How Long a New CDC Will Need Grants for Operations
Visitor Question: How long should a foundation expect to provide operating support for a new CDC? Is there research on the average number of years it takes for a rural CDC focused on downtown revitalization and development, and managing a loan fund for real estate acquisition and development, to be self-sustaining?
Editors Reply: You will find that research that applies to your particular CDC will be in short supply. The nearly infinite variation among communities, circumstances, approaches, and activities means that a research question centered on particular types of rural CDCs is extremely unlikely to exist. Our search of the literature didn’t turn up anything.
Here are our observations, based on personal experience of helping to found CDCs, staffing them, and serving on their boards. At the moment, one of the authors of this website happens to be consulting with a rural CDC (meaning one that is located in a small city of about 15,000 population in the midst of farmland.) Your plans sound somewhat similar, although we want to point out that often the plans of an initial CDC board change dramatically in the first few years.
Our first reaction to your question is that you perhaps will need to find ways to attract operating support for many years. Real estate deals focused on renovation and attracting new tenants often take several years to complete, and even then, of course the revenue stream is not instantaneous.
At a minimum, even in a small town with a minimum of regulatory hurdles and red tape, in a state that regulates lightly, you will need three years to attract a stable revenue stream. We would not feel comfortable in proceeding with real estate acquisition and renovation unless you thought you had a stable source of income for five years.
Let's look at it this way. If your town were in a hot market already, you would not be at all likely to be putting in the work it takes to establish a CDC.
Having said that, we advise your talking with the foundation in question in some detail about the potential risks and rewards of your proposed activities. If you help them understand from the outset that even though you think you have a great business plan, you are clear-headed about potential risks and setbacks, then you will be setting the stage to extend your request for funding further than originally anticipated.
One rewarding strategy we used with a foundation was to ask them to suggest other sources of operating funds during the fairly lengthy process of real estate development. After about 15 minutes of their offering vague and evasive answers, which they themselves promptly beat back, they owned up to the difficulty of finding other ways to raise money to support an office and a minimal staff.
It sounds as though you have identified a particular foundation likely to support you. If so, you also may want to scout for other potential sources of funding, even if minor. For example, your county or city government may be willing to contribute small amounts every year as long as certain progress milestones are met. Another foundation active in the entire state might be interested if their role is a supporting one, rather than becoming a major player. We mention these possibilities because they can help ease your target foundation's anxiety about your reliance on them.
If you really want us to pick a number, we suggest five years, with annual discussions with the foundation that are detailed enough so that they understand what has gone well, what has not been as successful as expected, unanticipated challenges that you have faced, and any adjustments to your overall strategy that you have made during the previous year. Try to establish a culture of frank discussions with the foundation about your progress, thus setting the stage for continued funding should you need it for a longer period.
Start by being frugal, even if you think you have lucrative redevelopment opportunities. You can never tell when a pandemic, tornado, mayoral election, devastating state law change, or loss of a key local business will hand you a temporary defeat. Be careful with the operating funds you attract, contributions from the public or business community, and proceeds of any fund raising events so you will be prepared to remain viable as a CDC until the real estate ventures become sufficiently profitable to support your loan fund. Then at some point the revolving loan fund might make foundation support a distant memory.
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