes to negative social impacts to the community.  This article speaks to the “lessons-learned” and the need to create a more sustainable model that will balance the corporate benefits with the social impacts to urban communities.  This article speaks to problems that are systemic and attempts to shed light on the issues of crime and poverty that have become generational.  We believe this article would be of interest to anyone who is concerned with the social ills plaguing inner city urban communities.

The authors of this article come from varying perspectives.  Sharon Sumpter has served as the Executive Director of Corridor Economic Development Corporation (CEDC), a community-based affordable housing developer, for over 22 years.  Calvin Kennedy is new to this industry recently joining the board of directors for CEDC earlier this year; he is a co-founder of the religious order, Sacred Order of the Sons of Ra, and his professional background is in management consulting and information technology.  Both have committed – along with the other members of the board of directors – to the transformation of CEDC into an organization that can more effectively serve civil society.

The Community Development Corporation (CDC) first appeared in the 1960s and early 70s as a response to the urban renewal that was occurring across the country.  In fact, it could be argued that CDCs arose out of the civil rights movement as a way to advocate and provide housing for the urban poor who were being dislocated as a result of urban renewal.  As part of the Tax Reform Act of 1986 a new “vehicle” was created to encourage for-profit corporations to invest in affordable housing projects.  This vehicle is the Low Income Housing Tax Credit (LIHTC) and it allows for-profit corporations to “write-off” passive losses and thus reduces their overall tax liability.  By 1990 the LIHTC was reaffirmed by Congress and as a result, CDCs now account for about 90 percent of the affordable housing that is built each year. [1]

Today LIHTC investments are considered some of the best, low risk and predictable investments for corporations to invest into.  According to one popular financial advisor, LIHTC investments provide the following:

• Excellent risk-adjusted returns;
• Lowest default rate of all real estate-related asset classes;
• Predictable 10 to 15-year benefit stream;
• Dollar-for-dollar tax credit benefits (deductible against AMT);
• High-impact socially responsible investment;
• Regulatory (CRA) credit for community development;
• Credits and passive losses can be carried back one year or forward up to 20 years. [2]

The corporations (for-profit) benefit greatly from these programs.  They have a viable investment instrument available to primarily only them that presents very little risk.  The government wins because it no longer has to be in the business of providing public housing.  This is in spite of the fact that not nearly enough affordable housing is being provided, as indicated by the following excerpt from Domhoff’s article:

The CDCs that came to be the main inner-city nonprofits in most cities in the 1990s do not provide nearly enough low-income housing by any means, and there remain serious weaknesses in their programs from the point of view of those who would like to see major reforms in inner-city neighborhoods, as cogently argued by a sociologist who has worked with CDCs and other CBOs (Stoecker, 1997).[3]

As the above quotation suggests, not all of the parties involved in the affordable housing equation come out as winners.  The nonprofit affordable housing developer (NAHD) and the residents of these communities simply do not fare as well in comparison.

To begin with, the partnerships themselves are not equitable.  The nonprofit partner is not regarded as being important and all too often is treated as a token of paternalistic concern.  For example, many partnership agreements provide a clause allowing for the nonprofit partner – the general manager of the partnership – to be removed from the partnership without cause.  This is regardless of the fact that nonprofit partners may have performed all of the development work and successfully managed the properties for several years.  These types of agreements are not challenged because of the nonprofit’s perceived lack of power and relevance by the nonprofits themselves as well as by government agencies and equity partners.  The NAHD operates in an atmosphere where it is not viable to question the status quo, often settling for nominal upfront developer fees that only provide for the short-term.

This pattern of inequity continues upon exploration of the affordable housing model.  The model is not truly sustainable over the course of a 15-year tax credit period. While the equity partners (corporations) are generally insulated from loss and continue to reap good and consistent returns, the economic benefits to the NAHD have dissipated.  In fact, the greater the losses for the partnership in turn mean greater profits for the corporations.  This is because passive losses to the partnership translate to higher returns for the investor.  Meanwhile, the NAHD developer fee has usually been spent within 36 months and the NAHD must constantly seek new deals to remain economically viable.  This cycle usually encourages the departure from the core social mission of the organization.

The lack of the sustainability of the model undermines the long-term viability of the nonprofit partner.  While reserves have been capitalized upfront; these reserves are often depleted well before the 15-year period, even after contributions from collected rents.  At the same time, however, the NAHD is saddled with the expense of reporting to five different regulatory agencies to include yearly audited financials which can be very expensive.  Utility expenses are often grossly underestimated based on the guidelines; maintenance expenses are increasing by 10% while rents can only be increased by 2%.  This causes maintenance to be deferred; and so begins the downward spiral from a livable affordable housing community to a slum.

This explains why in Los Angeles several community-based NAHDs are no longer in this business.  There are least six organizations that were forced to walk away from projects in South Central Los Angeles because their organizations and projects were no longer viable.  Oftentimes lead regulatory agencies are unwilling to work with NAHDs that are indigenous to the community as a partner in the fulfillment of the NAHDs legacies.  The perceived lack of viability is seen as failure.  What usually occurs next is that the properties are given to an organization that is from outside of the community and this comes with more subsidies from the regulatory agencies which were not previously made available to the indigenous NAHDs.  This new organization will be much larger than the community-based nonprofit; however, it will not have any connection or vested interest in the community that it is now meant to serve.

It is imperative that the NAHD be more than a conduit for property tax exemptions and LIHTCs for large distant corporations.  It should serve a primary role in addressing social issues.  This entails offering programs in areas such as tutoring, financial literacy, parenting classes and job training/placement; however, it calls for much more than that.  The NAHD must be a stakeholder in the community that it serves in order to authentically and effectively offer a positive social impact.

This article suggests that there have been unintended consequences that are a result of an affordable housing model that does not fully calibrate – in the way it does profit and losses to the investors – the social impacts to the community and society as a whole.  The relationship of inequity that exists between the nonprofit sector and the government and business sectors is a core issue.  The NAHD is put into a position that does not allow for it to fulfill its mission.  This contributes to the systemic failure of this model and the inability to create sustainable communities.  Thus the cycles of poverty and crime continue…

The next article in this series will present viable solutions and innovative models that create true Economic Justice as it relates to community development.  As a result, CEDC is being transformed and re-inaugurated as Ausar Economic Development Corporation (AEDC).

To learn more about this organization go to www.aedcorp.org[4]