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Business Law Today

What is community economic development today?
Several professionals offer perspective
By Rutledge A. Simmons
NeighborWorks America (NeighborWorks), a community economic development (CED) nonprofit, recently negotiated with the U.S. Patent and Trademark Office (PTO) over the use of the term CED to describe the field of use for a trademark it sought to register. The nonprofit was surprised to learn that the PTO has never recognized the term CED in connection with any registered marks. This will remain the case since the parties ultimately agreed upon alternative language. Many practitioners of CED would consider CED to be a fairly well-defined and understood term, and would not fully appreciate the basis for the PTO's resistance. However, an American Bar Association (ABA) panel in which lawyers recounted the novel and interesting ways in which each practiced CED lends some credence to the PTO's position.

At the ABA Business Law Section's 2009 Spring Meeting, the Committee on CED and co-sponsoring committees assembled the panel An Insider's View on CED; How to Add Value to Clients with CED. While listening to the other panelists, two matters became quite apparent. First, the term CED does not adequately capture or convey the breadth of approaches (e.g., revenue-generating initiatives or government subsidy-reliant initiatives) that these lawyers and their organizations use while engaging in CED.

Second, CED is a collaborative endeavor involving a variety of players such as charitable organizations, community residents, government, for-profit entities, practicing and nonpracticing lawyers, and financial institutions with a mix of motivations. In short, no single organization or single type of organization can claim its form of CED as the model for what constitutes CED, and lawyers and financial institutions are fully enmeshed within the myriad CED efforts. This article will expand on the foregoing and describe the activities of each of the organizations represented by the panelists.

Toronto Community Housing (TCH), a Canadian business corporation, is wholly owned by the City of Toronto. TCH is in the business of providing social housing, which is housing for low- and moderate-income individuals. As a for-profit business corporation, it operates at arm's length from the City of Toronto and it is encouraged to generate revenue from other business activity to support its core business of providing housing to almost 200,000 tenants.

To that end, TCH owns the largest construction and maintenance provider to the Ontario multiresidence housing market. The service provider had revenues in excess of $100 million in fiscal year 2008. TCH also develops, builds, and sells market-rate condominiums to pay for the replacement of its social housing buildings. To support these activities, it has accessed the capital markets by issuing bonds (approximately $250 million worth to date) and taps into a master loan platform with committed facilities in excess of $250 million.

Its consolidated revenues of $570 million in fiscal year 2007 consisted of 49 percent government housing subsidies, 46 percent rental revenue, and 5 percent nonrental revenue. It aspires to achieve self-sustainability as it grows its revenues from sources other than its housing subsidy. TCH is a prime example of frontline and direct involvement in the CED process in the sense that it builds and manages housing, among other things.

Unlike TCH, the nonprofit corporation NeighborWorks does not manage or build housing but rather facilitates such efforts of other nonprofits. NeighborWorks was founded by the U.S. Congress, not as a governmental entity, and yet it receives an appropriation of federal dollars from Congress. NeighborWorks provides technical and financial assistance for locally shaped, community-based revitalization and leverages its national reach to fashion broad-based initiatives. NeighborWorks distributes the bulk of its appropriation to a nationwide network of approximately 230 chartered nonprofits, which use the funds to (1) subsidize their operations and (2) fund locally driven, community-based revitalization efforts, largely to facilitate access to affordable housing.

To equip its chartered network members with the requisite tools to develop and implement customized development programs, NeighborWorks conducts quarterly training institutes for both its network and the broader community of CED professionals. Today, the training institutes average just fewer than 2,000 fee-paying participants and they cover a broad array of relevant subjects.

NeighborWorks' national reach helps it to identify the need for broad-based initiatives. For example, many of NeighborWorks' network members that owned and managed significant units of affordable housing were paying very high rates for property and liability insurance on their units. NeighborWorks provided a million-dollar subsidy to seed the establishment of a loss pool to be managed by participating network members. Members pay premiums into the pool, which is responsible for liability claims up to $750,000 and property claims up to $500,000. The insurance provider that won the bid to provide insurance to the loss pool covers claims in excess of those limits. Some members experienced as much as a 50 percent reduction in rates and the loss pool is currently self-sustaining.

So, the NeighborWorks model of CED entails an outlay of fairly flexible federal funds to be used for locally devised CED efforts. The federal government tackles CED in a variety of other ways, as evidenced by its extensive collaboration with state and local governments.

For example, the District of Columbia's Department of Housing and Community Development (DHCD) seeks to create and preserve opportunities for affordable housing and economic development, and to revitalize underserved communities in the District of Columbia. To do so, it taps into a host of federal grant programs such as the HUD-administered (1) Community Development Block Grants program, flexible annual grants for a wide range of CED needs, and made available to over a 1,000 units of local governments and states; and (2) Home Investment Partnerships Fund, also an annual grant program, but such funds are used exclusively to create housing opportunities for low-income individuals, whether buying, building, and/or rehabilitating housing.

One of DHCD's more interesting programs is the Housing Production Trust Fund (Trust Fund), which was established in 1998, but not funded until fiscal year 2001. That year it received a $25 million infusion from the sale of District-owned land. In 2002, with passage of legislation, it garnered a dedicated revenue stream resulting from the collection of 15 percent of revenue from real estate recordation and transfer taxes. Since 2001 the Trust Fund's production of affordable housing, largely rental units, has increased dramatically.

Additionally, DHCD receives tax credits under the federal government's Low Income Housing Tax Credit program, and in turn allocates the credits to owners of housing projects, provided a certain amount of low- and moderate-income housing units are created and maintained. Financial institutions have been significant investors in these housing projects, and in return for their contribution they have secured tax credits to offset federal tax liability.

Thus far, it should be apparent that significant players in CED include nonprofits; federal, state, and local governments; and financial institutions. But unlike TCH, NeighborWorks, and DHCD, the Consultative Group to Assist the Poor (CGAP) focuses less on federal, state, and local government-oriented efforts and pursues CED efforts in which financial institutions play a more prominent and leading role. CGAP is an institution at the World Bank that strives to increase the poor's access to financial services. Its $28 million annual budget is funded by its 33 members, which includes development agencies, regional development banks, private foundations, and international financial institutions. The work of CGAP is illustrative of the variety of ways in which financial institutions have a role in advancing CED.

For example, financial institutions are involved in CED on both the community level and noncommunity level. On the community level it exists in the form of (1) community development financial institutions, financial institutions established to provide credit and financial services to certain communities in order to foster CED; (2) credit unions; and (3) neighborhood housing services, entities much like the nonprofits that comprise the NeighborWorks network. On the noncommunity level it exists in the activities of other financial institutions like commercial banks, the federal government's Small Business Administration, and private foundations that fund the aforementioned community-level financial institutions.

Financial institutions also provide microfinance, which is the provision of loans and other financial services to the poor and low-income people on a sustainable basis. Perhaps the most celebrated example of microfinance is the Grameen Bank, a Bangladesh bank established in 1976 and resulting from the efforts of Muhammad Yunus. Early support from the Central Bank of Bangladesh and the country's national banks got the effort started. Today, it is self-sustaining, independent, and 90 percent owned by the bank's borrowers and 10 percent owned by the government.

Another initiative is branchless banking, the use of nonbank retail agents and information technology to deliver financial services to low-income people. For example, in the way that the mobile phone obviated the need to wire a country to expand access to phone service, it is hoped that mobile phones will help bypass the need for costly infrastructure to increase access to financial services. Banks and mobile network operators are working together to employ a variety of business models to deliver branchless banking.

The last presentation addressed CED from a community perspective. Membertou First Nation (Membertou), a Canadian Aboriginal or indigenous community, is an urban First Nation consisting of about 1,050 members. It is situated about 3 kilometers from the heart of Sydney, Nova Scotia, and it is one of five communities that comprise the Cape Breton Regional Municipality. While Membertou sought to develop its significant assets, its lands, prospective business partners weren't as enthusiastic about collaborating.

The promise of Membertou's CED efforts gained tremendous traction when the management of Membertou's affairs improved. CED efforts at Membertou got a significant boost once it obtained its ISO 9001 certification, an international standard relating to quality management. This stamp of credibility gave it the standing to engage a host of business partners and financial institutions willing to undertake a number of significant economic development efforts. Membertou was not looking for charity; it became apparent that it was open for business.

The foregoing review demonstrates that a broad range of activities can be characterized as CED and that implementation of CED is conducted in a variety of ways by a variety of practitioners with varying perspectives. TCH and NeighborWorks rely heavily upon government subsidies but each seeks to tap into private market solutions that are self-sustaining. DCHD, a governmental entity, seeks to make effective use of federally funded CED programs like Community Development Block Grants. CGAP is focused on the ways in which financial institutions can contribute simply by making financial services more readily available and Membertou is consumed with brick-and-mortar economic development initiatives and the revenues they generate for other CED initiatives beneficial to its First Nation.

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Many fail to appreciate the broad scope of CED and its many forms. Many fail to appreciate the contributions of lawyers and financial institutions in the furtherance of CED. Many fail to understand that significant and sophisticated business is often conducted in furtherance of CED. Hopefully, this article has enlightened some. As an aside and in case anyone is wondering, the language that the PTO examiner found acceptable was "housing and community services."

Simmons is deputy general counsel of NeighborWorks America and chair of the ABA Business Law Section's Community Economic Development Committee. His e-mail is rsimmons@nw.org. The author wishes to thank Bernd Christmas, Leila Edmunds, Kate Lauer, and Howie Wong for participating on the panel "An Insider's View on CED; How to Add Value to Clients with CED" at the Business Law Section's 2009 Spring Meeting. The panel was sponsored in part by the Community Economic Development Committee, and the discussion by these individuals inspired this article.

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