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Joint Ventures with Private Developers
Joint Ventures with
Private Developers
© 2001-2005 Local Initiatives Support Corporation
Joint Ventures with Private Developers
What is a
“Joint Venture?”
• No precise definition
• Two or more entities working together
temporarily to meet common goals
• Partners combine assets and share results
• Typically for profit enterprises
Joint Ventures with Private Developers
• Limited Partnership
• Limited Liability Company
• Contract Developer
© 2006 Organizational Development Initiative
Structural Options
Joint Ventures with Private Developers
Limited Partnership (LP)
Plus
• Partners share (some)
financial risks
• Limited partners are
protected from
liability
• Limited partner
financial risks are
limited to the amount
of their investment.
Minus
• Management
structure options
limited
– General partner has
most risk and makes
most decisions
– Limited Partners are
prohibited from
playing an active role
in management
Joint Ventures with Private Developers
Limited Liability Company
(LLC)
Plus
• Sharing of financial risk
(both contribute capital)
• Protection of charitable
assets
• Flexible management
options
• Co-ownership provides
more leverage for
continued engagement of
for-profit
Minus
• Harder to unravel
relationship (sale of
interest, or dissolution and
liquidation, required)
• Need to share higher
fees/cost savings/upside
potential
Joint Ventures with Private Developers
Contract Developer
Plus
• Non-profit retains full
control over management
of the project
• No need to share upside
potential
Minus
• For-profit has less
incentive to hang in if
deals goes awry
• More financial risk to
non-profit
• Lack of co-ownership can
make it harder for non-
profit to learn
• Less control for non-profit
if for-profit is the
developer
Joint Ventures with Private Developers
Why Joint Venture?
Joint Ventures with Private Developers
Why Joint Venture?
For the For-profit:
• Community access
• Community support
• Access to public
subsidies
• Access to below-market
rate debt
• Tax credit access
• Ability to tap job
applicant pool
For the Non-profit:
• Inadequate experience
• Small staff
• Increase production and
results
• Skill building
opportunity
• Small capital size
• Access to financing
through for-profit
Joint Ventures with Private Developers
What does each party
bring?
Joint Ventures with Private Developers
The Non-Profit:
• The deal
• Knowledge of the neighborhood
• Local market knowledge
• Political support
• Attractive public and private funding
© 2006 Organizational Development Initiative
What’s brought to the table?
Joint Ventures with Private Developers
The For-Profit:
• The deal
• Technical expertise
• Staff size
• Financial strength
• Access to conventional financing
© 2006 Organizational Development Initiative
What’s brought to the table?
Joint Ventures with Private Developers
Chicago LISC-ULI Study
Brought together private developers
and CDC leaders to study projects
in Chicago and Boston and
identify keys to success:
• Clear division of roles and responsibilities
• Rely on the for-profit partner’s expertise in traditional
development, marketing and access to capital
• Rely on the CDC’s expertise to leverage government
and foundation resources, obtain site control and
public approvals and win community support.
Joint Ventures with Private Developers
Chicago LISC-ULI study
Partner Roles
CDC
• Add value to
projects
• Play a lead role in
assuming risk
• Capacity to
assemble land and
bear holding costs
and time delays
• Roles vary in
different deals –a
challenge for
private developers
For-profit Developer
• Flexible risk-taker
• Market knowledge
• “Deep pockets”
• Staffing expertise
• Creativity
Joint Ventures with Private Developers
Chicago LISC-ULI study
Partner Characteristics
CDC
• Already developed
community
consensus
• Planning process
completed or
underway
• Depth of connections
with community
institutions
• Level of
sophistication with
politics, zoning, and
government
approvals
For-profit Developer
• Entrepreneurial in
style and approach
• Able to dedicate 1 or
2 staff to project
• Financially stable
• Typically a small firm
with patient leader
able to wait for
success
• Some familiarity and
appreciation for
nonprofit sector and
the value of emerging
markets
Joint Ventures with Private Developers
Chicago LISC-ULI study
Partner Characteristics
• Deep pockets are not always as deep as you
think
• Expert developers are not always as expert
as you imagine
• Protect yourselves with proper legal
agreements, bonds, insurance
• Be prepared to step in and prevent failure
• Be prepared to negotiate community
interests vs. developer interests
• Calculate the opportunity cost
• There is no such thing as an “easy” deal
© 2006 Organizational Development Initiative
Joint Ventures with Private Developers
Case Studies
Joint Ventures with Private Developers
Marin City Gateway
Joint Ventures with Private Developers
Marin City History
• Built as temporary war worker housing
– Still occupied into the 1980s
• Still the only significant concentration of
African-American households in Marin
County
• High unemployment
• Marin City CDC formed in 1980 to fight
displacement
Joint Ventures with Private Developers
Marin City USA
Large Flea Market Site was acquired by CDC
• Two year community planning process
• 340 Housing Units
• 182,000 foot Retail Center
($20 million project)
• Partnership between
– Marin City CDC
– Bridge Housing
– The Martin Group
(Private Retail Developer)
Joint Ventures with Private Developers
Shopping Center
Community Goals
• Jobs for local residents
• Minority small business opportunities
• Supermarket/access to healthy food
• Income for Community Services District
– To replace income from flea market
• Income to CDC
Joint Ventures with Private Developers
Initial Ownership
Structure
• CDC and Marin City Community
Services District formed Marin City
Land Company
• Land Co. owns land and leased to The
Martin Group
• Land Lease controlled use and provided
for share of revenue
Joint Ventures with Private Developers
Outcomes - Jobs
• 200 construction jobs
• More than 150 retail store jobs
• 35% of jobs went to residents
– Short of 50% goal but significant
•Hiring goals were not
tracked after opening
–No funding for this
activity
Joint Ventures with Private Developers
Outcomes- Business
Development
• Project included retail incubator space
“Marin City Shops”
• 5 local start-up businesses
• CDC Paid $60,000 in rent but received only
$30,000 – gap funded by foundation
• Incubator space closed
– Minority businesses couldn’t pay market rent
– Foundation couldn't sustain funding
– Space remains vacant!
Joint Ventures with Private Developers
Outcomes -
Supermarket
• Supermarket Closed
– Discount store offered poor quality
– High security offended customers
– Even low-income residents used to higher end
stores
– Community had no way to control quality
– Supermarket replaced with Best Buy
Joint Ventures with Private Developers
Outcomes
Revenue
• Land Company received little revenue
– Project was not thriving
– Private partner controlled bookkeeping so no
profits were reflected (ie. Developer took fees
rather than profit)
Joint Ventures with Private Developers
New Partnership
• Marin City CDC and Bay Area Smart Growth
Fund bought project from Martin Group (2003)
• CDC as 50% owner of project
• Land Company as 100% owner of land
• CDC right to purchase project
• Partner to train community member in property
management
• First Source Hiring Agreement
• Minority tenant goals
Joint Ventures with Private Developers
More Problems
• No enforcement of hiring agreements
– Management company lease enforcement
– Tenants not notifying CDC of openings
– CDC has no way to force compliance
• No consequence to private partner, management
company or tenant for failure to comply
– CDC not compensated for service or
monitoring
Joint Ventures with Private Developers
More Problems
• No minority tenants
– Still no rent concessions for
minority/start up tenants
– Start up tenants held to
national credit standards
– CDC has no role in leasing
• No review of potential tenants
• No right to refuse
• No right to propose tenants
Joint Ventures with Private Developers
Still More Problems
• No training for community in property
management
– Agreement unclear about process and costs
– Private developer expected CDC to raise money
for trainee
– CDC expected project to pay for trainee
Joint Ventures with Private Developers
Even More Problems
• Still no cash flow for CDC
– Project still struggling
– Private partner still controls accounting/fees
– Details of LLC agreement limit CDC access to
profits
– Developer was able to refinance, take cash out
without sharing profit with CDC
Joint Ventures with Private Developers
Serious Problems
• Smart Growth Fund wants to sell after 3
years
• CDC has purchase option but…
– Purchase at market price
– Only 30 days to exercise option!
Joint Ventures with Private Developers
Lessons
• Large deals require top notch attorneys
– Private partners had experienced negotiators
– CDC trusted partners to look out for its interests
• CDC didn’t build its community goals into either
partnership structure in a binding way
• CDC didn’t have a real (economic) role in
ongoing success of project – didn’t provide value
• Without a role, CDC was not able to monitor to
make sure project was meeting goals
Joint Ventures with Private Developers
Discussion
Joint Ventures with Private Developers
New Horizons Center
MBD Development Corporation – The Bronx
134,000 square foot shopping center
• Pathmark Supermarket
• Athlete's Foot
• Blockbuster Video
• Paramount Home Decorators
• Petland Discount Stores
• Radio Shack
• Rent-A-Center
Joint Ventures with Private Developers
Mid Bronx Desperadoes
• Founded in 1974 as a coalition of
volunteers
• Focused on Crotona Park East section of the
Bronx
• 2,300 units of affordable housing
• Community health clinic
• Job training center
• Safety and open space
• Community planning
Joint Ventures with Private Developers
New Horizons Center
MBD Social Objectives
• Jobs for local residents
• Bring life back to the community
• Support local small businesses
• Generate income for MBD
• Build internal capacity for commercial
projects
Joint Ventures with Private Developers
New Horizons Center
Development Consultant
Development Advisor: Hutensky Group/ Felipe
Ventegeat
• Coordinate project team meetings and schedule
tasks
• Develop project budget
• Coordinate Contract Documents, permits, and
planning approvals
• Monitor General Contractor
• Coordinate leasing and lease negotiation
Joint Ventures with Private Developers
New Horizons Center
Development Consultant
Owner Responsibilities
• Representative to participate on project team
• Approve budgets, change orders, etc.
• Provide architect, legal and other consultants
• Secure project financing
• Pay advisor flat fee plus reimbursement of all
direct staff and other costs.
Joint Ventures with Private Developers
New Horizons Center
Outcomes
• 400 jobs; 85% neighborhood hires
– Most hires through MBD Job Center
• 22 national and regional credit tenants
– No local small businesses
• 2 year delay in opening
• $10 million cost overrun
– Excess income devoted to debt retirement for 5 years
• Significant staff burnout
– Two Executive Directors left
Joint Ventures with Private Developers
New Horizons Center
Lessons Learned
• Most mistakes - cost overruns were avoidable
• CDC carried the financial and political risk but
relied on partners to lead the project
• Key problems identified by CDC but ignored by
the experts
– Ex: Buried car on lot
• CDC let partners talk them into decisions that
turned out to be mistakes
• Very few experts on inner city mall management
– We have to become the experts
Joint Ventures with Private Developers
Discussion
Joint Ventures with Private Developers
Alternatives to Joint
Venturing
• Community Initiated Development
• Community Benefits Agreements
Joint Ventures with Private Developers
Community Initiated
Development
• Community Group leads community
planning process
• Identifies key development sites
• Develops general goals for site
development
• Promotes the neighborhood and the site
development opportunity
– RFP for developers
• Offers developers community support if
project conforms with plan
Joint Ventures with Private Developers
East Liberty
Development Inc.
Joint Ventures with Private Developers
East Liberty
Whole Foods Market
• CDC as “Development Advisor”
– Advise on design and concept
– Coordinate community input
– Apply for government grants
– Advocate in favor of the project
• CDC loans or re-grants funds to project
• CDC charges 5-10% of grant funds
• Developer agrees to follow community plan
Joint Ventures with Private Developers
Community Benefits
Agreements
• Legally enforceable contract
• Outcome of negotiation process
• Signed by community groups and by a
developer
• Developer agrees to provide certain benefits
• Community agrees to support project
Joint Ventures with Private Developers
CBA Example:
NoHo Commons
• 16 acre mixed use project in North
Hollywood (Retail, Office, Housing)
• Developer negotiated CBA with Valley Jobs
Coalition
– Project must include child care center including
at least 50 low income slots
– 75% of jobs must pay “Living Wage”
Joint Ventures with Private Developers
NoHo Commons
• Living Wage based on existing city
ordinance.
• Developer to consider wages in selecting
tenants
• Tenants required to report wages
• Coalition meets with prospective tenants to
explain goals
• Developer pays coalition $10,000 if goal
not met in any two year period.
Joint Ventures with Private Developers
CBA Enforcement
• How is the CBA enforced
– Ideally the CBA is incorporated into local
government Development Agreement
• Can be enforced by government
• or community advocates who signed agreement
Joint Ventures with Private Developers
Community Benefits
Agreements
For More Information:
• Community Benefits Agreements: Making
development projects accountable
http://www.goodjobsfirst.org/pdf/cba2005final.pdf
Joint Ventures with Private Developers
LUNCH
Joint Ventures with Private Developers
Joint Venture
Agreements
Joint Ventures with Private Developers
Partnership Planning
• Social objectives/requirements
• Roles and responsibilities
• Planned transfer of roles
• Consequences of performance failures
• Duties vs. decisions
• Ownership percentage/Allocation of board seats
• Staffing commitments
• Allocation of fees
• Termination/Purchase Options
• Capacity building partnerships
Joint Ventures with Private Developers
Joint Venture
Agreement Exercise
• Split each group into CDC and Partner
• Negotiate terms of an agreement
• Fill out the Joint Venture Planning Tool
Joint Ventures with Private Developers
Social Objectives
Can you require a private
development partner to guarantee
social objectives?
What happens if they fail?
Joint Ventures with Private Developers
Social Objectives
• Job Creation
• Neighborhood
Revitalization
• Community Services
• Neighborhood Safety
• Income Generation
• Organizational
Stability – Operating
Support
• Tenant Services –
Program Support
• Small Business
Development/Support
• Nonprofit space
• Arts Space
• Social Service Space
• Nonprofit Office
Space
Joint Ventures with Private Developers
Social Objectives
Some potential consequences
• Reduction in development fee for failing to meet
hiring targets
• Space remains vacant if leasing goals not met
• Rent surcharge for tenants that don’t meet goals
• Eviction for tenants that don’t report job openings
and hiring stats.
• Termination of property management contract for
failure to track social objectives
• Project provides funds for hiring program
Joint Ventures with Private Developers
Ownership Structure
Does it matter what percentage of
the partnership the CDC owns?
Joint Ventures with Private Developers
Markham Plaza – LIHTC
C O R E D e v e lo p m e n t
M a n a g in g G e n e r a l P a r t n e r
E m e r g e n c y H o u s in g
C o - G e n e r a l P a r t n e r
I n v e s t o r s ( F a n n ie M a e a n d P N C B a n k )
L im it e d P a r t n e r s
L im it e d P a r t n e r s h ip• For profit manages
development
• Nonprofit participates in
partnership
• Investors involvement
limited
• For profit takes all
development fee
• After completion,
nonprofit serves as property
manager
• Nonprofit will become
managing partner of project
after 3-5 years and CORE
will exit partnership.
Joint Ventures with Private Developers
Ownership Structure
Examples:
• Marin City: CDC owns 50% of shopping center
LLC but appoints minority of board and has
almost no real control.
• Orange County Housing Land Trust: Leased
land to Centex corp. to build houses. OCHLT had
fixed price option to buy houses, responsible for
marketing – no LLC. Land Lease and Purchase
Agreement gave CDC real control.
Joint Ventures with Private Developers
Roles and
Responsibilities
CDC (examples)
• Manage community
input
• Secure development
subsidies
• Marketing housing
units
• Select and manage
architect
Partner (examples)
• Secure private equity
• Construction
Management
• Marketing retail space
• Partnership accounting
Joint Ventures with Private Developers
Roles and
Responsibilities
What should happen when one
partner fails to perform their role?
Joint Ventures with Private Developers
Roles and
Responsibilities
Some potential consequences for performance
failure/role-creep:
• Forfeit of development fees
• Termination of partnership
• Hourly charge for partner performing other
partner’s roles
• Modification of fee split percentages
• Fees tied to performance milestones
Joint Ventures with Private Developers
Decision Making
CDC (examples)
• Approve project
design
• Select general
contractor
• Approve project
budgets
• Approve all tenants
Partner (examples)
• Select general
contractor
• Authorize expenses
within budget
• Negotiate and execute
leases
• Select property
management firm
Joint Ventures with Private Developers
Commercial Leasing
Decisions
CDC can:
• Market space and choose all tenants
• Have equal vote in selection of tenants
• Have approval (veto) of all tenants
• Set mandatory tenant requirements but not
have individual approval
• Set list of prohibited tenant types
• Receive reports on leasing
Joint Ventures with Private Developers
Financing
How much financial risk should the
CDC take?
How much financial risk should the
partner take?
Joint Ventures with Private Developers
Financing
• CDC can establish $ value for its intangible
contributions
• Public sector grants can be seen as CDC equity
• LLC structure limits loss to investment amount
unless additional guarantees are made
• Losses generally split like profits
• CDC should not guarantee partner against losses
• Deeper pockets demand higher return
• Distinguish capital contributions and loans
Joint Ventures with Private Developers
Development Fees
Can the CDC earn a developer fee
even if the other party does almost
all of the work?
Joint Ventures with Private Developers
Development Fees
Examples
• Fees split 50-50
• Fees tied to level of effort (staff commitment)
• Fees tied to risk taken
• Fees tied to value contributed
• Fees should not be paid out before they are
earned
Joint Ventures with Private Developers
Operating Income
If the CDC does not play an
ongoing role in operations, what
share of operating income is fair
for it to receive?
Joint Ventures with Private Developers
Operating Income
Examples:
• Net income split based on arbitrary
percentages
• Split based on return on equity invested
• Preferred return
– Traunched payments (20% of first $x, 60%
above $x)
• Asset management fees
Joint Ventures with Private Developers
Termination
Examples:
• Partner buys CDC out after construction
• CDC buys partner out after 10 years
• Sale to highest bidder after 5 years
Joint Ventures with Private Developers
Back end purchase
options
• Value
– Market appraisal
– Capitalized Net Operating Income
– Match qualified offer (right of refusal)
• Cost
– Initial development cost
– Outstanding debt remaining
– Price that generated target return to partner
Joint Ventures with Private Developers
Communication
• Build trust first
• Meet regularly to discuss partnership (before there
are problems)
• Make sure partners interact through the work itself
– It is easier to stay informed if you are doing some of
the work.
• Expect conflict:
– Outline process for arbitration, etc.
– Walk through potential problems in advance
Joint Ventures with Private Developers
Tax Issues
Joint Ventures with Private Developers
Tax Exemption
• Joint Venture can’t be tax exempt itself
• Nonprofit can participate in a for profit joint
venture as long as:
– Participation furthers charitable purpose
– Partnership Agreement allows the nonprofit to
insure that social goals are met
– Guarantees and indemnification may be
construed as furthering private interests
Joint Ventures with Private Developers
Charitable Purposes
Housing
• Safe Harbor
– 75% of units below 80% of AMI, and
– 20% below 50% of AMI or 40% below 60% of AMI
• Facts and Circumstances
– Relief of the Poor and Distressed
– Combating community deterioration
– Lessening the burdens of government
– Eliminating discrimination and prejudice
– Lessening neighborhood tensions
– Relief of the distress of the elderly or handicapped
Joint Ventures with Private Developers
Charitable Purposes
Economic Development
1. Help local businesses or attract new
businesses to disadvantaged area
2. Assistance offered on non-commercial
terms, and
3. There is a relationship between the
assistance offered and the improvement of
a distresses area or relief to a
disadvantaged group
Joint Ventures with Private Developers
UBIT
Unrelated Business Income Tax
Tax is owed if…
• Joint venture is not “substantially related”
to the charitable purpose of the CDC
• Business generating the income is
“regularly carried on” (not one time), and
• Not generated through “passive activity”
(ex: interest)
Joint Ventures with Private Developers
Capacity Building
Can the for profit partner be
expected to build the CDC’s
capacity?
Joint Ventures with Private Developers
Capacity Building Plan
• Identifies specific capacities that the CDC will
build through this specific project (ex. Leasing,
entitlement)
• Ties capacity goals to project responsibilities
• Provides incentives for private partner to help
• Provides resources to CDC to build capacity
(money, staff, training, etc.)
• Provides clear measures for CDC success
• Provides consequences for CDC failure
• Limits impact on project/investors if CDC fails
Joint Ventures with Private Developers
Closing

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Community Development Joint Ventures

  • 1. Joint Ventures with Private Developers Joint Ventures with Private Developers © 2001-2005 Local Initiatives Support Corporation
  • 2. Joint Ventures with Private Developers What is a “Joint Venture?” • No precise definition • Two or more entities working together temporarily to meet common goals • Partners combine assets and share results • Typically for profit enterprises
  • 3. Joint Ventures with Private Developers • Limited Partnership • Limited Liability Company • Contract Developer © 2006 Organizational Development Initiative Structural Options
  • 4. Joint Ventures with Private Developers Limited Partnership (LP) Plus • Partners share (some) financial risks • Limited partners are protected from liability • Limited partner financial risks are limited to the amount of their investment. Minus • Management structure options limited – General partner has most risk and makes most decisions – Limited Partners are prohibited from playing an active role in management
  • 5. Joint Ventures with Private Developers Limited Liability Company (LLC) Plus • Sharing of financial risk (both contribute capital) • Protection of charitable assets • Flexible management options • Co-ownership provides more leverage for continued engagement of for-profit Minus • Harder to unravel relationship (sale of interest, or dissolution and liquidation, required) • Need to share higher fees/cost savings/upside potential
  • 6. Joint Ventures with Private Developers Contract Developer Plus • Non-profit retains full control over management of the project • No need to share upside potential Minus • For-profit has less incentive to hang in if deals goes awry • More financial risk to non-profit • Lack of co-ownership can make it harder for non- profit to learn • Less control for non-profit if for-profit is the developer
  • 7. Joint Ventures with Private Developers Why Joint Venture?
  • 8. Joint Ventures with Private Developers Why Joint Venture? For the For-profit: • Community access • Community support • Access to public subsidies • Access to below-market rate debt • Tax credit access • Ability to tap job applicant pool For the Non-profit: • Inadequate experience • Small staff • Increase production and results • Skill building opportunity • Small capital size • Access to financing through for-profit
  • 9. Joint Ventures with Private Developers What does each party bring?
  • 10. Joint Ventures with Private Developers The Non-Profit: • The deal • Knowledge of the neighborhood • Local market knowledge • Political support • Attractive public and private funding © 2006 Organizational Development Initiative What’s brought to the table?
  • 11. Joint Ventures with Private Developers The For-Profit: • The deal • Technical expertise • Staff size • Financial strength • Access to conventional financing © 2006 Organizational Development Initiative What’s brought to the table?
  • 12. Joint Ventures with Private Developers Chicago LISC-ULI Study Brought together private developers and CDC leaders to study projects in Chicago and Boston and identify keys to success: • Clear division of roles and responsibilities • Rely on the for-profit partner’s expertise in traditional development, marketing and access to capital • Rely on the CDC’s expertise to leverage government and foundation resources, obtain site control and public approvals and win community support.
  • 13. Joint Ventures with Private Developers Chicago LISC-ULI study Partner Roles CDC • Add value to projects • Play a lead role in assuming risk • Capacity to assemble land and bear holding costs and time delays • Roles vary in different deals –a challenge for private developers For-profit Developer • Flexible risk-taker • Market knowledge • “Deep pockets” • Staffing expertise • Creativity
  • 14. Joint Ventures with Private Developers Chicago LISC-ULI study Partner Characteristics CDC • Already developed community consensus • Planning process completed or underway • Depth of connections with community institutions • Level of sophistication with politics, zoning, and government approvals For-profit Developer • Entrepreneurial in style and approach • Able to dedicate 1 or 2 staff to project • Financially stable • Typically a small firm with patient leader able to wait for success • Some familiarity and appreciation for nonprofit sector and the value of emerging markets
  • 15. Joint Ventures with Private Developers Chicago LISC-ULI study Partner Characteristics • Deep pockets are not always as deep as you think • Expert developers are not always as expert as you imagine • Protect yourselves with proper legal agreements, bonds, insurance • Be prepared to step in and prevent failure • Be prepared to negotiate community interests vs. developer interests • Calculate the opportunity cost • There is no such thing as an “easy” deal © 2006 Organizational Development Initiative
  • 16. Joint Ventures with Private Developers Case Studies
  • 17. Joint Ventures with Private Developers Marin City Gateway
  • 18. Joint Ventures with Private Developers Marin City History • Built as temporary war worker housing – Still occupied into the 1980s • Still the only significant concentration of African-American households in Marin County • High unemployment • Marin City CDC formed in 1980 to fight displacement
  • 19. Joint Ventures with Private Developers Marin City USA Large Flea Market Site was acquired by CDC • Two year community planning process • 340 Housing Units • 182,000 foot Retail Center ($20 million project) • Partnership between – Marin City CDC – Bridge Housing – The Martin Group (Private Retail Developer)
  • 20. Joint Ventures with Private Developers Shopping Center Community Goals • Jobs for local residents • Minority small business opportunities • Supermarket/access to healthy food • Income for Community Services District – To replace income from flea market • Income to CDC
  • 21. Joint Ventures with Private Developers Initial Ownership Structure • CDC and Marin City Community Services District formed Marin City Land Company • Land Co. owns land and leased to The Martin Group • Land Lease controlled use and provided for share of revenue
  • 22. Joint Ventures with Private Developers Outcomes - Jobs • 200 construction jobs • More than 150 retail store jobs • 35% of jobs went to residents – Short of 50% goal but significant •Hiring goals were not tracked after opening –No funding for this activity
  • 23. Joint Ventures with Private Developers Outcomes- Business Development • Project included retail incubator space “Marin City Shops” • 5 local start-up businesses • CDC Paid $60,000 in rent but received only $30,000 – gap funded by foundation • Incubator space closed – Minority businesses couldn’t pay market rent – Foundation couldn't sustain funding – Space remains vacant!
  • 24. Joint Ventures with Private Developers Outcomes - Supermarket • Supermarket Closed – Discount store offered poor quality – High security offended customers – Even low-income residents used to higher end stores – Community had no way to control quality – Supermarket replaced with Best Buy
  • 25. Joint Ventures with Private Developers Outcomes Revenue • Land Company received little revenue – Project was not thriving – Private partner controlled bookkeeping so no profits were reflected (ie. Developer took fees rather than profit)
  • 26. Joint Ventures with Private Developers New Partnership • Marin City CDC and Bay Area Smart Growth Fund bought project from Martin Group (2003) • CDC as 50% owner of project • Land Company as 100% owner of land • CDC right to purchase project • Partner to train community member in property management • First Source Hiring Agreement • Minority tenant goals
  • 27. Joint Ventures with Private Developers More Problems • No enforcement of hiring agreements – Management company lease enforcement – Tenants not notifying CDC of openings – CDC has no way to force compliance • No consequence to private partner, management company or tenant for failure to comply – CDC not compensated for service or monitoring
  • 28. Joint Ventures with Private Developers More Problems • No minority tenants – Still no rent concessions for minority/start up tenants – Start up tenants held to national credit standards – CDC has no role in leasing • No review of potential tenants • No right to refuse • No right to propose tenants
  • 29. Joint Ventures with Private Developers Still More Problems • No training for community in property management – Agreement unclear about process and costs – Private developer expected CDC to raise money for trainee – CDC expected project to pay for trainee
  • 30. Joint Ventures with Private Developers Even More Problems • Still no cash flow for CDC – Project still struggling – Private partner still controls accounting/fees – Details of LLC agreement limit CDC access to profits – Developer was able to refinance, take cash out without sharing profit with CDC
  • 31. Joint Ventures with Private Developers Serious Problems • Smart Growth Fund wants to sell after 3 years • CDC has purchase option but… – Purchase at market price – Only 30 days to exercise option!
  • 32. Joint Ventures with Private Developers Lessons • Large deals require top notch attorneys – Private partners had experienced negotiators – CDC trusted partners to look out for its interests • CDC didn’t build its community goals into either partnership structure in a binding way • CDC didn’t have a real (economic) role in ongoing success of project – didn’t provide value • Without a role, CDC was not able to monitor to make sure project was meeting goals
  • 33. Joint Ventures with Private Developers Discussion
  • 34. Joint Ventures with Private Developers New Horizons Center MBD Development Corporation – The Bronx 134,000 square foot shopping center • Pathmark Supermarket • Athlete's Foot • Blockbuster Video • Paramount Home Decorators • Petland Discount Stores • Radio Shack • Rent-A-Center
  • 35. Joint Ventures with Private Developers Mid Bronx Desperadoes • Founded in 1974 as a coalition of volunteers • Focused on Crotona Park East section of the Bronx • 2,300 units of affordable housing • Community health clinic • Job training center • Safety and open space • Community planning
  • 36. Joint Ventures with Private Developers New Horizons Center MBD Social Objectives • Jobs for local residents • Bring life back to the community • Support local small businesses • Generate income for MBD • Build internal capacity for commercial projects
  • 37. Joint Ventures with Private Developers New Horizons Center Development Consultant Development Advisor: Hutensky Group/ Felipe Ventegeat • Coordinate project team meetings and schedule tasks • Develop project budget • Coordinate Contract Documents, permits, and planning approvals • Monitor General Contractor • Coordinate leasing and lease negotiation
  • 38. Joint Ventures with Private Developers New Horizons Center Development Consultant Owner Responsibilities • Representative to participate on project team • Approve budgets, change orders, etc. • Provide architect, legal and other consultants • Secure project financing • Pay advisor flat fee plus reimbursement of all direct staff and other costs.
  • 39. Joint Ventures with Private Developers New Horizons Center Outcomes • 400 jobs; 85% neighborhood hires – Most hires through MBD Job Center • 22 national and regional credit tenants – No local small businesses • 2 year delay in opening • $10 million cost overrun – Excess income devoted to debt retirement for 5 years • Significant staff burnout – Two Executive Directors left
  • 40. Joint Ventures with Private Developers New Horizons Center Lessons Learned • Most mistakes - cost overruns were avoidable • CDC carried the financial and political risk but relied on partners to lead the project • Key problems identified by CDC but ignored by the experts – Ex: Buried car on lot • CDC let partners talk them into decisions that turned out to be mistakes • Very few experts on inner city mall management – We have to become the experts
  • 41. Joint Ventures with Private Developers Discussion
  • 42. Joint Ventures with Private Developers Alternatives to Joint Venturing • Community Initiated Development • Community Benefits Agreements
  • 43. Joint Ventures with Private Developers Community Initiated Development • Community Group leads community planning process • Identifies key development sites • Develops general goals for site development • Promotes the neighborhood and the site development opportunity – RFP for developers • Offers developers community support if project conforms with plan
  • 44. Joint Ventures with Private Developers East Liberty Development Inc.
  • 45. Joint Ventures with Private Developers East Liberty Whole Foods Market • CDC as “Development Advisor” – Advise on design and concept – Coordinate community input – Apply for government grants – Advocate in favor of the project • CDC loans or re-grants funds to project • CDC charges 5-10% of grant funds • Developer agrees to follow community plan
  • 46. Joint Ventures with Private Developers Community Benefits Agreements • Legally enforceable contract • Outcome of negotiation process • Signed by community groups and by a developer • Developer agrees to provide certain benefits • Community agrees to support project
  • 47. Joint Ventures with Private Developers CBA Example: NoHo Commons • 16 acre mixed use project in North Hollywood (Retail, Office, Housing) • Developer negotiated CBA with Valley Jobs Coalition – Project must include child care center including at least 50 low income slots – 75% of jobs must pay “Living Wage”
  • 48. Joint Ventures with Private Developers NoHo Commons • Living Wage based on existing city ordinance. • Developer to consider wages in selecting tenants • Tenants required to report wages • Coalition meets with prospective tenants to explain goals • Developer pays coalition $10,000 if goal not met in any two year period.
  • 49. Joint Ventures with Private Developers CBA Enforcement • How is the CBA enforced – Ideally the CBA is incorporated into local government Development Agreement • Can be enforced by government • or community advocates who signed agreement
  • 50. Joint Ventures with Private Developers Community Benefits Agreements For More Information: • Community Benefits Agreements: Making development projects accountable http://www.goodjobsfirst.org/pdf/cba2005final.pdf
  • 51. Joint Ventures with Private Developers LUNCH
  • 52. Joint Ventures with Private Developers Joint Venture Agreements
  • 53. Joint Ventures with Private Developers Partnership Planning • Social objectives/requirements • Roles and responsibilities • Planned transfer of roles • Consequences of performance failures • Duties vs. decisions • Ownership percentage/Allocation of board seats • Staffing commitments • Allocation of fees • Termination/Purchase Options • Capacity building partnerships
  • 54. Joint Ventures with Private Developers Joint Venture Agreement Exercise • Split each group into CDC and Partner • Negotiate terms of an agreement • Fill out the Joint Venture Planning Tool
  • 55. Joint Ventures with Private Developers Social Objectives Can you require a private development partner to guarantee social objectives? What happens if they fail?
  • 56. Joint Ventures with Private Developers Social Objectives • Job Creation • Neighborhood Revitalization • Community Services • Neighborhood Safety • Income Generation • Organizational Stability – Operating Support • Tenant Services – Program Support • Small Business Development/Support • Nonprofit space • Arts Space • Social Service Space • Nonprofit Office Space
  • 57. Joint Ventures with Private Developers Social Objectives Some potential consequences • Reduction in development fee for failing to meet hiring targets • Space remains vacant if leasing goals not met • Rent surcharge for tenants that don’t meet goals • Eviction for tenants that don’t report job openings and hiring stats. • Termination of property management contract for failure to track social objectives • Project provides funds for hiring program
  • 58. Joint Ventures with Private Developers Ownership Structure Does it matter what percentage of the partnership the CDC owns?
  • 59. Joint Ventures with Private Developers Markham Plaza – LIHTC C O R E D e v e lo p m e n t M a n a g in g G e n e r a l P a r t n e r E m e r g e n c y H o u s in g C o - G e n e r a l P a r t n e r I n v e s t o r s ( F a n n ie M a e a n d P N C B a n k ) L im it e d P a r t n e r s L im it e d P a r t n e r s h ip• For profit manages development • Nonprofit participates in partnership • Investors involvement limited • For profit takes all development fee • After completion, nonprofit serves as property manager • Nonprofit will become managing partner of project after 3-5 years and CORE will exit partnership.
  • 60. Joint Ventures with Private Developers Ownership Structure Examples: • Marin City: CDC owns 50% of shopping center LLC but appoints minority of board and has almost no real control. • Orange County Housing Land Trust: Leased land to Centex corp. to build houses. OCHLT had fixed price option to buy houses, responsible for marketing – no LLC. Land Lease and Purchase Agreement gave CDC real control.
  • 61. Joint Ventures with Private Developers Roles and Responsibilities CDC (examples) • Manage community input • Secure development subsidies • Marketing housing units • Select and manage architect Partner (examples) • Secure private equity • Construction Management • Marketing retail space • Partnership accounting
  • 62. Joint Ventures with Private Developers Roles and Responsibilities What should happen when one partner fails to perform their role?
  • 63. Joint Ventures with Private Developers Roles and Responsibilities Some potential consequences for performance failure/role-creep: • Forfeit of development fees • Termination of partnership • Hourly charge for partner performing other partner’s roles • Modification of fee split percentages • Fees tied to performance milestones
  • 64. Joint Ventures with Private Developers Decision Making CDC (examples) • Approve project design • Select general contractor • Approve project budgets • Approve all tenants Partner (examples) • Select general contractor • Authorize expenses within budget • Negotiate and execute leases • Select property management firm
  • 65. Joint Ventures with Private Developers Commercial Leasing Decisions CDC can: • Market space and choose all tenants • Have equal vote in selection of tenants • Have approval (veto) of all tenants • Set mandatory tenant requirements but not have individual approval • Set list of prohibited tenant types • Receive reports on leasing
  • 66. Joint Ventures with Private Developers Financing How much financial risk should the CDC take? How much financial risk should the partner take?
  • 67. Joint Ventures with Private Developers Financing • CDC can establish $ value for its intangible contributions • Public sector grants can be seen as CDC equity • LLC structure limits loss to investment amount unless additional guarantees are made • Losses generally split like profits • CDC should not guarantee partner against losses • Deeper pockets demand higher return • Distinguish capital contributions and loans
  • 68. Joint Ventures with Private Developers Development Fees Can the CDC earn a developer fee even if the other party does almost all of the work?
  • 69. Joint Ventures with Private Developers Development Fees Examples • Fees split 50-50 • Fees tied to level of effort (staff commitment) • Fees tied to risk taken • Fees tied to value contributed • Fees should not be paid out before they are earned
  • 70. Joint Ventures with Private Developers Operating Income If the CDC does not play an ongoing role in operations, what share of operating income is fair for it to receive?
  • 71. Joint Ventures with Private Developers Operating Income Examples: • Net income split based on arbitrary percentages • Split based on return on equity invested • Preferred return – Traunched payments (20% of first $x, 60% above $x) • Asset management fees
  • 72. Joint Ventures with Private Developers Termination Examples: • Partner buys CDC out after construction • CDC buys partner out after 10 years • Sale to highest bidder after 5 years
  • 73. Joint Ventures with Private Developers Back end purchase options • Value – Market appraisal – Capitalized Net Operating Income – Match qualified offer (right of refusal) • Cost – Initial development cost – Outstanding debt remaining – Price that generated target return to partner
  • 74. Joint Ventures with Private Developers Communication • Build trust first • Meet regularly to discuss partnership (before there are problems) • Make sure partners interact through the work itself – It is easier to stay informed if you are doing some of the work. • Expect conflict: – Outline process for arbitration, etc. – Walk through potential problems in advance
  • 75. Joint Ventures with Private Developers Tax Issues
  • 76. Joint Ventures with Private Developers Tax Exemption • Joint Venture can’t be tax exempt itself • Nonprofit can participate in a for profit joint venture as long as: – Participation furthers charitable purpose – Partnership Agreement allows the nonprofit to insure that social goals are met – Guarantees and indemnification may be construed as furthering private interests
  • 77. Joint Ventures with Private Developers Charitable Purposes Housing • Safe Harbor – 75% of units below 80% of AMI, and – 20% below 50% of AMI or 40% below 60% of AMI • Facts and Circumstances – Relief of the Poor and Distressed – Combating community deterioration – Lessening the burdens of government – Eliminating discrimination and prejudice – Lessening neighborhood tensions – Relief of the distress of the elderly or handicapped
  • 78. Joint Ventures with Private Developers Charitable Purposes Economic Development 1. Help local businesses or attract new businesses to disadvantaged area 2. Assistance offered on non-commercial terms, and 3. There is a relationship between the assistance offered and the improvement of a distresses area or relief to a disadvantaged group
  • 79. Joint Ventures with Private Developers UBIT Unrelated Business Income Tax Tax is owed if… • Joint venture is not “substantially related” to the charitable purpose of the CDC • Business generating the income is “regularly carried on” (not one time), and • Not generated through “passive activity” (ex: interest)
  • 80. Joint Ventures with Private Developers Capacity Building Can the for profit partner be expected to build the CDC’s capacity?
  • 81. Joint Ventures with Private Developers Capacity Building Plan • Identifies specific capacities that the CDC will build through this specific project (ex. Leasing, entitlement) • Ties capacity goals to project responsibilities • Provides incentives for private partner to help • Provides resources to CDC to build capacity (money, staff, training, etc.) • Provides clear measures for CDC success • Provides consequences for CDC failure • Limits impact on project/investors if CDC fails
  • 82. Joint Ventures with Private Developers Closing

Editor's Notes

  1. 9:00 Welcome and Introductions (15 minutes) Local Program Director provides general welcome and introduces Trainer. Ask participants to introduce themselves by providing their Name Organization Whether they are working on commercial projects currently Whether they have prior experience with commercial If participants are sitting with their co-workers, ask them to move to different tables
  2. Trainer: We are going to talk about a range of different structures that all allow a CDC to work closely with a private company in order to build a project that the CDC might not be able to undertake alone.
  3. Joint ventures can also be structured as “General Partnerships” in which both partners are jointly and severally liable.
  4. Inadequate experience: It may be a CDC (1) has not done any physical development yet, (2) has not attempted a project of large scale before in a particular area such as housing, or (3) is trying to branch out, for example, from housing development into commercial or retail space development. The CDC can access the technical expertise and experience of a for-profit business in a joint venture arrangement.   Lack of staff. The CDC may have a small staff or no staff at all, or its staff may be part-time or not have the available time required to carry out the development.   Opportunity to achieve higher production scale. Without the for-profit the nonprofit might not be able to do a particular project or might have to do a smaller project of less impact.   Core skill building opportunity. If structured correctly the arrangement can present a capacity building opportunity for the CDC with the for-profit in a mentoring role. Lack of financial strength. It may be that a CDC has a long track record, solid staff with lots of experience and capacity, but that financially it is weak.   Access to development financing through for-profit partner. A for-profit partner may have access to conventional financing sources that a CDC does not. The developer may be in a strong financial condition or because of its track record and character able to access a significant amount of capital that the CDC cannot attract on its own.   For-profit developers cite a number of reasons for partnering with CDCs including:   Access to the community. The project may be in a community where a for-profit developer has not done business before. CDCs are typically more in touch with the community and can better identify the needs.   Site Control. The CDC may have site control of a key property which is critical to a project’s viability or better access to a property through a Redevelopment Agency or City.   Support among community residents. The CDC may be able to garner support among neighborhood residents for a difficult project, get local elected officials on board in favor of the development, and help counter any nimbyism that could derail the project.   Access to public funding sources. This is often one of the strengths a CDC can bring to the relationship. Many potential sources of project subsidy either provide a priority for or limit access exclusively to nonprofits. Federal grants such as HUD’s HOME and Community Development Block Grants (CDBG) programs, and Health and Human Services’ Office of Community Services (OCS) and the Federal Home Loan Bank’s Affordable Housing Program make funds available to nonprofits that might not be available to for profit developers.   Access to attractive debt sources. The CDC may have access to low interest financing (LISC, for example) that is unavailable to the for-profit. Not only is this a financial benefit, but it often pays the early costs of the project at its riskiest stage, something many banks are unwilling to do.   Access to tax credit allocations. This can occur through the CDC’s site or project control over a high scoring LIHTC project. Without access through the CDC to the credits, the for-profit would have difficulty getting the deal. CDC joint ventures may be more competitive in obtaining New Markets Tax Credits as well.   Pool of interested job applicants. For an economic development joint venture, a CDC can be a pipeline for interested local residents to apply for the jobs to be created. Not only may this speed the filling of the jobs, but it can provide the for-profit co-venturer with some helpful initial screening of job applicants.
  5. The deal. Often the CDC will bring a deal concept to the table along with predevelopment work that has been done, including possible title to the project property or at least site control. The more the CDC has developed the concept for the project and the more up-front work the CDC has done, the more attractive it can make the deal for a potential partner and the more leverage it will have over a prospective co-venturer during negotiations.   Knowledge of the neighborhood and neighborhood support. A community-based organization should know its target area(s) well and understand what the pressure points are and what the community needs, wants and will support. The CDC can shape a deal so it’s consistent with a neighborhood revitalization plan, thereby ensuring the project’s support and success and providing the joint venture partner with a marketing and acceptance comfort level not obtainable from a non-community-based business. The CDC also brings support from its client base and hopefully, the larger community.   Knowledge of the market. Related to the above point is the CDC’s knowledge of the market. Though the CDC may not have a definitive handle on all aspects of its market, it typically is in a much better position than a for-profit (particularly one not based in the neighborhood) to understand what the market is for housing, commercial space for growing businesses, retail services, community facilities such as child care and health centers, and charter schools.   Political Support. The CDC’s contacts with local political and administrative officials can be a huge factor in making the project successful. Beyond the obvious overt support for the project, it can translate into public subsidies and other support such as zoning, building and environmental reviews in a more expedited manner (or in some cases a zoning change to move the project forward).   Attractive Public and Private Funding Sources. Mentioned above, if the CDC can come to the table, even with preliminary commitments from such funding sources, it strengthens the attractiveness of the arrangement to the for-profit and gives the CDC added bargaining clout.
  6. Technical Expertise and Experience. The for-profit will bring its real estate development skills and experience to the table. If the CDC is inexperienced, this is critical to successfully completing the project. Additionally, the for-profit’s experience and track record is critical in attracting support and funding for the project.   Staff Size. The for-profit will usually bring a complement of dedicated full-time staff to the project.   Financial Strength. The for-profit has access to funds that many smaller CDCs do not. They typically have established financial institutions that they work with and many times have access to their own company funds that can be used to finance the project. For example, in an Indianpolis deal where an LLC joint venture contracted with for-profit builders to build new homes on lots owned by the LLC the builders funded the costs of construction through their own financing sources.   Access to Conventional Funding. Separate from the issue of financial strength, the for-profit may have a relationship with banks or mortgage companies based on the for-profit’s “character,” i.e., its track record in completing deals skillfully, efficiently, on time, and within budget. These long-standing relationships providing access to financing may or may not correlate to the actual financial strength of the for-profit.
  7. Trainer: LISC and ULI in Chicago led a joint study process to research CDC partnerships with private developers. A group of CDC leaders and for profit developers looked together at projects in Chicago and Boston and identified these keys to success. The whole report is in the binders.
  8. These are some of the roles that Chicago study participants thought were typical and logical for each partner
  9. These are characteristics that they felt each partner should look for in the other.
  10. Some other general observations
  11. Trainer: I am going to tell you some real CDC joint venture stories. These are true stories (though I have surely gotten some of the details wrong here and there). The CDCs featured have made some mistakes and have been generous enough to share their mistakes with us – so we can make new mistakes! Keep in mind that, while I am focusing on the challenges here, that these are great projects that you might read glowing profiles of in some other context.
  12. These are the objectives that they identified for the New Horizons Center. In order to finance the project, their lenders pushed MBD to take on a development partner.
  13. Trainer: Unlike Marin City, MBD decided to hire a development consultant who took day to day responsibility for most aspects of the project on a fee for service basis but left MBD in control of all the important decisions.
  14. Trainer: This left MBD with only a small list of responsibilities – basically to oversee the consultant, approve budgets and line up public financing.
  15. Trainer: The project has had mixed results. They created a large number of jobs for local residents but the project was late and over budget. Equally important is the fact that they burned through a number of staff members including two different Executive Directors during the course of the project. Rather than building staff capacity, it may have left them with diminished capacity. While they are preparing for another commercial project, none of the staff that will work on it worked on New Horizons!
  16. Trainer: The current Executive Director shared several lessons that MBD learned from the partnership. The CDC had all of the decision making authority but because they were not responsible for the day to day work they had no choice to rely on the advice of their expert consultants (and various subcontractors) even when they suspected that that advice was wrong. They had the power but lacked the necessary skills, experience and information necessary to really make decisions. One moral of the story is that there may be no alternative to the CDC becoming the expert for these projects.
  17. Both of these approaches involve a CDC or other community group working with a private developer to insure that a project meeting the community’s goals is built but in both cases, the CDC does not actually participate as co-owner of the project.
  18. The City of LA Living Wage ordinance only applies to city contractors – this developer and his tenants would have been exempt without the agreement.
  19. Local governments are not always good at enforcing these agreements. CBA allows the community groups to directly enforce but allows government to do so also.
  20. Trainer: These are some of the many issues to be clear about UP FRONT when putting together a new joint venture.
  21. Ask people to return to their earlier groups. In each group half of the people must now play role of the for profit partner. Each group should negotiate the terms of the partnership that they spelled out in Exercise #1 and fill out the Joint Venture Agreement Planning Tool. It is OK to leave some items blank.
  22. Ask participants to describe what their groups came up with related to insuring that social benefit goals are met. Get one or two examples – not every group reporting back.
  23. Trainer: Here is a list of some common goals that CDCs cite for undertaking commercial projects??
  24. Ask some participant(s) to describe what their group came up with as a split?
  25. The private partner and the CDC share 1% ownership while the limited partners own 99% of this project. Nonetheless the Managing General Partner makes all the decisions with active involvement from the Co-General Partner. The Limited Partners take much of the risk and receive all net revenue but have almost no involvement day to day. The CDC’s role in development was extremely limited but because they have stronger property management capacity, they serve as long term manager and owner of the project. The private developer is essentially a turn-key builder except that they are taking on development risk (which the CDC is protected from). CDC takes the long term management risks and benefits.
  26. While Marin City CDC had 50% ownership they had no real control. OCHLT negotiated for real control even though they didn’t have a partnership agreement.
  27. Ask participants to describe how they proposed to split responsibilities in the case example.
  28. Ask participants to describe how they proposed to split decision making responsibilities in the case example.
  29. Ask participants what their groups came up with?
  30. Explain that the legal structure may protect the partners against liability and loss but other lenders may insist on guarantees, cosigners, etc to get around those protections – lenders want access to your other assets and those of your partner. In some cases the CDC guarantee may not have much value (ie. CDC has limited assets). If the CDC takes on too much of the financial risk but partner shares in return than there may be tax issues for the CDC’s exemption.
  31. Ask for an example of what one group decided?
  32. Ask participants to describe how they proposed to handle termination in the case example.
  33. Point out that detailed accounting issues will can make the difference between a successful transition and a lost project under several of these scenarios. It is important to have technical experts review the specific language of any option agreement.
  34. A few additional points about keeping the partnership running smoothly.
  35. One way to prove the tie between the assistance and improvement of the area is by showing that the businesses selected for assistance were prioritized based on their potential impact.
  36. We seldom spell out the capacity building goals of these partnerships clearly enough. If CDC capacity is a social goal then we should treat it like hiring and create a program to support it and insure that it really happens. A complete program would look something like this: