Nonprofit developers operate in a market that could put them out of business with one bad deal.
It happened to West End Development Corp., Milwaukee, after its West Pointe condominium project tanked in 2008.
And it’s on the minds of the people who run the Local Initiatives Support Corp., which on Monday will buy the unfinished affordable-housing West Pointe building for $600,000 in a foreclosure sale. LISC foreclosed on the property at 2632 W. Wells St. because it loaned $271,000 for the project to a West End offshoot in 2001.
“It was a project that probably, in hindsight, needed a for-profit partner to be involved in vetting and analyzing the market,” said Kathryn Berger, Milwaukee LISC program officer. “It is not enough to have good will.”
The West Pointe project ran out of money after condo units did not sell and West End could not pay its debts.
“When we first proposed it, it was so revolutionary and unique that people thought it was crazy, and then the market started to overheat,” said Milwaukee County Supervisor Theo Lipscomb, West End’s former director of community development.
“People thought it was so simple, ‘Of course you can sell a condo for $100,000.’”
Unlike for-profit developers that can run multiple projects at once and pocket more money from the developments, nonprofits such as West End have little to no room for error, said Teig Whaley-Smith, attorney and owner of Community Development Advocates LLC, a Milwaukee company that nonprofit developers hire to oversee and manage projects.
“The one project that works pays for the projects that don’t work,” Whaley-Smith said of the for-profit market. “On the nonprofit side, there’s not that kind of compensation. If one project doesn’t work, the whole nonprofit is in trouble.”
Nonprofit developers struggle to survive in Milwaukee. According to a 2009 report by the Public Policy Forum of Wisconsin, between 1999 and 2009, four large nonprofit housing developers closed.
Milwaukee, compared with cities such as Madison, does not let nonprofit developers keep as much money when developing projects, Lipscomb said. Government grant programs that pay for affordable-housing projects let nonprofit developers keep some of the money as fees for their work on the projects.
In Milwaukee, developers can collect $8,000 per project for administrative costs, plus $1,250 for every housing unit created. Madison lets developers collect a fee of up to 12 percent of their project cost, Lipscomb said.
The higher fees in Madison let nonprofit developers set aside more money, so the businesses grow as they do more projects, he said.
“It’s so incongruous with the private market,” Lipscomb said, “yet, we don’t pay less.”
The tight budgets mean nonprofits cannot keep people on staff to oversee projects.
Kristi Luzar, who studied West Pointe as a project manager for the Urban Economic Development Association, said Milwaukee nonprofits must call on their for-profit counterparts for advice, and she is trying to line up a group of developers to give free advice to nonprofits.
The West Pointe project could have used that advice, Berger said. She said the renovation of the West Pointe building is not complete, and LISC will seek a partner to finish the project and find tenants.
“At any price, it’s a tough place,” she said of the neighborhood around West Pointe, “a tough situation to try to get someone to buy a condo in. I think the goal was to create homeownership there.”
Projects such as West Pointe will continue to erode what little cushion there is for nonprofit developers unless Milwaukee makes changes that offer opportunities for profit and growth, Lipscomb said.
“To the sense that they are doing projects successfully,” he said, “you can break even, but you can never prosper.”