Urban Strategy Fund : A new Boston Real Estate Fund

Private/Nonprofit Partnership Strategies
A for-profit/nonprofit partnership presents significant, but worthwhile, challenges

 

 

 

by JERRY RAPPAPORT, JR., AND JIM HOFFMAN

(Published in August 2007 issue of Urban Land magazine)

 

Emerging urban markets represent a rich source of real estate deals with high yields for all sectors. When executed strategically, deals in these markets will result in multiple bottom lines that provide exceptional returns for investors, promote sustainable design, and have a posi¬tive impact on communities through economic development.

Urban public/private partnership deals, however, have high barriers to entry. If a nonprofit entity is interested in executing deals on the scale required to have a significant community impact, it is likely to lack the financial power, resources, market knowledge, and execution ability needed to bring such a project to fruition. A private developer may not have the credibility in the community, access to key local relationships to find feasible profitable deals and ensure permitting certainty, and the ability to tap the public subsidies that fund extraordi¬nary costs and reduce risk. It is a situation ripe for partnership, the classic scenario of the sum being greater than the value of its parts.


Having mixed-income price points broadens market appeal and leads to quicker absorption. Olmsted Green is a mixed-use, mixed-income community that will include market-rate townhomes and condominiums as well as affordable rental units and affordable seniors’ housing.

A for-profit/nonprofit partnership also presents significant, but worthwhile, challenges. There can be mistrust on both sides, resistance to thinking in new ways, and interests that are difficult to align. Oftentimes, prospective for-profit and nonprofit partners are accustomed to working at different speeds and with different agendas. Nonprofit groups may be accustomed to a slower pace because of their reliance on outside funding, consensus decision-making style, and their need to satisfy capital sources before a move is made, which can be time consuming. In real estate, however, the old adage is true in the most literal sense: Time is money.

Forethought, commitment, and vision make these challenges surmountable. And because these chal¬lenges may seem daunting to some, those able to overcome them reap the rewards—finding less competi¬tion for deals that, adeptly executed, can be extremely profitable on a risk-adjusted basis. Such deals, however, are not without palpable risk.

Choose the right partner. One of the most crucial determinants of a successful for-profit/nonprofit relation¬ship occurs before the relationship even exists: the choice of partner. A private partner should seek out non¬profit groups whose missions resonate with its own, who attract strong public appeal, and who have a proven track record. Often, referrals come from gov¬ernment agencies seeking a financial resource and executor to make goals come to fruition.

The ideal nonprofit partner is not only mission driven, but also pragmatic, with the willingness to compromise and find win-win solu¬tions. Nonprofits that exhibit busi¬ness acumen, strong executive direction, a sense of urgency, and the determination not to fail will often make the strongest partners in a process that can be long and fraught with hurdles.

On the more tangible side, the developer should look for nonprofits that are willing to provide site-control access, the ability to garner broad community support, and the political network to secure entitlements and programmatic funding. Ideally, they should have a track record in social or economic development programs and strong cohesive boards. They should have nurtured critical neighborhood relationships; and they should have the ability to demonstrate the beginnings of a development program that has market support—at such a level to attract the public political support and funding necessary to fill any funding gap and strong enough to pay for a sig¬nificant portion of the cost.

Community development corporations (CDCs) are often ideal non¬profit partners. CDCs, with their origins in 1960s-era federal urban development legislation, can bring to the table a true alignment of in¬terests and community benefits that sustain community and project fea¬sibility. They can help make a proj¬ect viable where the parcel is closely held by the community and at the center of public opinion, especially where the development group uses federal, state, and local funding sources to fund visible value-added social programs and infrastructure. For example, one of New Boston Fund’s current partnerships is with Boston’s Lena Park CDC in the devel¬opment of Olmsted Green, a 42-acre (17-ha) planned, mixed-use, mixed-income community on the site of the former Boston State Hospital. Lena Park CDC brought a wealth of value to the partnership: strong executive leadership and vision, greater zoning and permitting certainty, the ability to attract public subsidies, and help with market acceptance and attracting buyers.

As a development partner, Lena Park created a ripple effect and attracted other nonprofit entities that will use the site for an urban farm and skilled nursing center. When completed, the property will encompass green design, affordable housing, housing for the elderly and mentally infirm, and enhanced Lena Park’s facilities.

From the nonprofit perspective, a variety of considerations should also go into assessing whether the prospective private partner is the right fit. First, a nonprofit organization should look for a partner who respects its mission. Its leadership should sit down with the developer’s leadership team and feel comfortable that there is a shared commitment to the goals they are trying to achieve in the community and that the developer is not approaching the project with a “we’ll change it in the future” attitude. The nonprofit should also be satisfied that the for-profit partner demonstrates a willingness to include its leadership in the decision- making process so that they do not find themselves in the position of being the outsider looking in.

On the financial side, a nonprofit should select a development partner willing to fund upfront predevel¬opment costs before feasibility is 100 percent assured and who has the capability to provide all of the necessary equity and debt. A well- capitalized developer with a sufficient predevelopment budget and total funding for the project not only provides a greater certainty of execution, but also is crucial to avoid a rush to source the capital later.


The private sector development team needs to realize that targeted returns cannot be achieved without a community planning process. One Brigham Circle in Boston’s Mission Hill district includes neighborhood-serving retail, specifically a full-service grocery store, a restaurant, and a pedestrian plaza to serve as the town center.

Operate with clarity and respect. Beyond partner selection, the success of a private/nonprofit partnership is determined by the principles that guide the relationship. The best private partner will commit to sharing profits once a minimum threshold is met. The private sector development team needs to realize that the targeted returns could not be achieved “if not for” the public subsidies, community support, site control, and entitlements. In this light, a CDC’s participation is implicit in the cost of for-profit/nonprofit partnerships. In addition, splitting fees and profit aligns interests so that everyone is working toward a shared goal.

Transparency is crucial from both partners. A deal that fulfills each partner’s objectives necessarily starts with a straightforward delineation of collective and individual goals. From the outset of the relationship, both partners should sit down together and speak openly about these goals and how they prioritize them, putting them in writing with a decision-making process set out for any changes in the future.

The initial discussion should include a frank disclosure of what elements in the deal are untouch¬able and must be protected, and what the conditions precedent are for moving the deal ahead.

At One Brigham Circle in Boston’s Mission Hill neighborhod, for example, a New Boston Fund joint venture development with NDC Development Associates, Inc., and Mission Hill Neighborhood Housing Services, Inc. (MHNHS), the program was created by the community planning process implemented by MHNHS and in¬cluded neighborhood-serving retail with specific uses such as a full-service grocery store and restaurant, a 5.5-acre (2.2-ha) passive park, a pedestrian plaza to serve as Mission Hill’s town center, and office space with ancillary parking to make the project financially feasible. Other objectives of the project included creating a new image for Brigham Circle, revitalizing the commercial center of Mission Hill with a transit-oriented mixed-use project,and creating opportunities for jobs. Housing was off the table—it was not a use supported in the community planning process. Hearing this point of view early, committing to uphold it, and respecting it throughout helped drive a smoother process.

The early discussion period is also the time for the private partner to clearly specify the financial feasibility of the deal and the necessary components to make it successful. Shared financial projections from the private partner help drive consensus throughout by demonstrating to the nonprofit what it can expect to gain from the deal. Often, a professional intermediary can help bridge a divide between two partners. Someone who understands real estate markets, supply-and-demand complexity, and real estate math can opine effectively about the viability and fairness of the deal based on the risks and returns.

Openness can go a long way toward staving off any mistrust and helping a deal to progress more effectively from start to finish through all of its complicated facets.

Pick the right property and program. The ability to be successful in an emerging urban market is deter¬mined not only by the right nonprofit partnership and how one approaches it, the selection of the property itself is important too. When developers are relatively new to nonprofit part¬nerships, deals may flow in both directions, with developers finding deals and the deals sometimes find¬ing the developers. Once a certain threshold of deals is reached and there are more satisfied joint venture partners, the network opens up and developers don’t have to work as hard to find deals.

Evaluation of a development deal should include scrutiny of the competition to help ensure demand. The project selected should be of a scale to attract public money for infrastructure and avoid risk. A mixture of housing affordability increases proj¬ect impact and reduces risk of overexposure in one market segment.

Choosing a project with historic implications has both value and complications. A layer of historic pedigree entails more issues than a flat piece of land. Working with a parcel that has a legacy—like the Olmsted Green site or Parcel 24 in Boston’s Chinatown, which New Boston will soon develop in partner¬ship with the Asian CDC—means more longstanding stakeholders and more deeply felt perceptions. It under¬scores the importance of respecting community values and ensuring that consensus will be reached.

Work toward a win-win. Providing investors with a competitive return and achieving the goals of a non¬profit partner are not mutually ex¬clusive objectives. To the contrary, investors realize that an 18 percent internal rate of return (IRR) with lower risk and greater certainty is better than 25 percent IRR with heightened risk and uncertainty. The combina¬tion of a developer with preferred equity priority returns from low land costs and strong preleasing and pre-sales is a formula for success. Using public subsidies to increase project quality and feasibility, coupled with profit sharing after a minimum threshold rate of return, provides the basis of an urban redevelopment strategy that is a true win-win.

The viability of emerging urban markets has yet to fully take hold in the real estate industry’s consciousness. Leadership in both sectors should be supported, strengthened, and seeded to expand development opportunities in these markets. The private sector and endowments can provide organizing and planning funding to nonprofit entities so they can do the necessary predevelop¬ment work for projects. More case studies with hard numbers are needed, as are more leaders on both sides who are willing to share their success factors, as well as mistakes made and lessons learned. Public economic development officials need to be armed with more information about the potential tools for trans¬forming a community vision into a rewarding reality, and providing the political firepower to do so. UL

JERRY RAPPAPORT, JR., is president and CEO of New Boston Fund, a Boston-based real estate investment and development company.

 

JIM HOFFMAN is the executive director of Mission Hill Neighborhood Housing Services, a community-based nonprofit housing and economic development organization.

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