Nonprofit community development corporations (CDCs) are uniquely positioned to address the affordable housing challenges in today’s market. But they face challenges that constrain their ability to compete in the affordable housing marketplace, including geographic limitations; tighter underwriting standards and lower tolerance for risk; lack of economies of scale due to portfolios of smaller, more scattered, and less profitable buildings; scarce subsidy options to finance affordable housing; reserves siloed to individual projects instead of across a portfolio; and the reputational damage of a few actors tarnishing the sector.
One way CDCs can address these challenges, adapt to today’s housing climate, and become more competitive in the market is by collaborating with peers in a joint ownership and management structure known as a joint-ownership entity, or “JOE.”
The JOE is a nonprofit membership organization that owns and asset manages a portfolio of affordable multifamily properties. In exchange for assigning ownership interests and properties to the JOE, CDCs receive a membership interest, a seat on the JOE’s board, and a proportional share of net revenue. The umbrella ownership allows the JOE to drive efficiencies in asset and property management across the portfolio. The shared scale and financial resources also provide the balance sheet strength necessary to favorably finance, refinance, and recapitalize contributed projects without having to joint venture and often cede control to larger for-profit developers. The JOE serves as a guarantor for CDC acquisitions contributed to it. By virtue of its nonprofit ownership and mission, the JOE is committed to long-term affordability and is not seeking, as a for-profit developer might, to capitalize on appreciation in the real estate market at the back end of a deal. Lastly, it helps achieve better financial outcomes by improving the operating margins of projects through economies of scale and implementing other asset management measures designed to increase the economic efficiency of projects.
The JOE model is applicable to any group of CDCs struggling to further their mission—whether it be the result of an economic boom or ongoing economic stagnation. The first, and currently only, JOE is JOE NYC, which was developed through a three-year process by a working group of New York City’s leading CDCs. At present, JOE NYC has 11 member CDCs with footprints in Brooklyn, the Bronx, Manhattan, and Queens and the membership of several additional groups pending. Accomplishments to date include:
· A strong and growing balance sheet: JOE NYC has acquired 20 developments, comprised of 145 buildings containing 2,104 units. An additional 24 developments comprised of 81 buildings and 1,522 units are in the acquisition pipeline, which will bring JOE’s portfolio to 3,656 units. Its balance sheet can complement its members’ balance sheets, allowing them to undertake a broader range of development projects on their own.
· Nonprofit acquisition of privately owned portfolios: Among the acquisitions have been three developments, comprised of 58 buildings and 584 units, originally owned by for-profit developers. This is a reversal of a long-term trend of private acquisition of nonprofit portfolios.
· Renewable energy enhancements across the portfolio: JOE NYC has undertaken an ambitious solar energy initiative encompassing 87 buildings, benefitting approximately 180 buildings in the Bronx, Brooklyn, and Manhattan. With a mix of public and private financing, installation of solar panels will help to reduce carbon footprints, drive down energy costs, and increase net cash flow—a double bottom-line win.
· Collaborations to acquire public sites: Two JOE members collaborated with two other nonprofits to successfully bid against private developers to acquire a city-owned site.
· Collaborations to achieve economies of scale in recapitalizations: Four members collaborated on an 87 building, 525-unit, $102 million recapitalization of a mix of housing developments, strengthening individual deals with anemic cash flow and resulting in economies of scale they previously lacked.
· Capitalization of a pooled operating reserve: As part of the $102 million deal, JOE NYC created its first pooled reserve available to developments, regardless of financing structure, across JOE’s entire portfolio.
While the JOE was originally designed to address the competitive challenges CDCs face in the overheated high-cost real estate market of New York City, the model of collaboration, resource pooling, risk-sharing, and scale is equally applicable to real estate markets where there is inadequate market activity. Scale and collaboration can create the financial strength and risk diversification needed to sustain individual projects and keep individual CDCs solvent. CDCs, like many nonprofits, are increasingly competing against each other for limited dollars and are under constant pressure to merge or consolidate. A joint ownership structure can satisfy funders’ and stakeholders’ desire for collaboration while maintaining the individual existence, institutional history, and expertise of the individual CDCs.
Despite much of the success JOE NYC has had to date, the JOE model is complicated, unprecedented, and not without challenges. It requires substantial, even unprecedented, commitment from its member CDCs and their boards, such as agreeing to contribute their assets to the JOE for at least 10 years. Transferring assets to a JOE requires the approval of local regulatory authorities, lenders, and investors—stakeholders who may be reluctant to approve a transfer to an entity they don’t understand or for which they see no value. Further, a JOE requires start-up capital or grants until the entity acquires and controls a sufficient number of units for it to generate positive cash flow and support itself, which can be challenging for smaller, less sophisticated CDCs to fundraise for. Lastly, the JOE model may not be right for all CDCs as there are many models between no collaboration and joint ownership that CDCs could employ to strengthen themselves, their sector, and affordable housing.
The successful formation of a JOE will largely depend on the commonality of challenges faced by the CDCs, a willingness and ability to work together and meet for the creation and operation of the JOE, and buy-in and support from stakeholders, including affordable housing regulatory agencies, boards of directors of individual CDCs, and philanthropic supporters. Regardless of whether CDCs ultimately choose this model to collaborate, what we know for sure is that collaboration among CDCs in any region is necessary to make the organizations more competitive, more profitable, and more able to meet the affordable housing needs of their communities and beyond.