Community Development Corporations

Community Development Corporations or Certified Development Companies (CDCs) play important roles in community economic development through their affordable housing and economic development programs. In recent years, many CDCs have begun providing commercial space as one component of their mixed-use development projects. In Seattle, CDCs like SouthEast Effective Development (SEED) lease commercial space to relieve pressure on businesses, thereby strengthening communities and providing stability for the future. This section explores how CDCs can use their mission to providing affordable commercial space.

What Are CDCs?

The broadest explanation of CDCs are Community Development Corporations that offer programs and services to revitalize the neighborhoods in which they are located. CDCs typically support underserved communities primarily through “fostering job creation and access to affordable housing.[1]” There is no legal definition of CDCs in this sense, though they do share 501(c)(3) status and partial or full community-controlled governance structures. CDCs may pursue Small Business Administration (SBA) certification in order to make SBA 504 loans to small businesses (SBA 504 loans are explored in further detail in the report on Access to Capital).

Upon association with SBA lending, this distinction changes the CDC into a Certified Development Company. Unless otherwise specified, the former definition – community-oriented economic development organizations authorized to make SBA 504 loans – should be assumed throughout this report.

The concept of CDCs comes from the “War on Poverty” in 1966, when Congress earmarked federal funding for community-controlled organizations focused on local business and economic development[2], affordable housing development, and the promotion of economic and community development in low-income neighborhoods. Local economic development theories hold that job creation and small business development are part of the foundation for community stability. Many CDCs have responded by incorporating commercial development into their mission. This can take the form of leasing commercial spaces, attracting business investment, or offering small business lending, to name a few products.[3]

In the context of this report, many CDCs seek to provide affordable commercial space in response to gentrification that may be ongoing or may occur in the future in low-income areas. A deeper explanation of gentrification can be found here.

Formation & Governance of CDCs

Formation

CDCs are typically formed by a group of community leaders in response to some perceived social or economic problem in the community. Historically, CDCs emerged in the 1960s and 1970s as part of the “War on Poverty” focusing on social issues and affordable housing. Some CDCs have been formed with guidance from a public planning agency or were specifically created by a government entity. Many have emerged as the end result of neighborhood planning processes, including the Central Area Development Association.

Certified Development Companies with SBA lending capability have specific structural requirements. “Some of the requirements for an organization to operate as a Certified Development Company are:

  • Be a non-profit corporation in good standing
  • Have at least 25 members representing the following groups:
    • Government organizations responsible for economic development in the specific community and acceptable to SBA
    • Financial institutions that provide long-term, fixed asset financing in the community where it operates
    • Community organizations dedicated to the local economic development
    • Businesses located in the area of operation
  • Have a board of directors chosen from among the members and representing at least three of the four membership groups
  • Meet a minimum level of lending activity

All these requirements –and others not mentioned here- have to be met to be certified by the SBA.”

Please visit the SBA to view the most updated requirements.

Governance

CDCs are non-profit organizations and, as such, are structured with board members and an executive director. The board of directors typically consists of a diverse group of community members or area residents, business leaders, and other civic stakeholders. In an ideal world, significant board membership and “control of a CDC should reside with the people who live in the neighborhood,” but often resident participation can be quite low.

A CDC moving into the affordable commercial space realm should have a governance structure that balances the need for commercial real estate expertise and strong connections to the local residents. A CDC specializing in commercial development might want a diverse board consisting of business community members, residents of CDC-provided affordable housing, and members of the broader community, who are a major component of decision-making regarding tenants and strategies for providing commercial space. Further, a diverse board containing local residents may help an existing CDC refocus its efforts on affordable commercial space.


CDC Rationales for Developing Commercial Space

CDCs acquire and redevelop commercial space for a number of reasons that do not always include providing permanently affordable commercial space for local businesses, but it is a goal that fits well within their capabilities

The evolution of community economic development theories have led to a focus on job creation, with the understanding that at the base of economic growth is the provision of living wage jobs across all social classes. CDCs accordingly focus on business retention and/or business attraction within their neighborhoods. Given gentrification trends pushing up land values and the need for communities to have inventories of the physical resources and assets in their communities (such as empty lots, historical buildings, and empty buildings), CDCs are some of the best-positioned organizational entities to identify and preserve land for industrial and commercial use.

Once the land is acquired, CDCs are capable of then pursuing community-appropriate redevelopment. One example of a CDC focusing revitalization efforts on a neighborhood and providing jobs for its residents is Seattle-based SEED’s development of Rainier Valley Square. As part of a larger neighborhood action plan, SEED formed a limited liability partnership, secured financing, and developed 104,000 sq ft of commercial space. SEED leveraged $15M worth of redevelopment funds, expanded the shopping center, and brought in an anchor grocery store and other small businesses. This project created both a renewed sense of neighborhood vibrancy as well as stable income opportunities for residents of this economically depressed area.

Affordable housing with lower-level commercial space creates earned income opportunities. CDCs may also use commercial space to pay for other CDC activities. CDCs may begin developing commercial spaces that are permanently affordable when there is an absence of affordable spaces in a community following gentrification. While some CDCs are explicit in their offerings of below-market rate rents for commercial spaces, research suggests below market-rate leasing to small businesses is an informal and non-explicit process for many CDCs.

Developing and Leasing Commercial Space

Land Acquisition

Similar to CLTs, there are two main processes through which CDC’s would acquire commercial space to lease to local small businesses. Both involve acquiring ownership of the underlying land. Land acquisition for CDCs is a capital-intensive process that occurs by either purchasing vacant land or an existing building in the general real estate market or by working closely with a local government or other local partners. One example of a CDC using this approach is Hope Community, Inc. in East Harlem, New York City. Hope has acquired and kept affordable over 40,000 sq ft of commercial space across 28 buildings.

CDCs, also like CLTs, use different land acquisition strategies depending on the local real estate market and neighborhood trends. Land acquired by CDCs often is not used for commercial space, yet in recent years CDCs and other non-profit developers have included some amount of ground floor commercial space. CDCs may receive funds directly from a local government to purchase land. SEED received $2.5 million from the city of Seattle for land acquisition for Phase I of its Rainier Court Senior Apartments in the early 2000s, for example.xlvii

CDCs may provide affordable commercial space in other forms where they do not own the underlying land. Some CDCs instead choose to enter into agreements with private commercial property owners to lease space for an extended period, and subsequently sub-lease space to small, local businesses at affordable rates. This model removes the risk and potential turnover a private developer might experience. This model appears to be less commonly used because direct subsidization is not a financially sustainable long-term strategy for a CDC.

In contrast to the SEED example, in Seattle’s Capitol Hill neighborhood, Capitol Hill Housing (a PDA which also calls itself a CDC, mostly focused on affordable housing) has developed an affordable housing project called “12th Ave Arts.” This project also includes ground- floor retail “prioritized” for local businesses.

Master Lessor Leasing Model

While CDCs employ a variety of leasing strategies, the master lessor model described above is commonly used to retain ownership of the commercial space, while leasing the space to local businesses or non-profits. Often, CDCs will renovate or upgrade space before it is suitable for use by businesses. In this model, a mixed-use building would reserve the ground-floor space for commercial purposes. This model allows the affordable commercial space to potentially benefit many businesses overtime, but also entails more risk. A CDC can expect to have the space vacant for some period of time, either between leases or soon after construction. Locally, the commercial space component of SEED’s Claremont Apartments was vacant for some time before the units were converted and sold as condominiums.xlviii

Strengths of CDCs

This underlying ownership of land allows CDCs to keep prices low indefinitely. Additionally, due to their community-driven mission and links to residents living in their community, CDCs are uniquely placed to develop or redevelop commercial spaces that respond to a community’s needs through their ability to influence key factors.

Rent Stabilization

CDC’s are not driven by an underlying profit motive and are less likely to incrementally or drastically raise rents for their commercial tenants.

Linking other CDC Activities

CDCs that have business technical assistance initiatives as part of the community development work are especially well placed to help local businesses grow. Leveraging these existing programmatic resources increases the odds businesses will be successful.

Physical Dimensions of Commercial Space

Affordability of commercial spaces depends on a number of variables, including unit size. Optimizing space size for target businesses can make units more affordable for small businesses.

Tenant Selection & Leasing Terms

CDCs, like private property managers, can employ some amount of discretion in choosing to which businesses they lease affordable commercial space. A CDC’s mission also allows them some leeway in rent-setting and lease terms. This includes both the term of a lease and the rent.l

Weaknesses of CDCs

The CDC as a provider of affordable commercial space has considerable drawbacks. These originate mostly from the rapid pace of market forces and the inevitable capital constraints many CDCs would experience in accumulating large amounts of land or space.

Slow Pace of Development

Building new space or rehabilitating vacant space takes time. If a CDC’s short-term goal is to provide space to struggling businesses or other entities, the development of new space may come too late.

Governance

The composition of a CDC’s board of directors may determine the vision and practices of the organization.

Financing

Actively subsidizing bottom-floor retail in a mixed-use building may make it difficult for a CDC project to prove financially sustainable over the long-term. Finally, some scholars have argued that because they operate within the confines of the market system and are in some sense at the mercy of many external (non-local) forces and funding streams, CDCs are not “community-driven” at all.li


Sources and Resources:

[1] Morris, Stephen, U.S. Small Business Association. “CDCs and CDCs: Community Development Corporations and SBA Certified Development Companies.” Published June 23, 2011. Accessed November 25, 2015.

[2] Leigh and Blakeley, Planning Local Economic Development: Theory and Practice, Fifth Edition. Ch 11, p 336.

[3] Community-Wealth.Org. “Overview: Community Development Corporations (CDCs).” Accessed November 25, 2015.

WEBSITE | Overview of Community Development Corporations, Community-Wealth.org
WEBSITE | National Alliance of Community Economic Development Associations
WEBSITE | CDCs and CDCs: Community Development Corporations and SBA Certified Development Companies
REPORT | Community Development Investments and Neighborhood Change: An Analysis of LISC’s Building Sustainable Communities Neighborhoods
REPORT | Ten Realistic Retail Themes for a Vibrant Downtown
EXAMPLE | SouthEast Effective Development (SEED)
EXAMPLE | Yesler Community Collaborative
EXAMPLE | InterIm Community Development Association
EXAMPLE | White Center Community Development Association
EXAMPLE | Central Area Development Association
EXAMPLE | Capital Hill Housing
EXAMPLE | El Centro de la Raza
EXAMPLE | Washington Community Reinvestment Association